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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-14016
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 COTTONWOOD DRIVE, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant's common stock was
$303,281,705 on March 3, 2001 (based on the closing sales price of the
registrant's common stock on that date). Shares of the registrant's common stock
held by each officer and director and each person who owns more than 5% or more
of the outstanding common stock of the registrant have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes. As of
March 3, 2001, 117,046,481 shares of the registrant's Common Stock, $.01 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
(the "Proxy Statement"), to be filed within 120 days of the end of the fiscal
year ended December 30, 2000, are incorporated by reference in Part III hereof.
Except with respect to information specifically incorporated by reference in
this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 1, Business, "Products," "Marketing and Customers,"
"Manufacturing and Suppliers," "Research and Development," and "Competition;"
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Results of Operations," "Liquidity and Capital Resources" and
"Certain Factors Affecting Future Performance;" or elsewhere in this report. In
this report, the words "anticipates," "believe," "expect," "intend," "may,"
"will," "should," "plan," "estimate," "predict," "potential," "future,"
"continue" or similar expressions also identify forward-looking statements.
These statements are only predictions. We make these forward-looking statements
based upon information available on the date hereof, and we have no obligation
(and expressly disclaim any such obligation) to update or alter any such
forward-looking statements, whether as a result of new information, future
events, or otherwise. Our actual results could differ materially from those
anticipated in this report as a result of certain factors including, but not
limited to, those set forth in the following in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Performance" and elsewhere in
this report. Maxtor(R), DiamondMax(R), Formula 4(R) and MaxFax(R) are registered
trademarks -- and No Quibble(R) is a registered servicemark of Maxtor. The
Maxtor logo, MaxAttach(TM) and Reflect-It(TM) are trademarks of Maxtor. All
other brand names and trademarks appearing in this report are the property of
their respective holders.
We are a leading provider of hard disk drive storage products for desktop
computer systems. Our DiamondMax product family, originally announced in 1999,
consists of 3.5-inch hard disk drives. These products have high speed interfaces
for greater data throughput, a robust mechanical design for improved
reliability, magneto-resistive head technology and a digital signal
processor-based electronic architecture that, when combined, provide
industry-leading benchmark performance and storage capacity to the personal
computer marketplace. During 2000, we expanded our DiamondMax Plus product
family to include disk drives targeted for mainstream, entry-level and
high-performance desktop systems. The storage capacities of our current
DiamondMax products range from 30 to 81.5 gigabytes. Some of our top customers
are desktop computer manufacturers, including Dell, Fujitsu, Compaq and IBM;
distributors, including Xander International, Bell Micro, and Ingram; and
retailers including CompUSA.
We formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of Creative Design Solutions, Inc. ("CDS") on September 10, 1999.
MNSG concentrates on products and offerings in or related to the Networked
Attached Storage ("NAS") market segment. Maxtor's NAS products are designed to
enable quick, easy, reliable and cost-effective storage solutions for business
networks and data centers. In October 1999, we announced MaxAttach(TM), MNSG's
first NAS product. In January 2000, we announced the MaxAttach 3000 desktop line
of server appliances with enhanced features that provide data protection (disk
mirroring) and data management (disk spanning) at storage capacities of 20, 40,
and 80 gigabytes. In July 2000, we began shipping the MaxAttach NAS 4000 rack
mount server with storage configurations of 40, 60 and 160 gigabytes. The units
fit into industry standard 19" racks and are only 1.75" (IU) high. The NAS 4000
supports an expanded set of network platforms including Linux and UNIX in
addition to Windows. It is designed to meet the needs of Internet Service
Providers, Application Service Providers and large workgroups. In September
2000, we announced that we had increased the maximum capacity of the NAS 4000 to
320 gigabytes, providing nearly one terabyte of storage in 5.25" of rack space.
In October 2000, we announced our new external storage solution, the Maxtor
1394 External Storage product, which adds up to 80 gigabytes of additional
storage to 1394-equipped PCs and Macintosh personal computers. This product is
an external hard drive that uses the high-speed IEEE 1394 interface and allows
customers to quickly and easily install additional storage to their desktop or
laptop computers. The product is hot swappable and features data transfer rates
up to 400 megabytes per second. It is designed for emerging applications such as
video editing, digital music, digital photos and games.
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COMPANY BACKGROUND
We were founded in 1982 and completed an initial public offering of common
stock in 1986. In the mid-1980's, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive industry during
the 1980's was intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of average
selling prices. In an effort to mitigate the risks associated with these
factors, we pursued all major product segments in the hard disk drive market,
utilizing multiple product families and technology platforms. This costly
strategy added significant complexity to the business, which caused us to delay
or miss a number of key product introductions and ultimately led to the
deterioration of our overall financial condition. As a result of this
deterioration, we sold 40% of our outstanding common stock to Hyundai
Electronics Industries and its affiliates in 1994.
In early 1996, Hyundai Electronics America ("HEA") acquired all of the
remaining publicly held shares of our common stock as well as all of our common
stock then held by Hyundai Electronics Industries and its affiliates. Shortly
thereafter, HEA invested in renewed efforts to revitalize Maxtor. In July 1996,
we hired Michael R. Cannon, our current Chief Executive Officer and President
and a 20 year veteran of the hard drive industry, who had previously served in
senior management positions in the systems storage division at IBM, SyQuest
Technology and Control Data Corporation, to lead a turnaround of the company and
capture business at leading desktop computer manufacturers.
In July 1998, we completed a public offering of 49,731,225 shares of our
common stock, receiving net proceeds of approximately $328.8 million from the
offering. As a result of this offering, our company ceased to be a
majority-owned subsidiary of HEA. In February 1999, we completed a public
offering of 7.8 million shares of common stock with net proceeds to us of
approximately $95.8 million.
PROPOSED MERGER WITH QUANTUM HDD
Maxtor and Quantum Corporation have entered into an Amended and Restated
Agreement and Plan of Merger and Reorganization dated as of October 3, 2000.
Under the Merger Agreement, Quantum has agreed to split off its hard disk drive
business, which will then be combined with Maxtor by a merger. In the merger,
each holder of Quantum HDD common stock will receive 1.52 shares of Maxtor
common stock for each share of Quantum HDD common stock held by such person.
Immediately following the merger, the former holders of Maxtor common stock will
hold not more than 49.9% of the total outstanding common stock of Maxtor and
former holders of Quantum HDD common stock will hold not less than 50.1% of
Maxtor's outstanding common stock. The merger is subject to customary
conditions, including receipt of stockholder approval. The merger proposal and
other matters have been submitted for stockholder approval to the holders of
Quantum and Maxtor common stock at special meetings of stockholders to be held
on March 30, 2001. In connection with the proposed merger, Maxtor filed a
registration statement on Form S-4 with the Securities and Exchange Commission.
INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENT
AND THE PROXY STATEMENT-PROSPECTUS BECAUSE THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE PROPOSED MERGER. Investors and security holders may obtain a free copy
of the registration statement and the proxy statement-prospectus and other
documents filed by Maxtor with the Securities and Exchange Commission at the
Securities and Exchange Commission's web site at http://www.sec.gov. Free copies
of the registration statement and other documents filed by Maxtor with the
Securities and Exchange Commission may also be obtained from Maxtor by directing
a request to Maxtor, Attention: Jenifer Kirtland, 408-432-4270.
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INDUSTRY BACKGROUND
The Desktop Hard Disk Drive Market. According to International Data
Corporation ("IDC"), the desktop computer segment is the largest segment of the
worldwide personal computer market, accounting for approximately 74% of global
personal computer shipments in 2000. The demand for desktop computers and,
therefore, computer hard disk drives, is driven by:
- continued improvements in desktop computing price to performance ratios;
- the rapid accumulation of data resulting from the digitization of
information previously stored in paper form;
- larger file sizes created by multimedia-intensive applications; and
- the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing.
Future demand growth for hard disk drives also may be driven by new and
emerging hard disk drive markets.
Hard Disk Drive Technology. The basic operation of a hard disk drive has
not changed materially since its introduction in the 1950's. To improve the
performance of hard disk drives, hard disk drive manufacturers have concentrated
their efforts on optimizing the performance of the various components of the
hard disk drive.
The main components of the hard disk drive are the hard disk assembly and
the printed circuit board. The head disk assembly includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. These components
are contained in a hard base plate protective package in a contamination-free
environment. The printed circuit board includes custom integrated circuits, an
interface connector to the host computer and a power connector.
The head disk assembly is comprised of one or more disks positioned around
a spindle hub that rotates the disks by a spin motor. Disks are made of a smooth
substrate to which a thin coating of magnetic materials is applied. Each disk
has a head suspended directly above it, which can read data from or write data
to the spinning disk. The sensor element of the head, also known as the slider,
is getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the printed circuit board typically include a
drive interface and a controller. The drive interface receives instructions from
the computer, while the controller directs the flow of data to or from the
disks, and controls the heads. The location of data on each disk is logically
maintained in tracks, divided into sectors. The computer sends instructions to
read data or write data to the disks based on track and sector locations.
Industry standard interfaces are utilized to allow the disk drive to communicate
with the computer.
A key performance metric in the hard disk drive industry is "areal
density," which is the measure of stored bits per square inch on the recording
surface of a disk. An increase in areal density allows a hard disk drive
provider to decrease the price per megabyte stored by increasing overall storage
capacity per disk, thus reducing product costs through reduced component
requirements. During 1996 and 1997, certain hard disk drive providers began
transitioning to magneto-resistive heads. Prior to this transition, most hard
disk drives utilized thin-film inductive recording heads. Magneto-resistive
heads have discrete read and write structures which provide more signal than the
older thin-film inductive heads. This results in significantly higher areal
densities, which increases storage capacity per disk and improves manufacturing
margin and product reliability. Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to further increase
hard disk drive performance and reduce product costs, including attempting to
simplify the electronic architecture by combining the traditional servo-control
functions of the digital signal processor-based electronic architecture and the
error recovery and interface management functions of traditional hard drive
microprocessors on a single integrated circuit. Moreover, to consistently
achieve timely introduction and rapid volume production of new products, some
hard disk drive providers are striving to
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simplify their product design processes by focusing on creating extendible core
technology platforms which utilize common firmware and mechanical designs and
re-use of manufacturing tooling and application specific integrated circuits
across various product generations and product lines.
Hard Disk Drive Market Challenges. Personal computer manufacturers compete
in a consolidating market. The top ten personal computer manufacturers accounted
for greater than 50% of all personal computer units shipped during 1999 and
2000. These personal computer manufacturers use the quality, storage capacity
and performance characteristics of hard drives to select their hard disk drive
providers. Personal computer manufacturers typically seek to qualify three or
four providers for a given hard disk drive product generation. To qualify
consistently with personal computer manufacturers and thus succeed in the
desktop hard drive industry, a hard disk drive provider must consistently
execute on its product development and manufacturing process in order to be
among the first-to-market introduction and first-to-volume production at leading
storage capacity per disk with competitive prices. Failure to reach the market
on time or to deliver timely volume production usually results in significantly
decreased gross margins due to rapidly declining average selling prices and
dramatic losses in market share. Successful achievement on the performance
parameters, however, is only part of the competitive equation. As personal
computer manufacturers seek to develop successful business models, they are also
requiring their hard disk drive vendors to maintain high levels of quality to
enable low cost of ownership and adapt their inventory management models to be
compatible with the emerging build-to-order business model in the personal
computer industry.
OUR SOLUTION
We have established ourselves as a leading provider of high quality, high
performance hard disk drives to major desktop computer manufacturers,
distributors and retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we have been able
to define and implement the key business processes necessary to fulfill the
needs of our customers. These processes focus on the efficient, timely and
cost-effective integration of leading-edge technology to create highly
manufacturable hard disk drives. Moreover, our senior management team vigorously
monitors these processes in an effort to ensure consistent execution and prompt
response to customer demands. We intend to continue our leadership position in
the desktop hard disk drive industry by consistently executing these fundamental
business processes.
We have leveraged our strength in hard drives to provide reliable, easy to
install, cost-effective network attached storage devices to meet the growing
storage needs of business networks and data centers. We intend to expand our
presence in the network attached storage industry by adding functionality and
features to our core product line.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Our strategy to achieve this
goal includes the following elements:
Effectively Integrate New Technology. We augment our traditional product
development teams with an advanced technology group. The advanced technology
group's purpose is to monitor and evaluate advancements in hard disk drive
technology for possible integration into our future products. This group also
works closely with our product development teams and strategic component vendors
to:
- obtain early access to the latest hard disk drive component technology;
- allow for flexibility in choosing state-of-the-art components; and
- ensure viability of new product technologies and components prior to
product design.
Through this process, we intend to continue to integrate new technologies
into our existing core technology platform and to strengthen our ability to
introduce high quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a consistent basis.
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Leverage Design Excellence. Our product development methodology reduces
risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and application specific
integrated circuits. Through this process, we have created a technology
platform, which is used as the common core of each of our current hard disk
drive products and which we believe is extendible into products for new and
emerging hard disk drive market opportunities. To reduce the overall cost of
ownership of our hard disk drive products, we use a robust mechanical
architecture designed to reduce defects that result from customer mishandling
during installation. We also work closely with leading component suppliers in an
effort to ensure that adequate tolerances are designed into our products to
achieve high manufacturing yields and product quality. By utilizing this product
development methodology, we have successfully introduced and achieved timely
volume production of magneto-resistive head hard disk drives.
Capitalize on Flexible Manufacturing. Our Singapore manufacturing facility
utilizes a flexible cell-based process that enables us to:
- dedicate manufacturing cells to particular customers, thereby allowing us
to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and
improved overall customer satisfaction;
- simultaneously manufacture multiple product configurations;
- quickly reconfigure the facility to respond to customer change requests
and changes in product and customer mix;
- effectively adapt our inventory management model to the emerging
build-to-order business model employed by certain of our desktop computer
manufacturer customers; and
- add incremental capacity as needed at a relatively low cost.
This flexible cell-based process, when coupled with our product design
methodology, has enabled us to significantly improve time-to-volume production.
Maintain Strong Market Share With Leading Desktop Computer
Manufacturers. We intend to continue to achieve leading time-to-volume
production of high quality, high performance hard disk drives and maintain our
focus on excellent customer service to continue to support and maintain our
strong market share position with leading personal computer manufacturers. Our
quarterly market share of the desktop hard disk drive market in terms of units
shipped increased from 5.6% in the first quarter of 1997 to 19.7% in the fourth
quarter of 2000 according to IDC. Shipments to Dell, Fujitsu, Compaq and IBM
accounted for 3.8% of our total revenue in the quarter ended June 29, 1996 and
increased to 25.6% in the quarter ended December 30, 2000.
Expand Relationships with Distributors and Retailers. We intend to
strengthen our distribution and retail businesses to capture the higher margin
opportunities offered in these markets. We will continue to build the
infrastructure necessary to better target these markets, including additional
staff and marketing support. We will continue to invest in promotional programs
to generate interest and sales in the distribution and retail channels.
Capture Emerging Opportunities for Hard Drives in Consumer Electronics
Applications. We believe that the demand for hard drives in consumer electronics
applications will grow significantly. Today hard drive storage in consumer
electronics applications has been primarily incorporated into personal video
recorders (PVRs) and set-top boxes. Maxtor has announced agreements with WebTV
and ReplayTV to provide hard disk drives for PVRs. We intend to pursue consumer
electronics opportunities by developing hard drive products appropriate for
these applications and establishing the necessary infrastructure and expertise
to sell to these markets.
Maintain Customer Satisfaction. We believe we distinguish ourselves from
our competitors by focusing on ease of doing business and overall customer
satisfaction. For example, our "No Quibble" service program has been well
received by our customers. We also have begun to place significant attention on
total supply chain management to align our business model with the evolving
build-to-order manufacturing business model of certain desktop computer
manufacturers. We use our flexible, cell-based manufacturing process coupled
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with a just-in-time inventory model to rapidly respond to the changing needs of
our key desktop computer manufacturer customers. To further automate and improve
the efficiency of our total supply chain management, we have installed new
enterprise resource planning and related software.
Broaden Product Portfolio. To capture higher margin opportunities, we
intend to leverage our existing technology platform and product development
methodology to develop hard disk drive products to meet the needs of desktop
computers, storage subsystems, consumer electronics, and other emerging storage
applications. To this end, we currently offer products with two rotational
speeds (5400 and 7200 RPM) with configurations from 1 through 4 disks. This
results in a portfolio with one of the broadest ranges of performance and
capacity in the industry and allows us to target entry, mid-range and high-end
applications in all of the above markets. The 3 and 4-platter designs have been
particularly beneficial to our profit margins and our strategic position, as few
of our competitors offer these high capacity products.
Additionally, in 2000 we announced the MaxAttach NAS 3000 line of server
appliances with enhanced software features that include disk mirroring and disk
spanning at storage capacities ranging from 40 to 81.5 gigabytes. These products
are designed to enable quick, easy, safe and cost-effective addition of storage
to business networks. Our MaxAttach NAS 4000 line of rack mounted server
appliances broadens client support to include UNIX/Linux in addition to Windows.
The MaxAttach 4000 is available in 160 and 320 gigabyte configurations, allowing
us to address the storage needs of larger workgroups, Internet service providers
and departmental market segments.
In October 2000, we announced our new external storage solution, the Maxtor
1394 External Storage product, which adds external storage to 1394-enabled PCs
and Macintosh computers.
PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of our turnaround was
the restructuring of our product development process to separate the enabling
technology development phase from the product design phase. In early 1996, we
suffered from poor product quality and performance and products that were late
to market. This contrasts sharply with today as we now enjoy strong customer
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including:
- working closely with our product design teams and strategic component
suppliers to create a variety of state-of-the-art technologies to be used
in our future products;
- developing early prototypes to ascertain the stability and
manufacturability of our planned products; and
- analyzing the latest head, disk, channel, motor and application specific
integrated circuit technologies and designs to broaden and strengthen our
technology platform.
This group also focuses on leveraging our current proven technology
platform by re-using as much electronic and mechanical technology as possible in
each successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in our products.
Product Design Phase. The creation of the advanced technology group as part
of our turnaround freed our existing product design group from the
responsibility of assessing the viability of new and emerging technologies and
allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing our new product introduction process. This
process is a highly disciplined review procedure designed to ensure that new
product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity and production ramp rates prior to release into volume
production.
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PRODUCTS
We currently provide hard disk drives exclusively for the desktop computer
market. Our DiamondMax product family consists of 3.5-inch hard disk drives with
storage capacities ranging from 5.1 gigabytes to 20.4 gigabytes. Our products
have a number of features including high speed interfaces for greater data
throughput, a robust mechanical design for improved reliability,
magneto-resistive and giant magneto-resistive head technology and a digital
signal processor-based electronic architecture that, when combined, provides
industry-leading performance.
The tables below sets forth key performance metrics for our DiamondMax
products dating from 1999:
DIAMONDMAX MODELS
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PLUS PLUS PLUS
5120* 6800* 6800* VL17 36 VL20 40 40 VL30 60
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Maximum Capacity
(GB).................. 20.4 27.3 27.3 17.4 36.5 20.4 40.9 40.9 30.7 61.4
Capacity per Disk
(GB).................. 5.1 6.8 6.8 9.1 9.1 10.2 10.2 10.2 15.3 15.3
Rotational Speed
(RPM)................. 7200 5400 7200 7200 5400 5400 5400 7200 5400 5400
First Shipment Date.... Mar. 99 Jun. 99 Jul. 99 Sep. 99 Sep. 99 Nov. 99 Nov. 99 Jan. 00 Apr. 00 Apr. 00
DIAMONDMAX MODELS
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PLUS PLUS
45 VL40 80 60
------- ------- ------- -------
Maximum Capacity
(GB).................. 45 40 80 60
Capacity per Disk
(GB).................. 15 20 20 20
Rotational Speed
(RPM)................. 7200 5400 5400 7200
First Shipment Date.... Jul. 00 Jul. 00 Aug. 00 Nov. 00
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* No longer in volume production.
The table below sets forth key performance metrics for our MNSG Products:
MNSG PRODUCTS
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MAXATTACH NAS 3000 NAS 4000 NAS 4000
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Maximum Capacity
(GB)................ 72 80 160 320
Client Support........ Microsoft Microsoft Microsoft, UNIX, Linux Microsoft, UNIX, Linux
Form Factor........... Desktop Desktop Rack Mount Rack Mount
First Shipment Date... 3rd Qtr. 99 1st Qtr. 00 2nd Qtr. 00 3rd Qtr. 00
Our DiamondMax product family has won a number of recent editorial and
industry awards including:
Winmag.com -- USA WinList -- DiamondMax Plus 40 -- January 2000
Computer Shopper -- USA Five Star Review -- DiamondMax Plus 40 -- March 2000
Maximum PC -- USA Kick Ass Product -- DiamondMax Plus 40 -- April 2000
PC/Computing -- USA A-List -- DiamondMax Plus 40 -- April 2000
Computer Shopper -- USA Best Buy -- DiamondMax Plus 40 -- April 2000
Computer Technology Resellers Choice -- DiamondMax 60 and DiamondMax VL30 --
Review -- USA April 2000
Computer Shopper -- USA Best Buy -- DiamondMax Plus 40 -- June 2000
Winmag.com -- USA Win 100 Award 2000 (Recommended Hardware Storage) --
DiamondMax Plus 40 -- June 2000
PC World -- USA PC World -- World Class (Best Hard Drive) -- DiamondMax
60 -- July 2000
Computer Shopper -- USA Best Buy -- DiamondMax 80 -- October 2000
Computer Shopper -- USA Top 100 Products of 2000 -- DiamondMax 60 -- October 2000
Winmag.com -- USA WinList -- DiamondMax Plus 60 -- December 2000
Our MaxAttach products received the following editorial awards in 2000:
Winmag.com -- USA Win 100 Award 2000 (Recommended Hardware Storage) --
MaxAttach 3000 -- June 2000
Computer Reseller News -- USA Editors' Choice -- MaxAttach 4000 -- August 2000
MANUFACTURING/QUALITY
To be competitive, we must manufacture high quality, highly manufacturable,
high performance hard disk drives with industry leading time-to-volume
production at competitive costs. Our hard disk drive
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manufacturing operations consist primarily of the final assembly of high-level
subassemblies built to our specifications and testing of completed products.
Manufacturing. Pilot production of our products, as well as cost reduction,
quality and product improvement engineering on current products, are conducted
at our Longmont, Colorado facility. We manufacture our hard disk drives in
volume at multiple facilities in Singapore, which uses a flexible, cell-based
process. The Singapore facility consists of modular production units ("MPUs"),
each of which contains a number of modular work cells ("MWCs"). Each MWC
essentially is a mini-serial production line consisting of all of the tooling
and test equipment necessary to build and test a hard disk drive. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. We coupled our cell-based manufacturing approach with a
sophisticated factory information system that collects data from each MWC on
various productivity and quality metrics.
In March 1999, we purchased two buildings in Singapore totaling
approximately 39,455 square meters and entered into a long-term lease of the
underlying land from Singapore's Housing Development Board. The property is
located near our current volume manufacturing facilities. Pursuant to a sublease
accompanying the option, we have taken possession of this facility and have
begun volume manufacturing and warehousing operations there.
Quality. Consistent with our goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, we have implemented a
corporate-wide quality program, which focuses on:
- robustness of design and improved design tolerances;
- quality of incoming parts and factory process control; and
- customer feedback, failure analysis and timely response.
In addition, our quality, materials, enabling technology and product
development groups work closely with leading component vendors in an effort to
ensure sufficient tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. Our Singapore facility also is
ISO 9002 certified. Finally, our executives meet regularly with customers to
exchange product quality information to facilitate rapid analysis of customer
failures and timely implementation of corrective actions.
MATERIALS AND SUPPLIES
We have developed and continue to develop strategic relationships with
leading suppliers of many of the key components for our hard disk drive
products. These relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and to reduce
component, inventory and overall product costs. In addition, our strategic
suppliers work closely with our advanced technology group, enabling us to gain
early access to leading-edge hard disk drive technology and to improve the
overall efficiency of our product design process.
We rely on a limited number of leading suppliers for the parts used in the
manufacturing of our products, including magneto-resistive heads and head stack
assemblies, media, custom integrated circuits, read channel integrated circuits,
printed circuit boards and motor/baseplate assemblies. In general, we seek to
have at least two or three suppliers for each of our component requirements.
Custom application specific integrated circuits, including our digital signal
processor controller chips, and channels, however, currently are sole-sourced
from Texas Instruments and Lucent, respectively. Because of their custom nature,
these products require significant design-in periods and long lead times. We
outsource a majority of our printed circuit board assembly to Celestica, Inc., a
successor to our former affiliate, International Manufacturing Services, Inc.
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as being
late to the market, had impacted adversely our ability to win business with
leading desktop computer manufacturers. As a result, we were heavily dependent
on sales to a large number of regional distributors which limited our ability to
forecast periodic shipments and shifted our product mix toward lower
performance, lower margin products. Recogniz-
8
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ing that the majority of the growth in shipments in the desktop computer market
was being captured by a limited number of desktop computer manufacturers, we
simplified our sales channels and focused our sales and marketing efforts on
becoming a significant provider of hard disk drives to leading desktop computer
manufacturers, including Dell, Fujitsu, Compaq, and IBM, and leading
distributors and retailers, including Xander International, Bell Micro, Ingram
and CompUSA. By emphasizing overall customer satisfaction, product quality and
performance and time-to-volume production, we believe that we have established a
strong customer base.
Manufacturers. Shipments to Dell, Fujitsu, Compaq, and IBM, our largest
desktop computer manufacturer customers, accounted for 3.8% of our total revenue
in the quarter ended June 29, 1996 and increased to 25.6% in the quarter ended
December 30, 2000. During the year ended December 26, 1998, two customers, Dell
and IBM, accounted for 27% and 15% of our revenue. During the years ended
January 1, 2000 and December 30, 2000, Dell accounted for 23% and 14% of our
revenue. We believe that our success depends on our ability to maintain and
further develop strong desktop computer manufacturer customer relationships and
to provide products that fit the needs of the desktop computer manufacturer
channel.
Distributors. We use a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed customers which
tend to hold very small market shares of the overall desktop computer market,
including value-added resellers, dealers, system integrators and small desktop
computer manufacturers. Distributors accounted for 15.4% of revenue for the year
ended December 26, 1998; 18.5% of revenue for the year ended January 1, 2000;
and 22.1% of revenue for the year ended December 30, 2000. Distributors
generally enter into non-exclusive agreements with us for purchase and
redistribution of product on a quick turnover basis. Purchase orders are placed
and revised on a weekly basis. We grant certain of our distributors price
protection and limited rights to return product on a rotation basis. Our major
distributors include Bell Micro, Xander International and Ingram.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, we sell our
retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores, and authorized
sales through distributors to smaller retailers. Retailers accounted for 8.1% of
revenue for the year ended December 26, 1998; 6.3% of revenue for the year ended
January 1, 2000; and 8.1% for the year ended December 30, 2000. Our current
retail customer base is in the United States and Canada; however, we have begun
efforts to establish a retail channel presence in the emerging retail markets in
Europe and Asia. We believe the retail channel complements other sales channels.
Retailers supply the after-market "upgrade" sector in which end-users purchase
and install products to upgrade their computers. We grant certain of our
retailers price protection and limited rights to return product on a rotation
basis.
SALES AND MARKETING
We market and sell our products to leading desktop computer manufacturers,
distributors and retailers. Representative offices are located throughout the
U.S. and in Australia, France, Germany, Great Britain, Hong Kong, Japan, Korea,
Singapore and Taiwan. We have formed multi-disciplined, dedicated account and
channel teams focused on each of its current and target strategic desktop
computer manufacturer, distributor and retail accounts. These teams generally
are comprised of representatives from our sales, marketing, engineering and
quality organizations. Our senior management also takes an active role in our
sales efforts. Dedicated field sales and technical support personnel are located
in close proximity to the manufacturing facilities of each of our desktop
computer manufacturer customers.
Our marketing and public relations functions are performed both internally
and through outside firms. Public relations, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments. We
utilize both consumer media and trade publications. We have programs under which
qualifying resellers are reimbursed for certain advertising expenditures. We
also have invested in direct marketing and customer satisfaction programs. We
maintain ongoing contact with end-users through primary and secondary market
research, focus groups, product registrations and technical support databases.
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BACKLOG
We generally sell standard products according to standard agreements or
purchase order terms. Delivery dates are specified by purchase orders. Such
orders may be subject to change, cancellation or rescheduling by the customer
without significant penalties. The quantity actually purchased and shipment
schedules are frequently revised to reflect changes in the customer's needs. In
addition, orders for our products are filled for several large customers from
just-in-time inventory warehouses, whereby orders are not placed ahead of time
on our order entry backlog system. Instead, we receive a periodic forecast of
requirements from the customer. Upon shipment from the just-in-time warehouse,
the customer is invoiced. In light of these factors, backlog reporting as of any
particular date may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor of our future
revenue.
COMPETITION
We compete primarily with manufacturers of 3.5-inch hard disk drives,
including Fujitsu, Quantum, Samsung, Seagate, IBM and Western Digital, some of
which have a larger share of the desktop hard disk drive market than ours.
We believe that important competitive factors in the hard disk drive market
are quality, storage capacity, performance, price, time-to-market introduction,
time-to-volume production, desktop computer manufacturer product qualifications,
breadth of product lines, reliability and technical service and support. We
believe we compete favorably with respect to these factors. See section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Performance."
INTELLECTUAL PROPERTY
We have been granted 181 U.S. and 77 foreign patents related to disk drive
products and technologies, and have additional patent applications pending in
the United States and certain foreign countries. We have patent protection on
certain aspects of our technology and also rely on trade secret, copyright and
trademark laws, as well as contractual provisions to protect our proprietary
rights. There can be no assurance that our protective measures will be adequate
to protect our proprietary rights; that others, including competitors with
substantially greater resources, have not developed or will not independently
develop or otherwise acquire equivalent or superior technology; or that we will
not be required to obtain licenses requiring us to pay royalties to the extent
that our products may use the intellectual property of others, including,
without limitation, our products that may also be subject to patents owned or
licensed by others. There can be no assurance that any patents will be issued
pursuant to our current or future patent applications, or that patents issued
pursuant to such applications or any patents we own or have license to use will
not be invalidated, circumvented or challenged. Moreover, there can be no
assurance that the rights granted under any such patents will provide
competitive advantages to us or be adequate to safeguard and maintain our
proprietary rights. Litigation may be necessary to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights or those of
others. We could incur substantial costs in seeking enforcement of our issued or
licensed patents against infringement or the unauthorized use of our trade
secrets and proprietary know-how by others or in defending ourselves against
claims of infringement by others, which could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
laws of certain countries in which our products are manufactured and sold,
including various countries in Asia, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States, and there can be no assurance that such laws will be enforced in an
effective manner. Any failure by us to enforce and protect our intellectual
property rights could have a material adverse effect on our business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors Affecting
Future Performance."
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EMPLOYEES
As of December 30, 2000, we had 8,551 employees worldwide, including 953 in
engineering, research and development; 207 in marketing, sales and customer
support; 7,210 in manufacturing; and 181 in executive, general management and
administration. As of December 30, 2000, we had 6,806 employees at our
manufacturing facilities in Singapore and 145 employees at our foreign sales
offices. None of our U.S. employees currently are represented by a labor
organization. In May 1997, our Singapore subsidiary recognized a labor union,
the United Workers of Electronic and Electrical Industries, and in November
1998, signed a three-year collective bargaining agreement with that union. We
believe that our employee relations are positive.
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company and their
ages as of March 3, 2000. There are no family relationships between any director
or executive officer of the Company. Executive officers serve at the discretion
of the Board of Directors.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Michael R. Cannon............ 48 President, and Chief Executive Officer
Paul J. Tufano............... 47 Senior Vice President, Finance, and Chief Financial
Officer
Dr. Victor B. Jipson......... 48 President, Network Systems Group
Dr. Pantelis S. 52 Vice President, Advanced Technology and Chief Technology
Alexopoulos................ Officer
David L. Beaver.............. 46 Vice President, Worldwide Materials
Michael D. Cordano........... 36 Vice President, Worldwide Sales
Ted Deffenbaugh.............. 38 Vice President, Consumer Electronics Applications
Phillip C. Duncan............ 50 Vice President, Human Resources and Facilities
Misha Rozenberg.............. 38 Vice President, Quality
Glenn H. Stevens............. 50 Vice President, General Counsel and Secretary
K. H. Teh.................... 46 Vice President, Worldwide Manufacturing & Managing
Director, Singapore
Michael J. Wingert........... 40 Vice President, Desktop Development
Michael R. Cannon has been our President and Chief Executive Officer since
July 1996. From 1993 until he joined us in 1996, Mr. Cannon held several senior
management positions with IBM's Storage Systems division, including Vice
President, Mobile and Desktop Business Unit; Vice President, Product Design; and
Vice President, Worldwide Operations. From May 1991 to January 1993, he served
as Senior Vice President of Syquest, a removable disk drive company, and prior
to joining SyQuest he held the position of Vice President, Southeast Asia
Operations, with Imprimis Technology. He is also director of MMC Technology, a
wholly owned subsidiary of Hyundai Electronics America.
Paul J. Tufano has been our Senior Vice President, Finance since November
1998 and Chief Financial Officer since July 1996. From July 1996 to his
appointment as Senior Vice President, Finance Mr. Tufano served as our Vice
President, Finance. From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM. Mr. Tufano was Manager of Worldwide Logistics for IBM's
storage systems division. Other management positions included Manager of Plans
and Controls for IBM's Desktop and Mobile Storage products business unit, and
Controller for IBM's San Jose, California facility. Until December 30, 1998, Mr.
Tufano was a director of International Manufacturing Services, Inc., a major
electronic manufacturing service company.
Dr. Victor B. Jipson has been President of our Network Systems Group since
October 1999. From December 1995 until his appointment as President, Network
Systems Group, he served as our Senior Vice President, Engineering. From 1991 to
1995, he was General Manager of IBM's Optical Storage Solutions business unit.
From 1975 to 1991, Dr. Jipson held key management positions in research,
technical strategy, product strategy and research and development with IBM.
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Dr. Pantelis S. Alexopoulos has been our Vice President, Advanced
Technology and Chief Technology Officer since April 1997. Before joining Maxtor
in 1996, Mr. Alexopoulus spent 14 years at IBM, the most recent position being
Manager, Head-Disk Interface and Advance Files, Storage Systems and Technology
at the Almaden Research Laboratory.
David L. Beaver has been our Vice President, Materials since May 1998. From
1994 to 1997, he was Director of Operations -- Materials at EMASS, a data
storage company, and from 1991 to 1994, he was Director of Corporate Materials
Procurement at SyQuest.
Michael D. Cordano has been our Vice President, Worldwide Sales since
August 1999. Prior to his promotion, he held the position of Vice President,
Global Sales. Prior to joining Maxtor in 1994, Mr. Cordano held various sales
positions at Conner Peripherals, Inc.
Ted Deffenbaugh has been our Vice President, Consumer Electronics
Applications since May 2000. Prior to joining Maxtor, Mr. Deffenbaugh was with
Quantum Corporation working in the areas of creative strategic alliances,
product planning, technical marketing and standards committee representation. He
also worked at IBM in various management roles in marketing, engineering and
public relations.
Philip C. Duncan has been our Vice President, Human Resources since August
1996. From 1994 to 1996, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems, a software company. From 1992
to 1994, he held senior human resources management positions at SyQuest, and
from 1990 to 1992, he held similar positions at Cirrus Logic, a semiconductor
company.
Misha Rozenberg has been Vice President, Quality since March 1998. From
1996 to 1998, he was Vice President, Supplier Engineering. From 1994 to 1996,
Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner
Peripherals, Inc., a disk drive company. From 1990 to 1994, he was a Manager
with Apple Computer.
Glenn H. Stevens has been our Vice President, General Counsel and Secretary
since June 1994. From 1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal department at U S West,
Inc., a telecommunications products and services provider, including Chief
Counsel and Secretary for its research and development organization and Chief
Intellectual Property Counsel for the family of U S West companies.
K. H. Teh has been our Vice President, Worldwide Manufacturing since May
1997. From 1996 to 1997, he was with Iomega, a removable disk drive company,
where he had been Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was a Managing Director, Malaysia Manufacturing, with Quantum,
and was a Senior Director with Syquest from 1993 to 1994.
Michael J. Wingert has been our Vice President, Desktop Engineering since
November 1999. Previously he was the Vice President, Engineering for five years.
Prior to joining Maxtor in 1994, Mr. Wingert held various senior management
positions in product testing and development at IBM.
ITEM 2. PROPERTIES
Our sales and administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California. HEA is
currently an unconditional guarantor of our facilities lease in Milpitas,
California.
We also maintain 373,457 square feet of engineering and pilot production
facilities as well as administrative, marketing and materials facilities in
Longmont, Colorado. All of our domestic facilities are leased. Our leases for
our Longmont, Colorado facility begin to expire on December 2001. We have
entered into a lease for a new facility in Longmont, Colorado of 450,090 square
feet, to be completed in April 2001. The new lease has a 15-year term and is
renewable for five years. There can be no assurance that we will be able to
obtain additional space that can accommodate our needs.
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Our volume manufacturing facilities are located in buildings in Singapore
totaling approximately 734,000 square feet, which are located on two parcels of
leased land with leases terminating in 2016 (with an option to renew for 30
years) and 2018 (with an option to renew for 30 years).
We also lease various sales and support facilities in Australia, France,
Germany, Hong Kong, Ireland, Japan, Korea, Singapore, Taiwan, United Kingdom,
and the United States. The aggregate rent under all of our leases is currently
$9.1 million per annum.
ITEM 3. LEGAL PROCEEDINGS
We were previously involved in a dispute with StorMedia Incorporated, which
arose out of an agreement among Maxtor, StorMedia and Hyundai Electronics
Industries. On February 8, 2001, the Bankruptcy Court for the Northern District
of California, San Jose Division, entered an order implementing and approving as
fair and reasonable the terms of a settlement agreement, pursuant to which
Hyundai and Maxtor have paid to StorMedia an aggregate of $9.7 million in
settlement of the parties' dispute. This settlement amount is accrued in
Maxtor's fiscal year 2000 financial statements. The settlement is now final and
all cases relating to this matter have been dismissed.
We also have also been in litigation with Magnetic Media Development, LLC,
or MMD, in the United States District Court for the Central District of
California, over assertions that we infringed certain patents owned by MMD. The
patents relate to magnetic media that we purchase from third party media vendors
for use in our hard disk drives. We made a settlement payment on March 26, 2001
to MMD and obtained a release from MMD of all claims asserted or that could have
been asserted against us. Additionally, we have obtained a paid-up license for
any future activities that may come within the scope of the MMD patents. The
pending lawsuit is in the process of being dismissed by the court with
prejudice.
On March 18, 1999, we were sued by Papst Licensing, GmbH, a German
corporation, for infringement of patents that relate to hard disk drives. Papst
has asserted that Maxtor infringes 13 patents. The lawsuit had been pending in
the United States District Court for the Northern District of California, but
was transferred with other litigation involving Papst patents to the United
States District Court for the Eastern District of Louisiana by the Judicial
Panel on Multidistrict Litigation for consolidated or coordinated proceedings.
Papst's infringement allegations are based on spindle motors that Maxtor
purchases from third party motor vendors, and the use of such spindle motors in
hard disk drives. Maxtor purchased the overwhelming majority of the spindle
motors used in its hard disk drives from vendors that were licensed under
Papst's patents.
While we believe that we have valid defenses to Papst's claims, the results
of any litigation are inherently uncertain and other infringement claims
relating to current patents, pending patent applications, and/or future patent
applications or issued patents could be asserted by Papst. Additionally, we
cannot assure you that we will be able to successfully defend ourself against
this or any other Papst lawsuit. The Papst complaint asserts claims to an
unspecified dollar amount of damages. A favorable outcome for Papst in this
lawsuit could result in the issuance of an injunction against us and our
products and/or the payment of monetary damages equal to a reasonable royalty.
In the case of a finding of a willful infringement, we also could be required to
pay treble damages and Papst's attorney's fees. Accordingly, a litigation
outcome favorable to Papst could harm our business, financial condition, and
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 30, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been trading publicly on the Nasdaq National Market
under symbol "MXTR" since July 31, 1998. The table below sets forth the range of
quarterly high and low closing sales prices for our common stock on the Nasdaq
National Market. Our fiscal year end is the last Saturday of December,
conforming to a 52/53-week year methodology.
HIGH LOW
------ -----
Fiscal 2001 First Quarter (through March 3, 2001)........... $ 8.50 $5.09
Fiscal 2000 Fourth Quarter.................................. 11.00 5.13
Fiscal 2000 Third Quarter................................... 11.25 5.50
Fiscal 2000 Second Quarter.................................. 13.75 9.81
Fiscal 2000 First Quarter................................... 14.69 6.25
Fiscal 1999 Fourth Quarter.................................. 7.25 4.94
Fiscal 1999 Third Quarter................................... 7.31 4.69
Fiscal 1999 Second Quarter.................................. 8.25 4.53
Fiscal 1999 First Quarter................................... 19.56 7.78
As of March 3, 2001, there were approximately 190 stockholders of record of
our common stock including The Depository Trust Company which holds shares of
Maxtor common stock on behalf of an indeterminate number of beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our stock and do not anticipate paying
cash dividends in the near future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents the consolidated financial information for the
periods indicated:
NINE MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26, JANUARY 1, DECEMBER 30,
1996(1) 1997 1998 2000 2000
------------ ------------ ------------ ----------- ------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 798.9 $1,424.3 $2,408.5 $2,486.1 $2,704.8
Cost of revenue........................... 888.9 1,352.9 2,108.1 2,287.3 2,328.3
--------- -------- -------- -------- --------
Gross profit (loss).................. (90.0) 71.4 300.4 198.8 376.5
--------- -------- -------- -------- --------
Operating expenses:
Research and development................ 87.8 106.2 158.4(3) 192.8 235.0
Selling, general and administrative..... 60.7 62.6 81.9(3) 90.5 110.5
Acquired in-process technology.......... -- -- -- 7.0 --
Amortization of goodwill and other
intangible assets.................... -- -- -- 3.1 9.9
Other................................... -- -- -- -- --
--------- -------- -------- -------- --------
Total operating expenses........ 148.5 168.8 240.3(3) 293.4 355.4
--------- -------- -------- -------- --------
Income (loss) from operations............. (238.5) (97.4) 60.1(3) (94.6) 21.1
Interest expense.......................... (18.0) (36.5) (28.8) (13.7) (13.7)
Interest and other income................. 1.0 25.0(2) 7.4 15.6 24.3
Gain on sale of investment................ -- -- -- 44.1 1.8
--------- -------- -------- -------- --------
Income (loss) before income taxes......... (255.5) (108.9) 38.7(3) (48.6) 33.5
Provision for income taxes................ 0.8 1.0 7.5 1.5 1.7
--------- -------- -------- -------- --------
Net income (loss)......................... $ (256.3) $ (109.9)(2) $ 31.2(3) $ (50.1) $ 31.8
========= ======== ======== ======== ========
Net income (loss) per share -- basic...... $ -- $ -- $ 0.81 $ (0.48) $ 0.28
Net income (loss) per
share -- diluted(4)..................... $ --(4) $ --(4) $ 0.47 $ (0.48) $ 0.28
========= ======== ======== ======== ========
Shares used in per share calculation (in
thousands):
Basic................................... -- -- 38,295 105,503 113,433
--------- -------- -------- -------- --------
Diluted................................. -- -- 65,814 105,503 119,116
--------- -------- -------- -------- --------
Pro forma net loss per share -- diluted... $ (17.62) $ (3.62) $ 0.47 $ (0.48) $ 0.27
========= ======== ======== ======== ========
Shares used in pro forma calculation (in
thousands).............................. 14,552 30,350 65,814 105,503 119,116
========= ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets.............................. $ 314.5 $ 555.5 $ 863.4 $ 906.3 $1,024.9
Total current liabilities................. 412.9 552.2 548.9 537.2 628.9
Long-term debt............................ 229.1 224.3 145.0 113.8 92.3
Total stockholders' equity (deficit)...... (327.5) (221.0) 169.4 255.3 303.7
- ---------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform our fiscal year to that of Hyundai Electronics America.
(2) Includes recovery of a $20.0 million fully-reserved note from IMS.
(3) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. The charge was allocated equally to research and development
and selling, general and administrative expenses. Without such charge, we
would have had research and development expenses of $152.4 million, selling,
general and administrative expenses of $75.8 million, total operating
expenses of $228.2 million, income from operations of $72.2 million, income
before income taxes of $50.8 million and net income of $43.3 million. Our
1996 Stock Option Plan was amended and restated to remove the variable
features and provide for fixed award options. See Note 10 of notes to
consolidated financial statements.
(4) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 have not been presented since such information is
not meaningful due to the limited number of shares of common stock
outstanding at that time.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 1:
BUSINESS, ITEM 6: SELECTED FINANCIAL INFORMATION AND ITEM 8: CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
OVERVIEW
In February 1999, we completed a public offering of 7.8 million shares of
our common stock. We received net proceeds of approximately $95.8 million from
the offering, net of issuance costs. A portion of the proceeds from the offering
was used to prepay without penalty outstanding aggregate principal indebtedness
of $55 million owing to HEA under a subordinated note due July 31, 2001.
In September 1999, we acquired privately held Creative Design Solutions,
Inc. ("CDS"), a leading participant in the emerging network attached storage
market. We are transitioning from only being a supplier of hard disk drives for
the desktop personal computer market to a company well positioned to provide
storage solutions that will deliver outstanding price and performance values in
networked environments.
We formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of CDS. MNSG concentrates on products and offerings in or related to
the Networked Attached Storage ("NAS") market.
Maxtor and Quantum Corporation have entered into an Amended and Restated
Agreement and Plan of Merger and Reorganization dated as of October 3, 2000.
Under the Merger Agreement, Quantum has agreed to split off its hard disk drive
business, which will then be combined with Maxtor by a merger. In the merger,
each holder of Quantum HDD common stock will receive 1.52 shares of Maxtor
common stock for each share of Quantum HDD common stock held by such person.
Immediately following the merger, the former holders of Maxtor common stock will
hold not more than 49.9% of the total outstanding common stock of Maxtor and
former holders of Quantum HDD common stock will hold not less than 50.1% of
Maxtor's outstanding common stock. The merger is subject to customary
conditions, including receipt of stockholder approval. The merger proposal and
other matters have been submitted for stockholder approval to the holders of
Quantum and Maxtor common stock at special meetings of stockholders to be held
on March 30, 2001. In connection with the proposed merger, Maxtor filed a
registration statement on Form S-4 with the Securities and Exchange Commission.
INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENT
AND THE PROXY STATEMENT-PROSPECTUS BECAUSE THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE PROPOSED MERGER. Investors and security holders may obtain a free copy
of the registration statement and the proxy statement-prospectus and other
documents filed by Maxtor with the Securities and Exchange Commission at the
Securities and Exchange Commission's web site at http://www.sec.gov. Free copies
of the registration statement and other documents filed by Maxtor with the
Securities and Exchange Commission may also be obtained from Maxtor by directing
a request to Maxtor, Attention: Jenifer Kirtland, 408-432-4270.
INTELLECTUAL PROPERTY
When we were a majority-owned subsidiary of HEA, we had the benefit of
certain third-party intellectual property rights on terms that may have been
more favorable than would have been available to us if we have not been a
majority-owned subsidiary of HEA. On June 25, 1998, we entered into an agreement
with HEA whereby we agreed to pay an allocated share of the license fees
associated with certain third party rights in annual installments ranging from
$1.0 million to $2.3 million through 2007. For the year ended December 30, 2000,
we recorded an expense of $1.9 million in connection with this commitment. There
can be no assurance that we will be able to obtain similar rights in the future
on terms as favorable as those currently available to us.
REVENUE RECOGNITION
We generally recognize revenue upon shipment to our customers. Sales to
certain distributors and retailers are governed by agreements providing limited
rights of return, as well as price protection on unsold merchandise.
Accordingly, we record reserves upon shipment for estimated returns, exchanges
and credits for
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price protection. We also record reserves for the estimated cost to repair or
replace products under warranty at the time of sale. We warrant our products
against defects in parts and labor for a period of three years from the date of
shipment, with an additional three months allowed for distributors to account
for "shelf life."
TAX MATTERS
The provision for income taxes consists primarily of state and foreign
taxes. Due to our net operating losses ("NOLs"), NOL carryforwards and favorable
tax status in Singapore, we have not incurred any significant foreign, U.S.
federal, state or local income taxes for any recent fiscal periods. Future tax
benefits from current operating losses have not been recognized in the current
fiscal year because of the uncertainty concerning their realization.
As a result of the July 1998 public offering of our common stock, which
caused an "ownership change" for federal and state income tax purposes, a
significant portion of the NOL carryforwards is restricted in its utilization.
Details are provided in the footnotes to the financial statements.
We were part of the HEA consolidated group for federal income tax purposes
during the period from early 1996 to August 1998. Pursuant to a "Tax Allocation
Agreement" we were liable for our allocable share of the total consolidated tax
return liability during this period. The HEA consolidated group has used
substantial amounts of our NOLs and other tax attributes. Under the Tax
Allocation Agreement, neither HEA nor Maxtor was required to reimburse the other
for any utilization of the other member's NOLs or other tax attributes.
YEARS ENDED
----------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
(IN MILLIONS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................. 2,408.5 2,486.1 2,704.8
Cost of revenue..................................... 2,108.1 2,287.3 2,328.3
------- ------- -------
Gross profit...................................... 300.4 198.8 376.5
------- ------- -------
Operating expenses:
Research and development.......................... 158.4(1) 192.8 235.0
Selling, general and administrative............... 81.9(1) 90.5 110.5
Acquired in-process technology.................... -- 7.0 --
Amortization of goodwill and other intangible
assets......................................... -- 3.1 9.9
------- ------- -------
Total operating expenses.......................... 240.3(1) 293.4 355.4
------- ------- -------
Income (loss) from operations....................... 60.1(1) (94.6) 21.1
Interest expense.................................... (28.8) (13.7) (13.7)
Interest and other income........................... 7.4 15.6 24.3
Gain on sale of investment.......................... -- 44.1 1.8
------- ------- -------
Income (loss) before income taxes................... 38.7(1) (48.6) 33.5
Provision for income taxes.......................... 7.5 1.5 1.7
------- ------- -------
Net income (loss)................................... 31.2(1) (50.1) 31.8
======= ======= =======
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YEARS ENDED
----------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
(IN MILLIONS)
AS A PERCENTAGE OF REVENUE:
Revenue............................................. 100.0% 100.0% 100.0%
Cost of revenue..................................... 87.5 92.0 86.1
------- ------- -------
Gross profit...................................... 12.5 8.0 13.9
------- ------- -------
Operating expenses:
Research and development.......................... 6.6(1) 7.8 8.7
Selling, general and administrative............... 3.4(1) 3.6 4.0
Acquired in-process technology.................... -- 0.3 --
Amortization of goodwill and other intangible
assets......................................... -- 0.1 0.4
------- ------- -------
Total operating expenses.......................... 10.0(1) 11.8 13.1
------- ------- -------
Income (loss) from operations....................... 2.5(1) (3.8) 0.8
Interest expense.................................... (1.2)(1) (0.6) (0.5)
Interest and other income........................... 0.3 0.6 0.9
Gain on sale of investment.......................... -- 1.8 --
------- ------- -------
Income (loss) before income taxes................... 1.6(1) (2.0) 1.2
Provision for income taxes.......................... 0.3 0.1 0.1
------- ------- -------
Net income (loss)................................... 1.3%(1) (2.0)% 1.1%
======= ======= =======
- ---------------
(1) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. The charge was allocated equally to research and development
and selling, general and administrative expenses. Without such charge, we
would have had research and development expenses of $152.4 million, selling,
general and administrative expenses of $75.8 million, total operating
expenses of $228.2 million, income from operations of $72.2 million, income
before income taxes of $50.8 million and net income of $43.3 million. Our
1996 Stock Option Plan was amended and restated to remove the variable
features and provide for fixed award options. See Note 10 of notes to
consolidated financial statements.
COMPARISON OF 1998, 1999 AND 2000
Revenue. In 1998, we generated revenue of $2,408.5 million compared with
revenue of $2,486.1 million in 1999 and $2,704.8 million in 2000. Revenue
increased 3.2% from 1998 to 1999 and 8.8% from 1999 to 2000. The increase in
revenue in both years was due primarily to an increase in unit shipments arising
from improved time-to-market introduction and time-to-volume production. Revenue
from sales to desktop computer manufacturers was 76.5%, 75.9%, and 69.8% of our
revenue in 1998, 1999 and 2000, respectively. Actual revenue from sales to
desktop computer manufacturers slightly increased in each of these years. The
decline in the percentage of revenue contribution from desktop computer
manufacturers reflects the expansion of our sales to distributors and into the
retail channel. Throughout 1998 and 1999, revenue growth from increased unit
shipments was partially offset by rapid price erosion in the hard disk drive
market as a whole, which resulted in a decline in average selling prices. We
believe that the effect of hard disk drive market average selling price declines
on our average selling prices was contained partially by our improved
time-to-market introduction and time-to-volume production, and by Maxtor's trend
toward shipping higher capacity hard disk drives, which tend to have higher
initial average selling prices. Revenue and unit volume growth in 2000 were
favorably impacted by continued time to market performance, increased
penetration of the distribution channel, a continued trend to shipping higher
capacity drives.
Cost of Revenue; Gross Profit. Gross profit decreased from $300.4 million
in 1998 to $198.8 million in 1999 and increased to $376.5 million in 2000. Gross
margin as a percentage of revenue decreased from 12.5%
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in 1998 to 8.0% in 1999 and increased to 13.9% in 2000. The decrease in gross
margin from 1998 to 1999 was due primarily to rapid price erosion in the hard
disk drive market as a whole, which resulted in a decline in average selling
prices for our products. The increase in gross margin from 1999 to 2000 is due
primarily to manufacturing efficiencies including product designs, lower
component costs, and price moderations.
OPERATING EXPENSES
Research and Development Expense. Research and development ("R&D") expense
as a percentage of revenue was 6.6%, 7.8% and 8.7% in 1998, 1999 and 2000,
respectively. From 1998 to 1999, R&D expense as a percentage of revenue
increased by 1.2% and the absolute dollar level of R&D spending increased from
$158.4 million in 1998 to $192.8 million in 1999. These increases were due to
our continued efforts to develop new products for the desktop computer market
and future products in other hard disk drive segments and the NAS market. From
1999 to 2000, R&D expense as a percentage of revenue increased by 0.9% and the
absolute dollar level of spending increased from $192.8 million to $235.0
million. These increases are primarily due to our continued efforts to maintain
leadership products and to address the requirements of the desktop PC market as
well as investments in the NAS division.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expenses as a percentage of revenue were 3.4%, 3.6% and
4.0% in 1998, 1999 and 2000, respectively. The absolute dollar level of SG&A
expense increased from $81.9 million in 1998 to $90.5 million in 1999 and to
$110.5 million in 2000. The increases in SG&A expenses were primarily due to
costs associated with supporting our higher sales volume and increased emphasis
in the distribution and retail markets.
Acquired In-Process Technology. The acquired in-process technology charge
of $7 million in 1999 resulted from the acquisition of CDS. The value of the
acquired in-process technology was determined using a combination of
risk-adjusted income approaches and an independent valuation. The total amount
of $7 million was charged to operations as the technology had not reached the
stage of technological feasibility at the date of acquisition and had no future
alternative use.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets represents the amortization of goodwill and
other intangible assets related to the acquisition of CDS. Such amortization
amounted to $3.1 million in 1999 and $9.9 million in 2000.
Interest Expense. Interest expense was $28.8 million in 1998 and $13.7
million in 1999 and 2000, representing a 52.4% decrease from 1998 to 1999. As a
percentage of revenue, interest expense was 1.2%, 0.6% and 0.5% in 1998, 1999
and 2000, respectively. The decrease from year to year was due to the reduction
in borrowings.
As of December 26, 1998, January 1, 2000 and December 30, 2000, we had $5.3
million, $5.0 million and $15.4 million of short-term borrowings and $145.0
million , $113.8 million and $92.3 million of long-term indebtedness
outstanding, respectively.
Interest and Other Income. Interest and other income was $7.4 million,
$15.6 million and $24.3 million in 1998, 1999 and 2000, respectively. As a
percentage of revenue, interest and other income was 0.3%, 0.6% and 0.9% in
1998, 1999 and 2000, respectively. The increase was due primarily to the overall
increase in cash and marketable securities as a result of our public offerings
in 1998 and 1999.
Gain on Sale of Investment. During 1999, we sold our equity investment in
Celestica, Inc., resulting on a gain on sale of investment of $44.1 million.
During 2000, we sold our investment in Headway Technologies, Inc., resulting in
a gain on sale of investment of $1.8 million.
YEAR 2000 READINESS
We have not experienced any known material adverse impacts on our current
products, internal information systems, and non-information technology systems
(equipment and systems) as a result of the year 2000 issue. Based on the work
done, we have not incurred material costs to address the year 2000 readiness of
our systems (as a result of relatively new systems) and products.
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LIQUIDITY AND CAPITAL RESOURCES
As of December 30, 2000, we had $376.2 million in cash and cash equivalents
and marketable securities as compared to $353.9 million as of January 1, 2000.
In February 1999, we completed an underwritten secondary public offering of
7,800,000 newly issued shares of our common stock and received $95.8 million,
net of offering costs and expenses.
Operating activities provided net cash of $129.3 million for the year ended
December 30, 2000. The cash provided from operating activities was principally
generated from net income and the increase in accounts payable and accrued
expenses, which was partially offset by the increase in accounts receivable and
other assets. We used $183.4 million in investing activities during 2000,
principally for the purchase of property, plant and equipment and marketable
securities. For the twelve months ended December 30, 2000, we reduced short and
long-term debt by $5.0 million.
As of December 30, 2000, our outstanding debt consisted primarily of $79.9
million in publicly traded 5.75% Subordinated Debentures and a $27.8 million
loan from the Economic Development Board of Singapore. The Debentures, which are
due March 1, 2012, are entitled to annual sinking fund payments of $5.0 million,
which commenced March 1, 1998. The loan from the Economic Development Board of
Singapore is payable in seven equal semi-annual installments beginning March
2001. Interest is payable at 1% above the prevailing Central Provident Fund
lending rate, subject to a minimum of 3.5% per year.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. As of December 30, 2000,
$75.0 million of accounts receivable have been sold under this arrangement and
excluded from our accounts receivable balance.
We believe the existing capital resources, together with cash generated
from operations and borrowing capacity, will be sufficient to fund our
operations through at least the next 12 months. We require substantial working
capital to fund our business, particularly to finance accounts receivable and
inventory, and to invest in property, plant and equipment. In 2001, capital
expenditures are expected to be between approximately $150 million and $200
million, to be used principally for research and development activities, without
giving effect to the Quantum HDD business combination. We intend to seek
financing arrangements, including a line of credit, to fund our future capacity
expansion plans, as necessary. However, our ability to generate cash will depend
on, among other things, demand in the desktop hard disk drive market and pricing
conditions. If we need additional capital, there can be no assurance that such
additional financing can be obtained, or, if obtained, that it will be available
on satisfactory terms. See discussion below under the heading "Certain Factors
Affecting Future Performance."
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Derivatives Instruments and Hedging Activities -- An Amendment of FASB Statement
No. 133." SFAS No. 138 amends the accounting and reporting standards for certain
derivatives and hedging activities such as net settlement contracts, foreign
currency transactions and intercompany derivatives. We are required to adopt
SFAS 133 in the first quarter of fiscal 2001. The initial adoption of SFAS 133
is not material to our financial statements and the impact on future periods
will depend on our future activity.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC issued SAB
No. 101A to defer for one quarter the effective date of implementation of SAB
101 with earlier application encouraged. Subsequently, in June 2000, the SEC
issued SAB No. 101B to defer the implementa-
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tion of SAB 101 until the fourth quarter of 2000. We have adopted the provisions
of SAB 101 in these financial statements for all periods presented and there is
no material impact to the financial statements that results from the adoption of
SAB 101.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions in SFAS 125 without reconsideration. SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities, is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. SFAS 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This Statement is to be
applied prospectively with certain exceptions. We have adopted the provisions of
SFAS No. 140.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
WE HAVE A HISTORY OF LOSSES AND MAY NOT SUSTAIN PROFITABILITY.
We have a history of significant losses. In the last five fiscal years, we
have been profitable in only fiscal years 1998 and 2000. Although we achieved
profitability in the most recent fiscal year, we cannot assure you that we will
sustain such profitability.
THE DECLINE OF AVERAGE SELLING PRICES IN THE HARD DISK DRIVE INDUSTRY COULD
CAUSE OUR OPERATING RESULTS TO SUFFER AND MAKE IT DIFFICULT FOR US TO ACHIEVE
PROFITABILITY.
It is very difficult to achieve and maintain profitability and revenue
growth in the hard disk drive industry because the average selling price of a
hard disk drive rapidly declines over its commercial life as a result of
technological enhancement, productivity improvement and increase in the industry
supply. End-user demand for the computer systems that contain our hard disk
drives has historically been subject to rapid and unpredictable fluctuations. As
a result, the hard disk drive market tends to experience periods of excess
capacity and intense price competition. When competitors lower prices to
liquidate excess inventories, restructure, or attempt to gain market share,
average selling prices also decline. This intense price competition could force
us to lower prices, which would reduce margins, cause operating results to
suffer and make it difficult for us to achieve or maintain profitability. In
addition, the growth of the lower priced personal computer market has forced the
cost of desktop hard disk drives to decline. If we are unable to lower the cost
of our hard disk drives for the lower-priced personal computer market, we will
not be able to compete effectively and our operating results would 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 SUCH AS 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 has 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 such as Dell, Compaq or IBM;
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- changes in stock market analysts' estimates;
- the presence or absence of short-selling of our common stock;
- events affecting other companies that the market deems comparable to
Maxtor;
- general conditions in the semiconductor and electronic systems
industries; and
- general economic conditions in the United States and abroad.
OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SUBSTANTIALLY 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 cyclical
and seasonal nature of the desktop computer industry;
- the availability, and efficient use, of manufacturing capacity;
- competitors introducing better products at competitive prices before we
do;
- new competitors entering our market;
- our ability to successfully qualify our products with our customers;
- our customers canceling, rescheduling or deferring orders;
- our ability to purchase components at competitive prices;
- the availability of adequate capital resources; and
- other general economic and competitive factors.
Many of our expenses are relatively fixed and difficult to reduce or
modify. As a result, the fixed nature of our operating expenses will magnify any
adverse effect of a decrease in revenue on our operating results. If our future
operating results are below the expectations of stock market analysts, our stock
price may decline.
OUR STOCK PRICE MAY BE AFFECTED BY SALES OF OUR COMMON STOCK BY HYUNDAI
ELECTRONICS AMERICA OR ITS OFFICIALS.
Our stock price may be affected by sales of our common stock by Hyundai
Electronics America or the perception that such sales may occur due to the
financial condition of Hyundai Electronics America affiliates or otherwise.
Hyundai Electronics America has informed us that it may consider selling
additional Maxtor shares at a time it deems appropriate.
In February 1999, DECS Trust IV, a newly formed trust, sold 12,500,000 DECS
to several institutional investors in a registered public offering. The DECS are
securities that represent all of the beneficial interest in DECS Trust IV, which
owns U.S. treasury securities and a prepaid forward contract to purchase Maxtor
common stock from Hyundai Electronics America. The trust will terminate on or
shortly after February 15, 2002, or upon earlier liquidation of DECS Trust IV
under certain circumstances. When the trust terminates, Hyundai Electronics
America will deliver, at its option, either cash or Maxtor common stock to the
trust. If holders of DECS receive shares of Maxtor common stock at the
termination of the trust, such holders may sell those shares distributed to them
in the open market at or after the distribution occurs. We cannot predict
whether Hyundai Electronics America will deliver shares of Maxtor stock to the
trust on its termination or when or whether holders of the DECS will resell any
shares of Maxtor stock they receive. Further, any market that develops for the
DECS could reduce the demand for our common stock or otherwise negatively impact
the market price of our common stock.
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IF WE FAIL TO QUALIFY AS A SUPPLIER TO DESKTOP COMPUTER MANUFACTURERS, THEN
THESE MANUFACTURERS MAY NOT PURCHASE ANY UNITS OF AN ENTIRE PRODUCT LINE WHICH
WILL HAVE A SIGNIFICANT IMPACT ON OUR SALES.
Most of our products are sold to desktop computer manufacturers. These
manufacturers select or qualify their hard disk drive supplies based on quality,
storage capacity, performance and price. Manufacturers typically seek to qualify
three or four suppliers for each hard disk drive product generation. To qualify
consistently with these manufacturers and thus succeed in the desktop hard disk
drive industry, we must consistently be among the first-to-market introduction
and first-to-volume production at leading storage capacity per disk, offering
competitive prices and high quality. Once a manufacturer has chosen its hard
disk drive suppliers for a given desktop computer product, it often will
purchase hard disk drives from those suppliers for the commercial lifetime of
that product line. If we miss a qualification opportunity, we may not have
another opportunity to do business with that manufacturer 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. If we do not reach the market or deliver volume production
in a timely manner, we may lose opportunities to qualify our products. In such
case, our gross margins would decline due to rapidly declining average selling
prices, and we would lose market share. Loss of market share would have a
negative impact on our business, financial condition and operating results.
BECAUSE WE WILL BE SUBSTANTIALLY DEPENDENT ON DESKTOP COMPUTER DRIVE SALES, A
DECREASE IN THE DEMAND FOR DESKTOP COMPUTERS COULD REDUCE DEMAND FOR OUR
PRODUCTS.
Although there has been significant growth in the demand for desktop
computers over the past several years, according to International Data
Corporation, the growth rate in desktop computer sales has slowed in recent
fiscal quarters. Because we will rely substantially on 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.
IF WE DO NOT DIVERSIFY OUR OPERATIONS, EXPAND INTO NEW HARD DRIVE MARKET
SEGMENTS, OR CONTINUE TO MAINTAIN OUR PRESENCE IN THE DESKTOP MARKET, OUR
REVENUES WILL SUFFER.
To remain a significant supplier of hard disk drives to major manufacturers
of personal computers, we will need to offer a broad range of hard disk drive
products to our customers. Although our current products are designed for the
largest segment of the hard disk drive industry, the desktop computer area,
demand may shift to other segments over time. None of our products yet serve the
laptop personal computer segment. Accordingly, we will need to develop and
manufacture new products that address additional hard disk drive segments and
emerging technologies to remain competitive in the hard disk drive industry. We
cannot assure you that we will:
- successfully or timely develop or market any new hard disk drives in
response to technological changes or evolving industry standards;
- avoid technical or other difficulties that could delay or prevent the
successful development, introduction or marketing of new hard disk
drives;
- successfully qualify new hard disk drives, particularly high-end hard
disk drives, with customers by meeting their performance and quality
specifications;
- quickly achieve high volume production of new hard disk drives; or
- achieve market acceptance of our new products.
Any failure to successfully develop and introduce new products for our
existing customers or to address specifically additional market segments could
harm our business, financial condition and operating results.
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THE LOSS OF ONE OR MORE OF OUR 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 30, 2000, one customer, Dell, accounted for
approximately 14% of our revenue, and our top five customers accounted for
approximately 34% of our revenue. It is expected that a relatively small number
of customers will continue to account for a significant portion of our revenue
after the merger, and the proportion of our revenue from these customers could
continue to increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial demands on us. Even
if we successfully qualify a product for a given customer, the customer
generally will not be obligated to purchase any minimum volume of products from
us and generally will be able to terminate its relationship with us at any time.
Our ability to maintain strong relationships with our principal customers is
essential to our future performance. If we lose a key customer or if any of our
key customers reduce their orders of our products or require us to reduce our
prices before we are able to reduce costs, our revenue would decline, which
would cause our business, financial condition and operating results to suffer.
COSTLY NEW DEMANDS BY OUR CUSTOMERS ARE INCREASING THE RISK OF INVENTORY
OBSOLESCENCE AND DECLINING AVERAGE SELLING PRICES.
Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of the largest personal computer manufacturing
customers, may adopt build-to-order manufacturing models that reduce their
component inventories and related costs and enable them to tailor their products
more specifically to the needs of consumers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers) ship parts directly to the
dealer or other assembler for installation at its location. Finally, some of our
manufacturing customers have adopted just-in-time inventory management processes
that require component suppliers to maintain inventory at or near the customer's
production facility. These new business models require us to hold products in
inventory longer. These changing policies also increase our capital requirements
and costs, complicate inventory management strategies and make it difficult to
match manufacturing plans with projected customer demand. As a result, there is
an increased risk that inventory will become obsolete or average selling price
could decline, either of which could cause our operating results to suffer.
INTENSE COMPETITION IN THE HARD DISK DRIVE SEGMENT COULD REDUCE THE DEMAND FOR
OUR PRODUCTS OR THE PRICES OF OUR PRODUCTS WHICH COULD REDUCE OUR REVENUES.
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 for the personal
computer industry, including Fujitsu, IBM, Samsung, Seagate Technology and
Western Digital. Many of our competitors historically have had a number of
significant advantages, including larger market shares, a broader array of
product lines, preferred vendor status with customers, extensive name
recognition and marketing power, and significantly greater financial, technical
and manufacturing resources.
Although we are expected to be one of the largest hard disk drive
manufacturers after the merger, our size alone will not eliminate all of the
advantages of our competitors. Some of our competitors make many of their own
components which may provide them with benefits including lower costs. Our
competitors may also:
- consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against us;
- lower their product prices to gain market share; or
- bundle their products with other products to increase demand for their
products.
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Competition could reduce the demand for our products and/or the prices of
our 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.
POWER OUTAGES WHICH CURRENTLY IMPACT COMPANIES WITH FACILITIES IN CALIFORNIA MAY
ADVERSELY EFFECT OUR CALIFORNIA FACILITIES.
We conduct substantial operations in the state of California and rely on a
continuous power supply to conduct operations. California's current energy
crisis could substantially disrupt our operations and increase our expenses. In
the event of an acute power shortage, that is, when power reserves for the state
of California fall below 1.5%, California has on some occasions implemented, and
may in the future continue to implement, rolling blackouts throughout the state.
Although state lawmakers are working to minimize the impact, if blackouts
interrupt our power supply, we may be temporarily unable to continue operations
at our facilities. Any such interruption in our ability to continue operations
at our facilities could delay the development of our products and disrupt
communications with our customers, suppliers or our manufacturing operations.
Future interruptions could damage our reputation and could result in lost
revenue, either of which could substantially harm our business and results of
operations. Furthermore, the deregulation of the energy industry instituted in
1996 by the California government and shortages in wholesale electricity
supplies have caused power prices to increase. If wholesale prices continue to
increase, our operating expenses will likely increase which will have a negative
effect on our operating results.
IF WE DO NOT HAVE ADEQUATE MANUFACTURING CAPACITY IN THE FUTURE BECAUSE OF A
NATURAL DISASTER AT ONE OF OUR PLANTS OR AN INABILITY TO ACQUIRE NEEDED
ADDITIONAL MANUFACTURING CAPACITY, OUR GROWTH WILL BE ADVERSELY IMPACTED AND OUR
BUSINESS COULD SUFFER.
Our volume manufacturing operations are based primarily in Singapore. A
flood, earthquake, political instability or other disaster or condition after
the merger affecting either's facilities or ability to manufacture could harm
our business, financial condition and operating results. In addition, we will
need to acquire additional manufacturing capacity in the future. Our inability
to add capacity to allow us to meet customers' demands in a timely manner may
limit our future growth and could harm our business, financial condition and
operating results.
BECAUSE WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS, COMPONENT SHORTAGES
COULD RESULT IN DELAYS OF PRODUCT SHIPMENTS AND DAMAGE OUR BUSINESS AND
OPERATING RESULTS.
A number of the components used in our products are available from a
limited number of suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies Inc. Some required parts may be periodically in short supply. As a
result, we will have to allow for significant ordering lead times for some
components. In addition, we may have to pay significant cancellation charges to
suppliers if we cancel orders for components because we reduce production due to
market oversupply, reduced demand, transition to new products or technologies or
for other reasons. We order the majority of our components on a purchase order
basis and we have limited long-term volume purchase agreements with only some of
our existing suppliers. If we cannot obtain sufficient quantities of high
quality parts when needed, product shipments would be delayed and our business,
financial condition and operating results could suffer.
BECAUSE WE PURCHASE ALL OF OUR PARTS FROM THIRD PARTY SUPPLIERS, WE ARE SUBJECT
TO THE RISK THAT WE MAY BE UNABLE TO ACQUIRE QUALITY COMPONENTS IN A TIMELY
MANNER, OR EFFECTIVELY INTEGRATE PARTS FROM DIFFERENT SUPPLIERS, AND THESE
PROBLEMS WOULD CAUSE OUR BUSINESS TO SUFFER.
Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third party suppliers. Consequently, the
25
27
success of our products depends on our ability to gain access to and integrate
parts that use leading-edge technology. To successfully manage the integration
of parts, we must:
- obtain high quality parts;
- hire skilled personnel;
- effectively integrate different parts from a variety of suppliers;
- manage difficult scheduling and delivery problems; and
- develop and maintain relationships with key suppliers.
If we are unable to successfully integrate parts obtained from third party
suppliers, our business would suffer.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS.
Our success depends upon the continued contributions of key employees, many
of whom would be extremely difficult to replace. We do not have key person life
insurance on any of our personnel. Worldwide competition for skilled employees
in the hard disk drive industry is extremely intense. If we are unable to retain
existing employees or to hire and integrate new employees, our business,
financial condition and operating results could suffer. In addition, companies
in the hard disk drive industry whose employees accept positions with
competitors often claim that the competitors have engaged in unfair hiring
practices. We may be the subject of such claims in the future as we seek to hire
qualified personnel and we could incur substantial costs defending ourself
against those claims.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS OR AT ALL.
Our business is capital intensive and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:
- the rate of our sales growth;
- the level of our profits or losses;
- the timing and extent of our spending to expand manufacturing capacity,
support facilities upgrades and product development efforts;
- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
Any future equity financing will decrease the percentage equity ownership
of our stockholders and may, depending on the price at which the equity is sold,
result in significant economic dilution to them. Our board of directors will be
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of the common stock without
stockholder approval.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED AND IT IS EXPOSED TO THIRD
PARTY CLAIMS OF INFRINGEMENT.
We have patent protection on some of our technologies. After the merger, 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. 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
26
28
rights and the proprietary rights of others. Enforcing or defending our
proprietary rights could be expensive and might not bring us timely and
effective relief.
We may have to obtain licenses of other parties' intellectual property and
pay royalties. If we are unable to obtain such licenses, we may have to stop
production of our products or alter our products. In addition, the laws of
certain countries in which we sell and manufacture our products, including
various countries in Asia, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our
remedies in these countries may be inadequate to protect our proprietary rights.
Any failure to enforce and protect our intellectual property rights could harm
our business, financial condition and operating results.
WE ARE SUBJECT TO EXISTING INFRINGEMENT CLAIMS WHICH ARE COSTLY TO DEFEND AND
MAY HARM OUR BUSINESS.
We have been sued by Papst Licensing, GmbH, a German corporation, for
infringement of patents that relate to hard disk drives. Papst has asserted that
we infringe 13 patents. The lawsuit had been pending in the United States
District Court for the Northern District of California, but was transferred with
other litigation involving Papst patents to the United States District Court for
the Eastern District of Louisiana by the Judicial Panel on Multidistrict
Litigation for consolidated or coordinated proceedings. Papst's infringement
allegations are based on spindle motors that we purchase from third party motor
vendors, 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 Papst's patents.
While we believe that we have valid defenses to Papst's claims, the results
of any litigation are inherently uncertain and other infringement claims
relating to current patents, pending patent applications, and/or future patent
applications or issued patents could be asserted by Papst. Additionally, we
cannot assure you that we will be able to successfully defend ourselves against
this or any other Papst lawsuit. The Papst complaint asserts claims to an
unspecified dollar amount of damages. A favorable outcome for Papst in this
lawsuit could result in the issuance of an injunction against us and our
products and/or the payment of monetary damages equal to a reasonable royalty.
In the case of a finding of a willful infringement, we also could be required to
pay treble damages and Papst's attorney's fees. Accordingly, a litigation
outcome favorable to Papst could harm our business, financial condition, and
operating results.
In addition to the Papst lawsuit, other claims of infringement have been
made against us which have not been fully assessed and which could be material.
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 alter or
stop production of our products. There can be no assurance that such licenses
can be obtained on favorable terms and conditions and failure to obtain such
licenses or unfavorable terms and conditions for such licenses could harm our
business, financial condition, and operating results.
WE WILL FACE RISKS FROM OUR SUBSTANTIAL INTERNATIONAL OPERATIONS AND SALES.
We will conduct most of our manufacturing and testing operations and will
purchase a substantial portion of our key parts outside the United States. In
particular, our manufacturing operations will be concentrated in Singapore,
where our manufacturing operations are located. Such concentration of
manufacturing operations in Singapore will likely magnify the effects on us of
any labor shortages, political disruption, trade or tariff treaty changes, or
natural disasters relating to Singapore. 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 associated with staffing and managing international
operations;
- economic slowdown and/or downturn in the computer industry in foreign
markets;
- international currency fluctuations;
- general strikes or other disruptions in working conditions;
27
29
- political instability;
- trade restrictions;
- changes in tariffs;
- generally longer periods to collect receivables;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse taxes; and
- delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers.
The specific economic conditions in each country impact our international
sales. For example, our international contracts are denominated primarily in
U.S. dollars. Significant downward fluctuations in currency exchange rates
against the U.S. dollar could result in higher product prices and/or declining
margins and increased manufacturing costs. In addition, we attempt to manage the
impact of foreign currency exchange rate changes by entering into short-term,
foreign exchange contracts. If we do not effectively manage the risks associated
with international operations and sales, our business, financial condition and
operating results could suffer.
WE WILL BE 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. The standard warranties used by us
contain limits on damages and exclusions of liability for consequential damages
and for negligent or improper use of the products. We have established a
warranty provision, at the time of product shipment, in an amount equal to our
estimated warranty expenses. Although we believe that the warranty provision
will be sufficient, the failure to maintain a sufficient warranty provision or
the unenforceability of any liability limitations could harm our business,
financial condition and operating results.
WE COULD BE SUBJECT TO ENVIRONMENTAL LIABILITIES WHICH COULD INCREASE OUR
EXPENSES AND SUBJECT US TO LIABILITIES.
Although we use a limited variety of chemicals in its manufacturing and
research operations, we are subject to a wide range of environmental protection
regulations in the United States and Singapore. While we do not believe our
operations to date have been harmed as a result of such laws, future regulations
may increase our expenses and harm our business, financial condition and results
of operations. Even if we are in compliance in all material respects with all
present environmental regulations, in the United States environment regulations
often require parties to fund remedial action regardless of fault. As a
consequence, it is often difficult to estimate the future impact of
environmental matters, including potential liabilities. 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.
ANTITAKEOVER 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, however, 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
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30
offers, including offers at a price above the then-current market price for
Maxtor common stock. These provisions also may inhibit fluctuations in our stock
price that could result from takeover attempts.
WE ARE SUBJECT TO NUMEROUS RISKS RELATED TO THE MERGER WITH QUANTUM HDD.
In addition to the general operational and financial risk factors stated
above, we are subject to a number of risks specifically related to the pending
merger with Quantum HDD. These risks include, but are not limited to, the
following:
- We may be unsuccessful in integrating Quantum HDD's business operations
with our own. The challenges involved in integrating the two businesses
include, but are not limited to, the following:
- retaining the existing customers and employees of each business;
- coordinating research and development activities to permit efficient
time-to-market introductions and time-to-volume production for new
products and technologies;
- coordinating manufacturing operations in an optimum manner;
- integrating purchasing and procurement operations in multiple worldwide
locations;
- combining product offerings and product lines in a common platform and
incorporating acquired technology into new products effectively and
quickly;
- integrating sales efforts so that customers can do business easily with
us;
- transitioning all world-wide facilities to common accounting and
information technology systems;
- developing and maintaining uniform standards, controls, procedures and
policies; and
- controlling the costs associated with integration.
- We may fail to achieve the anticipated beneficial synergies such as cost
reductions.
- The equity interests of our stockholders may be diluted as a result of
the exercise after the closing of Quantum HDD options assumed at the
closing.
- - Our financial results will be adversely affected due to the costs of the
merger, which are expected to be between $80 million and $150 million, and
also due to the liabilities of Quantum HDD assumed by us in the merger, such
as any liability incurred by Quantum HDD in connection with the Papst
litigation in which it also is a named defendant.
- We may be unable to enter into manufacturing and purchase agreements with
MKE, which could result in our not having a source of supply for an
adequate volume of some of our products.
- We may be unable to secure assignment of the material contracts of
Quantum HDD or unable to continue our own material contracts following
the merger without adverse changes to their existing terms and
conditions.
- We may be required to pay a substantial termination fee to Quantum as a
result of the occurrence of certain triggering events which make us
unable or unwilling to complete the merger.
- We may be required to indemnify Quantum for the amount of any tax payable
by Quantum as a result of the split-off to the extent the 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 merger).
- In order to avoid the risk of triggering a tax obligation of Quantum, we
will be required to abide by potentially significant restrictions with
respect to our equity securities for two years after the merger which
could harm our ability to attract and retain key personnel. These same
restrictions will likely render us a less attractive acquisition
candidate for at least two years after the merger, and will also
adversely affect our ability to raise capital for two years after the
merger.
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31
A more complete discussion of the risks relevant to the merger is found in
the proxy statement-prospectus included as part of the Form S-4 registration
statement as filed by Maxtor with the Securities and Exchange Commission on
February 28, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT
We maintain an investment 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. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these factors, our
future investment income may fall short of expectations due to changes in
interest rates or we may suffer losses in principal if forced to sell securities
which have declined in market value due to change in interest rates. We do not
currently hedge these interest rate exposures.
The following table presents the hypothetical changes in fair values in the
financial instruments held at December 30, 2000 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
yield curve as measured by the Federal Funds Rate of plus or minus 50 basis
points ("BPS"), 100 BPS, and 150 BPS.
FAIR VALUE AS OF
INVESTMENT PORTFOLIO +150 BPS +100 BPS +50 BPS DECEMBER 30, 2000 -50 -100 BPS -150 BPS
- -------------------- ----------- ----------- -------- ----------------- ------- -------- --------
Financial
Instruments........ 181,525 181,996 182,470 182,949 183,431 183,916 184,401
% Change (0.78)% (0.52)% (0.26)% 0.26% 0.53% 0.79%
The following table presents the hypothetical changes in the fair value of
a public equity investment that is sensitive to changes in the stock market.
This equity security is held for purposes other than trading. 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 35 percent, and plus or minus 50 percent
were selected based on the probability of their occurrence.
VALUATION OF SECURITY VALUATION OF SECURITY
GIVEN X% INCREASE FAIR VALUE AS OF GIVEN X% DECREASE
IN THE SECURITY PRICE DECEMBER 30, 2000 IN THE SECURITY PRICE
--------------------- ----------------- ---------------------------
% Change 50% 25% 15% (15)% (25)% (50)%
Corporate equity
investment......... 3,720 3,100 2,852 2,480 2,108 1,860 1,240
FOREIGN CURRENCY FORWARD CONTRACT
We enter into foreign exchange forward contracts to manage foreign currency
exchange risk associated with our manufacturing operations in Singapore and
sales taxes in 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 for trading purposes. We do not expect gains
or losses on these contracts to have a material impact on our financial results
(see Note 3 to the Consolidated Financial Statements).
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32
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF MAXTOR CORPORATION
Consolidated Balance Sheets --
January 1, 2000 and December 30, 2000..................... 32
Consolidated Statements of Operations --
Fiscal years ended December 26, 1998, January 1, 2000 and
December 30, 2000......................................... 33
Consolidated Statements of Stockholders' Equity (Deficit) --
Fiscal years ended December 26, 1998, January 1, 2000 and
December 30, 2000......................................... 34
Consolidated Statements of Cash Flows --
Fiscal years ended December 26, 1998, January 1, 2000 and
December 30, 2000......................................... 35
Notes to Consolidated Financial Statements.................. 36
Report of Independent Accountants........................... 55
Financial Statement Schedules:
The following consolidated financial statement schedule of
Maxtor Corporation is filed as part of this Report and
should be read in conjunction with the Consolidated
Financial Statements of Maxtor Corporation
Schedule II Valuation and qualifying accounts............... S-1
Schedules not listed above have been omitted since they are
not applicable or are not required or the information
required to be set therein is included in the Consolidated
Financial Statements or notes thereto
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33
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
Current assets:
Cash and cash equivalents................................. $ 240,357 $ 193,228
Marketable securities..................................... 113,565 182,949
Accounts receivable, net of allowance of doubtful accounts
$15,459 at January 1, 2000 and $15,148 at December 30,
2000................................................... 231,616 284,253
Inventories, net.......................................... 103,854 106,405
Prepaid expenses and other................................ 12,338 34,577
---------- ----------
Total current assets.............................. 701,730 801,412
Property, plant and equipment, net.......................... 132,089 165,926
Goodwill and other intangible assets, net................... 55,107 44,237
Other assets................................................ 17,409 13,344
---------- ----------
Total assets...................................... $ 906,335 $1,024,919
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 5,000 $ 15,432
Accounts payable.......................................... 404,874 421,338
Accrued and other liabilities............................. 127,321 192,152
---------- ----------
Total current liabilities......................... 537,195 628,922
Long-term debt, net of current portion...................... 113,770 92,259
---------- ----------
Total liabilities................................. 650,965 721,181
Commitments and contingencies (Note 8)
Common stock, $0.01 par value, 250,000,000 shares
authorized; 113,428,924 shares issued and outstanding at
January 1, 2000 and 116,205,270 shares issued and
outstanding at December 30, 2000.......................... 1,119 1,162
Additional paid-in capital.................................. 1,043,964 1,059,899
Accumulated deficit......................................... (791,928) (760,126)
Cumulative other comprehensive income....................... 2,215 2,803
---------- ----------
Total stockholders' equity........................ 255,370 303,738
---------- ----------
Total liabilities and stockholders' equity........ $ 906,335 $1,024,919
========== ==========
The accompanying notes are an integral part of these financial statements.
32
34
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED
--------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ------------ ------------
Revenue........................................... $ 2,402,286 $ 2,486,123 $ 2,704,859
Revenue from affiliates........................... 6,242 -- --
----------- ------------ ------------
Total revenue........................... 2,408,528 2,486,123 2,704,859
Cost of revenue................................... 2,102,624 2,287,316 2,328,345
Cost of revenue from affiliates................... 5,491 -- --
----------- ------------ ------------
Total cost of revenue................... 2,108,115 2,287,316 2,328,345
----------- ------------ ------------
Gross profit............................ 300,413 198,807 376,514
----------- ------------ ------------
Operating expenses:
Research and development........................ 158,445 192,730 235,006
Selling, general and administrative............. 81,863 90,492 110,507
Acquired in-process technology.................. -- 7,028 --
Amortization of goodwill and other intangible
assets....................................... -- 3,118 9,906
----------- ------------ ------------
Total operating expenses................ 240,308 293,368 355,419
----------- ------------ ------------
Income (loss) from operations..................... 60,105 (94,561) 21,095
Interest expense.................................. (28,784) (13,723) (13,731)
Interest and other income......................... 7,415 15,592 24,291
Gain on sale of investment........................ -- 44,085 1,820
----------- ------------ ------------
Income (loss) before income taxes................. 38,736 (48,607) 33,475
Provision for income taxes........................ 7,563 1,541 1,673
----------- ------------ ------------
Net income (loss)................................. 31,173 (50,148) 31,802
Unrealized gain on investments in equity
securities, net of tax.......................... 13,832 16,206 2,408
Less: reclassification adjustment for gain
included in net income (loss)................... -- (44,085) (1,820)
----------- ------------ ------------
Comprehensive income (loss)....................... $ 45,005 $ (78,027) $ 32,390
=========== ============ ============
Net income (loss) per share -- basic.............. $ 0.81 $ (0.48) $ 0.28
Net income (loss) per share -- diluted............ $ 0.47 $ (0.48) $ 0.27
Shares used in per share calculation
-- basic........................................ 38,295,095 105,503,281 113,432,679
-- diluted...................................... 65,814,126 105,503,281 119,115,982
The accompanying notes are an integral part of these financial statements.
33
35
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK
-------------------- -------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT
----------- ------ ----------- ------ --------------- -----------
Balance, December 27, 1997......... 88,059,701 $ 880 7,563 $ -- $ 534,765 $(772,953)
Issuance of stock under stock
option and restricted stock
plan............................. -- -- 524,861 5 1,259 --
Issuance of common stock in initial
public offering.................. -- -- 49,731,225 498 328,348 --
Conversion of preferred stock to
common stock..................... (88,059,701) (880) 44,029,850 440 440 --
Stock compensation................. -- -- -- -- 12,088 --
Stock compensation reimbursement
due from an affiliate............ -- -- -- -- 3,275 --
Change in unrealized gain on
investments in equity
securities....................... -- -- -- -- -- --
Net income......................... -- -- -- -- -- 31,173
----------- ----- ----------- ------ ---------- ---------
Balance, December 26, 1998......... -- -- 94,293,499 943 880,175 (741,780)
Issuance of stock under stock
option plan and related
benefits......................... -- -- 3,205,743 17 8,915 --
Issuance of common stock in
secondary public offering........ -- -- 7,800,000 78 95,722 --
Issuance of stock in acquisition... -- -- 8,129,682 81 56,715 --
Stock compensation................. -- -- -- -- 2,437 --
Change in unrealized gain on
investments in equity
securities....................... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (50,148)
----------- ----- ----------- ------ ---------- ---------
Balance, January 1, 2000........... -- -- 113,428,924 1,119 1,043,964 (791,928)
Issuance of stock under stock
option plan and related
benefits......................... -- -- 2,776,346 43 11,763 --
Stock compensation................. -- -- -- -- 4,172 --
Change in unrealized gain on
investments in equity
securities....................... -- -- -- -- -- --
Net income......................... -- -- -- -- -- 31,802
----------- ----- ----------- ------ ---------- ---------
Balance, December 30, 2000......... -- $ -- 116,205,270 $1,162 $1,059,899 $(760,126)
=========== ===== =========== ====== ========== =========
TOTAL
CUMULATIVE OTHER STOCKHOLDERS'
COMPREHENSIVE INCOME EQUITY (DEFICIT)
-------------------- ----------------
Balance, December 27, 1997......... $ 16,262 $(221,046)
Issuance of stock under stock
option and restricted stock
plan............................. -- 1,264
Issuance of common stock in initial
public offering.................. -- 328,846
Conversion of preferred stock to
common stock..................... -- --
Stock compensation................. -- 12,088
Stock compensation reimbursement
due from an affiliate............ -- 3,275
Change in unrealized gain on
investments in equity
securities....................... 13,832 13,832
Net income......................... -- 31,173
-------- ---------
Balance, December 26, 1998......... 30,094 169,432
Issuance of stock under stock
option plan and related
benefits......................... -- 8,932
Issuance of common stock in
secondary public offering........ -- 95,800
Issuance of stock in acquisition... -- 56,796
Stock compensation................. -- 2,437
Change in unrealized gain on
investments in equity
securities....................... (27,879) (27,879)
Net loss........................... -- (50,148)
-------- ---------
Balance, January 1, 2000........... 2,215 255,370
Issuance of stock under stock
option plan and related
benefits......................... -- 11,806
Stock compensation................. -- 4,172
Change in unrealized gain on
investments in equity
securities....................... 588 588
Net income......................... -- 31,802
-------- ---------
Balance, December 30, 2000......... $ 2,803 $ 303,738
======== =========
The accompanying notes are an integral part of these financial statements.
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36
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 31,173 $(50,148) $ 31,802
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 74,203 83,219 82,136
Amortization of goodwill and other intangible assets...... -- 3,118 9,906
Acquired in-process technology............................ -- 7,028 --
Stock compensation expense................................ 12,543 4,947 4,172
Loss (gain) on sale of property, plant and equipment and
other assets............................................ 3,562 (603) 2,144
Gain on sale of investment................................ -- (44,085) (1,820)
Change in assets and liabilities:
Accounts receivable..................................... (66,836) 87,254 (52,637)
Inventories............................................. 2,120 49,586 (2,551)
Other assets............................................ (10,552) (7,206) (21,320)
Accounts payable........................................ 201,813 (24,343) 14,232
Accrued and other liabilities........................... 40,112 6,400 63,203
--------- -------- ---------
Net cash provided by operating activities........... 288,138 115,167 129,267
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment......... 3,323 339 1,930
Purchase of property, plant and equipment................... (95,230) (105,124) (117,815)
Cash acquired from acquisition.............................. -- 710 --
Purchase of marketable securities........................... (13,503) (110,062) (69,384)
Proceeds from sale of investment............................ -- 44,085 1,820
Proceeds from matured securities............................ -- 10,000 --
Other....................................................... 3,635 (2,309) --
--------- -------- ---------
Net cash used in investing activities............... (101,775) (162,361) (183,449)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, including short-term
borrowings................................................ 69,775 28,743 --
Principal payments of debt. including short-term
borrowings................................................ (308,838) (60,050) (5,036)
Net payments under accounts receivable securitization....... (79,754) -- --
Proceeds from issuance of common stock from public offering,
employee stock purchase plan and stock options
exercised................................................. 329,655 104,732 12,089
--------- -------- ---------
Net cash provided by financing activities........... 10,838 73,425 7,053
--------- -------- ---------
Net change in cash and cash equivalents..................... 197,201 26,231 (47,129)
Cash and cash equivalents at beginning of year.............. 16,925 214,126 240,357
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 214,126 $240,357 $ 193,228
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 24,047 $ 13,833 $ 14,440
Income taxes............................................ $ 1,022 $ 304 $ 875
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property, plant and equipment financed by
accounts payable........................................ $ 2,991 $ 374 $ 2,606
Retirement of debt in exchange for bond redemption........ $ -- $ 5,000 $ 5,000
Increase (decrease) in unrealized gain on investments in
equity securities....................................... $ 13,832 $(27,879) $ 588
Stock compensation reimbursement due from an affiliate.... $ 3,275 $ -- $ --
Common stock issued for acquisition....................... $ -- $ 56,796 $ --
The accompanying notes are an integral part of these financial statements.
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MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Maxtor
Corporation and its wholly-owned subsidiaries ("Maxtor" or the "Company"). All
significant inter-company accounts and transactions have been eliminated.
NATURE OF BUSINESS
Maxtor develops, manufactures and markets hard disk drive products for
desktop applications to customers that sell their products in the personal
computer industry. Customers include original equipment manufacturers ("OEM"s),
distributors, and national retailers. Additionally, several smaller retailers
and value-added resellers ("VAR"s) carry Maxtor products purchased through the
Company's distribution network. The Company relies on suppliers for components
including heads, disks and custom integrated circuits. Although printed circuit
board assemblies and head stack assemblies are outsourced, head disk assemblies
are completed by Maxtor. All of the Company's products are manufactured by
Maxtor at the Company's manufacturing facility in Singapore and sold in America,
Europe and Asia.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on Maxtor if the actual rate of unit failure or the
cost to repair a unit is greater than what the Company has used in estimating
its warranty expense accrual.
Given the volatility of the market for disk drives and for the Company's
products, the Company makes adjustments to the value of inventories based on
estimates of potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted average selling
prices. However, forecasts are always subject to revisions, cancellations, and
rescheduling. Actual demand will inevitably differ from such anticipated demand
and such differences may have a material impact on the financial statements.
RISKS AND UNCERTAINTIES
The Company's business entails a number of risks. As is typical in the disk
drive industry, the Company must utilize leading edge components for its new
generation of products, which may only be available from a limited number of
suppliers. While the Company is qualified and continues to qualify multiple
sources for many components, the Company constantly relies on the availability
of supplies from its vendors for many semi-custom and custom integrated
circuits, heads, media and other key components. Any de-commitments from
customers for product or delays of components from vendors could have an adverse
impact on the Company's ability to ship products as scheduled to its customers.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject Maxtor to concentrations of
credit risk consist primarily of accounts receivable, cash equivalents and
marketable securities. The Company has cash equivalents and marketable
securities policies that limit the amount of credit exposure to any one
financial institution and restrict placement of these funds to financial
institutions evaluated as highly credit-worthy. Maxtor's products are sold
worldwide to OEMs, distributors, and retailers. Concentration of credit risk
with respect to the Company's trade receivables is limited by an ongoing credit
evaluation process and the geographical dispersion
36
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MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of sales transactions. Therefore, collateral is generally not required from the
Company's customers. The allowance for doubtful accounts is based upon the
expected collectibility of all accounts receivable. As of January 1, 2000, the
Company had one customer who accounted for more than 10% of the outstanding
trade receivables. As of December 30, 2000, the Company had two customers who
collectively represented more than 27% of outstanding trade receivables. If the
customers fail to perform their obligations to us, such failures would have
adverse effects upon Maxtor's financial position, results of operations, cash
flows and liquidity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at time of purchase to be cash equivalents.
MARKETABLE SECURITIES
The Company's marketable securities comprise U.S., state, and municipal
government obligations; corporate debt securities; bank issues; and mortgage
backed securities. These marketable securities have maturities of less than one
year and are carried at fair value. All marketable securities are primarily held
in the Company's name and custodied with two major financial institutions. The
specific identification method is used to determine the cost of securities
disposed. At January 1, 2000 and December 30, 2000, substantially all of the
Company's investments were classified as available for sale. Unrealized gains
and losses on these investments are included as a separate component of
shareholders' equity, net of any related tax effect.
EQUITY SECURITIES
All equity securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value. Unrealized gains and
losses on securities classified as available-for-sale, when material, are
reported net of taxes as a separate component of stockholders' equity. Realized
gains and losses on sales of all such investments are included in the results of
operations computed using the specific identification cost method.
INVENTORIES
Inventories are stated at the lower of cost (computed on a first-in,
first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets, which
generally range from three to five years, except for buildings which are
depreciated over thirty years. Assets under capital leases and leasehold
improvements are amortized over the shorter of the asset life or the remaining
lease term. Capital lease amortization is included with depreciation expense.
Upon disposal, the Company removes the asset and accumulated depreciation from
its records and recognizes the related gain or loss in results of operations.
37
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MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of business acquired, and other intangible
assets, representing workforce, customer list and other current products and
technology, are being amortized over the estimated useful lives ranging from one
to seven years. The Company will evaluate the periods of amortization
continually to determine whether later events and circumstances warrant renewed
estimates of useful lives.
YEARS ENDED
-------------------------------------
JANUARY 1, 2000 DECEMBER 30, 2000
---------------- -----------------
Goodwill..................................... $47,953 $ 47,166
Existing technology.......................... 8,625 8,625
Workforce.................................... 866 866
Customer list................................ 780 780
------- --------
58,224 57,437
Accumulated amortization..................... (3,117) (13,200)
------- --------
Goodwill and other intangible assets, net.... $55,107 $ 44,237
======= ========
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue is recognized upon product shipment. Revenue from sales to certain
distributors is subject to agreements providing limited rights of return, as
well as price protection on unsold merchandise. Accordingly, the Company records
reserves upon shipment for estimated returns, exchanges and credits for price
protection. The Company also provides for the estimated cost to repair or
replace products under warranty at the time of sale. The Company currently
warrants its products against defects in parts and labor from the date of
shipment with an additional three months allowed for distributors to account for
"shelf life." All products currently in production are warranted for a period of
36 months after shipment.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company is required to adjust
its deferred tax assets and liabilities in the period when tax rates or the
provisions of the income tax laws change. Valuation allowances are established
to reduce deferred tax assets to the amounts expected to be realized.
FOREIGN CURRENCY TRANSLATION
The functional currency for all foreign operations is the U.S. dollar. As
such, all material foreign exchange gains or losses are included in the
determination of net income (loss). Net foreign exchange losses included in net
income (loss) for the fiscal years ended December 26, 1998, January 1, 2000 and
December 30, 2000 were immaterial.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company reviews property, plant and equipment and
other long lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of its carrying amount to
future net cash flows the assets are expected to generate. If
38
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MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the asset exceeds the net
present value of the future net cash flows.
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
The Company accounts for its accounts receivable securitization program in
accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
STOCK-BASED COMPENSATION
The Company has elected to continue to follow the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations thereof for financial reporting purposes
and has adopted the disclosure only provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation."
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed in accordance with SFAS No.
128, "Earnings per Share." Basic net income (loss) per share is computed using
the weighted average common shares outstanding during the year which is
exclusive of stock subject to future vesting. Diluted net income (loss) per
share is computed using the weighted average common shares and potentially
dilutive securities outstanding during the year. Potentially dilutive securities
are excluded from the computation of diluted net loss per share for those
presented years in which their effect would be anti-dilutive due to the
Company's net losses.
COMPREHENSIVE INCOME
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Cumulative other comprehensive income,
as presented on the accompanying consolidated balance sheets, consists of the
net unrealized gains on available-for-sale securities, net of tax.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to current year classifications. These reclassifications had no impact on prior
year stockholders' equity or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes methods of accounting for derivative instruments and hedging
activities related to those instruments as well as other hedging activities, and
is effective for fiscal years beginning after June 15, 2000, as amended by SFAS
No. 137. In June 2000, the Financial Accounting Standards Board issued SFAS No.
138, "Accounting for Derivatives Instruments and Hedging Activities -- An
Amendment of FASB Statement No. 133." SFAS No. 138 amends the accounting and
reporting standards for certain derivatives and hedging activities such as net
settlement contracts, foreign currency transactions and intercompany
derivatives. The Company is required to adopt SFAS 133 in the first quarter of
fiscal 2001. The initial adoption of SFAS 133 is not material to the Company's
financial statements and the impact on future periods will depend on the
Company's future activity.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC issued SAB
No. 101A to defer for one quarter the effective date of implementation of SAB
101 with earlier application encouraged. Subsequently, in June 2000, the SEC
issued SAB No. 101B to defer the implementa-
39
41
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tion of SAB 101 until the fourth quarter of 2000. The Company has adopted the
provisions of SAB 101 in these financial statements for all periods presented
and there is no material impact to the financial statements that results from
the adoption of SAB101.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions in SFAS 125 without reconsideration. SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities, is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. SFAS 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This Statement is to be
applied prospectively with certain exceptions. The Company has adopted the
provisions of SFAS No. 140.
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
Inventories:
Raw materials............................................. $ 29,027 $ 34,164
Work-in-process........................................... 2,302 8,352
Finished goods............................................ 72,525 63,889
--------- ---------
$ 103,854 $ 106,405
========= =========
Prepaid expenses and other:
Investments in equity securities, at fair value........... $ 2,215 $ 2,480
Prepaid expenses and other................................ 10,123 32,097
--------- ---------
$ 12,338 $ 34,577
========= =========
Property, plant and equipment, at cost:
Buildings................................................. $ 55,174 $ 60,396
Machinery and equipment................................... 248,880 321,024
Software.................................................. 48,129 55,200
Furniture and fixtures.................................... 10,149 11,631
Leasehold improvements.................................... 14,601 18,294
--------- ---------
$ 376,933 $ 466,545
Less accumulated depreciation and amortization.............. (244,844) (300,619)
--------- ---------
Net property, plant and equipment........................... $ 132,089 $ 165,926
========= =========
Accrued and other liabilities:
Income taxes payable...................................... $ 7,291 $ 8,080
Accrued payroll and payroll-related expenses.............. 39,228 60,608
Accrued warranty.......................................... 51,236 71,777
Accrued expenses.......................................... 29,566 51,687
--------- ---------
$ 127,321 $ 192,152
========= =========
40
42
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The fair values of cash and cash equivalents approximate carrying values
because of their short maturities. The carrying values of notes receivable,
which are classified in other assets, approximate fair values. The fair values
of the Company's variable rate debt approximate carrying values as these
instruments are adjusted periodically during the course of the year at market
prices. The fair values of the Company's convertible subordinated debentures are
based on the bid price of the last trade for the fiscal years ended January 1,
2000 and December 30, 2000.
The carrying values and fair values of the Company's financial instruments
are as follows (in thousands):
JANUARY 1, 2000 DECEMBER 30, 2000
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Cash and cash equivalents....................... $240,357 $240,357 $193,228 $193,228
Marketable securities........................... 113,565 113,565 182,949 182,949
Notes receivable................................ 331 331 170 170
Equity securities............................... 2,215 2,215 2,480 2,480
Short and long-term debt: variable rates........ 28,763 28,763 27,818 27,818
Subordinated debentures......................... $ 90,000 $ 63,000 $ 79,871 $ 55,451
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into currency forward contracts to manage foreign
currency exchange risk associated with its manufacturing operations in
Singapore. The Company's policy is to hedge all material transaction exposures
on a quarterly basis. Contracts are generally entered into at the beginning of
each fiscal quarter to reduce foreign currency exposures for that quarter.
Contracts generally have maturities of three months or less. Any gains or losses
on these instruments are accounted for in accordance with SFAS No. 52, "Foreign
Currency Translation," and are generally included in cost of revenue. Unrealized
gains or losses on foreign currency forward contracts that are designated and
effective as hedges of firm commitments, are deferred and recorded in the same
period as the underlying transaction. Notional amounts of outstanding currency
forward contracts were $0 and $3 million, as of January 1, 2000 and December 30,
2000, respectively.
SALES OF ACCOUNTS RECEIVABLES
On July 31, 1998, the Company entered into a three-year agreement with
Fleet Bank for a $200.0 million asset securitization program. Under the Fleet
Bank program, the Company sold all of its eligible trade accounts receivable on
a non-recourse basis through a special purpose entity. As of January 1, 2000 and
December 30, 2000, $100 million and $75 million of accounts receivable had been
sold under this arrangement and have been excluded from the Company's balance
sheet.
As part of this arrangement, the Company is subject to financial covenants
including the maintenance of certain financial ratios and a tangible net worth
test.
4. GAINS ON SALES OF INVESTMENT
In 1999, the Company sold its equity investment in Celestica Inc.,
resulting in a gain on sale of investment of approximately $44.1 million. In
2000, the Company sold its investment in Headway Technologies, Inc., resulting
in a gain on sale of investment of approximately $1.8 million.
41
43
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS
In September 1999, the Company acquired all the outstanding stock of
Creative Design Solutions, Inc. ("CDS"), in exchange for a total of 8,129,682
shares of the Company's common stock and assumption of outstanding CDS stock
options for an aggregate purchase price of approximately $57.6 million,
including acquisition expenses.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their fair values on the acquisition date of September 10, 1999. Approximately
$2.7 million of the aggregate purchase price was allocated to net tangible
assets consisting primarily of cash, accounts receivable, inventory, prepaids,
and property, plant and equipment, and $10.4 million to short-term borrowings,
accounts payable and accrued liabilities. The historical carrying amounts of
such net assets approximated their fair values. Approximately $7 million was
allocated to acquired in-process technology and was immediately charged to
operations at the acquisition date because it had no alternative future uses.
Approximately $10.3 million was allocated to current products and technology,
workforce and customer list, which are being amortized over their estimated
useful lives ranging from 1 to 7 years. The purchase price in excess of the fair
value of identified tangible and intangible assets and liabilities assumed in
the amount of $48.1 million was allocated to goodwill and is being amortized
over its estimated useful life of 7 years. The Company will evaluate the periods
of amortization continually to determine whether later events and circumstances
warrant revised estimates of useful lives.
The following unaudited proforma consolidated amounts give effect to the
acquisition of CDS as if it had occurred on December 28, 1997 and December 27,
1998 by consolidating the results of operations of CDS with the Company's
results for the fiscal years ended December 26, 1998 and January 1, 2000,
respectively (in thousands, except share and per share data):
YEARS ENDED
----------------------------
DECEMBER 26, JANUARY 1,
1998 2000
------------ ------------
(IN THOUSANDS)
Revenue..................................................... $ 2,409,094 $ 2,486,646
Net income (loss)........................................... $ 16,259 $ (63,291)
Net income (loss) per share:
Basic..................................................... $ 0.35 $ (0.59)
Diluted................................................... $ 0.22 $ (0.59)
Shares used in per share calculations:
Basic..................................................... 46,424,777 107,044,347
Diluted................................................... 74,303,301 107,044,347
The above unaudited proforma consolidated amounts are not necessarily
indicative of the actual results of operations that would have been reported if
the acquisition had actually occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
the Company's future operations. In the opinion of management, all adjustments
necessary to present fairly such proforma amounts have been made.
On October 3, 2000, the Company entered into a definitive acquisition
agreement with Quantum Corporation to combine Maxtor with Quantum's Hard Disk
Drive Group, pursuant to which, on closing, Quantum HDD Stockholders are to
receive 1.52 shares of Maxtor Common Stock for each share of Quantum HDD stock
they hold at the closing date of the merger. The transaction is to be accounted
for under the purchase method of accounting. Completion of the merger, which is
expected in April 2001, is subject to the approval of Maxtor and Quantum
stockholders.
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MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SEGMENT AND MAJOR CUSTOMERS INFORMATION
Based on the criteria set forth is SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," the Company has determined
that it has two reportable segments; hard disk drive operations and the network
systems group. The Company has a world-wide sales, service and distribution
network. Products are marketed and sold through a direct sales force to OEMs,
distributors and retailers in the United States, Europe and Asia Pacific.
The following table presents net revenue and net income (loss) for groups
of similar products (in millions):
YEARS ENDED
----------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
Net revenue:
Hard Disk Drive Operations.................................. $ 2,409 $ 2,485 $ 2,691
Network Systems Group....................................... -- 1 14
------- -------- --------
Total....................................................... $ 2,409 $ 2,486 $ 2,705
======= ======== ========
Net income (loss):
Hard Disk Drive Operations.................................. $31,173 $(36,150) $ 73,449
Network System Group........................................ -- (13,998) (41,647)
------- -------- --------
Total............................................. $31,173 $(50,148) $ 31,802
======= ======== ========
Assets of the segment groups are not relevant for management of the
business or for disclosure.
Operations outside the United States primarily consist of the manufacturing
plant in Singapore that produces subassemblies and final assemblies for the
Company's disk drive products. For the year ended January 1, 2000, the Company
has retroactively changed the method of presenting geographic revenue
information from point of origination to point of destination. The Company
applied the same method for the year ended December 30, 2000. Revenue by
destination and long-lived asset information by geographic area for each of the
three fiscal years is presented in the following table:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 26, 1998 JANUARY 1, 2000 DECEMBER 30, 2000
----------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
United States................. $1,493,271 $ 41,912 $1,781,296 $108,807 $1,248,525 $ 97,436
Asia Pacific.................. 317,033 65,797 342,890 77,832 720,083 111,858
Europe........................ 532,698 581 312,168 557 646,335 869
Latin America and other....... 65,526 -- 49,769 -- 89,916 --
---------- -------- ---------- -------- ---------- --------
Total......................... $2,408,528 $108,290 $2,486,123 $187,196 $2,704,859 $210,163
========== ======== ========== ======== ========== ========
Revenues are substantially originated from the United States. No individual
foreign country's revenue is material to the Company as a whole. Long-lived
assets located outside the United States consist primarily of the Company's
manufacturing operations located in Singapore which amounted to $65.5 million,
$77.5 and $111.5 million as of December 26, 1998, January 1, 2000 and December
30, 2000, respectively.
During the year ended December 26, 1998, two customers, Dell and IBM,
accounted for approximately 27% and 15% respectively, of the Company's revenue.
During the year ended January 1, 2000, Dell accounted for approximately 22.8% of
revenue. During the year ended December 30, 2000, Dell accounted for
approximately 14.2% of revenue.
43
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MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales to OEMs represented 77%, 75% and 70% of total revenue for the years
ended December 26, 1998, January 1, 2000 and December 30, 2000, respectively.
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt consist of the following (in
thousands):
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
5.75% Subordinated Debentures due March 1, 2012............. $ 90,000 $ 79,871
4-year loan due to Economic Development Board of Singapore;
interest payable at 1% above prevailing Central Provident
Fund lending rate, subject to minimum of 3.5% per year.... 28,763 27,818
Other obligations, including capital leases................. 7 2
-------- --------
118,770 107,691
Less amounts due within one year............................ (5,000) (15,432)
-------- --------
Due after one year.......................................... $113,770 $ 92,259
======== ========
Future aggregate maturities as of January 1, 2000 are as follows:
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
2001................................................... $ 15,432
2002................................................... 10,795
2003................................................... 10,795
2004................................................... 10,796
2005................................................... 5,000
Thereafter............................................. 54,873
--------
Total.................................................. $107,691
========
Interest on the Subordinated Debentures ("Debentures") is payable
semi-annually. The Debentures are convertible at the option of the holder into a
cash payment of $167.50 for each $1,000 principal amount at any time. The
Debentures, at the Company's option, are redeemable at 100.575% of the
outstanding principal amount, plus accrued interest. The Debentures require a
sinking fund payment of $5.0 million, payable annually, that is calculated to
retire at least 70% of the Debentures prior to maturity. The Debentures are
subordinated in right to payment to all senior indebtedness.
In September 1999, Maxtor's Singapore subsidiary Maxtor Peripherals (S) Pte
Ltd entered into a four-year loan agreement with the Economic Development Board
of Singapore (the "Board") for SGD48 million, which will amortize in 7 equal
semi-annual installments beginning March 2001. Interest is charged by the Board
at 1% above the prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year. This loan is supported by a two-year guaranty from the
Bank of Nova Scotia at an interest rate of 0.15% per year. This guaranty is
currently collateralized by cash but the Company may, at its option, substitute
other assets as security.
44
46
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its principal facilities and certain
machinery and equipment under operating lease arrangements. The future minimum
annual rental commitments as of December 30, 2000 are as follows:
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
2001................................................... $ 17,849
2002................................................... 12,761
2003................................................... 10,769
2004................................................... 8,120
2005................................................... 6,946
Thereafter............................................. 64,717
--------
Total.................................................. $121,162
========
The above commitments extend through fiscal year 2018. Rental expense was
approximately $11.6 million, $15.3 million and $12.7 million for the years ended
December 26, 1998, January 1, 2000 and December 30, 2000 respectively.
Pursuant to a sublicense agreement with Hyundai Electronics Industries Co.
Ltd. ("HEI"), the Company is obligated to pay a portion of an IBM license
royalty fee otherwise due from HEI. Such payments are due in annual installments
through 2007. As of December 30, 2000, aggregate future payments under this
commitment are estimated at $10.5 million.
LEGAL PROCEEDINGS
The Company was previously involved in a dispute with StorMedia
Incorporated, which arose out of an agreement among Maxtor, StorMedia and
Hyundai Electronics Industries. On February 8, 2001, the Bankruptcy Court for
the Northern District of California, San Jose Division, entered an order
implementing and approving as fair and reasonable the terms of a settlement
agreement pursuant to which Hyundai and Maxtor paid to StorMedia an aggregate of
$9.7 million in settlement of the parties' dispute. This settlement amount is
accrued in Maxtor's fiscal year 2000 financial statements. The settlement is now
final and all cases relating to this matter have been dismissed.
The Company also has also been in litigation with Magnetic Media
Development, LLC, or MMD, in the United States District Court for the Central
District of California, over assertions that Maxtor infringed certain patents
owned by MMD. The patents relate to magnetic media that Maxtor purchases from
third party media vendors for use in its hard disk drives. The Company made a
settlement payment on March 26, 2001 to MMD and obtained a release from MMD of
all claims asserted or that could have been asserted against Maxtor.
Additionally, the Company has obtained a paid-up license for any future
activities that may come within the scope of the MMD patents. The pending
lawsuit is in the process of being dismissed by the court with prejudice.
On March 18, 1999, Maxtor was sued by Papst Licensing, GmbH, a German
corporation, for infringement of patents that relate to hard disk drives. Papst
has asserted that Maxtor infringes 13 patents. The lawsuit had been pending in
the United States District Court for the Northern District of California, but
was transferred with other litigation involving Papst patents to the United
States District Court for the Eastern District of Louisiana by the Judicial
Panel on Multidistrict Litigation for consolidated or coordinated proceedings.
Papst's infringement allegations are based on spindle motors that Maxtor
purchases from third party motor vendors, and the use of such spindle motors in
hard disk drives. Maxtor purchased the overwhelming majority of the spindle
motors used in its hard disk drives from vendors that were licensed under
Papst's patents.
45
47
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
While Maxtor believes that it has valid defenses to Papst's claims, the
results of any litigation are inherently uncertain and other infringement claims
relating to current patents, pending patent applications, and/or future patent
applications or issued patents could be asserted by Papst. Additionally, Maxtor
cannot assure you that it will be able to successfully defend itself against
this or any other Papst lawsuit. The Papst complaint asserts claims to an
unspecified dollar amount of damages. A favorable outcome for Papst in this
lawsuit could result in the issuance of an injunction against Maxtor and its
products and/or the payment of monetary damages equal to a reasonable royalty.
In the case of a finding of a willful infringement, the Company also could be
required to pay treble damages and Papst's attorney's fees. Accordingly, a
litigation outcome favorable to Papst could harm the Company's business,
financial condition, and operating results.
9. RELATED PARTY TRANSACTIONS
Relationship with HEA and HEI
In 1994, HEI and certain of its affiliates purchased 40% of Maxtor's
outstanding common stock for $150.0 million in cash. In early 1996, HEA acquired
all of the remaining shares of publicly-held common stock in a tender offer and
merger for $215.0 million in cash and also acquired all of Maxtor's common stock
held by HEI and its affiliates. Maxtor operated as a wholly owned subsidiary of
HEA until completion of its July 31, 1998 initial public offering which reduced
the ownership interest of HEA to below 50%.
From August 1995 through July 1998, HEI and its affiliates guaranteed
Maxtor's various credit facilities, all of which were repaid and related
guarantee arrangements terminated in connection with the Company's initial
public offering.
The Company's Board of Directors has established an affiliated transactions
committee which consists entirely of directors who are not employed by HEA, any
affiliate thereof or the Company. The Board of Directors has adopted resolutions
requiring this Affiliated Transactions Committee to review any material
transactions between Maxtor and HEA or its affiliates. Also, the Company's
Amended and Restated Certificate of Incorporation have certain provisions
concerning the conduct of certain affairs of Maxtor as they may involve HEA and
its affiliates and the Company.
Transactions with Affiliates
In April 1997, HEA renewed a revolving line of credit with a borrowing
limit of $150 million, which was increased to $185 million in June 1997, and to
$270 million in August 1997. In December 1997, $200 million of this outstanding
indebtedness was cancelled in exchange for 29,850,746 shares of the Company's
preferred stock, the borrowing limit was reduced to $150 million, and $5 million
in principal was repaid. In January 1998, the Company repaid an additional $10
million in principal. In April 1998, the revolving credit line was renewed with
a borrowing limit of $100 million. On July 31, 1998, the revolving line, which
had an outstanding principal balance of $55 million, was replaced with a
three-year subordinated term note in the same principal amount. This note was
paid off in the first quarter of 1999. As of December 31, 2000, the Company has
no outstanding indebtedness to HEA.
The cost of revenue includes certain component parts purchased from MMC
Technology, Inc., a wholly owned subsidiary of HEA, amounting to $146.8 million
during the year ended December 26, 1998, $150.2 million during the year ended
January 1, 2000 and $161.9 million during the year ended December 30, 2000. The
cost of revenue also includes certain component parts purchased from HEI which
to date have not been significant.
Pursuant to a sublicense agreement with HEI, the Company is obligated to
pay a portion of an IBM license royalty fee otherwise due from HEI. Such
payments are due in annual installments through 2007. In connection with this
obligation, the Company recorded $1.1 million of expense in the year ended
Decem-
46
48
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ber 26, 1998. For the years ended January 1, 2000 and December 30, 2000, the
Company recorded $1.9 million of expense in each year in connection with the
obligation.
HEA currently is an unconditional guarantor of the Company's facilities
lease in Milpitas, California. The aggregate rent under the lease is currently
$3.24 million per annum.
Stockholder Agreement with HEA and HEI
The Company, HEA and HEI ("Hyundai Affiliates") are parties to a
stockholder agreement which includes provisions for HEA to nominate directors
based on the ownership interest of the Hyundai Affiliates, prohibition of
certain proxy solicitations by Hyundai Affiliates, and rights of the Hyundai
Affiliates to maintain stock ownership.
When the Hyundai Affiliates beneficially own less than a majority, but at
least 30% of the outstanding voting stock, HEA has the right to designate for
nomination one director in each of the three classes of the Company's Board of
Directors.
Standstill and Right to Maintain Ownership; Substantial Stock
Ownership. Hyundai Affiliates are not permitted to acquire additional shares of
voting stock except for two reasons. First, Hyundai Affiliates may purchase
voting stock if a third party makes a tender offer or exchange offer for at
least 40% or accumulates more than 20% of voting stock, unless these actions by
the third party have been approved by a majority of directors who are not
employees of any Hyundai entity or Maxtor. Second, Hyundai Affiliates could
purchase voting stock through December 31, 2000, if as a result of an issuance
of common stock or other equity securities, Hyundai Affiliates owned in the
aggregate less than 30% of outstanding voting stock, plus one share (the
"Minimum Ownership") following such issuance. The prohibition on Hyundai
Affiliates' acquisition of voting stock terminates on the earlier of December
31, 2001 or such time as the Hyundai Affiliates beneficially own less than 20%
of outstanding voting stock.
Agreement Not to Compete. HEA and HEI also have agreed not to compete with
Maxtor in the design, development, manufacture, marketing or sale of hard disk
drives through July 2003. Despite this agreement, Hyundai Affiliates are
permitted to make investments of up to 3% of the outstanding stock of a publicly
traded corporation that competes with Maxtor in the aforementioned businesses.
10. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In 1998, the Board of Directors approved the increase of the Company's
authorized common stock to 250 million shares.
In July 1998, the Company completed the issuance of 49,731,225 shares of
its common stock in an initial public offering. The Company received
approximately $328.8 million, net of issuance costs. Approximately $200.0
million of the proceeds were used for repayment of certain outstanding
indebtedness under credit facilities due to various banks. Upon closing of the
July 1998 public offering, all outstanding shares of the Series A Preferred
Stock converted into 44,029,850 shares of common stock.
In February 1999, the Company completed a public offering of 7.8 million
shares of its common stock. The Company received net proceeds of approximately
$95.8 million from the offering, net of issuance costs. A portion of the
proceeds from the offering was used to prepay without penalty outstanding
aggregate principal indebtedness of $55 million owing to HEA under a
subordinated note due July 31, 2001.
47
49
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED STOCK PLAN
On May 29, 1998, the Company adopted the 1998 Restricted Stock Plan, which
provides for awards of shares of common stock to certain executive employees.
Restricted stock awarded under this plan vests three years from the date of
grant and is subject to forfeiture in the event of termination of employment
with the Company prior to vesting. The Company granted 390,000 shares of common
stock in June 1998 under this plan. Compensation cost based on fair market value
of the Company's stock at the date of grant is reported as compensation expense
on a ratable basis over the vesting periods. For the years ended December 26,
1998, January 1, 2000 and December 30, 2000, compensation expense recorded in
connection with the Restricted Stock Plan amounted to $0.5 million, $1.3 million
and $1.8 million, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the 1998 Employee Stock Purchase Plan (the
"Purchase Plan") and in 1999 reserved 2.4 million shares for issuance under the
Purchase Plan. During 2000, the Company reserved an additional 2.1 million
shares for issuance. The Company issued 1.2 million shares pursuant to the
Purchase Plan in each year for the years ended January 1, 2000 and December 30,
2000. The Purchase Plan permits eligible employees to purchase Maxtor's common
stock at a discount, but only through accumulated payroll deductions, during
sequential six-month offering periods. Participants purchase shares on the last
day of each offering period. In general, the price at which shares are purchased
under the Purchase Plan is equal to 85% of the lower of the fair market value of
a share of common stock on (a) the first day of the offering period, or (b) the
purchase date. Offering periods of the Purchase Plan generally begin on February
16 and August 16 of each year, although the initial offering period under the
Purchase Plan commenced on July 30, 1998.
STOCK OPTION PLAN
The Company grants options and awards of restricted stock pursuant to the
Amended and Restated 1996 Stock Option Plan (the "Option Plan"), which was
approved by the Board of Directors in May 1996, and amended by Maxtor's
stockholders at the 1999 Annual Meeting of Stockholders. Options under the
Amended Plan expire ten years from the date of grant. Restricted stock vests in
one or more installments over a number of years. In June 1999, the Company
granted 1,765,000 shares of restricted common stock under this plan. During
2000, the Company granted 165,000 shares of restricted common stock. As of
December 30, 2000, 240,000 shares had been canceled. The Company recorded
compensation expense of $1.2 million and $2.3 million in 1999 and 2000.
The Plan generally provides for the grant of non-qualified stock options
and incentive stock options to eligible employees, consultants, affiliates and
directors at a price not less than 85% of the fair market value at the date of
grant, as determined by the board of directors, and incentive stock options to
Maxtor employees at a price not less than the fair market value at the date of
grant. The Plan also provides for the grant of restricted stock to eligible
employees. The Board of Directors or an executive committee appointed by the
Board also approves other terms such as number of shares granted and
exercisability thereof. Options granted under the Amended Plan vest over a
four-year period with 25% vesting at the first anniversary date of the vest date
and 6.25% each quarter thereafter. Restricted stock grants vest in one or more
installments over a period of years, and are subject to forfeiture if employment
is terminated prior to the time the shares become fully vested and
non-forfeitable.
In connection with Maxtor's acquisition of CDS in September 1999, the
Company established a separate reserve of 674,477 shares of its common stock for
issuance upon the exercise of stock options (the "Assumed Options") granted
under the CDS Incentive Stock Option Plan (the "CDS Plan"). As of December 30,
2000, 130,488 options were outstanding under the CDS Plan. The Assumed Options
are incentive stock options which vest over four years subject to the terms and
conditions of the Assumed Options agreement.
48
50
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Plan was amended in February 1998 to remove certain provisions which
had given rise to variable accounting, and offered and modified employee option
agreements in the second quarter of 1998 for the majority of employees who had
previously held variable options to achieve fixed-award accounting. To comply
with the variable plan accounting required prior to these amendments, the
Company recorded compensation expense related to the difference between the
estimated fair market value of its stock and the stated exercise price of its
options. Compensation cost was reflected in accordance with Financial Accounting
Standards Board Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans."
The following table summarizes option activity through December 30, 2000:
OPTIONS OUTSTANDING
--------------------------------------------
SHARES WTD AVERAGE
AVAILABLE EXERCISE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- -------------- --------------
(IN THOUSANDS)
Balance as of December 27, 1997............... 720,604 4,407,917 $6.00 $ 26,447
Shares reserved............................. 8,663,234 -- -- --
Options granted............................. (5,848,761) 5,848,761 10.16 59,431
Options exercised........................... -- (134,862) 6.00 (809)
Options canceled............................ 815,857 (815,857) 7.77 (6,339)
---------- ---------- --------
Balance as of December 26, 1998............... 4,350,934.. 9,305,959 8.46 $ 78,730
Shares reserved............................. 4,457,138 -- -- --
Options assumed from acquisition............ (670,293) 670,293 1.10 737
Options granted............................. (2,824,814) 2,824,814 5.30 14,980
Restricted stock granted.................... (1,765,000) -- -- --
Options exercised........................... -- (500,164) 4.10 (2,051)
Options canceled............................ 915,650 (915,650) 7.60 (7,349)
Resticted stock canceled.................... 150,000 -- -- --
---------- ---------- --------
Balance as of January 1, 2000................. 4,613,615 11,385,252 7.47 $ 85,047
Options reserved............................ 5,500,000 -- -- --
Options granted............................. (5,737,687) 5,737,687 8.15 46,772
Restricted stock granted.................... (165,000) -- -- --
Options exercised........................... -- (1,156,785) 5.61 (6,493)
Options canceled............................ 1,177,148 (1,177,148) 6.07 (7,143)
Resticted stock canceled.................... 90,000 -- -- --
---------- ---------- --------
Balance as of December 30, 2000 5,478,076.. 14,789,006 $7.96 $118,183
========== ========== ========
There were 4,734,701 shares vested but unexercised as of January 1, 2000 at
a weighted average exercise price of $7.63, and no shares exercised subject to
repurchase. There were 5,921,018 shares vested but unexercised as of, December
30, 2000 at a weighted average exercise price of $7.56, and no shares exercised
subject to repurchase.
49
51
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information for stock options outstanding as
of December 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------- ----------- ----------- -------- ----------- --------
$0.575 - $5.875 2,085,723 8.53 $ 4.49 708,902 $ 4.38
$5.9375 - $7.75 4,819,451 6.77 $ 6.26 3,853,534 $ 6.18
$7.8125 - $13.125 5,297,327 9.08 $ 8.27 73,456 $10.50
$13.1875 - $19.3113 2,586,505 7.88 $13.30 1,285,126 $13.28
---------- ---------
14,789,006 8.04 $ 7.96 5,921,018 $ 7.56
========== =========
The Company accounts for its stock option and employee stock purchase plans
in accordance with APB 25 and related interpretations. The following information
concerning such plans is provided in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation."
During 1997, the Company also granted options to the employees of MMC
Technology, Inc. ("MMC"), a wholly owned subsidiary of HEA. As of December 30,
2000, there were 274,032 options outstanding, which are now fully vested,
pursuant to these grants which are included in the table above. Compensation
cost for options granted to non-employees is measured at their fair value in
accordance with Emerging Issues Task Force No. 96-18. MMC has agreed to
reimburse Maxtor for any compensation expense arising from these grants.
Accordingly, compensation costs related to the MMC grants are reported as a
receivable from affiliates.
The fair value of option grants has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
YEARS ENDED
----------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
Risk-free interest rate..................................... 5.07% 5.50% 6.25%
Weighted average expected life.............................. 4 years 4.5 years 4.5 years
Volatility.................................................. 62% 76% 105%
Dividend yield.............................................. -- -- --
No dividend yield is assumed as the Company has not paid dividends and has
no plans to do so.
The weighted average expected life was calculated based on the vesting
period and the expected life at the date of grant. The risk-free interest rate
was calculated based on rates prevailing during grant periods and the expected
life of the options at the date of grants. The weighted average fair values of
options granted to employees during the years ended December 26, 1998, and
January 1, 2000 and December 30, 2000 were $4.54, $3.32 and $6.26, respectively.
Pursuant to SFAS No. 123, the Company also estimates the fair value of
employee's purchase rights under the Employee Stock Purchase Plan and unvested
shares issued under the Restricted Stock Plan using the Black-Scholes valuation
model. The fair value of purchase rights under the Employee Stock Purchase Plan
for the year ended December 30, 2000 was $2.74 which was estimated using the
following assumptions: a weighted-average expected life of 0.5 years; expected
volatility of 105%; and weighted-average risk-free interest rates of 6.17%. The
fair value of unvested shares issued under the Restricted Stock Purchase Plan
for the year ended December 30, 2000 was $10.11 which was estimated using the
following assumptions: a weighted-average expected life of 3.0 years, expected
volatility of 105%; and weighted-average risk-free interest rates of 6.22%.
50
52
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following proforma net income (loss) information for Maxtor's stock
options, restricted stock and employee stock purchase plan has been prepared
following the provisions of SFAS No. 123 (in thousands, except per share data):
YEARS ENDED
----------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
Net income (loss)
As reported............................................... $31,173 $(50,148) $31,802
Pro forma................................................. 21,481 (63,240) 10,694
Net income (loss) per share
As reported -- basic...................................... 0.81 (0.48) 0.28
Pro forma -- basic........................................ 0.56 (0.60) 0.09
As reported -- diluted.................................... $ 0.47 $ (0.48) $ 0.27
Pro forma -- diluted...................................... 0.33 (0.60) 0.09
The proforma net income (loss) disclosures made above are not necessarily
representative of the effects on pro forma net income (loss) for future years as
options granted typically vest over several years and additional option grants
are expected to be made in future years.
11. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED
--------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
-------------- ---------- ------------
(IN THOUSANDS)
Current:
U.S.................................................. $5,563 $ 616 $ 865
Foreign.............................................. 2,000 925 808
Deferred:
Foreign.............................................. -- -- --
------ ------ ------
Total........................................ $7,563 $1,541 $1,673
====== ====== ======
Income (loss) before provision for income taxes consists of the following:
YEARS ENDED
--------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
-------------- ---------- ------------
(IN THOUSANDS)
U.S................................................. $(133,866) $(200,366) $(115,331)
Foreign............................................. 172,602 151,759 148,806
--------- --------- ---------
Total....................................... $ 38,736 $ (48,607) 33,475
========= ========= =========
Subject to the Company's continued compliance with certain legal
requirements, the Company currently has a tax holiday for its operations in
Singapore that has been extended to June 30, 2003.
51
53
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% to the income (loss) before income taxes for the
years ended December 26, 1998, January 1, 2000 and December 30, 2000. The
principal reasons for this difference are as follows:
YEARS ENDED
--------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
-------------- ---------- ------------
(IN THOUSANDS)
Income tax expense (benefit) at U.S. statutory rate.... $ 13,558 $(17,012) $ 11,716
Rate differential on foreign operations................ (55,556) (52,190) (6,510)
Repatriated foreign earnings........................... 106,853 -- 4,206
U.S. loss not providing current tax benefit............ -- 88,401 --
Benefit of prior years U.S. losses..................... (63,875) -- (11,664)
Valuation of temporary differences..................... (382) (22,653) (1,931)
Stock compensation expense............................. 4,132 853 1,323
Alternative minimum tax................................ 2,500 -- 687
Nondeductible purchased R&D............................ -- 3,551 3,529
Other.................................................. 333 591 317
-------- -------- --------
Total........................................ $ 7,563 $ 1,541 $ 1,673
======== ======== ========
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
YEARS ENDED
-------------------------
JANUARY 1, DECEMBER 30,
2000 2000
---------- ------------
Deferred tax assets:
Inventory reserves and accruals........................... $ 7,419 $ 6,408
Depreciation.............................................. 4,647 10,095
Sales related reserves.................................... 19,654 22,533
Net operating loss carryforwards.......................... 217,877 199,092
Tax credit carryforwards.................................. 25,418 22,282
Capitalized research and development...................... 79,468 66,674
Notes receivable reserve.................................. 2,621 1,220
Other..................................................... 5,532 17,369
--------- ---------
Total deferred tax assets......................... 362,636 345,673
Valuation allowance for deferred tax assets................. (303,368) (230,746)
--------- ---------
Net deferred tax assets..................................... 59,268 114,927
========= =========
Deferred tax liabilities:
Unremitted earnings of certain foreign entities........... 58,493 113,946
Unrealized gain on investments in equity securities....... 775 981
--------- ---------
Total deferred tax liabilities.................... $ 59,268 $ 114,927
========= =========
During the years ended January 1, 2000 and December 30, 2000, the valuation
allowance for deferred tax assets increased by $35.8 million and decreased $72.6
million, respectively.
As of December 30, 2000, for federal income tax purposes, the Company had
net operating loss carryforwards of $563.0 million and tax credit carryforwards
of approximately $19.7 million which will expire beginning in fiscal years 2008
and 2001, respectively. To the extent that net operating loss carryforwards when
52
54
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
realized relate to stock option deductions, the resulting benefits will be
credited to stockholders' equity. Certain changes in stock ownership can result
in a limitation on the amount of net operating loss and tax credit carryovers
that can be utilized each year. The Company determined it had undergone such an
ownership change during 1998. Consequently, utilization of approximately $322.8
million of net operating loss carryforwards and the deduction equivalent of
approximately $19.7 million of tax credit carryforwards will be limited to
approximately $16.0 million per year.
The Company was part of the HEA consolidated group for federal income tax
returns for periods from early 1996 to August 1998 (the "Affiliation Period").
As a member of the HEA consolidated group, the Company was subject to a tax
allocation agreement. During the Affiliation Period, for financial reporting
purposes, the Company's tax loss was computed on a separate tax return basis
and, as such, the Company did not record any tax benefit in its financial
statements for the amount of the net operating loss included in the HEA
consolidated income tax return.
The Company ceased to be a member of the HEA consolidated group as of
August 1998. The Company remains liable for its share of the total consolidated
or combined tax return liability of the HEA consolidated group prior to August
1998. The Company has agreed to indemnify or reimburse HEA if there is any
increase in its share of the consolidated or combined tax return liability
resulting from revisions to its taxable income or revisions to another HEA
member's taxable income, except to the extent such revisions to another HEA
members' taxable income are made after September 15, 1999.
12. NET INCOME (LOSS) PER SHARE
In accordance with the disclosure requirements of SFAS No. 128, "Earnings
per Share," a reconciliation of the numerator and denominator of the basic and
diluted net income (loss) per share calculations is provided as follows (in
thousands, except share and per share amounts):
YEARS ENDED
--------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ------------ ------------
Numerator -- Basic and Diluted
Net income (loss)................................. $ 31,173 $ (50,148) $ 31,802
=========== ============ ============
Net income (loss) available to common
stockholders.................................... $ 31,173 $ (50,148) $ 31,802
=========== ============ ============
Denominator
Basic weighted average common shares
outstanding..................................... 38,295,095 105,503,281 113,432,679
Effect of dilutive securities:
Common stock options............................ 1,391,428 -- 3,890,803
Contingently issuable shares.................... -- -- 1,792,500
Convertible preferred stocks.................... 26,127,603 -- --
----------- ------------ ------------
Diluted weighted average common shares............ 65,814,126 105,503,281 119,115,982
=========== ============ ============
Basic net income (loss) per share................. $ 0.81 $ (0.48) $ 0.28
=========== ============ ============
Diluted net income (loss) per share............... $ 0.47 $ (0.48) $ 0.27
=========== ============ ============
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
YEARS ENDED
------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
Common stock options................................... -- 1,896,510 --
53
55
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLAN
401(k) PLAN
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") which is intended to qualify as a tax-qualified
plan under the Code. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a statutory
limit). Under the 401(k) Plan, the Company may make discretionary contributions.
The Company's contributions to the 401(k) Plan, for the years ended December 26,
1998, January 1, 2000 and December 30, 2000 were $2.0 million, $2.9 million and
$3.1 million, respectively. All amounts contributed by participants and earnings
on such contributions are fully vested at all times.
14. UNAUDITED QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
APRIL 3, JULY 3, OCTOBER 2, JANUARY 1, APRIL 1, JULY 1,
1999 1999 1999 2000 2000 2000
------------ ------------ ------------ ------------ ------------ ------------
Revenue.................... $ 681,590 $ 524,588 $ 589,321 $ 690,624 $ 691,286 $ 667,074
Gross profit (loss)........ 86,414 16,337 13,833 82,223 108,830 99,317
Net income (loss).......... 17,003 (30,873) (40,275) 3,993 27,601 13,189
Net income (loss) per
share:
Basic..................... 0.17 (0.30) (0.38) 0.04 0.24 0.11
Diluted................... 0.17 (0.30) (0.38) 0.03 0.23 0.11
Shares used in per share
calculation:
Basic..................... 98,912,770 103,046,181 106,713,093 113,341,080 114,029,979 114,981,276
Diluted................... 101,515,783 103,046,181 106,713,093 115,237,590 118,037,206 120,820,584
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 30,
2000 2000
------------- ------------
Revenue.................... $ 619,314 $ 727,185
Gross profit (loss)........ 62,935 105,432
Net income (loss).......... (13,993) 5,005
Net income (loss) per
share:
Basic..................... (0.12) 0.04
Diluted................... (0.12) 0.04
Shares used in per share
calculation:
Basic..................... 115,709,525 116,179,938
Diluted................... 117,709,525 119,038,276
54
56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 of this Form 10-K present fairly, in all material
respects, the financial position of Maxtor Corporation and its subsidiaries at
January 1, 2000 and December 30, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended December 30,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in such index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
- --------------------------------------
San Jose, California
January 26, 2001
except for Note 8, which is as of
March 26, 2001
55
57
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to identification of
directors is incorporated by reference to the information contained in the
section captioned "Election of Directors" in the Proxy Statement. For
information with respect to our executive officers, see "Executive Officers" at
the end of Item 1, Part I of this report. The information required by this item
with respect to Item 405 of Regulation S-K is incorporated by reference from the
section captioned "Section 16 Insider Trading and Beneficial Ownership" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information contained in the section captioned "Executive Compensation
and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information contained in the section captioned "Stock Ownership of
Management and Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1)-(2) Financial Statements and Financial Statement Schedules -- See Index
to Consolidated Financial Statements under Item 8 on page 31 of
this report.
(3)Exhibits See Index to Exhibits on pages 60 to 64 hereof.
(b) Reports on Form 8K.
(i) Maxtor filed a Current Report on Form 8-K on October 16, 2001, in which
it reported in Item 5 that Maxtor had entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), by and among Maxtor, Hawaii
Acquisition Corporation ("Merger Sub"), Quantum Corporation ("Quantum") and
Insula Corporation ("Spinco"), which provided that, upon the terms and
conditions set forth in the Merger Agreement, Maxtor and Quantum will enter into
a business combination transaction pursuant to which Merger Sub would merge with
Spinco, with Spinco continuing after the merger as the surviving corporation and
a wholly owned subsidiary of Maxtor.
(ii) Maxtor filed a Current Report on Form 8-K/A on December 14, 2000, in
which it reported in Item 5 that the parties to the Merger Agreement elected to
amend and restate the Merger Agreement to provide for the transaction to be
effected by a merger of Spinco directly into Maxtor, with Maxtor continuing
after the merger as the surviving corporation.
56
58
(iii) Maxtor filed a Current Report on Form 8-K on January 25, 2001,
setting forth in Item 7 a press release of Maxtor dated January 24, 2001,
announcing its financial results for the quarter and year ended December 30,
2000.
(iv) Maxtor filed a Current Report on Form 8-K on March 2, 2001, setting
forth in Item 7 the Certificate of Correction to the Restated Certificate of
Incorporation of Maxtor Corporation.
57
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, State of California, on the 28th day of March, 2001.
MAXTOR CORPORATION
(Registrant)
By /s/ MICHAEL R. CANNON
------------------------------------
Michael R. Cannon
President, Chief Executive
Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ------------------------------- --------------
/s/ MICHAEL R. CANNON President, Chief Executive
- ----------------------------------------------------- Officer, and Director
Michael R. Cannon March 28, 2001
/s/ PAUL J. TUFANO Sr. Vice President, Finance,
- ----------------------------------------------------- Chief Financial Officer and
Paul J. Tufano Principal Accounting Officer March 28, 2001
/s/ CHONG SUP PARK Chairman of the Board
- -----------------------------------------------------
Dr. Chong Sup Park March 28, 2001
/s/ THOMAS L. CHUN Director
- -----------------------------------------------------
Thomas L. Chun March 28, 2001
/s/ C. S. CHUNG Director
- -----------------------------------------------------
C. S. Chung March 28, 2001
/s/ CHARLES HILL Director
- -----------------------------------------------------
Charles Hill March 28, 2001
/s/ CHARLES F. CHRIST Director
- -----------------------------------------------------
Charles F. Christ March 28, 2001
/s/ ROGER W. JOHNSON Director
- -----------------------------------------------------
Roger W. Johnson March 28, 2001
/s/ Y. H. KIM Director
- -----------------------------------------------------
Y. H. Kim March 28, 2001
58
60
MAXTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND DEDUCTIONS/ END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES (RECOVERIES)[1] PERIOD
----------------- ---------- ---------- --------------- ----------
December 30, 2000........................... $15,459 $8,100 $8,411 $15,148
January 1, 2000............................. $ 8,409 $9,155 $2,105 $15,459
December 26, 1998........................... $ 3,573 $5,659 $ 823 $ 8,409
- ---------------
[1] Uncollectible accounts written off, net of recoveries.
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND DEDUCTIONS/ END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES (RECOVERIES) PERIOD
----------------- ---------- ---------- ------------ ----------
December 30, 2000............................. $303,368 -- $(72,622) $230,746
January 1, 2000............................... $267,549 -- $ 35,819 $303,368
December 26, 1998............................. $284,140 -- $(16,591) $267,549
S-1
61
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(20) Amended and Restated Agreement and Plan of Merger and
Reorganization, dated as of October 3, 2000, by and among
Quantum Corporation, Insula Corporation, Hawaii Acquisition
Corporation and Registrant.
3.1(20) Restated Certificate of Incorporation of Registrant.
3.2(21) Certificate of Correction to the Restated Certificate of
Incorporation of Registrant.
3.4 Amended and Restated Bylaws of Registrant, dated March 12,
2001.
4.1(13) Stockholder Agreement dated June 25, 1998.
4.2(20) Form of Voting Agreement, dated as of October 3, 2000,
between Registrant and certain stockholders of Quantum
Corporation.
4.3(20) Form of Voting Agreement, dated as of October 3, 200,
between Quantum Corporation and certain stockholders of
Registrant.
4.4(20) Amendment No. 1 to Stockholder Agreement, dated as of
October 3, 2000, by and among Hyundai Electronics America,
Hyundai Electronics Industries, Ltd. and Registrant.
4.5(17) Agreement and Plan of Reorganization dated as of August 23,
1999 by and among Registrant, Popup Acquisition Corporation,
Creative Design Solutions, Inc. and Peter Harvey.
10.1(15) Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.**
10.2(13) Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.
10.3(2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4(2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5(2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6(2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7(2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8(3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9(3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A, Longmont, CO, between Registrant as Tenant and
Pratt Land Limited Liability Company as Landlord, dated
February 24, 1995.
10.10(3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C, between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11(3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
10.12(3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13(5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14(5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
62
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.15(5) Amendment to the Financing Agreement among Registrant and
the CIT Group/Business Credit, Inc., dated October 17, 1995.
10.16(5) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17(5) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18(7) Maxtor Corporation 1996 Stock Option Plan.**
10.19(11) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20(7) Excerpts From the Execution Copy of Receivables Purchase and
Sale Agreement, dated as of March 30, 1996, among Registrant
and Corporate Receivables Corporation and Citicorp North
America, Incorporated.
10.21(6) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22(6) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23(6) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated As
of June 13, 1996.*
10.24(8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25(8) Exchange Agreement effective June 18, 1996, between
Registrant and Hyundai Electronics America.
10.26(9) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27(9) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28(10) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29(10) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30(11) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.31(13) 364-Day Credit Agreement dated as of October 31, 1997, among
Registrant and Nomura Bank International.
10.32(12) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
10.33(12) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.34(13) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**
10.35(13) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.
10.36(13) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.
10.37(13) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.38(13) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.39(13) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.
63
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.40(13) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.41(13) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.42(13) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.43(13) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.
10.44(13) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.45(13) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, Registrant and certain other
subsidiaries.
10.46(4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.47(13) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.48(13) Indemnity Agreement between Hyundai Electronics Industries
Co., Ltd. and Registrant dated June 25, 1998.
10.49(13) License Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd. dated June 25, 1998.
10.50(1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.51(14) Supply Agreement between Registrant and MMC Technology dated
August 18, 1998.*
10.52(13) 1998 Restricted Stock Plan.**
10.53(13) Form of Restricted Stock Grant Agreement.**
10.54(16) Amended and Restated 1996 Stock Option Plan.**
10.55(13) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael R. Cannon.**
10.56(13) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul J. Tufano.**
10.57(13) Form of Retention Agreement between Registrant and Executive
Officers.**
10.58(13) Letter Agreement between Victor B. Jipson and Registrant
dated as of June 10, 1998.**
10.59(13) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.60(13) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.61(13) Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.
10.62(13) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.63(13) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.
10.64(13) Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
64
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.65(14) Purchase and Sale Agreement, dated as of July 31, 1998,
between Registrant and Maxtor Receivables Corporation.
10.66(14) Receivables Purchase Agreement, dated as of July 31, 1998,
among Maxtor Receivables Corporation, the Registrant,
BlueKeel Funding LLC and Fleet National Bank.
10.67(15) Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.
10.68(15) Mutual Release and Termination Agreement by and among
Hyundai Electronics America, Axil Computers, Inc., Image
Quest Technologies, Inc., Registrant, Odeum Microsystems,
TV/COM International, Inc. dated November 1998.
10.69(15) Letter Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.
10.70(20) Form of Tax Opinion Insurance Policy.
10.71(15) Letter of Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.
10.72(18) Executive Retention Incentive Agreement between Michael R.
Cannon and Registrant dated June 25, 1999.**
10.73(18) Promissory Note between Michael R. Cannon and Registrant
dated June 23, 1999.**
10.74(19) Executive Retention Incentive Agreement and Promissory Note
between Registrant and Victor B. Jipson, dated October 18,
1999.**
10.75(19) Executive Retention Incentive Agreement and Promissory Note
between Registrant and Paul J. Tufano, dated October 18,
1999.**
10.76(18) Amendment One to Supply Agreement between MMC Technology,
Inc. and Registrant.*
10.77(18) Capital Assistant Scheme Loan Agreement between Maxtor
Peripherals (S) Pte Ltd. and the Economic Development Board
of Singapore dated September 9, 1999.
10.78(18) Guarantee Facility Agreement between Maxtor Peripherals (S)
Pte Ltd. and the Bank of Nova Scotia, Singapore branch dated
August 31, 1999.
10.79(19) Lease Agreement for Premises Located at 2452 Clover Basion
Drive, Longmont, Colorado, between Registrant, as Tenant,
and Pratt Land Limited Liability Company, as Landlord, dated
October 28, 1999.
10.80(19) Forms of Executive Retention Incentive Agreement and
Promissory Note Between Registrant and Pantelis Alexopoulos,
Michael D. Cordano, Phillip C. Duncan, Misha Rozenberg,
Glenn H. Stevens, K.H. Teh and Michael J. Wingert, each
dated November 19, 1999.**
10.81 Amendment Two to Supply Agreement between MMC Technology,
Inc. and Registrant.*
10.82 1998 Employee Stock Purchase Plan.**
21.1(13) List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
- ---------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits of Form 10-Q filed February 8, 1994.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits of Form 10-K filed June 23, 1995.
(4) Incorporated by reference to exhibits of Schedule 14D-9 filed November 8,
1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(6) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
65
(7) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(8) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(9) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(10) Incorporated by reference to exhibits of Form 10-K filed March 27, 1997.
(11) Incorporated by reference to exhibits of Form 10-Q filed May 13, 1997.
(12) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(13) Incorporated by reference to exhibits to registration statement on Form
S-1, File No. 333-56099, filed June 5, 1998, as amended.
(14) Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.
(15) Incorporated by reference to exhibits of registration statement on Form
S-3, File No. 333-69307, filed December 21, 1998, as amended.
(16) Incorporated by reference to exhibits of Form 8-K filed January 20, 1999.
(17) Incorporated by reference to exhibits of Form 8-K filed September 24, 1999.
(18) Incorporated by reference to exhibits of Form 10-Q filed November 16, 1999.
(19) Incorporated by reference to exhibits of Form 10-K filed March 29, 2000.
(20) Incorporated by reference to exhibits of registration statement on Form
S-4, File No. 333-51592, filed December 11, 2000, as amended.
(21) Incorporated by reference to exhibit of Form 8-K filed March 2, 2001.