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69
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
{X}Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 26, 1994
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or
{ }Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file Number: 0-14016
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Maxtor Corporation
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(Exact name of registrant as specified in its charter)
Delaware 77-0123732
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
211 River Oaks Parkway, San Jose, CA 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(408) 432-1700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark 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
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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.
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As of June 3, 1994, 30,452,111 shares of the registrant's Common
Stock, $.01 par value, and 19,480,000 shares of the registrant's
Class A Common Stock, $.01 par value, were issued and
outstanding, respectively. The aggregate market value of the
registrant's voting stock held by nonaffiliates of the registrant
as of June 3, 1994 was $160,024,578, based on the closing price
on NASDAQ National Market System reported for such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1994 Annual Meeting of
Stockholders (the Proxy Statement), to be filed within 120 days
of the end of the fiscal year ended March 26, 1994, are
incorporated by reference in Part II, Item 10 and Part III, Items
11, 12 and 13 hereof. Except with respect to information
specifically incorporated by reference in this Form 10-K, the
Proxy is not deemed to be filed as part hereof.
This Annual Report on Form 10-K contains 116 pages of which this
is number 1. The Index to Exhibits begins on page 57.
PART I
Item 1. BUSINESS
Maxtor Corporation (Maxtor or the Company) was organized in
1982 and develops, manufactures and markets mass-storage products
for desktop and mobile computer systems. Products range from low-
capacity flash cards to 546 megabyte (MB) Winchester disk drives
in 1.8-inch and 3.5-inch form factors and include ATA, SCSI and
PCMCIA (Personal Computer Memory Card International Association)
interfaces.
The Company owns 62% of Maxoptix Corporation (Maxoptix) which
develops, manufactures and markets optical disk drive products.
Maxoptix was formed in March 1989 as a joint venture with Kubota
Corporation (Kubota).
In August 1993, the Company signed a letter of intent for the
creation of a strategic relationship with Hyundai Electronics
Industries Co., Ltd. and several related members of the Hyundai
Business Group (Hyundai). In September 1993, the Company signed
the Stock Purchase Agreement (the Agreement) with Hyundai.
Conclusion of the transaction was conditional upon approval of
the U.S. and Korean governments, Maxtor stockholders and a number
of other conditions. In November 1993, the U.S. government
provided all necessary approvals. In December 1993, Maxtor
stockholders approved all matters submitted to them regarding the
proposed investment. At the end of January 1994, Korean
government approval was granted. The transaction closed on
February 3, 1994. Under the terms of the Agreement, Hyundai
invested approximately $150 million in the Company and received
approximately 19.5 million shares of Class A common stock,
representing a per share price of $7.70, and constituting
approximately 40% of the Company's outstanding voting stock at
that date. The stock issued to Hyundai is a special series of
common stock, entitling Hyundai to representation on the
Company's Board of Directors proportionate to its share of
ownership and certain voting rights. In addition, the Agreement
requires the Company's Board of Directors to elect the director
designated by Hyundai as Chairman of the Board, which occurred in
February 1994. The Agreement also provides that Hyundai may not
acquire more than 45% of the Company except in a tender for all
outstanding shares or in certain other cases.
PRODUCTS
The disk drive industry is subject to rapid technological
change and short product life cycles as data storage
manufacturers continually strive for smaller form factors, larger
storage capacities, higher performance and lower cost. Short
product life cycles dictate the importance of the Company's
ability to successfully manage product transitions. The failure
to adequately manage product transitions could result in the loss
of market opportunities, decreased sales of existing products,
cancellation of products or product lines, the accumulation of
obsolete and excess inventory, and unanticipated charges related
to obsolete capital equipment.
During the fourth quarter of fiscal year 1994, the Company
announced a major shift in strategy to devote Company resources
primarily to the design, manufacture and sale of its 7000 Series
of 3.5-inch disk drives and its new family of mobile computing
products, including the MobileMaxTM family of PCMCIA-based mobile
computing data storage products. In keeping with the Company's
product strategy, the Company will concentrate its research and
development (R&D) efforts on new products targeted at the desktop
personal computing market and the emerging mobile computing
market.
Desktop Personal Computer Products
The 7000 Series of 3.5-inch, low profile disk drives addresses
the demand for desktop PC drives. This Series presently includes
four capacity points: the 171MB product, the 7171, is designed
for entry level PCs; the 273MB product, the 7273, is designed for
mid-range PCs; and the 345MB and 546MB products, the 7345 and
7546, respectively, are designed for high-end PCs and entry-level
workstations. The newest products, the 273MB and 546MB versions,
were announced in November 1993 and are both currently in volume
production. Both the 7273 and 7546 share a common mechanical and
electronic platform and manufacturing process with previously
introduced 7000 Series products. The 7000 Series continues to
account for a substantial portion of the Company's revenue and
gross margins.
In April 1993, to service the growing retail market, the
Company began packaging the 3.5-inch 7000 Series hard drive
family into complete kits designed for end users. The retail
kits are available in 245MB, 345MB, and 546MB capacities, and
feature an IDE/AT interface. The 345MB version also supports
SCSI.
Mobile Computing Products
Introduced in the third quarter of fiscal year 1994, the
MobileMaxTM Family of products is a line of data storage products
that addresses the needs of the emerging mobile computing market.
The MobileMax Family includes MobileMaxTM Hard Drives, the
MobileMaxTM DeskRunnerTM and MobileMaxTM Flash Memory Cards.
MobileMax Hard Drives presently include 1.8-inch, PCMCIA Type
III drives in 105MB and 131MB capacities. They are designed for
use in notebook, subnotebook and desktop computers equipped with
PCMCIA Type III interface card slots, as well as for emerging non-
computer applications. The Company initially announced the MXL-
105-III disk drive product in January 1993; it is now marketed as
the MobileMax 105 Hard Drive (MobileMax 105). The MobileMax 105
was the Company's first entry into the PCMCIA market. Volume
production commenced in the third quarter of fiscal year 1994.
In April 1994, the Company announced the MobileMax 131 Hard Drive
(MobileMax 131). The MobileMax 131 is currently in volume
production.
The MobileMax DeskRunner, announced in November 1993, is a
PCMCIA Type III reader/writer socket designed for the large
installed base of desktop PCs that are not equipped with PCMCIA
technology. The DeskRunner is fully PCMCIA compatible with Type
I, Type II or Type III cards, including popular modems and
network attachments.
MobileMax Flash Memory Cards are a series of flash-memory
based PCMCIA Type I cards ranging in capacity from 2MBs to 20MBs.
These Cards are designed to fit the smaller PCMCIA Type I and
Type II slots found on most personal digital assistants and on
some notebook PCs - as well as the larger Type III slot on the
MobileMax DeskRunner.
The Company believes that the growth of the MobileMax product
line is primarily dependent on the growth of the emerging mobile
computing market, as well as the Company's ability to anticipate
market trends and to successfully develop, manufacture in volume
and sell new products in a timely manner. Although the Company
believes that PCMCIA storage devices are an important part of the
future disk drive marketplace, there can be no assurance that the
Company will be successful in such efforts, and the market has
been in fact slower to develop than some industry analysts had
predicted.
Other Products
Through its subsidiary, Maxoptix, the Company develops,
manufactures and markets high capacity, write once and rewritable
optical disk drives.
MARKETING AND CUSTOMERS
The Company markets and sells its products through a direct
sales force to OEMs (original equipment manufacturers),
distributors and retailers. As the market for Maxtor's products
has become increasingly segmented, diverse sales channels have
developed for different products.
Direct sales to OEM customers accounted for approximately one-
half of total revenue for both fiscal years 1994 and 1993. As a
result of volatile business conditions in the PC industry,
including the trend toward consolidation among PC manufacturers,
sales to the major PC manufacturers have become increasingly
important to the success of the disk drive industry participants.
In the last quarter of fiscal year 1994, the Company announced
OEM design wins for its MobileMax Hard Drives with both Hewlett-
Packard Company and Toshiba America Information Systems, Inc.
Although the Company intends to continue in its efforts to
increase its share of the OEM market for disk drives,
particularly in the marketing of its new products, there can be
no assurance that the Company will be successful in such efforts.
In addition to selling its products to OEMs and through
distributors, the Company is also pursuing the consumer retail
channel, which directly targets end-users. As end users become
more technically sophisticated, these users are upgrading their
own systems and adding peripherals. The Company has concentrated
on establishing its presence in this channel and offers
comprehensive end-user support services. Maxtor sells its retail-
packaged products directly and through distributors to major
retail computer dealers, superstores, warehouse clubs,
aggregators and mass merchants nationwide. In April 1994, the
Company announced that its MobileMax family is available through
Maxtor's comprehensive retail sales program, and that it expanded
its retail offerings to include the 7546 and the 7273 3.5-inch
disk drives. The Company believes that distributors and
retailers are important in supporting the large aftermarket. In
addition, the Company believes that the market for replacement
drives will result in the growth of retail sales. Sales to
distributors and retailers accounted for approximately one-half
of total revenue in fiscal years 1994 and 1993.
During fiscal years 1994 and 1993, sales to International
Business Machines accounted for approximately 24% and 14% of the
Company's revenue, respectively; however, this percentage may
fluctuate in future periods and the Company expects it will
decline substantially in fiscal year 1995. The Company did not
have any customer that accounted for 10% or more of its revenue
in fiscal year 1992.
As of June 3, 1994, the Company has 27 direct sales persons
located in ten offices in the United States, 12 direct sales
persons in the Far East located in six offices, and 12 direct
sales persons in Europe located in three offices. The Company's
export sales represented 43%, 50% and 37% of total revenue in
fiscal years 1994, 1993 and 1992, respectively.
For financial data relating to major customers and geographic
information refer to Part II, Item 8, Footnote 3 on pages 28 and
29.
MANUFACTURING AND SUPPLIERS
The Company has sought to maintain the flexibility necessary
to accommodate the continuous changes in product mix and volume
requirements resulting from the short product life cycles
characteristic of the disk drive industry through a relatively
low level of vertical integration and utilizing capital equipment
for the manufacture of multiple product lines.
The Company's disk drive manufacturing operations consist
mainly of the final assembly of high-level subassemblies and
testing of completed products. The Company manufactures all
magnetic disk drive products in volume production at its
manufacturing facility located in Singapore and conducts all
printed circuit board assembly in its facility in Hong Kong. In
addition to risks typically associated with the concentration of
vital operations, foreign manufacturing is subject to additional
risks, including changes in governmental policies, transportation
delays and interruptions, and the impositions of tariffs and
export controls. A disruption of manufacturing operations at the
Company's facilities could have an adverse effect on the
Company's results of operations and customer relations.
Pilot production of the Company's magnetic products and cost
reduction, quality and product improvement engineering on current
products are now conducted in the Company's Longmont, Colorado
facilities, and the San Jose, California R&D facilities have been
closed. When a new product or a design change to a current
product is ready for volume production, it is transferred from
the Longmont, Colorado facilities to the Company's Far East
manufacturing facilities.
Since the Company's manufacturing operations consists
primarily of the final assembly of subassemblies, the quality and
yield of the Company's products is highly dependent on its
ability to obtain high quality components and sub-assemblies.
The Company has implemented a number of programs with its vendors
to improve the quality of its key components and sub-assemblies.
These programs include a rating system for vendors which tracks
such items as on time delivery, quality, technology and pricing
which is then used as a basis for purchasing decisions. In the
past, the Company has nevertheless experienced production delays
due to yield shortfalls and there can be no assurance that the
Company will not experience similar problems in the future.
The Company's manufacturing process uses large volumes of
components supplied by outside suppliers and it is the Company's
goal to have multiple sources for most components. In the past,
the Company's operating results have been adversely affected by
production delays and quality problems resulting from its
inability to obtain certain key components and by the failure of
certain components to meet requisite quality standards. During
the first quarter of fiscal year 1994, the Company temporarily
shut down production of its 3.5-inch MXT product line as a result
of a quality problem related to a particular supplier's
component. Production resumed when it was determined that the
problem was limited to that particular supplier's component and
that an alternate supplier's components were not affected by the
quality problem. The Company's 25252 2.5-inch drive was also
subject to significant and on-going production delays as a result
of both design and vendor problems. The Company has recently
been unable to obtain required volumes of a key component for its
7000 Series product line which is supplied by a sole source
vendor who is experiencing production problems. It is expected
that this shortage will adversely affect the Company's operating
results for the quarter ending June 25, 1994, and that it will
prevent the Company from returning to profitability during this
quarter.
While the Company has qualified and continues to qualify
multiple sources for many components, it is reliant on and will
continue to be reliant on single sources for several semi-custom
and custom integrated circuits and other key components. The
Company does not have long-term supply contracts with most of its
single source vendors, some of which are companies with limited
financial and operational resources. The Company intends to
continue to pursue qualification of alternative sources for
single source components where practicable; the Company believes,
however, that it will have to continue to utilize leading edge
components which may only be available from a single source.
With the expansion of production experienced by the disk drive
industry during the last quarter of fiscal year 1994 and
continuing into the first quarter of fiscal year 1995, shortages
of certain key components for the disk drive industry have
increased and the Company expects it is likely that industry
shortages of key components may continue into future quarters.
The Company will continue to aggressively work with its vendor
base to minimize its exposure. There can be no assurance,
however, that the Company will be successful in such efforts or
that in the future the Company's vendors will meet the Company's
requirements for required volumes of high-quality components in a
timely and cost effective manner. In addition, there can be no
assurance that the Company's operating results or customer
relationships will not be adversely affected by production
delays, including delays in bringing new products into volume
production in a timely manner, resulting from an interruption or
reduction in its supply of any key components, excessive rework
costs associated with defective or substandard components, or its
inability to obtain continued reduction of component costs.
The Company's engineering focus is on developing families of
products from single platforms that have proven to be highly
manufacturable, cost-effective and timely. The 7000 Series and
the MobileMax family are both examples of products that have been
designed around a single architecture. Prior to transferring a
product from pilot line to volume production, engineering is
responsible for proving the manufacturability of the product.
The Company believes that this integration of product design and
manufacturing process development will enable the Company to more
rapidly achieve high volume, high quality production. However,
there can be no assurance that the Company will be able to
achieve volume production of new products in a timely manner
relative to its competitors.
RESEARCH AND DEVELOPMENT
As previously mentioned, the Company participates in an
industry that is characterized by rapid technological change and
short product life cycles. The Company's ability to compete
effectively will depend on, among other things, its ability to
anticipate such change. To compete effectively, the Company has
and will continue to devote substantial resources to producing
high-quality products which address the needs of expanding
segments of the disk drive market and which can be produced in
volume on a cost effective basis. In order to effectively
implement its product strategy, the Company intends to continue
to make significant investments in research and development. A
key element of the Company's strategy is to decrease the time
required to achieve volume production of new products through the
involvement of process engineers in developing manufacturing
processes during the research and development phase. However,
there can be no assurance that the Company will be able to bring
new products to market before its competitors or that such new
products will receive market acceptance.
The Company has focused its efforts on developing products
that incorporate components which may be shared by a broad range
of products, thereby reducing the time to develop a product and
the cost of components. The Company believes that the
integration of low cost manufacturing design into the development
of a broad range of the Company's products, combined with its
ability to utilize common platforms and electronics both within
product families and between different product families will
enable the Company to compete more effectively.
The Company believes that success in developing smaller form
factors, increasing performance and lowering production costs
depends in part on developing and incorporating new data storage
technologies into the Company's products. While the Company
believes that it needs to utilize the new technologies in order
to achieve technology and product leadership, to the extent that
such development efforts result in more advanced technology and
components, it may be more difficult to transition disk drives to
volume manufacturing or to obtain acceptable yields.
In connection with the Company's restructuring plan initiated
in the third quarter of fiscal year 1994, the Company
consolidated its R&D activities in Longmont, Colorado, which
eliminated the need for certain facilities in San Jose,
California, and also resulted in a substantial reduction in
headcount associated with R&D and related activities previously
conducted in San Jose. R&D expenses declined in absolute dollars
in fiscal year 1994 as compared to fiscal year 1993 as a result
of these actions. In fiscal years 1994, 1993 and 1992,
respectively, the Company's R&D expenses amounted to $97.2
million, $112.6 million and $72.4 million, respectively. While
R&D spending in absolute dollars is expected to decrease in
fiscal year 1995, the Company will continue to make substantial
investment in R&D since the timely introduction and transition to
volume production of new products is essential to its success.
In February 1994, the Company announced a major shift in product
strategy devoting Company resources primarily to the design,
manufacture and sale of its 7000 Series disk drives and its new
family of mobile computing products, including the MobileMax
family of PCMCIA-based mobile computing data storage products.
The Company's efforts will focus on new products targeted at the
desktop personal computing and mobile computing markets.
COMPETITION
The disk drive industry is intensely competitive and is
characterized by rapid technological change which can cause
substantial shifts in product capabilities and prices. The
principal competitive factors in the industry include time to
volume production, price, customer service, storage capacity and
performance. In addition, smaller form factors, height, power
consumption, ruggedness and interfaces are important competitive
factors.
Many of the Company's competitors have greater financial,
marketing and technological resources than the Company, which may
have enabled them to better withstand the intense price
competition most recently experienced during the last four months
of fiscal year 1993 which continued into the third quarter of
fiscal 1994. In February 1994, the Company received
approximately $150 million upon the closing of a stock purchase
agreement with Hyundai, as previously discussed. This cash
infusion is intended to be used for working capital needs,
including developing new products and technologies. However,
there can be no assurance that the Company will be able to
compete more effectively as a result of this cash infusion.
The disk drive industry is also subject to short product life
cycles, which increase the importance of the Company's ability to
successfully manage product transitions. The failure to
adequately manage product transitions could result in the loss of
market opportunities, decreased sales of existing products,
cancellation of products or product lines and the accumulation of
obsolete and excess inventory. As previously mentioned, the
Company announced a major shift in strategy in February 1994. As
a result of this shift in strategy, the Company's financial
results will be heavily dependent on the success of certain
products, namely its 7000 Series of 3.5-inch disk drives and its
new family of mobile computing products, including the MobileMax
family of PCMCIA-based mobile computing data storage products.
In the past, the Company has been less successful than its
competitors in managing product transitions, and successful new
products introduced by competitors have tended to displace older
products, including the Company's products. The Company's
ability to anticipate market trends and to successfully develop,
manufacture in volume and sell new products in a timely manner
and at favorable gross margins will be important factors
affecting the Company's future results, and there can be no
assurance that the Company will be successful in such efforts.
Significant price erosion is typical during the life of a disk
drive product. Industry participants include both independent
suppliers and large computer manufacturers that both supply their
own internal requirements and sell disk drives to third parties.
Sales by such large computer manufacturers to third parties are
an important factor in the market. Bringing new products to
market on a timely basis is critical to competing in this market
environment. When a new product is not brought to market on a
timely basis, the selling prices of older products must be
reduced in order to compete effectively with competitors' new
products, which are being produced at lower costs. If
competitors introduce products which offer greater capacity,
better performance, lower prices or any combination of these
factors, or if certain customers produce more disk drives for
internal use, the Company's results of operations would be
adversely affected.
As a result of volatile business conditions in the PC
industry, including the trend toward consolidation among PC
manufacturers, sales to the major PC manufacturers have become
increasingly important to the success of the disk drive industry
participants. Although the Company intends to continue in its
efforts to increase its share of this large OEM market,
particularly in the marketing of its new products, there can be
no assurance the Company will be successful in such efforts.
Furthermore, fluctuations in demand for computer systems, or
other end-user demand, can result, and have in the past resulted,
in deferral or cancellation of orders for the Company's products.
The Company presently competes primarily with independent
manufacturers of 3.5-inch disk drives, including companies such
as Conner Peripherals, Quantum, Seagate Technology and Western
Digital. The Company also competes directly and indirectly with
disk drive divisions of large computer manufacturers such as
Digital Equipment, Fujitsu, Hewlett-Packard, Hitachi, NEC,
Toshiba and IBM. Should other major OEMs develop disk drive
manufacturing capabilities, the demand for the Company's products
could be reduced. The Company competes for sales of optical disk
drives with such companies as Canon, Hitachi, Ricoh, Sharp
Electronics, Sony and Hewlett-Packard.
BACKLOG
The Company's sales are primarily made for delivery of
standard products according to standard purchase orders.
Delivery dates are specified by purchase orders, such orders may
be subject to change or cancellation by the customer without
significant penalties. The quantity actually purchased, as well
as the shipment schedules, therefore, are frequently revised to
reflect changes in the customer's needs. At times when industry-
wide production is believed to be insufficient to meet demand,
the Company believes that certain customers may place purchase
orders beyond their projected needs in order to maintain a
greater portion of product allocation. Conversely, at times when
price competition is intense and price moves are frequent, the
Company believes that most customers may place purchase orders
below their projected needs, or delay placing or even cancel
purchase orders with the expectation that future price reductions
may occur. In light of these factors, backlog as of any
particular date may not be indicative of the Company's actual
revenues for any succeeding period, and, therefore, are not
material to an evaluation of the Company's future revenue.
PATENTS AND LICENSES
The Company has been granted approximately 70 U.S. and foreign
patents related to disk drive products and technology. The
Company has additional patents pending in the United States and
foreign countries. The Company has entered into cross-license
agreements with certain of its competitors and has discussed
entering into cross-licenses with others.
As in other sectors of the electronics industry, the disk
drive industry has been characterized by significant litigation
relating to patent and other intellectual property rights. Many
patents have been issued in the United States and foreign
countries covering disk drive products and their manufacture.
These patents have been issued both to competitors of the Company
and to parties who are not disk drive vendors. The Company has
received notices from competitors and other patent holders
claiming infringement by the Company and litigation has been
commenced related to one such claim, made by Rodime plc (Rodime)
and described below, with respect to which the Company believes
it has a license. See Legal Proceedings. There can be no
assurance that other litigation will not be commenced based upon
such claims or that additional claims of patent infringement will
not be made against the Company in the future, nor can there be
any assurance that the Company would be able to obtain a license
under the patents asserted or that any such license, if
available, would be offered on terms acceptable to the Company.
Adverse resolution of litigation based upon claims of patent
infringement could subject the Company to substantial liabilities
and require the Company to refrain from manufacturing or selling
certain of its products in the country where the patents were
issued.
As part of the acquisition of the MiniScribe business in June
1990, the Company was assigned a patent license agreement between
MiniScribe and Rodime covering patents related to 3.5-inch disk
drives. The Company believes that the assignment was valid;
however, Rodime has taken the position that the assignment was
invalid and would not in any event cover 3.5-inch drives
manufactured and sold by the Company before the acquisition of
MiniScribe's assets. See Legal Proceedings.
WARRANTY AND SERVICE
The Company currently warrants its products against defects in
parts and labor for varying periods from the date of shipment
with an additional 3 months allowed for distributors to account
for "shelf life". The 7000 Series of disk drives are warranted
for a period of 12 or 24 months after shipment depending on the
model. The MobileMax disk drives are warranted for a period of
12 months after shipment.
Products are generally repaired or refurbished by the
Company's Singapore facility. The Company operates a European
drive exchange center in Ireland, a domestic drive exchange
center in San Jose, California and an Asian drive exchange center
in Singapore.
EMPLOYEES
As of June 3, 1994, the Company had approximately 6,400
employees, of whom approximately 1,100 were located in the United
States, 100 in Europe and 5,200 in the Far East. Of the
employees, approximately 5,400 were engaged in manufacturing and
quality assurance and 200 in research and development.
The Company believes that its future success will depend on
its ability to continue to attract and retain a team of highly
motivated and skilled individuals. None of the Company's
employees are represented by a labor organization. The Company
believes that its employee relations are good.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES, AND FINANCIAL INFORMATION
The Company operates in a single industry segment: the
design, manufacture and marketing of data storage products for
desktop and mobile computer systems. It has a worldwide sales,
service and distribution network. The Company markets and sells
its products through a direct sales force to OEMs, distributors
and other emerging sales channels. For financial information
relating to foreign and domestic operations and export sales
refer to Part II, Item 8, Footnote 3, on pages 28 and 29.
Item 2. PROPERTIES
The Company's administrative offices are located in San Jose,
California and its research and development facilities are
located in Longmont, Colorado. These facilities are all leased.
The Company's manufacturing facilities include a disk drive
manufacturing facility in Singapore and a printed circuit board
manufacturing facility in Hong Kong. The Company owns and
occupies a 384,000 square-foot building in Singapore which is
situated on land leased through the year 2016 (subject to an
option to renew for an additional 30 years). All other
facilities located in Singapore and Hong Kong are leased. The
corporate offices for Maxoptix are located in San Jose,
California and are held under lease.
All of the Company's facilities are well maintained, suitable
for the advanced technological products and services of the
Company. The Company believes that its current facilities are
sufficient to meet its expected requirements.
Item 3. LEGAL PROCEEDINGS
As part of the acquisition of the MiniScribe business in June
1990, the Company was assigned a patent license agreement between
MiniScribe and Rodime covering patents related to 3.5-inch disk
drives. The Company believes that the assignment was valid;
however, Rodime has taken the position that the assignment was
invalid and would not in any event cover 3.5-inch drives
manufactured and sold by the Company before the acquisition of
MiniScribe's assets. In February 1993, Maxtor commenced an
action for declaratory relief in U. S. Bankruptcy Court in
Denver, Colorado seeking a judgment that the assignment was
valid. Rodime filed a denial and counterclaim for patent
infringement. In April 1994, the relevant claims of the Rodime
patent at issue in Rodime's counterclaims were declared invalid
in litigation between Rodime and another disk drive manufacturer.
The Company's litigation with Rodime has been stayed pending
Rodime's appeal of the finding of invalidity. Certain other
patent infringement claims against the Company have arisen in the
course of its business. There is presently no litigation
involving such claims, and the Company believes the outcome of
these claims will not have a material adverse effect, if any, on
the Company's financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security
holders during the last quarter of its fiscal year ended March
26, 1994.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Maxtor has two classes of stock issued and outstanding: common
stock, with a $.01 par value; and Class A common stock, also with
a $.01 par value. Maxtor common stock is designated on the
National Market System of NASDAQ under the symbol MXTR.
As of June 3, 1994, Maxtor had approximately 1,906
stockholders of record.
For the dividend policy of the Company, refer to Part II, Item
7, Dividend Policy, on page 20.
Item 6. SELECTED FINANCIAL INFORMATION
SELECTED FINANCIAL INFORMATION (In thousands, except per share amounts)
ANNUAL
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Fiscal Period March 26, March 27, March 28, March 30, March 31,
Ended 1994 1993 1992 1991 1990
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Revenue $1,152,615 $1,442,546 $1,037,481 $ 871,305 $491,134
Income (loss)
from operations (247,921) 53,968 12,304 (49,077) 25,810
Net income (loss) (257,589) 46,112 7,149 (45,429) 18,943
Net income (loss)
per share
-primary (8.00) 1.46 0.27 (1.89) 0.90
-fully diluted (8.00) 1.46 0.24 (1.89) 0.90
Total assets 492,375 579,113 445,182 453,856 384,542
Long-term debt and
capital lease
obligations due
after one year 107,393 119,868 110,744 128,066 126,575
Minority interest - - 1,023 8,201 11,666
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QUARTERLY (unaudited)
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Fiscal Period March 26, Dec. 25, Sept. 25, June 26,
Ended 1994 1993 1993 1993
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Revenue $ 260,397 $ 318,098 $ 313,546 $ 260,574
Gross margin 29,696 (53,633) (10,453) (18,009)
Net loss (4,482) (121,305) (59,623) (72,179)
Net loss per
share:
-primary (0.11) (4.12) (2.02) (2.50)
-fully diluted (0.11) (4.12) (2.02) (2.50)
Price range per
common share* $5.4375-$8.3125 $4.625-$6.75 $4.5-$6.6875 $6.0625-$8.0625
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Fiscal Period March 27, Dec. 26, Sept. 26, June 27,
Ended 1993 1992 (F2) 1992 (F2) 1992 (F2)
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Revenue $ 345,567 $ 402,614 $ 357,198 $ 337,167
Gross margin 17,458 80,743 80,426 86,459
Net income (loss) (19,692) 18,630 18,656 28,518
Net income (loss)
per share
-primary (0.69) 0.61 0.63 0.98
-fully diluted (0.69) 0.59 0.61 0.93
Price range per
common share* $6.875-$15.375 $12.625-$19.625 $9.25-$15.25 $8.375-$14.00
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* Price range is based on the quarterly high and low closing prices as
quoted from NASDAQ
[FN]
Fiscal year ended March 30, 1991 results include the acquisition of
substantially all of the assets of MiniScribe on June 30, 1990. See Note
2 of Notes to Consolidated Financial Statements for additional
information.
Income used in the fully diluted net income per share calculation is
$19,493, $19,519 and $29,381 for the quarterly periods ended December 26,
1992, September 26, 1992 and June 27, 1992, respectively, each of which
includes the addition of interest related to convertible subordinated
debentures.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
(Tabular information: Dollars in millions, except per share amounts)
RESULTS OF OPERATIONS
General
Since its inception in 1982, Maxtor Corporation (Maxtor or the
Company) has been subject to the highly cyclical nature of the disk
drive industry. In fiscal year 1993, as a result of an industry-wide
increase in demand and the related stabilization in prices, the
Company grew its revenue to over $1.4 billion. However, during the
last four months of fiscal year 1993 and continuing into the third
quarter of fiscal year 1994, the disk drive industry was experiencing
intense price competition and excess industry capacity, which
resulted in lower revenue for the Company. The Company began to
experience an increase in demand in the third quarter of fiscal year
1994, with most products in short supply, as well as concurrent
easing of price reductions and price increases on certain products.
In the fourth quarter of fiscal year 1994, revenue declined in
connection with the Company's decision in the third quarter of fiscal
year 1994 to discontinue certain unprofitable products, as described
below. In all quarters of fiscal year 1994, revenues were below the
levels in the same quarters of the prior fiscal year. In fiscal year
1994, the Company reported revenue of approximately $1.2 billion.
The Company reported net income of $46.1 million for fiscal year
1993. For fiscal year 1994, the Company reported a net loss of
$257.6 million. The Company incurred quarterly losses in each of
the five consecutive quarters beginning with the fourth quarter of
fiscal year 1993 and continuing through the fourth quarter of fiscal
year 1994. Such losses through the second quarter of fiscal year
1994 and continuing into the third quarter of fiscal year 1994 were
primarily the result of negative industry conditions and the
Company's inability to bring certain products to market in a timely
and cost effective manner. The negative industry conditions were
primarily the result of intense price competition and excess
industry capacity. In addition, the Company's losses were the
result of insufficient differentiation between the products of the
Company and its competitors, and efforts by better financed
competitors to increase market share. As noted above, the Company
began to experience an increase in demand in the third quarter of
fiscal year 1994, with most products in short supply, as well as
concurrent easing of price reductions and price increases on certain
products. Although general industry conditions improved during the
third and fourth quarters of fiscal year 1994, the Company continued
to incur losses as a result of continuing cost and time-to-market
issues with regard to its new products. The high start-up costs
associated with developing and commencing volume production on the
new 1.8-inch form factor products also contributed to the quarterly
losses during that period. In addition, the Company recorded
special and restructuring charges totaling $88.4 million during the
third quarter of fiscal year 1994, as described below, which
contributed significantly to the loss incurred during that period.
During the first three quarters of fiscal year 1994, the Company
experienced significant production delays with certain product lines
as a result of both design and vendor problems. Due to continuing
production and sales issues, the Company assessed its competitive
position and determined that it was unable to bring to market
profitable successor products to certain existing products. The
Company therefore decided to discontinue certain products, reduce
manufacturing capacity and write down inventory and equipment that
were no longer productive. The Company recorded special charges
amounting to $68.9 million in cost of revenue in the third quarter
of fiscal year 1994 as a result of these decisions. These decisions
reduced the scope of the Company's product and manufacturing
activities and, as a result, the Company then initiated a
restructuring plan and recorded a restructuring charge of $19.5
million in the third quarter of fiscal 1994. The restructuring plan
provides for the consolidation and streamlining of certain
operations and administration, including a reduction in worldwide
headcount by approximately 500 employees. At the same time, the
Company announced a major shift in strategy to devote Company
resources primarily to the design, manufacture and sale of its 7000
Series disk drives and its new family of mobile computing products,
including the MobileMax family of PCMCIA-based mobile computing data
storage products. The Company's research and development efforts
will focus on new products targeted at the desktop personal
computing and mobile computing markets.
The disk drive industry is subject to rapid technological change and
short product life cycles as data storage manufacturers continually
strive for smaller form factors, larger storage capacities, higher
performance and lower cost. As a result, Maxtor expects that the
Company's new products will replace the products which accounted for
a majority of the Company's revenues in fiscal years 1993 and 1994.
Shorter product life cycles also increase the importance of the
Company's ability to successfully manage product transitions. The
failure to adequately manage product transitions could result in the
loss of market opportunities, decreased sales of existing products,
cancellation of products or product lines, the accumulation of
obsolete and excess inventory and unanticipated charges related to
obsolete capital equipment. As previously mentioned, the Company
announced a major shift in strategy, devoting Company resources
primarily to the design, manufacture and sale of its 7000 Series of
inch-high, 3.5-inch disk drives and its new family of mobile
computing products, including the MobileMax family of PCMCIA-based
mobile computing data storage products. As a result of this shift
in strategy, the Company's financial results will be heavily
dependent on the success of these products. The Company's ability to
anticipate market trends and to successfully develop, manufacture in
volume and sell new products in a timely manner and at favorable
gross margins will be important factors affecting the Company's
future results and there can be no assurance that the Company will
be successful in such efforts. The Company has been less successful
than its competitors in managing product transitions, and successful
new products introduced by competitors have tended to displace older
products, including the Company's products. If the Company does not
successfully manage new product transitions in the near-term,
further losses will be incurred.
The disk drive industry is intensely competitive and significant
price erosion is typical during the life of a product. Industry
participants include both independent suppliers and large computer
manufacturers that both supply their own internal requirements and
sell disk drives to third parties. Sales by such large computer
manufacturers to third parties are an increasingly important factor
in the market. Bringing new products to market on a timely basis
has become increasingly critical to competing in this market
environment. When a new product is not brought to market on a
timely basis, the selling price of older products must be reduced in
order to compete effectively with competitors' new products, which
are being produced at lower costs. If competitors introduce
products which offer greater capacity, better performance, lower
prices or any combination of these factors, or if certain customers
produce more disk drives for internal use, the Company's results of
operations would be adversely affected.
As a result of volatile business conditions in the personal computer
(PC) industry, including the trend toward consolidation among PC
manufacturers, sales to the major PC manufacturers have become
increasingly important to the success of the disk drive industry
participants. Although the Company intends to continue in its
efforts to increase its share of this large OEM market, particularly
in the marketing of its new products, there can be no assurance that
the Company will be successful in such efforts. Furthermore,
fluctuations in demand for computer systems, or other end-user
demand, can result, and have in the past resulted, in deferral or
cancellation of orders for the Company's products.
The Company's manufacturing process requires large volumes of high
quality components supplied by outside suppliers. The Company
periodically receives communication from vendors that they may be
unable to supply required volumes of certain key components. During
the first quarter of fiscal year 1994, the Company temporarily shut
down production of its MXT product line as a result of a quality
problem related to a particular supplier's component. Production
resumed when it was determined that the problem was limited to that
particular supplier's component and that an alternate supplier's
components were not affected by the quality problem. The Company's
25252 2.5-inch drive has also been subject to significant and on-
going production delays as a result of both design and vendor
problems. The Company is currently unable to obtain required
volumes of a key component for its 7000 Series product line which is
supplied by a sole source vendor who is experiencing production
problems. It is expected that this shortage will adversely affect
the Company's operating results for the forthcoming quarter ending
June 25, 1994 and that it will prevent the Company from returning to
profitability during that quarter.
While the Company has qualified and continues to qualify multiple
sources for many components, it is reliant on, and will continue to
be reliant on, single sources for many semi-custom and custom
integrated circuits and other key components. The Company does not
have long-term supply contracts with most of its single source
vendors, some of which are companies with limited financial and
operational resources. The Company intends to continue to pursue
qualification of alternative sources for single source components
where practicable; the Company believes, however, that it will have
to continue to utilize leading edge components which may only be
available from a single source. With the expansion of production
experienced by the disk drive industry during the last quarter of
fiscal year 1994 and continuing into the first quarter of fiscal
year 1995, shortages of certain key components for the disk drive
industry have increased and the Company expects it is likely that
industry shortages of key components may continue into future
quarters. The Company will continue to aggressively work with its
vendor base to minimize its exposure. There can be no assurance,
however, that the Company will be successful in such efforts or that
in the future the Company's vendors will meet the Company's
requirements for required volumes of high-quality components in a
timely and cost effective manner. In addition, there can be no
assurance that the Company's operating results or customer
relationships will not be adversely affected by production delays,
including delays in bringing new products into volume production in
a timely manner, resulting from an interruption or reduction in its
supply of any key components, excessive rework costs associated with
defective or substandard components or its inability to obtain
continued reduction of component costs.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
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Year Ended March 26, March 27, Change
1994 1993
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Revenue $ 1,152.6 $ 1,442.5 $ (289.9)
Gross margin $ (52.4) $ 265.1 $ (317.5)
As a percentage of revenue (4.5%) 18.4%
Net income (loss) $ (257.6) $ 46.1 $ (303.7)
As a percentage of revenue (22.3%) 3.2%
Net income (loss) per share. $ (8.00) $ 1.46 $ (9.46)
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Revenue
Unit sales of the Company's 7000 Series disk drives accounted for a
significant portion of the Company's revenue during both the current
fiscal year and the prior fiscal year, and increased modestly during
fiscal year 1994 over fiscal year 1993. However, these product
offerings, particularly 100-200 megabyte products, were subject to
intense price competition and excess industry capacity during most
of the first nine months of fiscal year 1994, which negatively
impacted per unit revenue in fiscal year 1994 despite the increase
in unit volumes. The Company began to experience an increase in
demand during the third quarter of fiscal year 1994, which continued
through the fourth quarter of fiscal year 1994 with most products in
short supply, as well as concurrent easing of price reductions and
certain price increases. While there was a significant shift in
product mix from the older, lower capacity 3.5-inch and 5.25-inch
product offerings to the higher capacity 7000 Series and MXT product
offerings, average unit selling prices, in terms of megabyte per
dollar, declined substantially between fiscal years 1993 and 1994.
Revenue for fiscal year 1993 included approximately $61 million
generated by the Company's wholly-owned subsidiary, Storage
Dimensions, Inc. (SDI); no such revenue was recognized in fiscal
year 1994 due to the sale of SDI on December 26, 1992. In addition,
revenue for fiscal year 1994 did not include $16.1 million, net, of
non-recurring revenue recognized in fiscal year 1993 related to
certain royalty and licensing agreements.
During fiscal year 1994, the Company had one customer which
accounted for approximately 24% of the Company's revenue. This
percentage may fluctuate in future periods and the Company expects
it will decline substantially in fiscal year 1995.
As a result of the Company's shift in strategy, as discussed above,
the Company will be heavily dependent on the success of certain
products. During the third and fourth quarters of fiscal year 1994,
the Company announced several new products, including additions to
the MobileMax family of PCMCIA-compatible storage products for
mobile computing applications. These new products did not
contribute significantly to revenue in the fourth quarter of fiscal
year 1994, and the Company anticipates that these new products will
not contribute significantly to revenue during fiscal year 1995. The
Company's ability to increase revenues is dependent on its ability
to anticipate market trends and to successfully develop, manufacture
in volume and sell new products in a timely manner. There can be no
assurance that the Company will be successful in such efforts.
Gross Margin
Gross margin as a percentage of revenue decreased significantly to
(4.5)% in fiscal year 1994 from 18.4% in fiscal year 1993. As
discussed previously, the Company recorded special charges amounting
to $68.9 million in cost of revenue in the third quarter of fiscal
year 1994. The charges consist of estimated costs associated with
the termination of certain products, a reduction in manufacturing
capacity, write downs of inventory and equipment that are no longer
productive, and related future commitments to third parties.
Excluding the special charges of $68.9 million, gross margin for
fiscal year 1994 was 1.4%. Excluding the non-recurring revenue of
approximately $16.1 million, gross margin was 17.5% for fiscal year
1993.
Excluding the impact of the special charges, the significant decline
in gross margin during fiscal year 1994 is primarily attributable to
the prevailing negative business conditions in the disk drive
industry, including intense price competition and excess industry
capacity, as well as to cost and time-to-market issues with regard
to the Company's new products. During the last four months of
fiscal year 1993 and continuing into the third quarter of fiscal
year 1994, gross margin declined significantly due to increased
price competition on 100-200 megabyte 3.5-inch products, price
erosion on older products as they were being phased out, and costs
associated with the startup and initial production of the Company's
MXT products. Gross margin began to improve during the third and
fourth fiscal quarters of fiscal year 1994 from (3.3%) for the
second quarter to 4.8% for the third quarter, excluding the special
charges of $68.9 million, to 11.4% for the fourth quarter as a
result of increased unit sales volumes of certain products for which
average unit selling prices were relatively constant while average
unit manufacturing costs declined from quarter to quarter.
During most of the first nine months of fiscal year 1994, gross
margin was negatively impacted by the Company's failure to produce
planned unit volumes of its MXT product line due to a quality
problem involving a particular supplier's component, plus higher
costs than planned due to related design and manufacturing issues,
in addition to failure to produce planned unit volumes of its 2.5-
inch product line due to design and component issues. A temporary
shutdown of production of the MXT product occurred during the first
quarter and resulted in an estimated loss of $25.0 million of
revenue and an accompanying negative gross margin for this product
offering during that quarter. This first quarter production
shutdown of the MXT product also adversely affected production costs
in the second quarter of fiscal year 1994 until efficient production
levels were achieved. The design and component issues related to
the 2.5-inch product line resulted in a negative gross margin for
this product line during most of fiscal year 1994.
The Company believes that the reduced rate of decline in average
unit selling prices experienced in the latter months of fiscal year
1994 will continue through the first quarter of fiscal year 1995.
The Company will continue its efforts to reduce its average unit
manufacturing costs and to introduce and produce in volume new
higher margin products in an effort to improve gross margin during
fiscal year 1995. However, there can be no assurance that average
unit selling prices will not decline at a more rapid rate or that
the Company will be successful in its efforts to improve gross
margin.
Operating expenses
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Year Ended March 26, March 27, Change
1994 1993
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Research and development $ 97.2 $ 112.6 $ (15.4)
As a percentage of revenue 8.4% 7.8%
Selling, general and
administrative $ 78.9 $ 98.5 $ (19.6)
As a percentage of revenue 6.8% 6.8%
Restructuring $ 19.5 - $ (19.5)
As a percentage of revenue 1.7% n/a
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Research and Development
Research and development (R&D) expenses decreased from the prior
fiscal year in absolute dollars due primarily to the consolidation
of the Company's R&D activities in Longmont, Colorado in connection
with the Company's restructuring plan. This consolidation
eliminated the need for certain facilities in San Jose, California,
and also resulted in a substantial reduction in headcount associated
with R&D and related activities previously conducted in San Jose.
R&D increased as a percentage of revenue as a result of the
decreased revenue base between fiscal years 1993 and 1994. While
R&D spending in absolute dollars is expected to decrease during
fiscal year 1995, the Company must continue to make substantial
investments in R&D since the timely introduction and transition to
volume production of new products is essential to its future
success. In addition, R&D expenses may fluctuate in the future
resulting from the cost of acquiring rights to new technologies.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses declined in
absolute dollars primarily due to the sale of the assets of SDI, and
were relatively unchanged as a percentage of revenue for fiscal year
1994 compared to the prior fiscal year given the decline in the
revenue base during that period. SG&A for the first nine months of
fiscal year 1993 included expenses incurred by SDI until December
1992 at which time the Company sold the assets of SDI. The decline
in SG&A expenses also reflects the Company's efforts to control and
reduce expenditures. The Company has ongoing efforts to control
costs and expenditures and reduce SG&A expenses in future quarters,
however, there can be no assurance that the Company will be
successful in such efforts.
Restructuring
The Company recorded a restructuring charge of $19.5 million in the
third quarter of fiscal year 1994. The restructuring plan provides
for the consolidation and streamlining of certain operations and
administration, including a reduction in the Company's worldwide
headcount, and is expected to be completed within the twelve-month
period from the date of the charge. The charge consists of
approximately $11.8 million in estimated costs related to the
worldwide reduction in headcount and approximately $7.7 million
associated with facility consolidations, including lease and other
obligations on certain facility leases, none of which extend beyond
calendar year 1994. The plan provides for a worldwide headcount
reduction of approximately 500 employees, which was substantially
completed during February 1994. The Company's research and
development activities will be consolidated at its Longmont,
Colorado facilities, which will eliminate the need for certain
facilities in San Jose, California. In addition, the Company's
actions will eliminate the need for certain manufacturing facilities
in Singapore. The Company anticipates that these restructuring
actions will require the expenditure of approximately $9.0 million
of cash over the first nine months of fiscal year 1995, which will
be provided by cash flow from operations or capital infusions. As
of March 26, 1994, approximately $9.0 million of the $19.5 million
charge remained in current liabilities. As a result of these
activities, the Company has eliminated an estimated $9.0 million per
quarter of operating costs, beginning with the fourth quarter of
fiscal year 1994.
Interest expense, interest income, and minority interest in loss of
joint venture
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Year ended March 26, March 27, Change
1994 1993
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Interest expense $ 10.1 $ 10.1 $ -
Interest income $ 2.3 $ 2.6 $ (.3)
Minority interest $ - $ 1.0 $ (1.0)
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The Company's minority interest account is related to Maxoptix
Corporation (Maxoptix), a joint venture formed in March 1989 with
Kubota Corporation (Kubota), 62% owned by Maxtor and 34% owned by
Kubota, subject to certain adjustments. All operating losses
incurred by Maxoptix from March 31, 1990 through June 27, 1992 were
allocated to the minority interest account and, therefore, did not
impact Maxtor's net income (loss). During the fiscal quarter ended
September 26, 1992, the minority interest account was reduced to
zero. Thereafter, all future operating losses incurred by Maxoptix
were and will continue to be fully allocated to Maxtor. See Note 2
to Notes to Consolidated Financial Statements.
Provision for income taxes and effective tax rate
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Year ended March 26, March 27, Change
1994 1993
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Provision for income taxes $ 1.9 $ 1.3 $ .6
Effective tax rate n/a 2.7%
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The provision for income taxes consists primarily of foreign taxes.
The Company's effective tax rate for fiscal year 1994 differs from
the combined federal and state rate due to the repatriation of
foreign earnings absorbed by current year losses, the Company's U.S.
operating losses not providing current tax benefits, and valuation
of temporary differences, offset in part by the tax savings
associated with the Company's Singapore operations. Income from the
Singapore operations is not taxable in Singapore as a result of the
Company's pioneer tax status, and those earnings which are
permanently reinvested outside the United States are not taxable in
the United States. The Company's effective tax rate for fiscal year
1993 was 2.7%, which is below the combined federal and state rate
due to the tax benefits associated with the Company's Singapore
operations, valuation of temporary differences and the non-recurring
reduction of taxes provided in prior periods, offset by the
Company's U.S. operating losses not providing current tax benefits.
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109). Under SFAS No. 109, the liability
method is used in accounting for income taxes. For purposes of this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets
and liabilities and are measured by applying enacted tax rates and
laws to the taxable years in which such differences are expected to
reverse. The Company adopted the provisions of SFAS No. 109 in its
financial statements effective March 28, 1993 for fiscal year 1994.
Adoption of SFAS No. 109 had no financial impact on the Company's
consolidated financial position or results of operations.
FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992
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Year ended March 27, March 28, Change
1993 1992
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Revenue $ 1,442.5 $ 1,037.5 $ 405.1
Gross margin $ 265.1 $ 189.0 $ 76.0
As a percentage of revenue 18.4% 18.2%
Net income $ 46.1 $ 7.1 $ 39.0
As a percentage of revenue 3.2% .1%
Net income per share:
- Primary $ 1.46 $ 0.27 $ 1.19
- Fully diluted $ 1.46 $ 0.24 $ 1.22
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Revenue
The Company's revenue increased to $1.4 billion in fiscal year 1993,
an increase of 39% over the prior fiscal year. This increase was
primarily due to strong unit sales of the Company's 7000 Series of
one-inch high 3.5-inch products, partially offset by a decrease in
unit sales of the Company's full height, 3.5-inch products and 5.25-
inch products. In addition, revenue increased due to a shift in
product mix to higher capacity, higher price drives within certain
product series, partially offset by a decline in the latter part of
the fiscal year in the average unit selling prices of the Company's
products, particularly with respect to the 100-200 megabyte 3.5-inch
products. Revenue also increased during fiscal year 1993 as a
result of $16.1 million, net, of non-recurring revenue related to
certain royalty and licensing agreements. This compares to
approximately $8.0 million of non-recurring revenue recognized in
fiscal year 1992 in connection with a patent cross license agreement
and the gain on the sale of certain manufacturing rights and assets.
Revenue increases during fiscal year 1993 over fiscal year 1992 were
impacted by the sale of the assets of the Company's wholly-owned
subsidiary, Storage Dimensions, Inc. (SDI) at the end of the
Company's third fiscal quarter. Fiscal year 1993 revenues include
only nine months of revenues generated by SDI, whereas a full year
of SDI revenues were included in the fiscal year 1992 results of
operations, a decline of approximately $26.8 million.
Gross Margin
Gross margin as a percentage of revenue increased to 18.4% in fiscal
year 1993 from 18.2% in fiscal year 1992. Excluding the non-
recurring revenue of approximately $16.1 million recognized in
fiscal year 1993, gross margin was 17.5%, as compared to 17.4% for
fiscal year 1992, which excludes non-recurring revenue of
approximately $8.0 million and an aggregate net reduction to cost of
revenue of approximately $2.3 million related to special charges and
certain non-recurring reductions to cost of revenue.
Over a nine-month period through September 28, 1991, the Company
experienced downward pressure on gross margins as a result of
difficult business conditions and intense price competition which
forced the Company to decrease average unit selling prices more
quickly than it could reduce manufacturing costs. Beginning in the
quarter ended December 28, 1991, there was an industry-wide increase
in demand for disk drive products which led to a stabilization in
prices. This increase in demand, combined with a shift in the
product mix to higher capacity, higher gross margin products, led to
improved gross margins during the first eight months of fiscal year
1993 over the prior fiscal year. In addition, gross margins
improved during that eight-month period as a result of manufacturing
efficiencies resulting from the consolidation and reorganization of
the Company's manufacturing organization, decreased material costs
and increased unit volume, which helped to lower fixed costs per
unit. During the four-month period ended March 27, 1993, however,
gross margins declined significantly due to increased price
competition for the 100-200 megabyte 3.5-inch products, price
erosion on older products as they are being phased out, and costs
associated with the startup and initial production of the 3.5-inch
MXT products.
Operating expenses
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Year ended March 27, March 28, Change
1993 1992
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Research and development $ 112.6 $ 72.4 $ 40.2
As a percentage of revenue 7.8% 7.0%
Selling, general and
administrative $ 98.5 $ 104.3 $ (5.8)
As a percentage of revenue 6.8% 10.1%
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Research and Development
R&D expenses increased in fiscal year 1993 over the prior fiscal
year primarily due to planned expenses to support the development
and engineering production of new products, including increased
headcount and new product/technology expenditures.
Selling, General & Administrative
SG&A expenses as a percentage of revenue declined in fiscal year
1993 from the prior fiscal year primarily due to relatively flat
spending in absolute dollars over a significantly increased revenue
base in fiscal year 1993 compared to the prior fiscal year. In
addition, fiscal year 1992 expenses included special charges of $3.8
million which were not incurred in fiscal year 1993. Exclusive of
these special charges, SG&A expenses would have been 9.7% of revenue
in fiscal year 1992.
Interest expense, interest income, and minority interest in loss of
joint venture
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Year ended March 27, March 28, Change
1993 1992
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Interest expense $ 10.1 $ 12.6 $ (2.4)
Interest income $ 2.6 $ 1.4 $ 1.2
Minority interest $ 1.0 $ 7.2 $ (6.2)
- - --------------------------------------------------------------------
Interest expense decreased in fiscal year 1993 compared to the prior
fiscal year primarily due to average short-term bank borrowings
being significantly lower during fiscal year 1993.
Interest income increased in fiscal year 1993 compared to the prior
fiscal year due to an improved cash and cash equivalents position,
partly offset by a decrease in interest rates.
Provision for income taxes and effective tax rate
- - -------------------------------------------------------------------
Year ended March 27, March 28, Change
1993 1992
- - -------------------------------------------------------------------
Provision for income taxes $ 1.3 $ 1.1 $ .2
Effective tax rate 2.7% 13.8%
- - -------------------------------------------------------------------
The Company's effective tax rate for fiscal year 1993 was 2.7%,
which is below the combined federal and state rate due to the tax
benefits associated with the Company's Singapore operations,
valuation of temporary differences and the non-recurring reduction
of taxes provided in prior periods, offset by the Company's U.S.
operating losses not providing current tax benefits. Income from
the Singapore operations is not taxable in Singapore as a result of
the Company's pioneer tax status, and earnings which are permanently
reinvested outside the United States are not taxable in the United
States. The effective tax rate for fiscal year 1992 was also below
the combined federal and state statutory rate due to the tax
benefits associated with the Company's Singapore operations and the
Company's U.S. operating loss.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------------------------------------------
March 26,
Year ended 1994
- - -------------------------------------------------------------------
Cash and cash equivalents $ 144.5
Short-term investments $ 74.9
Net cash used in operating activities $ 16.5
Net cash used in investing activities $ 103.7
Net cash provided by financing activities $ 129.4
- - --------------------------------------------------------------------
During fiscal year 1994, the Company's losses impacted its financial
position by decreasing available cash and requiring the Company to
seek alternative financing, including replacing its existing
revolving line of credit and seeking other long-term financing. In
February 1994, the Company received approximately $150 million from
Hyundai Electronics Industries Co., Ltd. and several related members
of the Hyundai Business Group (Hyundai) pursuant to the Stock
Purchase Agreement described below.
As of March 26, 1994, the Company had net cash and cash equivalents
of $114.5 million, excluding $30.0 million of short-term borrowings,
as compared to $102.3 million as of March 27, 1993, an increase of
$12.2 million. In addition, the Company had short-term investments
of $74.9 million at the end of fiscal year 1994. The combined
increase in the Company's cash and cash equivalents, and short-term
investments of $87.1 million was primarily the result of the $150
million investment by Hyundai in February 1994 offset by debt
repayments, capital expenditures and operating activities.
Of the net cash used in operating activities during fiscal year
1994, net loss less non-cash depreciation and amortization accounted
for approximately $171.7 million. This was offset in part by the
decreases in accounts receivable and inventories, and increases in
current liabilities which totaled approximately $151.3 million. The
decline in accounts receivable primarily reflects lower sales levels
in the quarter ending March 26, 1994 than in the quarter ending
March 27, 1993 and improved days sales outstanding. Days sales
outstanding improved to 34 days at the end of fiscal year 1994 from
39 days at the end of fiscal year 1993. Inventories decreased
primarily because of the Company's efforts to balance production
with demand and control inventory purchases. Despite the Company's
efforts to tightly control inventory levels, inventories may
increase in the future based on changes in market demand or industry-
wide production. Current liabilities increased by approximately $42
million primarily as a result of the special and restructuring
charges recorded by the Company in the third quarter of fiscal year
1994.
Net cash used in investing activities was primarily attributable to
the $74.9 million of short-term investment purchases and $29.7
million of capital expenditures. A significant portion of the
capital expenditure activity was related to the acquisition of
manufacturing equipment. Depending on business conditions, the
Company currently expects to make capital expenditures of
approximately $35 to $40 million during fiscal year 1995, as
compared to approximately $30 million during fiscal year 1994.
Net cash provided by financing activities during fiscal year 1994
primarily reflects the issuance of approximately 19.5 million shares
of Maxtor Class A common stock to Hyundai pursuant to the Stock
Purchase Agreement described below, offset in part by cash used to
reduce outstanding debt.
In September 1992, the Company established a $70.0 million domestic
unsecured revolving line of credit. In April 1993, in consideration
of the amendment of certain financial covenants, the Company agreed
to grant the lenders a security interest in the Company's
inventories and receivables which would automatically become
effective under certain circumstances. In July 1993, the Company
obtained a waiver and second amendment of certain financial
covenants through September 27, 1993, and in connection with the
waiver, agreed to grant the lenders a security interest in the
Company's inventories and receivables and agreed to limit its
borrowings to the $27.0 million of current borrowings at that time.
During fiscal year 1993, the Company also established a $48.0
million term loan facility in Singapore with several banks. In July
1993, the Company repaid in full the outstanding borrowings on that
term loan facility and terminated the agreement.
On September 17, 1993, the Company obtained a secured, asset-based
revolving line of credit of $76.0 million. This line of credit
replaced the existing $70.0 million line of credit from different
lenders, as well as $6.0 million of equipment term loans. This
asset-based revolving line of credit provides for borrowings up to
$76.0 million based on eligible receivables at various interest
rates over a two-year term and is secured by receivables, certain
inventories and other assets. As of March 26, 1994, $30.0 million
of borrowings and $2.9 million of letters of credit were
outstanding. The $30.0 million of borrowings was fully repaid
during the first fiscal week of April 1994. The availability of
this line of credit in the future depends on the Company meeting
certain covenants. The line of credit expires in September 1995.
In August 1993, the Company signed a letter of intent for the
creation of a strategic relationship with Hyundai. In September
1993, the Company then signed the Stock Purchase Agreement (the
Agreement) with Hyundai. The transaction closed on February 3, 1994
and was recorded in the fourth quarter of fiscal year 1994. Under
the terms of the Agreement, Hyundai invested approximately $150
million in Maxtor and received approximately 19.5 million shares of
common stock, representing a per share price of $7.70, and
constituting approximately 40% of the Company's outstanding voting
stock at the time. The stock issued to Hyundai is a special series
of common stock, entitling Hyundai to representation on the
Company's Board of Directors proportionate to its share of ownership
and certain voting rights. In addition, the Agreement requires the
Company's Board of Directors to elect the director designated by
Hyundai as Chairman of the Board, which occurred in February 1994.
The Agreement also provides that Hyundai may not acquire more than
45% of Maxtor except in a tender for all outstanding shares or in
certain other cases. These provisions could deter a third party
from making a tender or exchange offer for the stock of the Company.
The Company believes that the $150 million of funding generated by
the Hyundai investment, and the Company's expected cash flow from
operations, equipment financing and available lines of credit will
be sufficient to fund the Company's working capital and capital
expenditure requirements through fiscal year 1995.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. It
is the present policy of the Board of Directors to retain earnings
for use in the business. The Company does not anticipate paying
cash dividends in the near future. Under the terms of the Company's
line of credit and term loan facilities, the Company may not declare
or pay any dividends without the prior consent of its lenders.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Financial Statements:
Consolidated Balance Sheets -
March 26, 1994 and March 27, 1993 21
Consolidated Statements of Income (Loss) -
Years ended March 26, 1994,
March 27, 1993 and March 28, 1992 22
Consolidated Statements of Stockholders' Equity -
Years ended March 26, 1994,
March 27, 1993 and March 28, 1992 23
Consolidated Statements of Cash Flows -
Years ended March 26, 1994,
March 27, 1993 and March 28, 1992 24 - 25
Notes to Consolidated Financial Statements 25 - 36
Report of Ernst & Young, Independent Auditors 37
Financial Statement Schedules:
The following consolidated financial statement schedules of
Maxtor Corporation are filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of Maxtor Corporation.
Schedule I Short-term investments S-1
Schedule II Amounts receivable from related
parties and underwriters,
promoters and employees other S-2,
than related parties S-3
Schedule V Property, plant and equipment S-4
Schedule VI Accumulated depreciation and
amortization of property,
plant and equipment S-5
Schedule VIII Valuation and qualifying accounts S-6
Schedule IX Short-term borrowings S-7
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.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
- - --------------------------------------------------------------------
March 26, March 27,
ASSETS 1994 1993
- - --------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 144,520 $ 135,324
Short-term investments 74,911 -
Accounts receivable, net of
allowance for doubtful accounts
of $3,653 at March 26, 1994 and
$4,190 at March 27, 1993 99,806 149,397
Inventories:
Raw materials 51,419 77,039
Work-in-process 19,196 32,650
Finished goods 25,408 45,654
- - -------------------------------------------------------------------
96,023 155,343
Prepaid expenses and other 7,936 10,675
- - -------------------------------------------------------------------
Total current assets 423,196 450,739
Property, plant and equipment, at cost:
Buildings 21,387 8,585
Machinery and equipment 195,820 204,090
Furniture and fixtures 18,195 19,214
Leasehold improvements 17,506 17,940
- - -------------------------------------------------------------------
252,908 249,829
Less accumulated depreciation
and amortization (191,750) (130,713)
- - -------------------------------------------------------------------
Net property, plant and equipment 61,158 119,116
Other assets 8,021 9,258
- - -------------------------------------------------------------------
$ 492,375 $ 579,113
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ 30,000 $ 33,000
Accounts payable 137,566 130,192
Income taxes payable 7,530 4,664
Accrued payroll and payroll-
related expenses 11,720 16,516
Accrued warranty 27,281 16,089
Accrued special and restructuring 21,777 -
Accrued expenses 25,700 21,753
Long-term debt and capital lease
obligations due within one year 4,155 16,373
- - -------------------------------------------------------------------
Total current liabilities 265,729 238,587
Long-term debt and capital lease
obligations due after one year 107,393 119,868
Deferred tax liabilities 66 1,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized;
no shares issued or outstanding - -
Class A common stock, $0.01 par value,
19,480,000 shares authorized;
issued and outstanding:
March 26, 1994 - 19,480,000 shares 195 -
Common stock, $0.01 par value,
180,520,000 shares authorized;
issued and outstanding:
March 26, 1994 - 30,425,242 shares;
March 27, 1993 - 28,809,277 shares 304 288
Additional paid-in capital 320,564 163,747
Retained earnings (deficit) (201,749) 55,840
- - -------------------------------------------------------------------
119,314 219,875
Less notes receivable from stockholders (127) (217)
- - -------------------------------------------------------------------
Total stockholders' equity 119,187 219,658
- - -------------------------------------------------------------------
$ 492,375 $ 579,113
===================================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
Year ended
- - --------------------------------------------------------------------
March 26, March 27, March 28,
1994 1993 1992
- - --------------------------------------------------------------------
Revenue $ 1,152,615 $ 1,442,546 $ 1,037,481
Cost of revenue 1,205,014 1,177,460 848,435
- - --------------------------------------------------------------------
Gross margin (52,399) 265,086 189,046
- - --------------------------------------------------------------------
Operating expenses:
Research and development 97,168 112,621 72,417
Selling, general and
administrative 78,854 98,497 104,325
Restructuring 19,500 - -
- - --------------------------------------------------------------------
Total operating expenses 195,522 211,118 176,742
- - --------------------------------------------------------------------
Income (loss) from operations (247,921) 53,968 12,304
Interest expense (10,087) (10,140) (12,584)
Interest income 2,283 2,557 1,387
Minority interest in loss of
joint venture - 1,014 7,187
- - --------------------------------------------------------------------
Income (loss) before income
taxes (255,725) 47,399 8,294
Provision for income taxes 1,864 1,287 1,145
- - --------------------------------------------------------------------
Net income (loss) $ (257,589) $ 46,112 $ 7,149
====================================================================
Net income (loss) per share
-primary $ (8.00) $ 1.46 $ 0.27
-fully diluted $ (8.00) $ 1.46 $ 0.24
====================================================================
Shares used in computing net
income (loss) per share
-primary 32,203 31,534 26,721
-fully diluted 32,203 31,599 29,215
====================================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
- - ---------------------------------------------------------------------------
Common Notes
Stock Addi- Receiv-
tional Retained able Total
----------------- Paid-in Earnings From Stock-
Shares Amount Capital (Deficit) Stock- holders'
holders Equity
- - ---------------------------------------------------------------------------
Balance, March
30, 1991 23,096,417 $232 $137,157 $ 2,579 $(325) $139,643
Issuance of
common stock
under stock
option plans 349,929 3 2,034 - (291) 1,746
Payments on and
forgiveness of
notes
receivable from
stockholders - - - - 187 187
Issuance of
common stock
under stock
purchase plan 565,885 5 1,437 - - 1,442
Adjustment to
common stock
held by
Standard
Chartered Bank - - 5,618 - - 5,618
Net income - - - 7,149 - 7,149
- - ---------------------------------------------------------------------------
Balance, March
28, 1992 24,012,231 240 146,246 9,728 (429) 155,785
Issuance of
common stock
under stock
option plans
and related
tax benefit 2,075,738 21 12,767 - (167) 12,621
Payments on and
forgiveness of
notes
receivable from
stockholders - - - - 379 379
Issuance of
common stock
under stock
purchase plan 721,308 7 3,249 - - 3,256
Adjustment to
common stock
held by
Standard
Chartered Bank - - 1,505 - - 1,505
Issuance of
common stock
from exercise
of stock rights 2,000,000 20 (20) - - -
Net income - - - 46,112 - 46,112
- - ---------------------------------------------------------------------------
Balance, March
27, 1993 28,809,277 288 163,747 55,840 (217) 219,658
Issuance of
common stock
under stock
option plans
and related
tax benefit 792,920 8 3,362 - - 3,370
Payments on
and forgiveness
of notes
receivable from
stockholders - - - - 90 90
Issuance of
common stock
under stock
purchase plan 823,045 8 4,307 - - 4,315
Issuance of
Class A
common stock 19,480,000 195 149,148 - - 149,343
Net loss - - - (257,589) - (257,589)
- - ---------------------------------------------------------------------------
Balance, March
26, 1994 49,905,242 $499 $320,564 $(201,749) $(127) $119,187
===========================================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended
- - --------------------------------------------------------------------
March 26, March 27, March 28,
1994 1993 1992
- - --------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents
Cash flows from operating
activities:
Net income (loss) $(257,589) $ 46,112 $ 7,149
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization 85,865 62,028 55,190
Forgiveness of notes
receivable from
stockholders 61 74 72
Change in non-current
deferred tax
liabilities (934) 1,000 -
Gain on sale of facility - - (5,500)
Loss on disposal of
property, plant
and equipment 2,135 2,301 4,920
Minority interest in
loss of joint venture - (1,023) (7,187)
Other, net - (796) -
Change in assets and
liabilities:
Accounts receivable 49,591 (17,248) (16,953)
Inventories 59,320 (45,740) 21,418
Prepaid expenses and
other 2,739 (6,256) 449
Accounts payable 7,374 20,020 12,772
Income taxes payable 2,866 (3,894) 2,077
Accrued payroll and
payroll-related
expenses (4,796) (1,066) 4,894
Accrued warranty 11,192 1,657 (3,409)
Accrued special and
restructuring 21,777 - -
Accrued expenses 3,947 12,706 3,922
- - --------------------------------------------------------------------
Total adjustments 241,137 23,763 72,665
- - --------------------------------------------------------------------
Net cash provided by (used
in) operating activities (16,452) 69,875 79,814
- - --------------------------------------------------------------------
Cash flows from investing
activities:
Proceeds from sale of
subsidiary, net of costs - 15,842 -
Purchase of short-term
investments (74,911) - -
Purchase of property, plant
and equipment, net (29,746) (91,700) (36,833)
Proceeds from disposal of
property, plant and equipment 1,013 1,930 12,969
Proceeds from sale of facility - - 7,600
Other assets (72) (1,686) (509)
- - --------------------------------------------------------------------
Net cash used in investing
activities (103,716) (75,614) (16,773)
- - --------------------------------------------------------------------
Cash flows from financing
activities:
Proceeds from issuance of debt,
including short-term borrowings 2,870 79,798 3,006
Principal payments of debt,
including capital lease
obligations (30,563) (30,092) (35,977)
Proceeds from issuance of
Class A common stock 149,343 - -
Proceeds from issuance of
common stock, net of
issuance of notes
receivable, stock
repurchase and tax benefits 7,685 15,193 3,188
Payments on notes receivable
from stockholders 29 305 115
- - --------------------------------------------------------------------
Net cash provided by (used
in) financing activities 129,364 65,204 (29,668)
- - --------------------------------------------------------------------
Net change in cash and cash
equivalents 9,196 59,465 33,373
Cash and cash equivalents at
beginning of period 135,324 75,859 42,486
- - --------------------------------------------------------------------
Cash and cash equivalents at end
of period $ 144,520 $ 135,324 $ 75,859
====================================================================
See accompanying notes.
Supplemental disclosures of cash flow information:
(In thousands) Year ended
- - -------------------------------------------------------------------
March 26, March 27, March 28,
1994 1993 1992
- - -------------------------------------------------------------------
Cash paid (received) during
the year for:
Interest $ 9,985 $ 9,250 $ 12,820
Income taxes 1,337 4,661 298
Income tax refunds (1,824) (292) (1,504)
- - -------------------------------------------------------------------
Supplemental information on noncash investing and financing
activities:
Capital lease obligations of approximately $122,000, $520,000 and
$695,000 were incurred when the Company entered into capitalized
leases for new equipment in fiscal years 1994, 1993 and 1992,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of Maxtor
Corporation (Maxtor or the Company) and its wholly owned
subsidiaries, after elimination of all intercompany accounts and
transactions. The consolidated financial statements also include
the accounts of Maxoptix Corporation (Maxoptix), a majority owned
joint venture (see Note 2). In connection with the sale of the
assets of SDI, Maxtor acquired a 32.8% interest in the company
formed for the purpose of purchasing the net assets of SDI. Maxtor
accounts for its investment under the equity method (see Note 2).
Cash and cash equivalents
The Company considers all highly liquid instruments, which are
purchased with a maturity of three months or less, to be cash
equivalents. Cash equivalents are stated at cost, which
approximates market. A substantial portion of the Company's cash
and cash equivalents is held by foreign subsidiaries and is
generally in U.S. dollar-denominated holdings. Certain amounts held
by foreign subsidiaries would be subject to U.S. income taxation
should repatriation to the United States to meet domestic cash needs
become necessary (see Note 8).
Fair value of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying value reported in the Company's balance sheet as cash
and cash equivalents approximates its fair value.
Short-term investments
The carrying value reported in the Company's balance sheet as short-
term investments approximates its fair value.
Note receivable
The carrying value of the note receivable, which is classified in
other assets on the Company's balance sheet, approximates its fair
value.
Short and long-term debt
The fair value of the Company's fixed rate debt is estimated based
on the current rates offered to the Company for similar debt
instruments of the same remaining maturities. The fair value of the
Company's variable rate debt approximates its carrying value as
these instruments are repriced frequently at market rates.
Convertible subordinated debentures
The fair value of the Company's convertible subordinated debentures
is based on the quoted market price at March 26, 1994.
Foreign currency contracts
The fair value of foreign currency contracts used for hedging
purposes is estimated based on the quoted market price at the end of
the quarter.
The carrying value and fair values of the Company's financial
instruments at March 26, 1994, are as follows:
(In thousands) Carrying Value Fair Value
- - -----------------------------------------------------------------
Cash and cash equivalents $ 144,520 $ 144,520
Short-term investments 74,911 74,911
Note receivable 4,000 4,000
Short and long-term debt
-fixed rate 7,405 7,350
-variable rate 33,368 33,368
Convertible subordinated debentures 100,000 66,000
Foreign currency contracts - 2
- - -----------------------------------------------------------------
Accounting for certain investments in debt and equity securities
The Company considers all highly liquid instruments, which are
purchased with a maturity between three and twelve months, to be
short-term investments. The Company is required to adopt Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115), on or
before the end of the first quarter of fiscal year 1995. SFAS No.
115 superseded Statement of Financial Accounting Standards No. 12,
"Accounting for Certain Marketable Securities", and requires
unrealized holding gains and losses on securities classified as
available-for-sale to be reported as a separate component of
stockholders' equity, and unrealized holding gains and losses on
securities classified as trading to be reported as earnings. The
Company has evaluated the impact of SFAS No. 115 on its financial
statements, and believes if SFAS No. 115 were adopted in fiscal year
1994, its impact would have been immaterial to the Company's fiscal
year 1994 financial condition and results of operations.
Inventories
Inventories are stated at the lower of cost (computed on a first-in,
first-out basis) or market.
Depreciation and amortization
Depreciation and amortization are provided on the straight-line
basis over the estimated useful lives of the assets, which are
generally 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.
Revenue recognition & 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.
Off balance sheet risk and concentration of credit risk
The Company's products are sold worldwide to original equipment
manufacturers (OEMs) through a direct sales force and to an
extensive network of domestic and international industrial
distributors, as well as to end users and retail sales outlets via
commercial distributors. Concentration of credit risk with respect
to the Company's trade receivables is limited by the Company's
credit evaluation process and the geographical dispersion of sales
transactions, therefore the Company generally requires no collateral
from its customers. The Company also has cash equivalent and short-
term investment policies that limit the amount of credit exposure to
any one financial institution and restrict placement of these
investments to financial institutions evaluated as highly credit-
worthy.
Foreign exchange gains and losses
The functional currency for all foreign operations is the U.S.
dollar. As such, all material foreign exchange gains or losses are
included in net income (loss). Approximately $865,000, $659,000 and
$2,300,000 of foreign exchange losses were included in net income
(loss) in fiscal years 1994, 1993 and 1992, respectively.
The Company enters into foreign currency forward exchange contracts
to reduce the impact of currency fluctuations on monetary asset and
liability positions. The cash flows related to gains and losses on
these contracts are classified as operating activities in the
Consolidated Statements of Cash Flows.
The foreign currency forward exchange contracts described above
require the Company to exchange U.S. dollars for foreign currencies
at rates agreed to at the inception of the contract. These
contracts generally have maturities that do not exceed three months.
At March 26, 1994, the Company had approximately $18,026,000 of
foreign currency forward exchange contracts outstanding.
Accounting for income taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109). Under SFAS No. 109, deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are
measured by applying enacted tax rates and laws for the taxable
years in which those differences are expected to reverse.
The Company adopted the provisions of SFAS No. 109 in its financial
statements effective March 28, 1993 for fiscal year 1994. The
adoption of SFAS No. 109 did not have a material effect on the
Company's consolidated financial position or results of operations
in fiscal year 1994. Prior years were accounted for under Statement
of Financial Accounting Standards No. 96, "Accounting for Income
Taxes" (SFAS No. 96), and have not been restated.
Net income (loss) per share
Net loss per share is based upon the weighted average number of
shares of common stock outstanding during fiscal year 1994. For
fiscal years 1993 and 1992, net income per share is based upon the
weighted average number of shares of common stock and common stock
equivalents outstanding during the fiscal year. Common stock
equivalents include shares issuable upon the assumed exercise of
stock options reflected under the treasury stock method. The
convertible subordinated debentures are excluded from the
calculation of primary and fully diluted earnings per share as they
had an anti-dilutive impact on net income per share in fiscal years
1993 and 1992.
Fiscal year
The Company maintains a 52/53-week fiscal year cycle. Fiscal years
1994, 1993 and 1992 were each comprised of 52 weeks.
2. JOINT VENTURE, ACQUISITION AND INVESTMENT IN AFFILIATE
Maxoptix Corporation
In March 1989, the Company entered into an agreement with Kubota
Corporation (Kubota), a Japanese company based in Osaka, Japan, to
organize a jointly-owned corporation. Maxtor retains a 62%
interest, subject to adjustment upon exercise of Maxoptix employee
stock options, in the resulting corporation, Maxoptix. Maxoptix is
engaged in research, development, manufacturing and marketing of
optical storage products.
Effective March 31, 1990, the Company's net investment in Maxoptix
was reduced to zero as a result of its share of accumulated losses
of Maxoptix. All operating losses incurred by Maxoptix from March
31, 1990 through June 27, 1992 were allocated to the minority
interest account and, therefore did not impact Maxtor's net income
(loss). During the second quarter of fiscal year 1993, the minority
interest account was reduced to zero. Thereafter, all future
operating losses were and will continue to be fully allocated to
Maxtor until such time as the total profits of Maxoptix exceed the
aggregate accumulated losses fully absorbed by Maxtor. After such
time, profits will then be fully allocated to the minority interest
account until the total profits of Maxoptix exceed the excess
aggregate losses allocated to the minority interest account. In
fiscal year 1994, approximately $5,363,000 of Maxoptix losses have
been fully allocated to Maxtor.
MiniScribe Acquisition
On June 30, 1990, the Company acquired substantially all of the
assets and certain liabilities of MiniScribe from the U.S.
Bankruptcy Court. Payment to the bankruptcy court and to receivers
for such assets totaled approximately $41,500,000, which consisted
of $21,500,000 in cash, 1,423,488 shares of the Company's common
stock with an estimated value of approximately $6,932,000 and a note
estimated at approximately $13,068,000. The acquisition was
accounted for as a purchase.
In fiscal year 1992, the Company repaid $2,500,000 on the note. In
addition, in fiscal years 1992 and 1993, the 1,423,488 shares were
registered and subsequently sold resulting in proceeds to Standard
Chartered Bank of $4,545,000 and $9,510,000 in fiscal years 1992 and
1993, respectively. Adjustments of $5,618,000 and $1,505,000 in
fiscal years 1992 and 1993, respectively, were recorded to increase
additional paid-in capital to reflect the changes in the fair market
value of the shares of common stock.
In October 1992, the Company repaid in full the note of
approximately $3,445,000 due to Standard Chartered Bank afterwhich
no further obligation existed between the Company and Standard
Chartered Bank related to the acquisition of the net assets of
MiniScribe. The Company also issued rights to certain of the
vendors of MiniScribe's foreign subsidiaries to receive
approximately 2 million shares of the Company's common stock at no
cost to the vendors. The related shares were issued on March 30,
1992.
Investment in Affiliate
On December 26, 1992, the Company sold the assets and liabilities of
its wholly-owned subsidiary, SDI. The consideration received by the
Company in connection with the transaction consisted of $17,400,000
in cash, a $4,000,000 three-year subordinated promissory note and a
minority interest of 32.8% in the company formed for the purpose of
purchasing the assets of SDI. The Company recognized a nominal gain
on the transaction. Terms of the note include principal payments
due in three equal installments on the first, second, and third
anniversary dates, and interest payments due monthly at rates of 8%,
10%, and 12% per annum through the first, second and third
anniversary dates, respectively. The terms of the note were amended
in fiscal year 1994 to provide for an additional six-month period
from the first anniversary date for payment of the first principal
installment. If SDI had not been included in the consolidated
financial statements during the fiscal years 1993 and 1992, the
Company's results of operations would have been as follows:
Year ended March 27, March 28,
(In millions , except percentages 1993 1992
and per share amounts)
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Revenue $ 1,388.2 $ 971.8
Gross margin 246.2 167.1
As a percentage of revenue 17.7% 17.2%
Income from operations $ 50.3 $ 13.7
Net income 43.5 8.0
Net income per share -primary $ 1.38 $ 0.30
-fully diluted $ 1.38 $ 0.27
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Maxtor's investment in the company formed for the purpose of
purchasing the assets of SDI amounted to $1,095,000 at March 26,
1994. Maxtor's share of the loss of the affiliate was $594,000 and
$138,000 in fiscal years 1994 and 1993, respectively.
3. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the design,
manufacture and sale of data storage products. It has a world-wide
sales, service and distribution network. The Company markets and
sells its products through a direct sales force to OEMs,
distributors and other emerging sales channels such as computer
specialty retailers and computer superstores. Retail sales started
to grow in the first quarter of fiscal year 1994.
During fiscal years 1994 and 1993, one customer accounted for
approximately 24% and 14% of the Company's revenue, respectively.
During fiscal year 1992, no customer accounted for more than 10% of
the Company's revenue.
The Company had export sales of approximately 43%, 50% and 37% of
revenue in fiscal years 1994, 1993 and 1992, respectively.
Approximately 35%, 57% and 51% of export sales were to the Far East
in fiscal years 1994, 1993 and 1992, respectively. The balance of
export sales was primarily to Europe in each of the three fiscal
years.
Operations outside the United States consist of manufacturing plants
in Singapore and Hong Kong that produce subassemblies and final
assemblies for the Company's disk drive products. The geographic
breakdown of the Company's activities for each of the three fiscal
years in the period ended March 26, 1994 is presented in the
following table:
(In thousands) U.S. Far East Eliminations Consolidated
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Fiscal Year 1994
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Revenue from
unaffiliated customers $1,150,146 $ 2,469 $ - $1,152,615
Transfers between
geographic locations 75,233 1,169,240 (1,244,473) -
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Revenue 1,225,379 1,171,709 (1,244,473) 1,152,615
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Income (loss) from
operations (305,824) 57,903 - (247,921)
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Identifiable assets 470,787 306,574 (284,986) 492,375
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Fiscal Year 1993
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Revenue from
unaffiliated customers $1,440,737 $ 1,809 $ - $1,442,546
Transfers between
geographic locations 81,412 1,265,548 (1,346,960) -
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Revenue 1,522,149 1,267,357 (1,346,960) 1,442,546
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Income (loss) from
operations (55,882) 109,257 593 53,968
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Identifiable assets 619,439 464,697 (505,023) 579,113
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Fiscal Year 1992
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Revenue from
unaffiliated customers $ 873,976 $ 163,505 $ - $1,037,481
Transfers between
geographic locations 33,633 667,360 (700,993) -
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