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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JANUARY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-14016
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 COTTONWOOD DRIVE, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant's common stock was
$566,218,397 on March 6, 2000 (based on the closing sales price of the
registrant's common stock on that date). Shares of the registrant's common stock
held by each officer and director and each person who owns more than 5% or more
of the outstanding common stock of the registrant have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes. As of
March 6, 2000, 114,393,301 shares of the registrant's Common Stock, $.01 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
(the "Proxy Statement"), to be filed within 120 days of the end of the fiscal
year ended January 1, 2000, are incorporated by reference in Part III hereof.
Except with respect to information specifically incorporated by reference in
this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 1, Business, "Products," "Marketing and Customers,"
"Manufacturing and Suppliers," "Research and Development," and "Competition;"
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Results of Operations," "Liquidity and Capital Resources" and
"Certain Factors Affecting Future Performance;" and elsewhere in this report. In
this report, the words "anticipate," "believe," "expect," "intend," "future" and
similar expressions also identify forward-looking statements. We make these
forward-looking statements based upon information available on the date hereof,
and we have no obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in this report as
a result of certain factors including, but not limited to, those set forth in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Affecting Future
Performance" and elsewhere in this report. Maxtor(R), DiamondMax(R), Formula
4(R) and MaxFax(R) are registered trademarks -- and No Quibble(R) is a
registered servicemark of Maxtor. The Maxtor logo, MaxAttach(TM) and
Reflect-It(TM) are trademarks of Maxtor. All other brand and company names and
trademarks appearing in this report are the property of their respective
holders.
We are a leading supplier of hard disk drive storage products for desktop
computer systems. Our DiamondMax product family consists of 3.5-inch hard disk
drives with storage capacities which range from 4.3 gigabytes to 60 gigabytes.
These products have high speed interfaces for greater data throughput, a robust
mechanical design for improved reliability, magneto-resistive head technology to
enable high recording density, and a digital signal processor electronic
architecture that, when combined, provide industry leading benchmark performance
and storage capacity to the personal computer marketplace. Our latest products,
announced March 13, 2000, are the DiamondMax VL 30 and Diamond Max 60, both 5400
rpm products. The DiamondMax VL 30 provides capacity of 7.5 gigabytes up to 30
gigabytes and provides cost-optimized storage for the Entry and Mainstream
segments of the market. The DiamondMax 60 provides up to 60 gigabytes of storage
for High end applications. These products add to our DiamondMax Plus 40,
announced in November, 1999, which is an award-winning 7200 rpm product
providing capacities ranging from 10 to 40 gigabytes for the Performance
segment. Our customers are desktop computer manufacturers, including Compaq,
Dell, IBM, Hewlett Packard and Apple; distributors, including Bell Micro and
Ingram; and retailers, including Best Buy, Comp USA, and Staples.
We formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of Creative Design Solutions, Inc. ("CDS") on September 10, 1999.
MNSG concentrates on products and offerings in or related to the Network
Attached Storage ("NAS") market segment. In October 1999, we announced
MaxAttach(TM), MNSG's first NAS product. In January 2000, we announced
MaxAttach(TM) 3000 desktop line of server appliances with enhanced features that
provide data protection (disk mirroring) and data management (disk spanning) at
storage capacities of 20, 40 and 80 GB. The MaxAttach products are designed to
enable the quick, easy, safe and cost-effective addition of storage to networks
in workgroups and small businesses.
COMPANY BACKGROUND
We were founded in 1982 and completed an initial public offering of common
stock in 1985. In the mid-1980's, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive industry during
the 1980's was intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of average
selling prices. In an effort to mitigate the risks associated with these
factors, we pursued all major product segments in the hard disk drive market,
utilizing multiple product families and technology platforms. This costly
strategy added significant complexity to the business, which
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caused us to delay or miss a number of key product introductions and ultimately
led to the deterioration of our overall financial condition. As a result of this
deterioration, we sold 40% of our outstanding common stock to Hyundai
Electronics Industries and its affiliates in 1994.
In early 1996, Hyundai Electronics America ("HEA") acquired all of the
remaining publicly held shares of our common stock as well as all of our common
stock then held by Hyundai Electronics Industries and its affiliates. Shortly
thereafter, HEA invested in renewed efforts to revitalize Maxtor. In July 1996,
we hired Michael R. Cannon, our current Chief Executive Officer and President
and a 20 year veteran of the hard drive industry, who had previously served in
senior management positions in IBM's systems storage division and at SyQuest
Technology and Control Data Corporation. With a view toward capturing business
at leading desktop computer manufacturers, Mr. Cannon identified four key areas
requiring improvement:
Corporate Leadership. To provide strong leadership and the required focus
on execution, we recruited seasoned, industry veterans for key senior management
positions. In addition to Mr. Cannon, key management positions added includes:
- Paul J. Tufano, our Senior Vice President, Finance, and Chief Financial
Officer, whose previous experience includes more than 17 years in a
variety of management positions at IBM; and
- K.H. Teh, our Vice President, Worldwide Manufacturing, whose previous
experience includes 20 years in a variety of manufacturing management
positions at Iomega, Quantum and SyQuest.
These senior managers joined Dr. Victor B. Jipson, our President, Network
Systems Group, who has been at Maxtor since December 1995 and was then our
Senior Vice President, Engineering, whose previous experience includes 16 years
with IBM in a variety of research, technical strategy, product strategy,
research and development, and general management positions. In addition, we
added personnel with significant industry experience to our engineering,
manufacturing, procurement, human resources, and sales and marketing
organizations.
Cost Competitiveness. Since 1996, we aggressively moved to reduce our cost
structure. We stopped using a hard disk drive manufacturing facility owned and
operated by Hyundai Electronics Industries in Korea and consolidated our volume
hard disk drive manufacturing facilities in Singapore. We also closed our sub-
assembly manufacturing facility in Thailand and sold our majority interest in
International Manufacturing Services, our former printed circuit board division,
to certain members of International Manufacturing Services management and
institutional investors. These actions helped reduce our workforce by
approximately 54% by October of 1996. We also removed layers of management and
implemented strict discretionary expense controls. In addition, we improved the
productivity of our research and development expenditures by simplifying our
technology and product roadmap to focus on desktop computer hard disk drives
using a single core technology platform.
Timely Introduction of New Products. Our new management team took a number
of steps designed to improve time-to-market introduction, time-to-volume
production, quality, performance and manufacturability of our products, and the
effectiveness and efficiency of our research and development expenditures. In
particular, we:
- simplified our product and technology roadmap by canceling our 5.25-inch
and 2.5-inch programs;
- focused our research and development efforts on a single core technology
platform that included magneto-resistive head technology and a digital
signal processor-based electronic architecture, which we believe are
capable of supporting rapid extension of our product and technology
roadmap; and
- restructured our product development process by creating an advanced
technology group, which is responsible for assessing new technology
viability, developing early prototypes and exploiting common design
architectures, and by strengthening our existing product design teams,
which are responsible for taking the building blocks provided by the
advanced technology group and designing high performance, highly
manufacturable, cost-effective products which meet our customer
specifications.
Customer/Channel Mix. Recognizing that the vast majority of the growth in
the desktop computer market was being captured by a limited number of leading
personal computer manufacturers, our new
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management simplified our sales channels and focused our sales and marketing
resources on establishing Maxtor as a preferred supplier to leading desktop
computer manufacturers and a limited number of leading distributors and
retailers. To improve overall customer satisfaction and capture accounts with
leading desktop computer manufacturers, we initiated a number of actions to
improve product quality and created dedicated account support teams for our
major desktop computer manufacturer clients, emphasizing senior management
involvement in developing and maintaining customer relationships.
TURNAROUND RESULTS
As a result of the changes described above, our performance improved
significantly during a period of severe fluctuations in the overall hard disk
drive market.
Timely Introduction of New Products. Our restructured manufacturing and
product development processes, as well as a simplified product and technology
roadmap, enabled us to complete one of the fastest transitions in the industry
from hard disk drives utilizing thin-film head technology to 100% use of
magneto-resistive head technology by the end of 1997. With our DiamondMax 2160,
2880 and 3400 products, we demonstrated significantly improved time-to-volume
manufacturing in the fourth quarter of 1997, second quarter of 1998 and the
third quarter of 1998 by producing 1.4, 1.3 and 2.8 million units of these
products, respectively, during their first full quarters of production. In the
first quarter of 1998, we established ourselves as a time-to-market entry leader
with our 2.8 gigabytes per disk hard drive, the DiamondMax 2880. In the second
quarter of 1998, we continued our trend of being a time-to-market leader with a
3.4 gigabyte hard disk drive, the DiamondMax 3400, and the DiamondMax Plus 2500,
our first 7200 RPM product. Our time-to-market leadership continued in the
fourth quarter of 1998 with the introduction of our 4.3 gigabyte per disk hard
disk drive, the DiamondMax 4320, and in the first quarter of 1999 with our
DiamondMax Plus 5120, our second generation 7200 RPM drive. These improvements,
in turn, enabled us to increase our units shipped per quarter from 1.3 million
units during the first quarter of 1997 to 6.8 million units in the fourth
quarter of 1999.
Customer/Channel Mix. Our new focus on leading desktop computer
manufacturers led to significant improvements in our customer/channel mix. For
example, our revenue from shipments to Compaq, Dell and IBM has increased from
approximately 3.8% of total revenue in the second quarter of 1996 to 26.3% of
our total revenue in the fourth quarter of 1999. We also became a leading
supplier of desktop hard disk drives to Dell in less than six months and were a
leading provider of desktop hard disk drives shipped to the domestic retail
channel during 1997. These cumulative changes have resulted in improved
financial results. We increased revenues by 69.1% and 3.2%, from $1,424.3
million in 1997 to $2,408.5 million and $2,486.1 million in 1998 and 1999,
respectively, with improvements in gross margin from 5.0% to 12.5% and 11.9% for
the same periods.
Cost Competitiveness. Our cost competitiveness initiatives led to
significant reduction of operating expenses. Our selling, general and
administrative expense as a percentage of revenue was among the lowest in the
industry for our 1998 and 1999 fiscal years.
INDUSTRY BACKGROUND
The Desktop Hard Disk Drive Market. According to International Data
Corporation ("IDC"), the desktop computer segment is the largest segment of the
worldwide personal computer market, accounting for approximately 82% of global
personal computer shipments in 1999. As a result, desktop computers were the
leading source of demand for hard disk drives, accounting for more than 75% of
all hard disk drive units shipped worldwide in 1999, according to IDC. The
demand for desktop computers and, therefore, computer hard disk drives,
continues to grow in part due to:
- continued improvements in desktop computing price to performance ratios,
including the emergence of the sub-$1,000 desktop computer;
- the rapid accumulation of data resulting from the digitization of
information previously stored in paper form;
- larger file sizes created by multimedia-intensive applications;
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- the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing;
and
- increased demand for desktop computer upgrades as a result of Year 2000
compliance efforts.
Future demand growth for hard disk drives also may be driven by new and
emerging hard disk drive markets. In October 1999, IDC forecast that the
worldwide desktop computer segment of the hard disk drive market would grow from
approximately 129 million units in 1999 to 207 million units in 2003, reflecting
a compound annual growth rate of approximately 13.9%.
Hard Disk Drive Technology. The basic operation of a hard disk drive has
not changed materially since its introduction in the 1950's. To improve the
performance of hard disk drives, hard disk drive manufacturers have concentrated
their efforts on optimizing the performance of the various components of the
hard disk drive.
The main components of the hard disk drive are the hard disk assembly and
the printed circuit board. The head disk assembly includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. These components
are contained in a hard base plate protective package in a contamination-free
environment. The printed circuit board includes custom integrated circuits, an
interface connector to the host computer and a power connector.
The head disk assembly is comprised of one or more disks positioned around
a spindle hub that rotates the disks by a spin motor. Disks are made of a smooth
substrate to which a thin coating of magnetic materials is applied. Each disk
has a head suspended directly above it, which can read data from or write data
to the spinning disk. The sensor element of the head, also known as the slider,
is getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the printed circuit board typically include a
drive interface and a controller. The drive interface receives instructions from
the computer, while the controller directs the flow of data to or from the
disks, and controls the heads. The location of data on each disk is logically
maintained in tracks, divided into sectors. The computer sends instructions to
read or write data to the disks based on track and sector locations. Industry
standard interfaces are utilized to allow the disk drive to communicate with the
computer.
A key performance metric in the hard disk drive industry is "areal
density," which is the measure of stored bits per square inch on the recording
surface of a disk. An increase in areal density allows a hard disk drive
provider to decrease the price per megabyte stored by increasing overall storage
capacity per disk, thus reducing product costs through reduced component
requirements. During 1996 and 1997, certain hard disk drive providers began
transitioning to magneto-resistive heads. Prior to this transition, most hard
disk drives utilized thin-film inductive recording heads. Magneto-resistive
heads have discrete read and write structures which provide more signal than the
older thin-film inductive heads. This results in significantly higher areal
densities, which increases storage capacity per disk and improves manufacturing
margin and product reliability. Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to further increase
hard disk drive performance and reduce product costs, including attempting to
simplify the electronic architecture by combining the traditional servo-control
functions of the digital signal processor-based electronic architecture and the
error recovery and interface management functions of traditional hard drive
microprocessors on a single integrated circuit. Moreover, to consistently
achieve timely introduction and rapid volume production of new products, some
hard disk drive providers are striving to simplify their product design
processes by focusing on creating extendible core technology platforms which
utilize common firmware and mechanical designs and re-use of manufacturing
tooling and application specific integrated circuits across various product
generations and product lines.
Hard Disk Drive Market Challenges. Personal computer manufacturers compete
in a consolidating market. The top ten personal computer manufacturers accounted
for greater than 50% of all personal computer units shipped during 1998 and
1999. These personal computer manufacturers use the quality, storage capacity
and performance characteristics of hard drives to select their hard disk drive
providers. Personal computer manufacturers typically seek to qualify three or
four providers for a given hard disk drive
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product generation. To qualify consistently with personal computer manufacturers
and thus succeed in the desktop hard drive industry, a hard disk drive provider
must consistently execute on its product development and manufacturing process
in order to be among the first-to-market introduction and first-to-volume
production at leading storage capacity per disk with competitive prices. Failure
to reach the market on time or to deliver timely volume production usually
results in significantly decreased gross margins due to rapidly declining
average selling prices and dramatic losses in market share. Successful
achievement of the performance parameters, however, is only part of the
competitive equation. As personal computer manufacturers seek to develop
successful business models, they are also requiring their hard disk drive
vendors to maintain high levels of quality to enable low cost of ownership and
adapt their inventory management models to be compatible with the emerging
build-to-order business model in the personal computer industry.
OUR SOLUTION
We have established ourselves as a leading provider of high quality, high
performance hard disk drives to major desktop computer manufacturers,
distributors and retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we have been able
to define and implement the key business processes necessary to fulfill the
needs of our customers. These processes focus on the efficient, timely and
cost-effective integration of leading-edge technology to create highly
manufacturable hard disk drives. Moreover, our senior management team vigorously
monitors these processes in an effort to ensure consistent execution and prompt
response to customer demands. We intend to strengthen our leadership position in
the desktop hard disk drive industry by consistently executing these fundamental
business processes.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Since the fourth quarter of
1999, we have been broadening our business to the NAS market. Our strategy to
achieve this goal includes the following elements:
Effectively Integrate New Technology. In 1996, we overhauled our research
and development process by augmenting our traditional product development teams
with a new advanced technology group. The advanced technology group's purpose is
to monitor and evaluate advancements in hard disk drive technology for possible
integration into our future products. This group also works closely with our
product development teams and strategic component vendors to:
- obtain early access to the latest hard disk drive component technology;
- allow for flexibility in choosing state-of-the-art components; and
- ensure viability of new product technologies and components prior to
product design.
Through this process, we intend to continue to integrate new technologies
into our existing core technology platform and to strengthen our ability to
introduce high quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a consistent basis.
Leverage Design Excellence. Our product development methodology reduces
risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and application specific
integrated circuits. Through this process, we have created a technology
platform, which is used as the common core of each of our current hard disk
drive products and which we believe is extendible into products for new and
emerging hard disk drive market opportunities. To reduce the overall cost of
ownership of our hard disk drive products, we use a robust mechanical
architecture designed to reduce defects that result from customer mishandling
during installation. We also work closely with leading component suppliers in an
effort to ensure that adequate tolerances are designed into our products to
achieve high manufacturing yields and product quality. By utilizing this product
development methodology, we have successfully introduced and achieved timely
volume production of seven generations of magneto-resistive head hard disk
drives in less than two years.
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Capitalize on Flexible Manufacturing. Our Singapore manufacturing facility
utilizes a flexible cell-based process that enables us to:
- dedicate manufacturing cells to particular customers, thereby allowing us
to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and
improved overall customer satisfaction;
- simultaneously manufacture multiple product configurations;
- quickly reconfigure the facility to respond to customer change requests
and changes in product and customer mix;
- effectively adapt our inventory management model to the emerging
build-to-order business model employed by certain of our desktop computer
manufacturer customers; and
- add incremental capacity as needed at a relatively low cost.
This flexible cell-based process, when coupled with our product design
methodology, has enabled us to significantly improve time-to-volume production.
For example, we manufactured 2.8 million units of our DiamondMax 3400 in the
third quarter of 1998, the first full quarter of production.
Increase Market Share With Leading Desktop Computer Manufacturers. We
intend to continue to achieve leading time-to-volume production of high quality,
high performance hard disk drives to capture additional market share with
leading personal computer manufacturers. Our quarterly market share of the
desktop hard disk drive market in terms of units shipped increased from 5.6% in
the first quarter of 1997 to 18.7% in the fourth quarter of 1999, according to
IDC.
Maintain Customer Satisfaction. We believe we distinguish ourselves from
our competitors by focusing on ease of doing business and overall customer
satisfaction. For example, our "No Quibble" service program has been well
received by our customers. We also are devoting significant attention to total
supply chain management to align our business model with the evolving
build-to-order manufacturing business model of certain desktop computer
manufacturers. We use our flexible, cell-based manufacturing process coupled
with a just-in-time inventory model to rapidly respond to the changing needs of
our key desktop computer manufacturer customers. To further automate and improve
the efficiency of our total supply chain management, we have recently installed
a new enterprise resource planning system.
Broaden Product Portfolio. To capture higher margin opportunities, we
intend to leverage our existing technology platform and product development
methodology to develop hard disk drive products to meet the needs of desktop
computers, storage subsystems, consumer electronics, and other emerging storage
applications. To this end, we currently offer products with two rotational
speeds (5400 and 7200 rpm) with configurations from 1 through 4 disks. This
results in a product portfolio with the broadest range of performance and
capacity in the industry and allows us to target entry, mid-range, and high-end
applications in all of the above markets. The 3 and 4-platter designs have been
particularly beneficial to our profit margins and our strategic position as
competitors have suspended their development and introduction of these high
capacity products.
Additionally, on January 18, 2000 Maxtor announced the MaxAttach Desktop
2.0 line of server appliances with enhanced software features that include disk
mirroring and disk spanning at storage capacities of 20, 40 and 80 GB. These
products are designed to enable quick, easy, safe and cost-effective addition of
storage to networks in workgroups and small businesses. The new MaxAttach NAS
4000 line of rack mount server appliances broadens client support to include
UNIX and Linux in addition to Microsoft, and is slated for volume availability
in the second quarter of 2000. To address the expanding storage needs of larger
work groups, Internet service providers and departmental market segments, Maxtor
has announced its intention to introduce additional solutions in its extended
family of MaxAttach storage solutions during the first half of 2000. These will
include application-specific appliances as well as capacity increases to 240 GB.
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PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of our turnaround was
the restructuring of our product development process to separate the enabling
technology development phase from the product design phase. In early 1996, we
suffered from poor product quality and performance, and products that were late
to market. This contrasts sharply with today as we now enjoy strong customer
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including:
- working closely with our product design teams and strategic component
suppliers to create a variety of state-of-the-art technologies to be used
in our future products;
- developing early prototypes to ascertain the stability and
manufacturability of our planned products; and
- analyzing the latest head, disk, channel, motor and application specific
integrated circuit technologies and designs to broaden and strengthen our
technology platform.
This group also focuses on leveraging our current proven technology
platform by re-using as much electronic and mechanical technology as possible in
each successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in our products.
Product Design Phase. The creation of the advanced technology group as part
of our turnaround freed our existing product design group from the
responsibility of assessing the viability of new and emerging technologies and
allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing our new product introduction process. This
process is a highly disciplined review procedure designed to ensure that new
product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity and production ramp rates prior to release into volume
production.
PRODUCTS
We currently provide hard disk drives primarily for the desktop computer
market, with applications beginning to emerge in consumer electronics, network
attached storage (supporting MNSG), and storage subsystems. Our DiamondMax
product family consists of 3.5-inch hard disk drives with storage capacities
ranging from 4.3 to 60 gigabytes. Our latest products, announced March 13, 2000,
are the DiamondMax VL 30 and DiamondMax 60, both 5400 rpm products. The
DiamondMax VL 30 provides capacity of 7.5 gigabytes up to 30 gigabytes and
provides cost-optimized storage for the Entry and Mainstream segments of the
market. The DiamondMax 60 provides up to 60 gigabytes of storage for High End
applications. These products add to our DiamondMax Plus 40, announced in
November, 1999, which is an award-winning 7200 rpm product providing capacities
ranging from 10 to 40 gigabytes for the Performance segment.
The table below sets forth key parameters for our fourteen generations of
DiamondMax products dating from 1998:
DIAMONDMAX MODELS
--------------------------------------------------------------------------------------------------
2880* 3400* PLUS 2500* 4320* PLUS 5120* 6800* PLUS 6800* VL17 36
------- ------- ---------- ------- ---------- ------- ---------- -------- --------
Max. Capacity (GB)........... 11.52 13.6 10.0 17.2 20.4 27.3 27.3 17.4 36.5
Capacity per Disk (GB)....... 2.88 3.40 2.50 4.32 5.1 6.8 6.8 9.1 9.1
Rotational Speed (rpm)....... 5400 5400 7200 5400 7200 5400 7200 5400 5400
First Shipment Date.......... Mar. 98 Jun. 98 Jun. 98 Oct. 98 Mar. 99 Jun. 99 July 99 Sept. 99 Sept. 99
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* No longer in volume production.
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DIAMONDMAX MODELS
---------------------------------------------------
VL20 40 PLUS 40 VL30 60
------- ------- ------- ------- -------
Max. Capacity (GB).......................................... 20.4 40.9 40.9 30.7 61.4
Capacity per disk (GB)...................................... 10.2 10.2 10.2 15.3 15.3
Rotational Speed (rpm)...................................... 5400 5400 7200 5400 5400
First Shipment Date......................................... Nov. 99 Nov. 99 Jan. 00 Apr. 00 Apr. 00
The table below sets forth key parameters for our current MNSG Products:
MNSG PRODUCTS
--------------------------------------------------
MAXATTACH NAS 3000 NAS 4000
-------------- -------------- --------------
Maximum Capacity(GB)........................ 72 80 160
Client Support.............................. Microsoft Microsoft Microsoft
UNIX/Linux
Form Factor................................. Desktop Desktop Rack Mount
First Shipment Date......................... 3rd Quarter 99 1st Quarter 00 2nd Quarter 00
Our DiamondMax product family has won a number of recent editorial and
industry awards including:
PC World -- Italy Best Hard Drive -- DiamondMax 2160 -- January 1999
PC Intern -- Germany PC Intern Test Winner and Recommendation -- DiamondMax Plus
2500 -- February 1999
Windows Magazine -- Recommended List DiamondMax 4320 -- March 1999
USA
Computer Reseller CRN Test Center Recommended for DiamondMax 6800 -- April
News -- USA 1999
CHIP -- Germany Top Ten Hard Drives -- DiamondMax Plus 2500 -- April 1999
PC ACHAT -- France Editor's Choice -- DiamondMax Plus 5120 -- May 1999
PC Professionell -- Editor's Choice -- DiamondMax Plus 5120 -- May 1999
Germany
PC Format -- UK PC Format Gold Award -- DiamondMax Plus 5120 -- May 1999
Computer Video -- UK Recommended Award -- DiamondMax Plus 5120 -- May 1999
Windows Magazine -- WIN 100 for DiamondMax 4320 -- JUNE 1999
USA
Windows Magazine -- Win 100 for DiamondMax Plus 2500 -- June 1999
USA
PC Format -- Spain PC Format Award -- DiamondMax Plus 5120 -- June 1999
Computing -- Spain PC Actual Recommended -- DiamondMax Plus 5120 -- June 1999
Personal Computer Editor's Choice -- DiamondMax Plus 5120 -- June 1999
World -- UK
Computer Dealer 1999 Reseller's Choice Award -- July 1999
News -- USA
PC Plus -- Spain Best Performance Award -- DiamondMax Plus 5120 -- July 1999
PC World -- Spain Recommended List DiamondMax Plus 5120 -- July 1999
PC Plus -- Spain PC Plus Performance Award -- DiamondMax Plus 5120 -- July
1999
Windows Magazine -- Recommended List DiamondMax Plus 5120 -- August 1999
USA
Computer Shopper -- Best Buy: DiamondMax 6800 -- September 1999
USA
PC World -- USA Hard Drive Best Buy: DiamondMax Plus 5120 -- October 1999
Winmag.com -- USA Winlist for DiamondMax Plus 6800 -- October 1999
MANUFACTURING/QUALITY
To be competitive, we must manufacture high quality, highly manufacturable,
high performance hard disk drives with industry leading time-to-volume
production at competitive costs. Our hard disk drive
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manufacturing operations consist primarily of the final assembly of high-level
subassemblies built to our specifications and testing of completed products.
Manufacturing. Pilot production of our products, as well as cost reduction,
quality and product improvement engineering on current products, are conducted
at our Longmont, Colorado facility. We manufacture our hard disk drives in
volume at multiple facilities in Singapore, which uses a flexible, cell-based
process. The Singapore facility consists of modular production units ("MPUs"),
each of which contains a number of modular work cells ("MWCs"). Each MWC
essentially is a mini-serial production line consisting of all of the tooling
and test equipment necessary to build and test a hard disk drive. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. We coupled our cell-based manufacturing approach with a
sophisticated factory information system that collects data from each MWC on
various productivity and quality metrics.
In March 1999, we purchased two buildings in Singapore totaling
approximately 39,455 square meters and entered into a long-term lease of the
underlying land from Singapore's Housing Development Board. The property is
located near our current volume manufacturing facilities. Pursuant to a sublease
accompanying the option, we have taken possession of this facility and have
begun volume manufacturing and warehousing operations there. We believe that we
will be able to add capacity at our current facility or another facility to
provide sufficient capacity through at least the end of 2000.
Quality. Consistent with our goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, we have implemented a
corporate-wide quality program, which focuses on:
- robustness of design and improved design tolerances;
- quality of incoming parts and factory process control; and
- customer feedback, failure analysis and timely response.
In addition, our quality, materials, enabling technology and product
development groups work closely with leading component vendors in an effort to
ensure sufficient tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. Our Singapore facility also is
ISO 9002 certified. Finally, our executives meet regularly with customers to
exchange product quality information to facilitate rapid analysis of customer
failures and timely implementation of corrective actions.
MATERIALS AND SUPPLIES
We have developed and continue to develop strategic relationships with
leading suppliers of many of the key components for our hard disk drive
products. These relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and to reduce
component, inventory and overall product costs. In addition, our strategic
suppliers work closely with our advanced technology group, enabling us to gain
early access to leading-edge hard disk drive technology and to improve the
overall efficiency of our product design process.
We rely on a limited number of leading suppliers for the parts used in the
manufacturing of our products, including magneto-resistive heads and head stack
assemblies, media, custom integrated circuits, read channel integrated circuits,
printed circuit boards and motor/baseplate assemblies. In general, we seek to
have at least two or three suppliers for each of our component requirements.
Custom application specific integrated circuits, including our digital signal
processor controller chips, and channels, however, currently are sole-sourced
from Texas Instruments and Lucent, respectively. Because of their custom nature,
these products require significant design-in periods and long lead times. We
outsource a majority of our printed circuit board assembly to Celestica, Inc., a
successor to our former affiliate, International Manufacturing Services, Inc.
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as
late-to-market product introduction, had impacted adversely our ability to win
business with leading desktop computer manufacturers. As a result, we were
heavily dependent on sales to a large number of regional distributors which
limited
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our ability to forecast periodic shipments and shifted our product mix toward
lower performance, lower margin products. Recognizing that the majority of the
growth in shipments in the desktop computer market was being captured by a
limited number of desktop computer manufacturers, we simplified our sales
channels and focused our sales and marketing efforts on becoming a significant
provider of hard disk drives to leading desktop computer manufacturers,
including Compaq, Dell, Gateway 2000, Inc., Hewlett-Packard and IBM, and a
limited number of leading distributors and retailers. By emphasizing overall
customer satisfaction, product quality and performance and time-to-volume
production, we believe that we have established a strong customer base.
Manufacturers. Shipments to our three primary desktop computer manufacturer
customers accounted for 3.8% of our total revenue in the quarter ended June 29,
1996 and increased to 26.3% in the quarter ended January 1, 2000. Including the
above, we shipped to nine of the top ten desktop computer manufacturers in 1999.
We believe that our success depends on our ability to maintain and further
develop strong desktop computer manufacturer customer relationships and to
provide products that fit the needs of the desktop computer manufacturer
channel.
Distributors. We use a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed customers which
tend to hold very small market shares of the overall desktop computer market,
including value-added resellers, dealers, system integrators and small desktop
computer manufacturers. Distributors accounted for 26.4% of revenue for the year
ended December 27, 1997; 15.4% of revenue for the year ended December 26, 1998;
and 18.5% of revenue for the year ended January 1, 2000. Distributors generally
enter into non-exclusive agreements with us for purchase and redistribution of
product on a quick turnover basis. Purchase orders are placed and revised on a
weekly basis. We grant certain of our distributors price protection and limited
rights to return product on a rotation basis. Our major distributors include
Bell Micro and Ingram.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, we sell our
retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores, and authorized
sales through distributors to smaller retailers. Retailers accounted for 9.2% of
revenue for the year ended December 27, 1997; 8.1% of revenue for the year ended
December 26, 1998; and 6.3% of revenue for the year ended January 1, 2000. Our
current retail customer base is in the United States and Canada; however, we
have begun efforts to establish a retail channel presence in the emerging retail
markets in Europe and Asia. We believe the retail channel complements other
sales channels. Retailers supply the after-market "upgrade" sector in which
end-users purchase and install products to upgrade their computers. We grant
certain of our retailers price protection and limited rights to return product
on a rotation basis.
SALES AND MARKETING
We market and sell our products to leading desktop computer manufacturers,
distributors and retailers. Representative offices are located throughout the
United States and in Australia, France, Germany, Great Britain, Hong Kong,
Japan, Korea, Singapore and Taiwan. We have formed multi-disciplined, dedicated
account and channel teams focused on each of its current and target strategic
desktop computer manufacturer, distributor and retail accounts. These teams
generally are comprised of representatives from our sales, marketing,
engineering and quality organizations. Our senior management also takes an
active role in our sales efforts. Dedicated field sales and technical support
personnel are located in close proximity to the manufacturing facilities of each
of our desktop computer manufacturer customers.
Our marketing and public relations functions are performed both internally
and through outside firms. Public relations, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments. We
utilize both consumer media and trade publications. We have programs under which
qualifying resellers are reimbursed for certain advertising expenditures. We
also have invested in direct marketing and customer satisfaction programs. We
maintain ongoing contact with end-users through primary and secondary market
research, focus groups, product registrations and technical support databases.
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BACKLOG
We generally sell standard products according to standard agreements or
purchase order terms. Delivery dates are specified by purchase orders. Such
orders may be subject to change, cancellation or rescheduling by the customer
without significant penalties. The quantity actually purchased and shipment
schedules are frequently revised to reflect changes in the customer's needs. In
addition, orders for our products are filled for several large customers from
just-in-time inventory warehouses, whereby orders are not placed ahead of time
on our order entry backlog system. Instead, we receive a periodic forecast of
requirements from the customer. Upon shipment from the just-in-time warehouse,
the customer is invoiced. In light of these factors, backlog reporting as of any
particular date may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor of our future
revenue.
COMPETITION
We compete primarily with manufacturers of 3.5-inch hard disk drives,
including Fujitsu, Quantum, Samsung, Seagate, IBM, and Western Digital, some of
which have a larger share of the desktop hard disk drive market than ours.
We believe that important competitive factors in the hard disk drive market
are quality, storage capacity, performance, price, time-to-market introduction,
time-to-volume production, desktop computer manufacturer product qualifications,
breadth of product lines, reliability and technical service and support. We
believe we compete favorably with respect to these factors. See section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Performance -- The Hard Disk
Drive Market is Highly Competitive."
INTELLECTUAL PROPERTY
We have been granted 177 United States and foreign patents related to disk
drive products and technologies, and have additional patent applications pending
in the United States and certain foreign countries. We have patent protection on
certain aspects of our technology and also rely on trade secret, copyright and
trademark laws, as well as contractual provisions to protect our proprietary
rights. There can be no assurance that our protective measures will be adequate
to protect our proprietary rights; that others, including competitors with
substantially greater resources, have not developed or will not independently
develop or otherwise acquire equivalent or superior technology; or that we will
not be required to obtain licenses requiring us to pay royalties to the extent
that our products may use the intellectual property of others, including,
without limitation, our products that may also be subject to patents owned or
licensed by others. There can be no assurance that any patents will be issued
pursuant to our current or future patent applications, or that patents issued
pursuant to such applications or any patents we own or have license to use will
not be invalidated, circumvented or challenged. Moreover, there can be no
assurance that the rights granted under any such patents will provide
competitive advantages to us or be adequate to safeguard and maintain our
proprietary rights. Litigation may be necessary to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights or those of
others. We could incur substantial costs in seeking enforcement of its issued or
licensed patents against infringement or the unauthorized use of our trade
secrets and proprietary know-how by others or in defending ourselves against
claims of infringement by others, which could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
laws of certain countries in which our products are manufactured and sold,
including various countries in Asia, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States, and there can be no assurance that such laws will be enforced in an
effective manner. Any failure by us to enforce and protect our intellectual
property rights could have a material adverse effect on our business, financial
condition and results of operations. See "Certain Factors Affecting Future
Performance -- Protection of Our Intellectual Property is Limited; We Face Risk
of Third Party Claims of Infringement," "-- We are Dependent on Our
International Operations; We Face Risks From Our International Sales."
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EMPLOYEES
As part of our turnaround, we reduced our personnel from 9,330 in March
1996 to 4,330 in October 1996. Since October 1996, we have added significant
personnel to our research and development, sales and marketing and production
staff. As of January 1, 2000, we had 6,669 employees worldwide, including 936 in
engineering, research and development; 188 in marketing, sales and customer
support; 5,367 in manufacturing; and 164 in general management and
administration. As of January 1, 2000, we had 5,035 employees at our
manufacturing facilities in Singapore and 98 employees at our foreign sales
offices. None of our U.S. employees currently are represented by a labor
organization. In May 1997, our Singapore subsidiary recognized a labor union,
the United Workers of Electronic and Electrical Industries, and in November
1998, signed a three-year collective bargaining agreement with that union. We
believe that our employee relations are positive.
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company and their
ages as of March 6, 2000. There are no family relationships between any director
or executive officer of the Company. Executive officers serve at the discretion
of the Board of Directors.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Dr. Chong Sup Park......................... 52 Chairman of the Board
Michael R. Cannon.......................... 47 President, and Chief Executive Officer
Paul J. Tufano............................. 46 Senior Vice President, Finance, and Chief
Financial Officer
Dr. Victor B. Jipson....................... 47 President, Network Systems Group
Dr. Pantelis S. Alexopoulus................ 51 Vice President, Advanced Technology and
Chief
Technology Officer
David L. Beaver............................ 45 Vice President, Worldwide Materials
Michael D. Cordano......................... 35 Vice President, Worldwide Sales
Phillip C. Duncan.......................... 49 Vice President, Human Resources and
Facilities
Catherine Hartsog.......................... 41 Vice President, Investor Relations
Misha Rozenberg............................ 37 Vice President, Quality
Glenn H. Stevens........................... 49 Vice President, General Counsel and
Secretary
K.H. Teh................................... 45 Vice President, Worldwide Manufacturing
& Managing Director, Singapore
Michael J. Wingert......................... 39 Vice President, Desktop Development
Dr. Chong Sup Park has been Chairman of our board of directors since May
1998. On March 1, 2000 he was appointed to the position of President and CEO of
Hyundai Electronics Industries Co., Ltd., and he continues to serve as Chairman
of Hyundai Electronics America, positions he has held since September 1996. Dr.
Park has also been Chairman of MMC Technology's board of directors since January
1998. From September 1996 to May 1998, Dr. Park served as Vice Chairman of our
board of directors. Dr. Park previously served as our President and Chief
Executive Officer from February 1995 until his appointment as Vice Chairman.
From 1993 until joining us in 1995, he was Chairman, President and Chief
Executive officer and a director of Axil Computer, Inc., a workstation computer
manufacturer and a Hyundai Business Group company, in Santa Clara, California.
Dr. Park also formerly held various other management positions with Hyundai
Electronics Industries, including the position of Senior Vice President,
Semiconductor Sales and Marketing, which he held from 1990 to 1992. From 1985 to
1989, Dr. Park was President and Chief Executive Officer of Hyundai Electronics
America.
Michael R. Cannon has been our President and Chief Executive Officer since
July 1996. From 1993 until he joined us in 1996, Mr. Cannon held several senior
management positions with IBM's Storage Systems division, including Vice
President, Mobile and Desktop Business Unit; Vice President, Product Design; and
Vice President, Worldwide Operations. From May 1991 to January 1993, he served
as Senior Vice President of SyQuest, a removable disk drive company, and prior
to joining SyQuest he held the position of Vice
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President, Southeast Asia Operations, with Imprimis Technology. He is also a
Director of MMC Technology, a wholly owned subsidiary of Hyundai Electronics
America.
Paul J. Tufano has been our Senior Vice President, Finance since November
1998 and Chief Financial Officer since July 1996. From July 1996 to his
appointment as Senior Vice President, Finance Mr. Tufano served as our Vice
President, Finance. From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM. Mr. Tufano was Manager of Worldwide Logistics for IBM's
storage systems division. Other management positions included Manager of Plans
and Controls for IBM's Desktop and Mobile Storage products business unit, and
Controller for IBM's San Jose, California facility. Until December 30, 1998, Mr.
Tufano was a director of International Manufacturing Services, Inc., a major
electronic manufacturing service company.
Dr. Victor B. Jipson has been President of our Network Systems Group since
October, 1999. From December 1995 until his appointment as President, Network
Systems Group, he served as our Senior Vice President, Engineering. From 1991 to
1995, he was General Manager of IBM's Optical Storage Solutions business unit.
From 1975 to 1991, Dr. Jipson held key management positions in research,
technical strategy, product strategy and research and development with IBM.
Dr. Pantelis S. Alexopoulos has been our Vice President, Advanced
Technology and Chief Technology Officer since April 1997. Before joining Maxtor
in 1996, Mr. Alexopoulus spent 14 years at IBM, the most recent position being
Manager, Head-Disk Interface and Advance Files, Storage Systems and Technology
at the Almaden Research Laboratory.
David L. Beaver has been our Vice President, Materials since May 1998. From
1994 to 1997, he was Director of Operations -- Materials at EMASS, a data
storage company, and from 1991 to 1994, he was Director of Corporate Materials
Procurement at SyQuest.
Mike Cordano has been our Vice President, Worldwide Sales since August
1999. Prior to his promotion, he held the position of Vice President, Global
Sales. Prior to joining Maxtor in 1994, Mr. Cordano held various sales positions
at Connor Peripherals, Inc.
Phillip C. Duncan has been our Vice President, Human Resources since August
1996. From 1994 to 1996, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems, a software company. From 1992
to 1994, he held senior human resources management positions at SyQuest, and
from 1990 to 1992, he held similar positions at Cirrus Logic, a semiconductor
company.
Catherine Hartsog has been Vice President, Investor Relations and Corporate
Communications since November 1999. Before joining Maxtor in 1998, Ms. Hartsog
spent 10 years in a variety of communications functions at Quantum Corporation.
Her most recent position there was Vice President of Corporate Communications, a
position she held from 1995 to 1998.
Misha Rozenberg has been Vice President, Quality since March 1998. From
1996 to 1998, he was Vice President, Supplier Engineering. From 1994 to 1996,
Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner
Peripherals, Inc., a disk drive company. From 1990 to 1994, he was a Manager
with Apple Computer.
Glenn H. Stevens has been our Vice President, General Counsel and Secretary
since June 1994. From 1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal department at US West,
Inc., a telecommunications products and services provider, including Chief
Counsel and Secretary for its research and development organization and Chief
Intellectual Property Counsel for the family of US West companies.
K.H. Teh has been our Vice President, Worldwide Manufacturing since May
1997. From 1996 to 1997, he was with Iomega, a removable disk drive company,
where he had been Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was a Managing Director, Malaysia Manufacturing, with Quantum,
and was a Senior Director with SyQuest from 1993 to 1994.
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Michael J. Wingert has been our Vice President, Desktop Engineering since
November 1999. Previously, he was the Vice President, Engineering for five
years. Prior to joining Maxtor in 1994, Mr. Wingert held various senior
management positions in product testing and development at IBM.
ITEM 2. PROPERTIES
Our sales and administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California. HEA is
currently an unconditional guarantor of our facilities lease in Milpitas,
California.
We also maintain 373,457 square feet of engineering and pilot production
facilities as well as administrative, marketing and materials facilities in
Longmont, Colorado. In addition, our MNSG division is located in Santa Clara,
California. All of our domestic facilities are leased. Our leases for our
Longmont, Colorado facility begin to expire on December 2001. We have entered
into a lease for a new facility in Longmont, Colorado of 450,090 square feet, to
be completed in April 2001. The new lease has a 15-year term and is renewable
for five years. There can be no assurance that we will be able to obtain
additional space that can accommodate our needs.
Our volume manufacturing facilities are located in buildings in Singapore
totaling approximately 734,000 square feet, which are located on two parcels of
leased land with leases terminating in 2016 (with an option to renew for 30
years) and 2018 (with an option to renew for 30 years).
We also lease various sales and support facilities in Australia, France,
Germany, Hong Kong, Ireland, Japan, Korea, Singapore, Taiwan, United Kingdom,
and the United States. The aggregate rent under all of our leases is currently
$8.4 million per annum.
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in a dispute with StorMedia Incorporated
("StorMedia"), which arose out of an agreement among Maxtor, StorMedia and
Hyundai Electronics Industries Co. Ltd. ("HEI") which became effective on
November 17, 1995. In that agreement, StorMedia agreed to supply disk media to
the Maxtor. StorMedia's disk media did not meet our specifications and
functional requirements as required by the agreement and we ultimately
terminated the agreement.
After a class action securities lawsuit was filed against StorMedia by
certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the agreement, StorMedia sued HEI, Mong Hun
Chung (HEI's chairman), Dr. Chong Sup Park (Hyundai Electronics America
("HEA")'s President and the individual who signed the StorMedia Agreement on
behalf of Maxtor) and K.S. Yoo (the individual who signed the StorMedia
Agreement on behalf of HEI) (collectively the "Original Defendants") in federal
court (the "Federal Suit"). In the Federal Suit, StorMedia alleged that at the
time HEI entered into the StorMedia Agreement, it knew that it would not and
could not purchase the volume of products it committed to purchase, and that
failure to do so caused damages to StorMedia in excess of $206 million.
In December 1996, we filed a complaint against StorMedia and William Almon
(StorMedia's Chairman and Chief Executive Officer) in a Colorado state court
seeking approximately $100 million in damages and alleging, among other claims,
breach of contract, breach of implied warranty of fitness and fraud under the
StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending
resolution of the Federal Suit. The Federal Suit was permanently dismissed early
in February 1998. On February 24, 1998, StorMedia filed a new complaint in a
California state court for $206 million, alleging fraud and deceit against the
Original Defendants and negligent misrepresentation against HEI and Maxtor (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
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StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against Maxtor since it filed for bankruptcy protection.
On or about February 17, 1999, we filed proofs of claim in the bankruptcy
cases against StorMedia, Inc. and StorMedia International, Ltd., in which we
asserted claims based upon the claims and allegations set forth in the Colorado
Action. On or about November 2, 1999, StorMedia filed an "Objection To Proof Of
Claim And Counterclaims And Crossclaims For Breach Of Contract, Breach Of The
Implied Covenant Of Good Faith, And Fair Dealing, Promissory Fraud, And Fraud
And Deceit," titled StorMedia, Inc and StorMedia Int'l Ltd. v. Maxtor Corp. and
Hyundai Electronics Indus., Inc. (In re StorMedia, Inc.), commencing Adversary
Proceeding Number 99-5409 (the "Bankruptcy Action"). In the Bankruptcy Action,
StorMedia seeks to disallow our proof of claim on the grounds that under
Bankruptcy Code section 502(b) and applicable state law, our claims against
StorMedia are unenforceable and not allowable because we rejected StorMedia's
products for reasons other than quality. StorMedia further seeks a determination
pursuant to Bankruptcy Code section 502(b) and applicable state law that our
claims are unenforceable and not allowable because StorMedia is entitled to a
setoff in an amount exceeding our claims. StorMedia further seeks a
determination that under Bankruptcy Code section 510(c) and applicable state law
that any allowable claim by us is equitably subordinated to all allowed claims
of StorMedia's other creditors. In addition, StorMedia also asserts in the
Bankruptcy Action counterclaims against us and cross-claims against HEI
asserting: Breach of Volume Purchase Agreement, Breach of the Implied Covenant
of Good Faith and Fair Dealing, Promissory Fraud and Fraud and Deceit.
On December 23, 1999, HEI and Maxtor filed motions seeking an order of the
Bankruptcy Court providing that the Bankruptcy Court will abstain from hearing
the Bankruptcy Action pursuant to 28 U.S.C. sec. 1334(c). In December of 1999,
the Bankruptcy Court entered an order extending the deadline for Maxtor and HEI
to file an answer or other responsive pleading in the Bankruptcy Action through
the earlier of: (i) entry of an order on the abstention motions, or (ii)
February 14, 2000.
On or about February 16, 2000, the Bankruptcy Court approved a stipulation
entered into among Maxtor, HEI and StorMedia, which provided in part, that the
Bankruptcy Court will abstain from the Bankruptcy Action pursuant to 28 U.S.C.
sec. 1334(c). The stipulation also provided that the automatic stay imposed by
the Bankruptcy Court will be modified to allow all parties to the Colorado
Action to proceed to final, non-appealable judgment or settlement.
In addition, the parties have agreed that any award of damages pursuant to
final, non-appealable judgment entered by the Colorado Court in our favor or any
final, non-appealable stipulated judgment or other form of settlement entered
into in the Colorado Action in our favor, will be deemed to be a valid claim
under applicable non-bankruptcy law for the purposes of allowance in StorMedia's
bankruptcy cases, subject, however, in all respects to the determination of the
Bankruptcy Court of all issues within the Bankruptcy Court's exclusive
jurisdiction (the "Bankruptcy Court Matters"), including, but not limited to:
(i) the extent to which StorMedia holds defenses that arise exclusively under
the Bankruptcy Code to the allowance of such claim in StorMedia's bankruptcy
cases; (ii) the classification of such claim under the Plan; (iii) the extent to
which such claim may be equitably subordinated pursuant to 11 U.S.C. sec. 510;
and (iv) the extent to which such claim may reduce our liability to StorMedia,
if any (as determined by a final non-appealable judgment of the Colorado Court),
pursuant to 11 U.S.C. 553. The Bankruptcy Court Matters will remain subject to
Bankruptcy Court jurisdiction and will be stayed and held in abeyance until such
time as the Colorado Court has fully resolved the Colorado Action by entry of a
final, non-appealable judgment or settlement.
We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that may ultimately be
incurred either in the context of a trial or as a result of a negotiated
settlement. The litigation could result in significant diversion of time by our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential
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settlement, are uncertain and there can be no assurance that they will not have
a material adverse effect on our business, financial position and results of
operations.
We were sued in the United States District Court for the Northern District
of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst")
claiming infringement of a number of hard disk drive motor patents. The lawsuit
alleges infringement of 15 of the hard disk drive motor patents, which relate to
motors that we purchase from motor vendors and the use of such motors in hard
disk drives. We filed our Answer and Counterclaim on May 19, 1999, alleging
defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others. We have also filed a motion
to bifurcate for early discovery the license, exhaustion and misuse defenses. At
hearing on July 21, 1999, the Court stayed further action in the case pending
the outcome of a motion filed by Papst on July 13, 1999, seeking coordination
and transfer of this case with several other actions involving Papst patents.
This motion was filed with the Judicial Panel on Multidistrict Litigation in
Washington, D.C. The motion was granted October 12, 1999, and the case has been
transferred to the Eastern District of Louisiana for coordinated or consolidated
pre-trial proceedings with three other actions involving Papst patents. The
consolidated proceedings are still in their initial stages, and there has been
no formal discovery taken by Maxtor. We deny any wrongdoing and intend to
vigorously defend ourselves. While the final outcome of these claims cannot be
determined at this time, we believe that resolution of these claims will not
have a material adverse effect on our business, financial condition or results
of operations. This statement should be read in conjunction with our periodic
reports filed with the SEC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended January 1, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been trading publicly on the Nasdaq National Market
under symbol "MXTR" since July 31, 1998. The table below sets forth the range of
quarterly high and low closing sales prices for our common stock on the Nasdaq
National Market.
HIGH LOW
----- ----
Fiscal 2000 First Quarter (through March 6, 2000)........... 8.88 6.25
Fiscal 1999 Fourth Quarter.................................. 7.25 4.94
Fiscal 1999 Third Quarter................................... 7.31 4.69
Fiscal 1999 Second Quarter.................................. 8.25 4.53
Fiscal 1999 First Quarter................................... 19.56 7.78
Fiscal 1998 Fourth Quarter.................................. 15.63 7.63
Fiscal 1998 Third Quarter (from July 31, 1998).............. 11.63 6.81
As of March 1, 2000, there were approximately 210 stockholders of record of
our common stock including The Depository Trust Company which holds shares of
Maxtor common stock on behalf of an indeterminate number of beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our stock and do not anticipate paying
cash dividends in the near future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
FISCAL YEAR NINE MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, DECEMBER 26, JANUARY 1,
1996 1996(1) 1997 1998 2000
----------- ------------ ------------ ------------ -----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue................................ $1,269.0 $ 798.9 $1,424.3 $2,408.5 $2,486.1
Cost of revenue........................ 1,196.3 888.9 1,352.9 2,108.1 2,287.3
-------- ------- -------- -------- --------
Gross profit (loss).................. 72.7 (90.0) 71.4 300.4 198.8
-------- ------- -------- -------- --------
Operating expenses:
Research and development............. 94.7 87.8 106.2 152.4 191.5
Selling, general and
administrative..................... 82.8 60.7 62.6 75.8 89.3
Stock compensation expense........... -- -- -- 12.1(3) 2.5(4)
Acquired in-process technology....... -- -- -- -- 7.0
Amortization of goodwill and other
intangible assets.................. -- -- -- -- 3.1
Other................................ 4.5 -- -- -- --
-------- ------- -------- -------- --------
Total operating expenses...... 182.0 148.5 168.8 240.3(3) 293.4
-------- ------- -------- -------- --------
Income (loss) from operations.......... (109.3) (238.5) (97.4) 60.1(3) (94.6)
Interest expense....................... (11.8) (18.0) (36.5) (28.8) (13.7)
Interest and other income.............. 1.1 1.0 25.0(2) 7.4 15.6
Gain on sale of investment............. -- -- -- -- 44.1
-------- ------- -------- -------- --------
Income (loss) before income taxes...... (120.0) (255.5) (108.9) 38.7(3) (48.6)
Provision for income taxes............. 2.8 0.8 1.0 7.5 1.5
-------- ------- -------- -------- --------
Net income (loss)...................... $ (122.8) $(256.3) $ (109.9)(2) $ 31.2(3) $ (50.1)
======== ======= ======== ======== ========
Net income (loss) per
share -- diluted(5).................. $ (5.94) $ -- $ -- $ 0.47 $ (0.48)
======== ======= ======== ======== ========
Shares used in per share calculation
(in thousands)....................... 20,677 -- -- 65,814 105,503
======== ======= ======== ======== ========
Pro forma net loss per
share -- diluted..................... $ -- $(17.62) $ (3.62) $ 0.47 $ (0.48)
======== ======= ======== ======== ========
Shares used in pro forma calculation
(in thousands)....................... -- 14,552 30,350 65,814 105,503
======== ======= ======== ======== ========
BALANCE SHEET DATA:
Total assets........................... $ 442.5 $ 314.5 $ 555.5 $ 863.4 $ 906.3
Total current liabilities.............. 413.1 412.9 552.2 548.9 537.2
Long-term debt......................... 100.2 229.1 224.3 145.0 113.8
Total stockholders' equity (deficit)... (71.1) (327.5) (221.0) 169.4 255.3
- ---------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform our fiscal year to that of Hyundai Electronics America.
(2) Includes recovery of a $20.0 million fully-reserved note.
(3) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. Without such charge, we would have had total operating expenses
of $228.2 million, income from operations of $72.2 million, income before
income taxes of $50.8 million and net income of $43.3 million. Our 1996
Stock Option Plan was amended and restated to remove the variable features
and provide for fixed award options. See Note 10 to the consolidated
financial statements.
(4) As in prior year, the $2.5 million compensation charge is related to the
removal of our 1996 Stock Option Plan's variable features. We will continue
to incur such expense until the year 2001.
(5) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 has not been presented since such information is
not meaningful due to the limited number of shares of common stock
outstanding at that time.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Item 1:
Business, Item 6: Selected Financial Information and Item 8: Consolidated
Financial Statements and Supplementary Data.
OVERVIEW
In February 1999, we completed a public offering of 7.8 million shares of
our common stock. We received net proceeds of approximately $95.8 million from
the offering, net of issuance costs. A portion of the proceeds from the offering
was used to prepay without penalty outstanding aggregate principal indebtedness
of $55 million owing to HEA under a subordinated note due July 31, 2001.
In September 1999, we acquired privately held Creative Design Solutions,
Inc. ("CDS"), a leading participant in the emerging network attached storage
market. We are transitioning from only being a supplier of hard disk drives for
the desktop personal computer market to a company well positioned to provide
storage solutions that will deliver outstanding price and performance values in
networked environments.
We have formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of CDS. MNSG concentrates on products and offerings in or related to
the Network Attached Storage ("NAS") market segment. In October 1999, we
announced MaxAttach(TM), MNSG's first NAS product. The MaxAttach(TM) network
storage appliance is a network file sharing solution for a broad range of office
and workgroup environments.
INTELLECTUAL PROPERTY
When we were a majority-owned subsidiary of HEA, we had the benefit of
certain third-party intellectual property rights on terms that may have been
more favorable than would have been available to us if we have not been a
majority-owned subsidiary of HEA. On June 25, 1998, we entered into an agreement
with HEA whereby we agreed to pay an allocated share of the license fees
associated with certain third party rights in annual installments ranging from
$1.0 million to $2.3 million through 2007. For the year ended January 1, 2000,
we recorded expense of $1.85 million in connection with this commitment. There
can be no assurance that we will be able to obtain similar rights in the future
on terms as favorable as those currently available to us.
REVENUE RECOGNITION
We generally recognize revenue upon shipment to our customers. Sales to
certain distributors and retailers are governed by agreements providing limited
rights of return, as well as price protection on unsold merchandise.
Accordingly, we record reserves upon shipment for estimated returns, exchanges
and credits for price protection. We also record reserves for the estimated cost
to repair or replace products under warranty at the time of sale. We warrant our
products against defects in parts and labor for a period of three years from the
date of shipment, with an additional three months allowed for distributors to
account for "shelf life."
TAX MATTERS
The provision for income taxes consists primarily of state and foreign
taxes. Due to our net operating losses ("NOLs"), NOL carryforwards and favorable
tax status in Singapore, we have not incurred any significant foreign, U.S.
federal, state or local income taxes for any recent fiscal periods. Future tax
benefits from current operating losses have not been recognized in the current
fiscal year because of the uncertainty concerning their realization.
As a result of the July 1998 public offering of our common stock, which
caused an "ownership change" for federal and state income tax purposes, a
significant portion of our NOL carryforwards is restricted as to utilization.
Details are provided in Note 11 to the consolidated financial statements.
We were part of the HEA consolidated group for federal income tax purposes
during the period from early 1996 to August 1998. Pursuant to a "Tax Allocation
Agreement" we were liable for our allocable share of the total consolidated tax
return liability during this period. The HEA consolidated group has used
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substantial amounts of our NOLs and other tax attributes. Under the Tax
Allocation Agreement, neither HEA nor Maxtor was required to reimburse the other
for any utilization of the other members' NOLs or other tax attributes.
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
(IN MILLIONS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................................. $1,424.3 $2,408.5 $2,486.1
Cost of revenue......................................... 1,352.9 2,108.1 2,287.3
-------- -------- --------
Gross profit.......................................... 71.4 300.4 198.8
-------- -------- --------
Operating expenses:
Research and development.............................. 106.2 152.4 191.5
Selling, general and administrative................... 62.6 75.8 89.3
Stock compensation expense............................ -- 12.1(2) 2.5(3)
Acquired in-process technology........................ -- -- 7.0
Amortization of goodwill and other intangible
assets............................................. -- -- 3.1
-------- -------- --------
Total operating expenses...................... 168.8 240.3(2) 293.4
-------- -------- --------
Income (loss) from operations........................... (97.4) 60.1(2) (94.6)
Interest expense........................................ (36.5) (28.8) (13.7)
Interest and other income............................... 25.0(1) 7.4 15.6
Gain on sale of investment.............................. -- -- 44.1
-------- -------- --------
Income (loss) before income taxes....................... (108.9) 38.7(2) (48.6)
Provision for income taxes.............................. 1.0 7.5 1.5
-------- -------- --------
Net income (loss)....................................... $ (109.9)(1) $ 31.2(2) $ (50.1)
======== ======== ========
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
AS A PERCENTAGE OF REVENUE:
Revenue................................................. 100.0% 100.0% 100.0%
Cost of revenue......................................... 95.0 87.5 92.0
----- ----- -----
Gross profit.......................................... 5.0 12.5 8.0
----- ----- -----
Operating expenses:
Research and development.............................. 7.5 6.3 7.7
Selling, general and administrative................... 4.4 3.2 3.6
Stock compensation expense............................ -- 0.5(2) 0.1(3)
Acquired in-process technology........................ -- -- 0.3
Amortization of goodwill and other intangible
assets............................................. -- -- 0.1
----- ----- -----
Total operating expenses...................... 11.9 10.0(2) 11.8
----- ----- -----
Income (loss) from operations........................... (6.9) 2.5(2) (3.8)
Interest expense........................................ (2.6) (1.2)(2) (0.6)
Interest and other income............................... 1.8(1) 0.3 0.6
Gain on sale of investment.............................. -- -- 1.8
----- ----- -----
Income (loss) before income taxes....................... (7.7) 1.6(2) (2.0)
Provision for income taxes.............................. 0.1 0.3 0.1
----- ----- -----
Net income (loss)....................................... (7.8)%(1) 1.3%(2) (2.0)%
===== ===== =====
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- ---------------
(1) Includes recovery of a $20.0 million fully-reserved note.
(2) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. Without such charge, we would have had total operating expenses
of $228.2 million, income from operations of $72.2 million, income before
income taxes of $50.8 million and net income of $43.3 million. Our 1996
Stock Option Plan was amended and restated to remove the variable features
and provide for fixed award options. See Note 10 to the consolidated
financial statements.
(3) As in prior year, the $2.5 million compensation charge is related to the
removal of our 1996 Stock Option Plan's variable features. We will continue
to incur such expense until the year 2001.
COMPARISON OF 1997, 1998 AND 1999
Revenue. In 1997, we generated revenue of $1,424.3 million compared with
revenue of $2,408.5 million in 1998 and $2,486.1 million in 1999. Revenue
increased 69.1% from 1997 to 1998 compared to an increase of 3.2% from 1998 to
1999. The increase in revenue in both years was due primarily to an increase in
unit shipments arising from improved time-to-market introduction and
time-to-volume production and a shift in our customer base to desktop computer
manufacturers. Throughout 1998 and 1999, revenue growth from increased unit
shipments was partially offset by rapid price erosion in the hard disk drive
market as a whole, which resulted in declining average selling prices. We
believe that the effect of hard disk drive market average selling price declines
on our average selling prices was contained partially by our improved
time-to-market introduction and time-to-volume production, and by Maxtor's trend
toward shipping higher capacity hard disk drives, which tend to have higher
initial average selling prices.
Revenue from sales to desktop computer manufacturers was 64.4%, 76.5% and
75.9% of our revenue in 1997, 1998 and 1999, respectively. During 1997, 1998 and
1999, sales to three of the largest desktop computer manufacturers, Compaq, Dell
and IBM, were in the aggregate 37.8%, 53.4% and 35.9%, respectively.
Cost of Revenue; Gross Profit. Gross profit improved from $71.4 million in
1997 to $300.4 million in 1998 and decreased to $198.8 million in 1999. Gross
margin increased from 5.0% in 1997 to 12.5% in 1998 and decreased to 8.0% in
1999. The improvement in gross margin from 1997 to 1998 was due primarily to the
timely introduction of new, higher margin products which achieved market
acceptance and higher manufacturing yields. The decrease in gross margin from
1998 to 1999 is due primarily to continued rapid price erosion in the hard disk
drive industry, which resulted in declining average selling prices for our
products.
OPERATING EXPENSES
Research and Development Expense. Research and development ("R&D") expense
as a percentage of revenue was 7.5%, 6.3% and 7.7% in 1997, 1998 and 1999,
respectively. From 1997 to 1998, R&D expense as a percentage of revenue
decreased by 1.2% while the absolute dollar level of R&D spending increased
which was due to our efforts to develop new products for the desktop computer
market and future products in other hard disk drive segments. From 1998 to 1999,
R&D expense as a percentage of revenue increased by 1.4% while the absolute
dollar level of R&D spending increased from $152.4 million in 1998 to $191.5
million in 1999. During 1999, the absolute dollar increase in R&D expenditures
was due to our continued efforts to develop new products for the desktop
computer market and future products in other hard disk drive segments and the
NAS market.
Selling, General and Administrative Expense. Selling, general &
administrative ("SG&A") expenses as a percentage of revenue were 4.4%, 3.2% and
3.6% in 1997, 1998 and 1999, respectively. The absolute dollar level of SG&A
expense increased from $62.6 million in 1997 to $75.8 million in 1998 and to
$89.3 million in 1999. During 1998 and 1999, increase in SG&A expense was
consistent with revenue growth.
Stock Compensation Expense. Stock compensation expense decreased from $12.1
million in 1998 to $2.5 million in 1999. This expense was incurred due to an
amendment of our 1996 Stock Option Plan to
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remove the variable options features resulting in additional non-cash
compensation expense of $12.1 million in 1998 and $2.5 million in 1999 related
to the difference between the estimated fair market value of our stock and the
exercise price of the options granted under our 1996 Stock Option Plan between
May 1996 and October 1997.
Acquired In-Process Technology. The acquired in-process technology charge
of $7 million resulted from the acquisition of CDS. The value of the acquired
in-process technology was determined using a combination of risk-adjusted income
approaches and an independent valuation. The total amount of $7 million was
charged to operations as the technology had not reached the stage of
technological feasibility at the date of acquisition and had no future
alternative uses.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets represents the amortization of goodwill and
other intangible assets relating to the acquisition of CDS. Such amortization
amounted to $3.1 million in 1999.
Interest Expense. Interest expense was $36.5 million, $28.8 million and
$13.7 million in 1997, 1998 and 1999, respectively, representing a 21.1%
decrease from 1997 to 1998 and a 52.1% decrease from 1998 to 1999. As a
percentage of revenue, interest expense was 2.6%, 1.2% and 0.6% in 1997, 1998
and 1999, respectively. The decrease from 1997 to 1998 was due primarily to a
reduction in debt of $239.1 million, approximately $200.0 million of which was
paid using proceeds from our July 1998 public offering. The decrease from 1998
to 1999 was due to the reduction in long-term and short-term borrowings.
As of December 27, 1997, December 26, 1998 and January 1, 2000, we had
$165.1 million, $5.3 million and $5.0 million of short-term and $224.3 million,
$145.0 million and $113.8 million of long-term indebtedness outstanding,
respectively.
Interest and Other Income. Interest and other income was $25.0 million,
$7.4 million and $15.6 million in 1997, 1998 and 1999, respectively. As a
percentage of revenue, interest and other income was 1.8%, 0.3% and 0.6% in
1997, 1998 and 1999, respectively. The increase was due primarily to the overall
increase in cash and cash equivalents and marketable securities as a result of
our public offerings in 1998 and 1999.
During 1999, we sold our equity investment in Celestica, Inc. resulting in
a gain on sale of investment of $44.1 million.
CURRENT PRODUCTS AND TECHNOLOGY ACQUIRED FROM CDS
When we acquired CDS in September 1999, the fair value of current products
and technology under development was determined by using the income approach,
which discounts expected future cash flows to present value. We consider the
pricing model for products related to the CDS acquisition to be standard within
the high-technology network attached storage industry. We expect that products
incorporating the current products and technology under development from the CDS
acquisition, will be completed and begin to generate cash flows over the six to
nine months after integration. However, development of these current products
and technology remains a significant risk to us due to the remaining effort to
achieve technical viability, rapidly changing customer markets, uncertain
standards for new products, and significant competitive threats from numerous
companies. The nature of the efforts to develop the current products and
technology into commercially viable products consists principally of planning,
designing, and testing activities necessary to determine that the product can
meet market expectations, including functionality and technical requirements.
Failure to bring these products to market in a timely manner could result in a
loss of market share, or a lost opportunity to capitalize on emerging markets,
and could have a material adverse impact on our business and operating results.
The approximate development costs incurred since the acquisition date to
January 1, 2000 on current products and technology under development is $2.3
million. Estimated cost to complete current products and technology under
development at the time of acquisition was $1.3 million.
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YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE DESCRIBED
Many computer systems and software products were coded to accept, store or
report only two digit entries in date code fields. Beginning in the Year 2000,
these date code fields needed to accept four digit entries to distinguish 21st
century dates from 20th century dates. This is the "Year 2000 Issue." As a
result, computer systems and/or software used by many companies, including
Maxtor and our vendors and customers, needed to be upgraded to comply with such
Year 2000 requirements. We could have been impacted by Year 2000 Issues
occurring in our own infrastructure or faced by our major distributors,
suppliers, customers, vendors and financial service organizations. Such Year
2000 Issues could have included information errors, significant information
system failures, or failures of equipment, vendors, suppliers or customers. Any
disruption in our operations as a result of Year 2000 Issues, whether by us or a
third party, could have had a material adverse effect on our business, financial
condition and results of operations.
OUR HARD DISK DRIVES COMPLY
Our hard disk drives are able to operate in the Year 2000 and beyond. The
Year 2000 Issue is only relevant to hardware and software components that use or
affect time and date data or system settings. In the case of our hard disk
drives, the ability to operate correctly in the next century is dependent on the
software and programming loaded on our hard disk drives by the system. Since our
hard disk drives have no inherent time or date function, they will not determine
whether a given system, or any software on a given system, will operate
correctly or incorrectly in this century. As a result, all of our hard disk
drives are able to receive, store and retrieve data, and operate with a system
or software that is Year 2000 compliant without modification.
MAXATTACH PRODUCTS
Our new NAS products are also Y2K compliant. Our NAS operating system
software uses ANSIC time specifications, which store time as number of seconds
since January 1, 1970 using a signed 32-bit number, which is unaffected in or by
the Year 2000, but which will roll over in the Year 2038.
RESULTS OF OUR YEAR 2000 PREPARATIONS
We have not experienced any known material adverse impacts on our current
products, internal information systems, and non information technology systems
(equipment and systems) as a result of the year 2000 Issue.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES
We made capital expenditures of approximately $33.0 million and incurred
related expenses of approximately $7.5 million in fiscal 1998 in connection with
our implementation of the SAP system. For our Year 2000 program we initially
estimated capital expenditures of approximately $10.0 million and expenses of
approximately $4.0 million in fiscal 1999 in connection with the resolution of
our Year 2000 issues. During 1999, we incurred approximately $1.5 million in
capital expenditures and approximately $3.0 million in expenses related to our
Year 2000 issues, well below estimates. No significant system projects were
deferred due to the Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 2000, we had $353.9 million in cash and cash equivalents
and marketable securities as compared to $227.6 million as of December 26, 1998.
In February 1999, we completed an underwritten secondary public offering of
7,800,000 newly issued shares of our common stock and received $95.8 million,
net of offering costs and expenses.
Operating activities provided net cash of $115.2 million for the year ended
January 1, 2000. The cash provided from operating activities was principally
generated from collection of accounts receivable and decreases in inventory
purchases, which was partially offset by the decrease in accounts payable and
accrued
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expenses. We used $162.4 million for investing activities during 1999,
principally for the purchase of marketable securities and property, plant and
equipment. For the twelve months ended January 1, 2000, we reduced short and
long-term debt by $60.0 million using approximately $55.0 million of the
proceeds from our February 1999 public offering and cash from operations.
In September 1999, our Singapore subsidiary, Maxtor Peripherals (S) Pte
Ltd, entered into a four-year loan agreement with the Economic Development Board
of Singapore (the "Board") for SGD48 million, which will amortize in seven equal
semi-annual installments beginning March 2001. Interest is charged by the Board
at 1% above the prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year, which has been the rate of payment since inception.
This loan is supported by a two-year guaranty from the Bank of Nova Scotia at an
interest rate of 0.15% per year. This guaranty is currently secured by cash but
the Company may, at its option, substitute other assets as security.
As of January 1, 2000, our outstanding debt primarily comprised $90.0
million in publicly traded 5.75% Subordinated Debentures, due March 1, 2012. The
Debentures require annual sinking fund payments of $5.0 million, which commenced
March 1, 1998. These debentures are no longer convertible into our common stock
or any other security of the Company.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. As of January 1, 2000,
$100.0 million of accounts receivable was securitized under the program and
excluded from our accounts receivable balance.
We believe our existing capital resources, together with cash generated
from operations and borrowing capacity, will be sufficient to fund our
operations through at least the next 12 months. We require substantial working
capital to fund our business, particularly to finance accounts receivable and
inventory, and to invest in property, plant and equipment. In 2000, capital
expenditures are expected to be between approximately $90.0 million and $120.0
million, to be used principally for adding manufacturing capacity. We intend to
seek financing arrangements, including a line of credit, to fund our future
capacity expansion plans, as necessary. However, our ability to generate cash
will depend on, among other things, demand in the desktop hard disk drive market
and pricing conditions. If we need additional capital, there can be no assurance
that such additional financing can be obtained, or, if obtained, that it will be
available on satisfactory terms. See discussion below under the heading "Certain
Factors Affecting Future Performance."
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will require us to recognize all derivatives on the balance sheet at
fair value. SFAS No. 133 requires that derivative instruments used to hedge be
identified specifically as to assets, liabilities, firm commitments or
anticipated transactions and measured as to effectiveness and ineffectiveness
when hedging changes in fair value or cash flows. Derivative instruments that do
not qualify as either a fair value or cash flow hedge will be valued at fair
value with the resultant gain or loss recognized in current earnings. Changes in
the effective portion of fair value hedges will be recognized in current
earnings along with the change in fair value of the hedged item. Changes in the
effective portion of the fair value of cash flow hedges will be recognized in
other comprehensive income until realization of the cash flows of the hedged
item through current earnings. Any ineffective portion of hedges will be
recognized in current earnings.
In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date
of FASB Statement No. 133," to defer for one year the effective date of
implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000, with earlier
application encouraged. We are in the process of evaluating the requirements of
SFAS Nos. 133, but do not expect this pronouncement to materially impact our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally
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accepted accounting principles to revenue recognition in financial statements.
In March 2000, the SEC issued SAB No. 101A, to defer for one quarter the
effective date of implementation of SAB No. 101 with earlier application
encouraged. We are required to adopt SAB 101 in the second quarter of fiscal
2000. We do not expect the adoption of SAB 101 to have a material effect on our
financial position or results of operations.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $791.9 MILLION
We have a history of significant losses. With the exception of the fiscal
year ended December 26, 1998, we incurred losses in each of the recent years.
These losses were primarily a result of:
- delayed product introductions;
- product performance and quality problems;
- low manufacturing yields and under-utilization of manufacturing capacity;
- high operating and interest expenses; and
- overall market conditions in the hard disk drive industry, including
fluctuations in demand and declining average selling prices.
As of January 1, 2000, we had an accumulated deficit of approximately
$791.9 million. If we do not address successfully the factors that led to our
history of losses, we will not be profitable in the future. Even if we
successfully addressed these factors, we still may not be profitable in the
future.
OUR AVERAGE SELLING PRICES ARE DECLINING
It is very difficult to achieve and maintain profitability and revenue
growth in the hard disk drive industry because the average selling price of a
hard disk drive rapidly declines over its commercial life due to technological
enhancement, productivity improvement, and also increase in industry supply.
This is true even for those products which are competitive and introduced into
the market in a timely manner. Average selling prices decline even further when
competitors lower prices to absorb excess capacity, liquidate excess
inventories, restructure or attempt to gain market share. We anticipate that
average selling prices of our products will continue to decline in the
foreseeable future.
UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES
Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of that product line. If we miss a
qualification opportunity, we may not have another opportunity to do business
with that manufacturer until we introduce our next generation of products. The
effect of missing a product qualification opportunity is magnified by the
limited number of high volume manufacturers of personal computers. If we do not
reach the market or deliver volume production in a timely manner, we may lose
opportunities to qualify our products, our gross margins probably will decline
due to rapidly declining average selling prices, and we probably will lose
market share.
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SUBSTANTIAL DEPENDENCE ON THE DESKTOP COMPUTER MARKET
While there has been significant growth in the demand for desktop computers
over the past several years, according to IDC, the growth rate in the desktop
computer market has slowed in recent quarters. Because of our reliance on the
desktop segment of the personal computer market, we will be affected more by
changes in market conditions for desktop computers than would a company with a
broader range of products. Any decrease in the demand for desktop computers
could cause a decrease in the demand for our products.
Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:
- the client-server market;
- lower cost, lower performance personal computer systems (typically below
$699); and
- laptop personal computers.
To specifically address these or additional market segments, we would have
to reengineer some of our existing technology and develop new technology.
Certain of our competitors have significant advantages over us in one or more of
these and other potentially significant new or growing market segments. Any
failure by us to successfully develop and introduce new products to address
specifically these additional market segments could have a material adverse
effect on our business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS
We sell most of our products to a limited number of customers. During the
year ended January 1, 2000, one customer, Dell, accounted for approximately
22.8% of our revenue, and our top ten customers accounted for approximately
58.0% of our revenue. During the year ended December 26, 1998, three customers,
Dell, Compaq and IBM, accounted for approximately 26.6%, 12.2% and 14.6%,
respectively of our revenue, and our top ten customers accounted for
approximately 72.7% of our revenue.
We believe that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future, and
that the proportion of our revenue from such customers could continue to
increase in the future. These customers have a wide variety of suppliers to
choose from and therefore can make substantial demands on us. Even if we
successfully qualify a product for a given customer, such customer generally is
not obligated to purchase any minimum volume of products from us and generally
is able to terminate its relationship with us at any time. Our ability to
maintain strong relationships with our principal customers is essential to our
future performance. If we lose a key customer or if any of our key customers
reduce their orders of our products or require us to reduce our prices before we
are able to reduce costs, our business, financial condition and results of
operations could be materially and adversely affected.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY
Our quarterly results may not be indicative of our future performance. Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate significantly in the future. Our future performance will depend on
many factors, including:
- our ability to be consistently among the first to volume-production with
competitive products;
- the average unit selling price of our products;
- fluctuations in the demand for hard disk drives as a result of the
cyclical and seasonal nature of the desktop computer industry;
- the availability of and efficient use of manufacturing capacity;
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- changes in product or customer mix;
- our existing competitors introducing better products at competitive
prices before we do;
- new competitors entering our market;
- our ability to manage successfully the complex and difficult process of
qualifying our products with our customers;
- our customers canceling, rescheduling or deferring significant orders for
our products, particularly in anticipation of new products or
enhancements from us or our competitors;
- the ability of certain of our distribution and retail customers to return
unsold products for credit;
- the ability of certain of our distribution and retail customers to
receive lower prices retroactively on their inventory of our products
when we lower prices on our products;
- our ability to purchase enough components and raw materials at
competitive prices which allows us to make a profit;
- the availability of adequate capital resources;
- increases in research and development expenditures, particularly as a
percentage of revenue, required to maintain our competitive position;
- changes in our strategy;
- personnel changes; and
- other general economic and competitive factors.
Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.
As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock