MAXTOR CORP - 10-Q Quarterly Report

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

As of November 6, 2002, 241,226,625 shares of the registrant’s Common Stock, $.01 par value, were issued and outstanding.


(1)	The amounts for three and nine months ended September 28, 2002 represent only amortization of other intangible assets.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Maxtor Corporation (“Maxtor” or the “Company”) and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. The unaudited interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2001 incorporated in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Saturday closest to December 31. As a result, the three and nine month periods ended September 28, 2002 comprised 13 weeks and 39 weeks, respectively, as did the three and nine month periods ended September 29, 2001. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

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

Operating results of NSG for the three and nine months ended September 28, 2002 and September 29, 2001 are as follows (in millions):

Included in the 2002 loss from the NSG discontinued operations are the following significant charges (in millions):

The following is a summary of the net liabilities of the NSG discontinued operations as of September 28, 2002 (in millions):

On April 2, 2001, Maxtor acquired the hard disk drive business of Quantum Corporation (“Quantum HDD”). The acquisition was approved by the stockholders of both companies on March 30, 2001 and was accounted for as a purchase. As of the effective time of the merger, each share of Quantum HDD common stock was converted into 1.52 shares of Maxtor common stock, and each outstanding Quantum HDD option assumed by Maxtor was converted into an option to purchase Maxtor common stock, with appropriate adjustment to the exercise price and share numbers in accordance with the exchange ratio. The total purchase price of $1,269.4 million included consideration of 121.0 million shares of Maxtor’s common stock valued at an average price of $9.40 per common share. The average market price was based on the average closing price for two trading days prior and two trading days subsequent to October 4, 2000, the announcement date of the terms of the merger.

The Company recorded $29.2 million for estimated severance pay associated with termination of approximately 700 Quantum HDD employees in the United States. In addition, the Company paid and expensed $30.5 million for severance pay associated with termination of approximately 600 Quantum Corporation (“Quantum”) employees. As a result, total severance related costs amounted to $59.7 million and the total number of terminated employees, including Quantum transitional employees was approximately 1,300. The Company also recorded a $59.1 million liability for estimated facility exit costs for the closure of three Quantum HDD offices and research and development facilities located in Milpitas, California, and two Quantum HDD office facilities located in Singapore. The Company also recorded a $12.7 million liability for certain non-cancelable adverse inventory and other purchase commitments.

The following table summarizes the activity related to the merger-related restructuring costs as of September 28, 2002:

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

On September 2, 2001, Maxtor completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix Semiconductor America Inc. (“Hynix”). MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for Maxtor acquiring MMC was to provide the Company with a reliable source of media supply. The acquisition was accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1.0 million, $16.0 million of loan forgiveness and $0.9 million of direct transaction costs. In connection with the acquisition, the Company also assumed liabilities of $105.7 million, including a $7.3 million note owed by MMC to Hynix, which was non-interest bearing through March 31, 2002, with any balance remaining thereafter bearing interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount, representing Hynix’s share of a settlement relating to litigation between Maxtor, Hynix and Stormedia. This note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29, 2001. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid. MMC’s results of operations are included in the financial statements from the date of acquisition, and the assets and liabilities acquired were recorded based on their fair values as of the date of acquisition.

The total purchase price and the purchase price allocation of the MMC acquisition were as follows (in millions):

The following unaudited pro forma consolidated amounts give effect to the acquisitions of Quantum HDD and MMC, excluding the charges for acquired in-process research and development, as if the acquisitions had occurred on January 1, 2001. The three and nine months ended September 28, 2002 represent the Company’s actual results of operations. On a pro forma basis, the results of operations of Quantum HDD are consolidated with the Company’s results for the nine months ended September 29, 2001 and the results of operations of MMC are consolidated with the Company’s results for the three and nine months ended September 29, 2001. The pro forma amounts do not purport to be indicative of what would have occurred had the acquisitions been made as of the beginning of each period or of results which may occur in the future.

The Company’s restricted cash balance of $56.5 million at September 28, 2002, is associated with short-term letters of credit (“LOCs”), where the Company has chosen to provide cash security in order to lower the cost of the LOCs. The reduction of cash security required for a letter of credit during the third quarter accounted for the decrease in restricted cash of $42.2 million from the previous quarter.

During the three month period ended September 28, 2002, the Company recorded a restructuring charge of $9.5 million associated with closure of one of its facilities located in California. The amount comprised

$8.9 million of future non-cancelable lease payments which are expected to be paid over several years based on the underlying lease agreement, and the write-off of $0.6 million in leasehold improvements. The restructuring accrual is included on the balance sheet within accrued and other liabilities.

In accordance with the disclosure requirements of Statements of Financial Accounting Standards No. 128, “Earnings per Share” a reconciliation of the numerator and denominator of the basic and diluted net loss per share calculations is provided as follows (in thousands, except share and per share amounts):

As the Company incurred net loss from continuing and discontinued operations, the following dilutive securities were excluded from the diluted net loss per share calculation.

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

The 5.75% Subordinated Debentures due March 1, 2012 require semi-annual interest payments and annual sinking fund payments of $5.0 million, which commenced March 1, 1998. The Debentures are subordinated in right to payment to all senior indebtedness.

In September 1999, Maxtor Peripherals (S) Pte Ltd entered into a four-year Singapore dollar denominated loan agreement with the Economic Development Board of Singapore (the “Board”), which is being amortized in seven equal semi-annual installments ending March 2004. As of September 28, 2002, the balance was equivalent to $9.7 million. The Board charges interest at 1% above the prevailing Central Provident Fund lending rate, subject to a minimum of 3.5% per year (3.5% as of September 28, 2002). This loan is supported by a two-year guaranty from a bank. Cash is currently provided as collateral for this guaranty but the Company may, at its option, substitute other assets as security. As part of this arrangement, the Company is subject to two financial covenants, the maintenance of minimum unrestricted cash and a tangible net worth test.

As of December 29, 2001, the Company determined that it was not in compliance with the tangible net worth covenant under the loan agreement. On February 15, 2002, the Company received a waiver and amendment from the lender for its Singapore loan relating to the tangible net worth covenant. On the same date, the banks participating in the Company’s asset securitization program (the “Program”) agreed to a first amendment through May 15, 2002 to the Program. In each case, the definition for calculating tangible net worth was amended to include an adjustment associated with the purchase price accounting for the acquisition of Quantum HDD. After giving effect to this first amendment, the Company was in compliance with the tangible net worth covenant.

the Program was reduced from $300 million to $210 million due to the withdrawal of one of the participating banks.

On May 28, 2002, the banks participating in the Program approved a third amendment, which modified the tangible net worth covenant and the minimum unrestricted cash requirement. On June 20, 2002 the Singapore loan was amended to the same effect. After giving effect to the third amendment to the Program and the amendment to the Singapore loan, the Company was in compliance with all covenants.

As of September 28, 2002, the Company concluded that it would not be in compliance with the tangible net worth covenant under the Program and the Singapore loan. On October 22, 2002, the Company received a waiver of the default as to the tangible net worth covenant for the quarter ended September 28, 2002 from the lender of the Singapore loan. After giving effect to this waiver, the Company was in compliance with the tangible net worth covenant under the Singapore loan. On October 21, 2002, the Banks participating in the Program agreed to waive a violation of the tangible net worth covenant for the period ended September 30, 2002 on condition that the Company is able to comply with a lower tangible net worth covenant. After giving effect to the waiver, the Company was in compliance under the Program. Pursuant to the fourth amendment on November 5, 2002, the Company and the Banks agreed to reduce the Program size from $210 million to $100 million, cap the purchase limit at $45 million and extend the liquidity agreement to December 13, 2002, in anticipation of a new program to be in place by December 13, 2002.

The Company is in discussions with lenders regarding a possible replacement facility for the Program of up to $100 million; however, the Company does not have a commitment letter for such replacement facility at this time. The Company believes that if it receives a commitment for such a replacement facility, the Banks will extend the Program as amended for a reasonable period beyond December 13, 2002 to permit it to negotiate a definitive agreement for such facility. If, however, the Company does not receive a commitment on terms acceptable to it, or at all, or the Banks decline to extend the Program beyond December 13, 2002, the Company will not have access to the Program beyond that date and there could be a liquidation event under the Program in the quarter ending December 29, 2002.

If a liquidation event or termination of the Program were to occur, the Banks would be entitled to all cash collections on the Company’s accounts receivables in the United States until their net investments had been recovered. The Company does not expect that such an event by itself would have a significant adverse impact on its liquidity, given the fact that it believes the Banks’ net investment would be satisfied shortly following such liquidation event or termination, based on the Company’s historical collection rate of receivables. However, the Company would no longer have access to the Program following such liquidation event or termination. The Company does not expect that the unavailability of the Program would have a material adverse effect on its liquidity.

The Company may not satisfy the minimum tangible net worth covenant under the Singapore loan at the end of the quarter ending December 29, 2002. There can be no assurance that the Singapore lender will agree to any amendments or provide a waiver for any such covenant violation. In the event that a default occurs in a financial covenant under the Singapore loan, and the Company does not receive a waiver, it may be required to repay the loan earlier than anticipated; however, the Company does not expect that such an earlier repayment of the Singapore loan would have a material adverse effect on its liquidity.

In connection with the acquisition of the Quantum HDD business, Maxtor agreed to indemnify Quantum for the Quantum HDD pro rata portion of Quantum’s outstanding $287.5 million 7% convertible subordinated notes due August 1, 2004, and accordingly the principal amount of $95.8 million has been included in the Company’s long term debt. Quantum is required to pay interest semi-annually on February 1 and August 1, and principal is payable on maturity. The Company is required to reimburse Quantum for interest and principal payments relating to the $95.8 million representing Quantum HDD’s pro rata portion of such notes.

In connection with the acquisition of the Quantum HDD business, the Company acquired real estate and related mortgage obligations. The term of the mortgages is ten years, at an interest rate of 9.2%, with monthly payments based on a twenty-year amortization schedule, and a balloon payment at the end of the 10-year term, which is September 2006. The outstanding balance at September 28, 2002 and December 29, 2001 were $35.9 million and $36.9 million, respectively.

In connection with the acquisition of MMC, the Company assumed certain amortizing equipment loans and capital leases. As of September 28, 2002, obligations having final maturity dates ranging from December 2002 to October 2004 and interest rates averaging 9.9% amounted to $48.6 million, of which $41.0 million was related debt assumed from the acquisition of MMC.

In connection with the acquisition of MMC, the Company assumed a note for $7.3 million owing to Hynix, which bore no interest through March 31, 2002; thereafter, unpaid principal amounts were to bear interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount, the note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of such date. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid.

Cumulative other comprehensive loss on the consolidated balance sheets consists of unrealized loss on investments. Total comprehensive loss for the three and nine months ended September 28, 2002 and September 29, 2001, is presented in the following table (in thousands):

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographic areas and major customers. The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer (“CEO”). The CEO reviews financial information for purposes of making operational decisions and assessing financial performance.

Subsequent to the decision to discontinue the manufacture and sales of NSG products, the Company determined that it operates in one reportable segment.

Sales of continuing operations to original equipment manufacturers (“OEMs”) for the three and nine months ended September 28, 2002 represented 52.0% and 48.4% of total revenue, respectively, compared to 52.8% and 59.7% of total revenue, respectively, for the corresponding period in fiscal year 2001. Sales to the

distribution and retail channels for the three and nine months ended September 28, 2002 represented 48.0% and 51.6% of total revenue, respectively, compared to 47.2% and 40.3% of total revenue, respectively, in the corresponding period in fiscal year 2001. Sales to one customer were 13.0% and 11.5% of revenue in the three and nine months ended September 28, 2002; sales to one customer represented 10.9% and 12.7% of total revenue for the corresponding period in fiscal year 2001, and there was only one customer with over 10% of revenue in these periods.

The Company has a world-wide sales, service and distribution network. Products are marketed and sold through a direct sales force to computer equipment manufacturers, distributors and retailers in the United States, Europe, Latin America and Asia Pacific. Maxtor operations outside the United States primarily consist of its manufacturing facilities in Singapore that produce subassemblies and final assemblies for the Company’s disk drive products. Revenue by destination information for the three and nine months ended September 28, 2002 and September 29, 2001 is presented in the following table:

Long-lived asset information by geographic area as of September 28, 2002 and December 29, 2001 is presented in the following table:

Long-lived assets located within the United States consist primarily of goodwill and other intangible assets which amounted to $981.4 million and $1,077.4 million as of September 28, 2002 and December 29, 2001, respectively. Long-lived assets located outside the United States consist primarily of the Company’s manufacturing operations located in Singapore which amounted to $138.7 million and $121.1 million as of September 28, 2002 and December 29, 2001, respectively.

In July 1998, the Company entered into an accounts receivable securitization program (the “Program”) with a financial institution. On November 15, 2001, the Company amended its asset securitization program to increase the amount available to $300 million from $200 million. The program allows the company to sell on a revolving basis an undivided interest in up to $300 million in eligible receivables. The eligible receivables are sold to bank conduits through a bankruptcy-remote special purpose entity which is consolidated for financial reporting purposes.

The transaction has been accounted for as a sale under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” As of September 28, 2002, the Company had sold $45.0 million of receivables under the Program which are reflected as reductions of receivables in the accompanying consolidated balance sheets. As part of this arrangement, the Company is subject to financial covenants including the maintenance of certain financial ratios and a tangible net worth test.

As of December 29, 2001, the Company determined that it was not in compliance with the tangible net worth covenant under the Program. On February 15, 2002, the Company received a waiver and amendment from the lender for its Singapore loan relating to the tangible net worth covenant. On the same date, the banks participating in the Company’s asset securitization program (the “Program”) agreed to a first amendment through May 15, 2002 to the Program. In each case, the definition for calculating tangible net worth was amended to include an adjustment associated with the purchase price accounting for the acquisition of Quantum HDD. After giving effect to this first amendment, the Company was in compliance with the tangible net worth covenant.

On March 15, 2002, the first amendment was superceded by a second amendment reflecting the terms of the first amendment and extending the terms of the amendment for the duration of the Program. At this time the Program was reduced from $300 million to $210 million due to the withdrawal of one of the participating banks.

The Company is in discussions with lenders regarding a possible replacement facility for the Program of up to $100 million; however, the Company does not have a commitment letter for such replacement facility at this time. The Company believes that if it receives a commitment for such a replacement facility, the Banks will extend the Program as amended for a reasonable period beyond December 13, 2002 to permit it to negotiate a definitive agreement for such facility. If, however, the Company does not receive a commitment on terms acceptable to it, or at all, or the Banks decline to extend the Program beyond December 13, 2002, it will not have access to the Program beyond that date and there could be a liquidation event under the Program in the quarter ending December 29, 2002.

termination. The Company does not expect that the unavailability of the Program would have a material adverse effect on its liquidity.

The Company may not satisfy the minimum tangible net worth covenant under the Singapore loan at the end of the quarter ending December 29, 2002. There can be no assurance that the Singapore lender will agree to any amendments or provide a waiver for any such covenant violation. In the event that a default occurs in a financial covenant under the Company’s Singapore loan, and the Company does not receive a waiver, it may be required to repay the loan earlier than anticipated; however, the Company does not expect that such an earlier repayment of the Singapore loan would have a material adverse effect on its liquidity.

The Company receives cash in respect of the interest in its receivables sold. The proceeds were used for working capital purposes and are reflected as operating cash flows in the Company’s statement of cash flows. Delinquent amounts and credit losses related to these receivables were not material at September 28, 2002. Sales of receivables resulted in recognition of expenses of approximately $2.8 million and $5.6 million for the nine months ended September 28, 2002 and September 29, 2001, respectively. These expenses are included in interest expense.

In 1994, Hyundai Electronics Industries, “HEI,” and certain of its affiliates purchased 40% of Maxtor’s outstanding common stock for $150.0 million in cash. In early 1996, Hynix, formerly Hyundai Electronics America, or HEA, acquired all of the remaining shares of common stock of Maxtor in a tender offer and merger for $215.0 million in cash and also acquired all of Maxtor’s common stock held by HEI and its affiliates. Maxtor operated as a wholly-owned subsidiary of Hynix until completion of its initial public offering on July 31, 1998, which reduced the ownership interest of Hynix to below 50%. In April 2001 as a result of Maxtor’s acquisition of the Quantum HDD business, Hynix’s ownership in Maxtor was reduced to approximately 17% of the outstanding common stock. As described below, Hynix sold Maxtor shares to the public and to Maxtor in October 2001, reducing Hynix’s ownership to 5.17% at December 29, 2001, and in February 2002, Hynix distributed the balance of its Maxtor shares to the beneficial owners of a trust and is no longer a stockholder of Maxtor.

On September 2, 2001, Maxtor completed its acquisition of MMC which had previously been a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor constituted 95% of MMC’s annual revenues. The primary business reason for Maxtor’s acquisition of MMC was to provide Maxtor with a reliable source of supply of media for hard disk drives. A fairness opinion was delivered to Maxtor’s Board of Directors by a nationally recognized investment banking firm in connection with the MMC acquisition. The fairness opinion concluded that the consideration to be paid by Maxtor for MMC was fair to Maxtor, from a financial point of view. The acquisition of MMC was approved by the Maxtor Board’s Affiliated Transactions Committee and was determined by the Committee to be in the best interests of Maxtor and its stockholders. The Affiliated Transactions Committee was comprised entirely of directors with no relationship with Hynix and its affiliates. The acquisition was accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1.0 million, $16.0 million of loan forgiveness, and $0.9 million of direct transaction costs. In connection with the acquisition, Maxtor also assumed liabilities of $105.7 million.

In connection with the acquisition of MMC Technology, Inc., Maxtor assumed a note for $7.3 million owing to Hynix, which bore no interest through March 31, 2002; thereafter, unpaid principal amounts bore interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount representing Hynix’s share of a settlement relating to litigation between Maxtor and Hynix and Stormedia. This note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal

amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid.

Maxtor’s cost of revenue includes certain component parts Maxtor purchased from MMC. These purchases amounted to $27 million and $99 million for the two and eight months ended September 1, 2001, respectively. In August 1998, Maxtor entered into an agreement with MMC with respect to the pricing of future purchases that provided for pricing discounts in return for a purchase volume commitment based on a percentage of our total media purchases through September 30, 2001. The pricing discounts generally ranged from 2% to 4% off of competitive prices. As described above, Maxtor completed its acquisition of MMC on September 2, 2001.

Maxtor’s cost of revenue also includes certain DRAM chip purchases from Hynix Semiconductor, Inc., “HSI,” formerly HEI. Hynix is treated identically to its competitors in the process by which commodity electronics, principally DRAMs, are selected, qualified, and purchased; pricing is negotiated with selected suppliers on the basis of suppliers’ bids and market information. Maxtor’s purchases from HSI totaled $26.5 million in fiscal year 1999, $41.6 million in fiscal year 2000 and $19.3 million in fiscal year 2001.

In October 2001, Hynix sold approximately 23.3 million shares of Maxtor common stock in a registered public offering. At the same time as Hynix’s sale of Maxtor common stock to the public, Maxtor purchased an additional 5.0 million shares of its common stock from Hynix. Maxtor’s purchase of its shares from Hynix was on the same terms as Hynix’s sale of shares to the public at $4 per share for an aggregate purchase price of $20.0 million. The repurchase of its shares was intended to improve Maxtor’s capital structure, increase shareholder returns, and increase the price of Maxtor’s stock. The repurchase of the shares from Hynix was approved by the Maxtor Board’s Affiliated Transaction Committee and determined to be in the best interest of the Company and its stockholders. As a result of Hynix’s sale of its Maxtor shares to the public and to Maxtor, in October 2001, and Hynix’s distribution of its remaining shares to the beneficial owners of a trust in February 2002, Hynix is no longer a stockholder of Maxtor.

Pursuant to a sublicense agreement with HEI, Maxtor is obligated to pay a portion of an IBM license royalty fee otherwise due from HEI. Such payments are due in annual installments through 2007, and are based upon the license fee separately negotiated on an arms’ length basis between HEI and IBM. For the years ended January 1, 2000, December 30, 2000 and December 29, 2001, Maxtor recorded $1.9 million of expenses each year in connection with this obligation.

Hynix was an unconditional guarantor of one of Maxtor’s facilities lease in Milpitas, California. The aggregate rent under the lease was $3.24 million per annum in each of the years ended January 1, 2000, December 30, 2000 and December 29, 2001. The lease rate was established by arms’ length negotiations with the lessor based on applicable market rates. The lease expired on March 31, 2002 and was not extended.

Prior to the Company’s acquisition of the Quantum HDD business, the Company, on the one hand, and Quantum and MKE, on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against the Company was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with other pending litigations involving the Papst patents (the “MDL Proceeding”). The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that the Company and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors

in hard disk drives. The Company purchased the overwhelming majority of the spindle motors used in its hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of the with the Company’s acquisition of the Quantum HDD business, the Company assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. The Company filed a motion to substitute the Company for Quantum in this litigation. The motion was denied by the Court presiding over the MDL Proceeding, without prejudice to being filed again in the future.

Papst and MKE recently entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus the Company, with additional defenses to Papst’s patent infringement claims.

On April 15, 2002, the Judicial Panel on Multidistrict Litigation ordered a separation of claims and remand to the District of Columbia of certain claims between Papst and another party involved in the MDL Proceeding. By order entered June 4, 2002, the court stayed the MDL Proceeding pending resolution by the District of Columbia court of the remanded claims. These separated claims are currently proceeding in the District for the District of Columbia.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, there are no assurances that the Company will be able to successfully defend itself against this or any other Papst lawsuit. The Papst complaints assert claims to an unspecified dollar amount of damages. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against the Company and its products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, the Company also could be required to pay treble damages and Papst’s attorney’s fees. Accordingly, a litigation outcome favorable to Papst could harm the Company’s business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

Maxtor has asserted multiple claims against Quantum, and Quantum has asserted multiple claims against the Company, for payment under agreements entered into in connection with the Company’s acquisition of the Quantum HDD business, including a tax sharing and indemnity agreement, which provides for the allocation of certain liabilities related to taxes. The Company disagrees with Quantum about the amounts owed by each party under the agreements and the parties are in negotiations to resolve the claims. The parties have commenced dispute resolution procedures under the tax sharing and indemnity agreement. Although the Company believes that it will be successful in asserting or defending these claims in the aggregate, an unfavorable resolution of such claims in the aggregate could harm its business, financial condition and operating results.

On December 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Goodwill and indefinite lived intangible assets will be subject to an impairment test at least annually.

The Company ceased amortizing goodwill totaling $846.0 million as of the beginning of fiscal 2002, including $31.1 million, net of accumulated amortization, of acquired workforce intangibles previously classified as purchased intangible assets.

Purchased intangible assets are carried at cost less accumulated amortization. The Company evaluated its intangible assets and determined that all such assets have determinable lives. Amortization is computed over the estimated useful lives of the respective assets, generally one to seven years. The Company expects amortization expense on purchased intangible assets to be $20.6 million for the fourth quarter of fiscal 2002, $82.2 million in fiscal 2003, $37.0 million in fiscal 2004, $21.9 million in fiscal 2005, and $5.8 million in fiscal 2006, at which time purchased intangible assets will be fully amortized.

In accordance with SFAS No. 142, the Company completed its first phase impairment analysis during the second quarter of 2002 and found no instances of impairment of its recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.

The following tables present the impact of SFAS 142 on net loss and net loss per share had the standard been in effect for the three and nine months ended September 29, 2001 (in thousands, except per share amounts):

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations or lessees. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 25, 2002. The Company is currently assessing the impact of SFAS 143 on its financial statements.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 replaces SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The FASB issued SFAS 144 to establish a single accounting model, based on the framework established in SFAS 121, as SFAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, “Reporting The Results of Operations — Reporting The Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 also resolves significant implementation issues related to SFAS 121. Companies are required to adopt SFAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The adoption of SFAS 144 did not have a significant impact on Maxtor’s financial statements.

In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections” (“SFAS 145”). Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company is currently assessing the impact of SFAS 145 on its financial statements.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently assessing the impact of SFAS 146 on its financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I. Financial Information, Item 1. Condensed Consolidated Financial Statements of this report.

This report contains forward-looking statements within the meaning of the U.S. federal securities laws that involve risks and uncertainties. The statements contained in this report that are not purely historical, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future, are forward-looking statements. In this report, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “will,” “should,” “plan,” “estimate,” “predict,” “potential,” “future,” “continue,” or similar expressions also identify forward-looking statements. These statements are only predictions. We make these forward-looking statements based upon information available on the date hereof, and we have no obligation (and expressly disclaim any such obligation) to update or alter any such forward-looking statements whether as a result of new information, future events, or otherwise. Our actual results could differ materially from those anticipated in this report as a result of certain factors including, but not limited to, those set forth in the following section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Affecting Future Performance” and elsewhere in this report.

Maxtor Corporation (“Maxtor” or the “Company”) was founded in 1982 and completed an initial public offering of common stock in 1986. In the mid-1980’s, we were a leading technology innovator in the hard disk drive industry. As is true today, the hard disk drive industry during the 1980’s was intensely competitive and characterized by rapid technological change, rapid rates of product and technology obsolescence, changing customer requirements, dramatic shifts in market share and significant erosion of average selling prices. In an effort to mitigate the risks associated with these factors, we pursued all major product segments in the hard disk drive market, utilizing multiple product families and technology platforms. This costly strategy added significant complexity to the business, which caused us to delay or miss a number of key product introductions and ultimately led to the deterioration of our overall financial condition. As a result of this deterioration, we sold 40% of our outstanding common stock to Hyundai Electronics Industries (now Hynix Semiconductor Inc.) and its affiliates in 1994.

In early 1996, Hyundai Electronics America (Hynix Semiconductor America, Inc. — “Hynix”) acquired all of the remaining publicly held shares of our common stock as well as all of our common stock then held by Hynix Semiconductor Inc. and its affiliates. Shortly thereafter, Hynix invested in renewed efforts to revitalize Maxtor. In July 1996, we hired a new management team, headed by Michael R. Cannon, our current President and Chief Executive Officer and a 20-year veteran of the hard drive industry, to lead our turnaround and capture business at leading desktop computer manufacturers.

In the third quarter of 1998, we completed a public offering of approximately 49.7 million shares of our common stock. We received net proceeds of approximately $328.8 million from the offering.

In February 1999, we completed a public offering of 7.8 million shares of our common stock. We received net proceeds of approximately $95.8 million from the offering. We used a portion of the proceeds from the offering to prepay, without penalty, outstanding aggregate principal indebtedness of $55.0 million owing to Hynix under a subordinated note.

In September 1999, we acquired privately held Creative Design Solutions, Inc. (“CDS”), a participant in the emerging network attached storage market. The acquisition of CDS helped us to transition from only being a supplier of hard disk drives for the desktop personal computer market to also being positioned to provide storage solutions that deliver price and performance values in networked environments.

On April 2, 2001, we completed our acquisition of Quantum Corporation’s Hard Disk Drive Group (“Quantum HDD”). The primary reason for our acquisition of the Quantum HDD business was to create a stronger, more competitive company, with enhanced prospects for continued viability in the storage industry.

On September 2, 2001, we completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for our acquisition of MMC was to provide us with a reliable source of supply of media. For additional information regarding the MMC acquisition, see note 3 of the Notes to Consolidated Financial Statements and “Related Party Transactions” below.

On October 9, 2001, Hynix sold 23,329,843 shares (including exercise of the underwriters’ over-allotment) of Maxtor common stock in a registered public offering. Maxtor did not receive any proceeds from Hynix’s sale of Maxtor stock to the public. In addition, at the same time and on the same terms as Hynix’s sale of Maxtor stock to the public, we repurchased 5.0 million shares from Hynix for an aggregate purchase price of $20.0 million. These repurchased shares are being held as treasury shares. See “Related Party Transactions” below. In February 2002, Hynix distributed all of its remaining Maxtor shares to the beneficial owners of a trust and is no longer a stockholder of Maxtor.

On August 15, 2002 we announced our decision to discontinue the manufacturing and sales of our MaxAttach^TM branded network attached storage products of our Network Systems Group (“NSG”). We worked with NSG customers for an orderly wind down of the business. Since our entrance into the network attached storage market in the fall of 1999, the growth rate of this market has fallen far short of expectations. Over the same period, the network attached storage market has become rapidly commoditized by the entrance of a number of global OEMs with their own branded products. This has placed us in competition with some of our largest disk drive customers. We believe exiting the NSG business will allow us to focus on our core hard disk drive market, further reduce expenses and accelerate our return to profitability. The NSG business is accounted for as a discontinued operation and therefore, results of operations and cash flows have been removed from our results of continuing operations for all periods presented in this report. For additional information regarding the NSG discontinued operations, see note 2 of the Notes to Consolidated Financial Statements.

Our discussion and analysis of the company’s financial condition and results of operations are based upon Maxtor’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies represent our significant judgments and estimates used in the preparation of the company’s consolidated financial statements:


	•	revenue recognition;

	•	sales returns, other sales allowances and the allowance for doubtful accounts;

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

	•	warranty;

	•	inventory reserves;

	•	income taxes; and

	•	restructuring liabilities, litigation and other contingencies.

For additional information regarding the Company’s critical accounting policies mentioned above, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2001.

Effective July 1, 2001, we adopted certain provisions of SFAS No. 141, and effective December 30, 2001, we adopted the full provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets apart from goodwill. We evaluated our goodwill and intangibles acquired prior to June 30, 2001 using the criteria of SFAS No. 141, which resulted in $31.1 million of other intangibles, net of accumulated amortization of $12.8 million, (comprised entirely of assembled workforce intangibles) being subsumed into goodwill at December 30, 2001. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually. We evaluated our intangible assets and determined that all such assets have determinable lives.

SFAS No. 142 prescribes a two-phase transitional process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment as of January 1, 2002. The second phase (if necessary), required to be completed by December 31, 2002, measures the impairment. We completed our first phase impairment analysis and found no instances of impairment of our recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.

Revenue in the three and nine months ended September 28, 2002 was $819.7 million and $2,741.2 million, compared to $1,035.2 million and $2,694.4 million in the corresponding periods in fiscal year 2001. Total shipments for the three months ended September 28, 2002 were 11.7 million units, which was 0.8 million units, or 6.4%, lower as compared to the three months ended September 29, 2001. The decrease in unit volume in the three months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 primarily reflected difficulties we encountered in ramping our new 60GB/80GB per platter products in the quarter ended September 28, 2002. This transition, which represented a 100% increase in aerial density, reflected issues associated with the ability of the supply chain to meet the technological demands of this new aerial density in high volumes, as well as our difficulties in optimizing drive yield. As a result of these difficulties, end of life volumes that were planned for the 40GB products were insufficient to support market demand. We have made good progress in resolving these problems and expect strong volume recovery in the

fourth quarter of 2002. Total shipments for the nine months ended September 28, 2002 were 38.1 million units, which was 6.7 million units, or 21.3%, higher as compared to the corresponding period in fiscal year 2001. The increase in unit volume in the nine months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the acquisition of the Quantum HDD business offset by the slowdown in demand for PCs and servers and the resulting reduced demand for hard disk drives and pressures in the market.

Revenues declined in the three months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 primarily due to difficulties in ramping our new products in the third quarter of 2002. Revenue in the nine months ended September 28, 2002 increased compared to the corresponding period in fiscal 2001, primarily as a result of our acquisition of the Quantum HDD business, offset by the decline in average selling prices in the PC and server markets as a result of the economic slowdown, and our difficulties in ramping up production of our new products in the third quarter of 2002. We expect improved revenue in the fourth quarter compared to the third quarter as a result of expected strong recovery in our volume production of our next generation products and seasonal demand for personal computers.

Revenues on a pro forma basis (as if the Quantum HDD business had been acquired on January 1, 2001) were $2,741.2 million and $3,347.4 million for the nine months ended September 28, 2002 and September 29, 2001, respectively. On a pro forma basis, the percentage decrease was 18.1% in the nine months ended September 28, 2002 compared to the corresponding period in fiscal year 2001, primarily reflecting our difficulties in ramping our new products in the third quarter of 2002, the slowdown in demand for PCs and the continued pricing pressures in the market.

Sales to the top five customers in the three and nine months ended September 28, 2002 represented 40.1% and 33.5% of revenue, respectively, compared to 37.0% and 36.4% of revenue, respectively, in the corresponding periods in fiscal year 2001. Sales to one customer were 13.0% and 11.5% of revenue in the three and nine months ended September 28, 2002; sales to one customer represented 10.9% and 12.7% of total revenue for the corresponding period in fiscal year 2001, and there was only one customer with over 10% of revenue in these periods.

Revenue from sales to original equipment manufacturers (“OEMs”) in the three and nine months ended September 28, 2002 represented 52.0% and 48.4% of revenue, respectively, compared to 52.8% and 59.7% of revenue, respectively, in the corresponding period in fiscal year 2001. The decrease in revenue from sales to the OEM channel in the three and nine months ended September 28, 2002 compared to the corresponding periods in 2001 was due to the slowdown in demand for PCs and servers in the OEM channel and a share loss as a result of our difficulties in ramping our new products. The decline in percentage of revenue from OEMs was a result of the growth of non-branded PC customers’ market share of the overall current desktop market and our effort to accommodate this growth. Revenue from sales to the distribution channel and retail customers in the three and nine months ended September 28, 2002 represented 48.0% and 51.6% of revenue, respectively, compared to 47.2% and 40.3% of revenue, respectively, in the corresponding period in fiscal year 2001. The increase in revenue from sales to the distribution channel in the three months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the growth of non-branded PC customers’ market share of the overall current desktop PC market and our effort to accommodate this growth. The increase in the nine months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to our acquisition of the Quantum HDD business and the growth of non-branded PC customers’ market share of the overall current desktop PC market and our effort to accommodate this growth.

Domestic revenue in the three and nine months ended September 28, 2002 represented 38.5% and 36.4% of total sales, respectively, compared to 42.1% and 43.9% of total sales, respectively, in the corresponding period in fiscal year 2001. International revenue in the three and nine months ended September 28, 2002 represented 61.5% and 63.6% of total sales, respectively, compared to 57.9% and 56.1% of total sales, respectively, in the corresponding period in fiscal year 2001. Revenue from international sales in the three and nine months ended September 28, 2002, as a percentage of total revenue, increased compared to the corresponding periods in fiscal year 2001, primarily as a result of our stronger presence in Europe and Asia Pacific, as a result of our acquisition of the Quantum HDD business, and the growth of sales to the non-

branded customers who are primarily located outside the United States and Canada. In absolute terms, international sales decreased 15.9% in the three months ended September 28, 2002 compared to the corresponding period in fiscal year 2001, primarily due to the difficulties we encountered in ramping our new products in the third quarter of 2002, resulting in a decline in overall sales. In absolute terms international sales increased 15.2% in the nine months ended September 28, 2002 compared to the corresponding period in fiscal year 2001, due to our stronger presence in Europe and Asia Pacific and the growth of our sales to non-branded customers located outside the United States and Canada. We plan to continue building our sales efforts in Europe and Asia Pacific over the course of the year.

Sales to Europe in the three months ended September 28, 2002 and September 29, 2001 represented 29.6% and 29.5% of total revenue, respectively. In absolute terms, European sales decreased 20.5% compared to the corresponding period in fiscal year 2001. Sales to Asia Pacific in the three months ended September 28, 2002 represented 31.4%, or an absolute decrease of 11.7% of total revenue, compared to 28.2% of total revenue for the corresponding period in fiscal year 2001. The decreases in the absolute dollar amount of sales to Europe and Asia Pacific in the three month period ended September 28, 2002 were mainly due to the difficulties we encountered in ramping our new 60/80GB per platter products. The increase as a percentage of total revenue represented by sales in Asia Pacific in the three months ended September 28, 2002 compared to the corresponding period in 2001 was due to the growth in sales to non-branded customers who are primarily located outside the United States and Canada.

Sales to Europe in the nine months ended September 28, 2002 and September 29, 2001 represented 31.3% and 26.2% of total revenue, respectively. In absolute terms, European sales increased 21.4% compared to the corresponding period in fiscal year 2001. Sales to Asia Pacific in the nine months ended September 28, 2002 represented 31.5%, or an absolute increase of 15.6% of total revenue, compared to 27.8% of total revenue for the corresponding period in fiscal year 2001. The increases in the sales to Europe and Asia Pacific in the nine month period ended September 28, 2002 were primarily due to the acquisition of the Quantum HDD business and increased sales to non-branded customers who are primarily located outside of the United States and Canada.

Gross profit decreased to $57.5 million in the three months ended September 28, 2002, compared to $79.6 million for the corresponding period in fiscal year 2001. As a percentage of revenue, gross profit decreased to 7.0% in the three months ended September 28, 2002 from 7.7% in the corresponding period of fiscal year 2001. Gross profit decreased to $230.7 million in the nine months ended September 28, 2002, compared to $243.2 million for the corresponding period in fiscal year 2001. The decrease in gross profit for the three month period was primarily due to lower sales, difficulties in optimizing drive yield and sales of a higher proportion of lower-priced single platter products than in the third quarter of 2001. The decline in gross profit for the nine month period was also primarily due to the result of product mix, as well as a more competitive pricing environment. As a percentage of revenue, gross profit decreased to 8.4% in the nine months ended September 28, 2002 from 9.0% in the corresponding period of fiscal year 2001. The decrease in gross profit as a percentage of revenues for the three months ended September 28, 2002 compared to the corresponding period in 2001 was primarily due to lower sales as a result of difficulties in optimizing drive yield. The decrease in gross profit as a percentage of revenues for the nine months ended September 28, 2002 compared to the corresponding period in 2001, was primarily due to the result of product mix, competitive pricing pressures, as well as the negative impact on gross profit from the transition of the manufacturing of desktop hard drive products from MKE to the Maxtor Singapore manufacturing facility.

R&D expense in the three and nine months ended September 28, 2002 was $94.1 million, or 11.5% of revenue and $301.2 million or 11.0% of revenue, respectively, compared to $118.6 million, or 11.5% of revenue, and $304.6 million or 11.3% of revenue, respectively, in the corresponding period in fiscal year 2001. The decrease in the absolute dollar amount of research and development expense in the three months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to compensation expenses resulting from reduced headcount and reduced spending on parts and equipment. The decrease in the nine months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to merger-related costs, such as amortization of stock-based compensation, associated with our acquisition of the Quantum HDD business incurred during the corresponding period in 2001 and lower compensation expenses resulting from reduced headcount in 2002. This decrease was offset by the inclusion of Quantum HDD and MMC expenses and our on-going effort to maintain leadership products to address the requirements of the PC desktop.

As a result our acquisition of the Quantum HDD business, R&D expense includes stock-based compensation charges of $0.4 million and $1.4 million in the three and nine months ended September 28, 2002, respectively, and $1.3 million and $2.5 million in the three and nine months ended September 29, 2001, respectively, resulting from options we issued to Quantum employees who joined Maxtor in connection with the acquisition on April 2, 2001. R&D expense in the three and nine months ended September 28, 2002 includes $0 and $2.8 million of stock-based compensation amortization for Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the acquisition. R&D expense in the three and nine months ended September 29, 2001 includes $3.0 million and $22.7 million of stock-based compensation amortization related to Quantum DSS restricted shares issued to Quantum employees who

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

SG&A expense in the three and nine months ended September 28, 2002 was $34.8 million, or 4.2% of revenue and $111.4 million, or 4.1% of revenue, respectively, compared to $48.0 million, or 4.6% of revenue, and $174.5 million or 6.5% of revenue, respectively, in the corresponding period in fiscal year 2001. SG&A expense decreased in absolute dollars and as a percentage of revenue in the three and nine months ended September 28, 2002 compared to the corresponding periods in fiscal year 2001 primarily due to reduced compensation expenses and payments associated with the Quantum HDD business incurred subsequent to the acquisition.

As a result of our acquisition of the Quantum HDD business, SG&A expense includes stock-based compensation charges of $0.1 million and $0.5 million in the three and nine months ended September 28, 2002, respectively, and $0.5 million and $0.9 in the three and nine months ended September 29, 2001, respectively, resulting from options we issued to Quantum employees who joined Maxtor in connection with the acquisition on April 2, 2001. SG&A expense in the three and nine months ended September 28, 2002 includes $0 and $1.0 million of stock-based compensation amortization for Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the acquisition. SG&A expense in the three and nine months ended September 29, 2001 includes $1.1 million and $8.1 million of stock-based compensation amortization related to the Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the acquisition. The following table summarizes the effect of these acquisition-related charges:

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

During September 2001, the Company expensed IPR&D costs of $0.4 million as a result of the acquisition of MMC. As a result of the business combination transaction with Quantum HDD in April 2001, the Company expensed IPR&D costs of $94.7 million. These amounts were expensed because the acquired technology had not yet reached technological feasibility and had no future alternative uses. For additional information regarding the MMC and Quantum HDD acquisitions and the costs associated with purchased in-process research and development, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

During the three month period ended September 28, 2002, we recorded a restructuring charge of $9.5 million associated with closure of one of our facilities located in California. The amount comprised $8.9 million of future non-cancelable lease payments which are expected to be paid over several years based on the underlying lease agreement, and the write-off of $0.6 million in leasehold improvements.

On April 2, 2001, as part of our acquisition of the Quantum HDD business, we assumed the following options and restricted stock:


	•	All Quantum HDD options and Quantum HDD restricted stock held by employees who accepted offers of employment with Maxtor, or “transferred employees,” whether or not options or restricted stock have vested;

	•	Vested Quantum HDD options and vested Quantum HDD restricted stock held by Quantum employees whose employment is terminated prior to the separation, or “former service providers”; and

	•	Vested Quantum HDD restricted stock held by any other individual.

In addition, Maxtor assumed vested Quantum HDD options held by Quantum employees who continued to provide services during a transitional period, or “transitional employees.” The outstanding options to purchase Quantum HDD common stock held by transferred employees and vested options to purchase Quantum HDD common stock held by former Quantum employees, consultants and transition employees were assumed by Maxtor and converted into options to purchase Maxtor common stock according to the exchange ratio of 1.52 shares of Maxtor common stock for each share of Quantum HDD common stock. Vested and unvested options for Quantum HDD common stock assumed in the acquisition represented options for 7,650,965 shares and 4,655,236 shares of Maxtor common stock, respectively.

Included in R&D expenses and SG&A expenses are charges for amortization of stock-based compensation resulting from both Maxtor options and options issued by Quantum to employees who joined Maxtor in connection with the acquisition on April 2, 2001. Stock compensation charges were as follows:

As of September 28, 2002, $1.8 million of stock-based compensation associated with our acquisition of the Quantum HDD business remains to be amortized, based on vesting schedules, and this amortization is expected to be completed early in fiscal year 2004.

In addition, Quantum Corporation issued restricted DSS shares to Quantum employees who joined Maxtor in connection with the acquisition in exchange for the fair value of DSS options held by such employees. A portion of the acquisition purchase price has been allocated to this deferred stock-based compensation, recorded as prepaid expense, and is amortized to expenses over the vesting period as the vesting

Amortization of other intangible assets represents the amortization of customer list and other current products and technology, arising from our acquisitions of the Quantum HDD business in April 2001 and MMC in September 2001. The net book value of these intangibles at September 28, 2002 was $167.5 million. Amortization of other intangible assets was $20.6 million and $61.7 million, in the three and nine months ended September 28, 2002, respectively, compared to $60.8 million and $120.2 million in the corresponding period in fiscal year 2001. The decrease was due to the cessation of the amortization of goodwill and workforce in 2002, as a consequence of adopting Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The three and nine months ended September 29, 2001 reflects $37.5 million and $76.7 million of goodwill amortization, respectively.

On December 30, 2001, the Company adopted SFAS 142, which requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. In compliance with SFAS No. 142:


	•	We reclassified $31.1 million, net of accumulated amortization, in workforce assets to goodwill and we ceased amortizing the resulting net goodwill balance of $846.0 million. Accordingly, there are no charges for the amortization of goodwill in 2002 or thereafter.

	•	SFAS No. 142 prescribes a two-phase transitional process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment as of January 1, 2002. The second phase (if necessary), required to be completed by December 31, 2002, measures the impairment. The Company completed its first phase impairment analysis during the second quarter of 2002 and found no instances of impairment of its recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.

	•	The net book value of goodwill will be reviewed for impairment annually and whenever there is indication that the value of the goodwill may be impaired. Any resulting impairment will be recorded in the income statement in the period it is identified and quantified.

Amortization of other intangible assets is computed over the estimated useful lives of the respective assets, generally one to seven years. The Company expects amortization expense on intangible assets to be $20.6 million for the remainder of fiscal 2002, $82.2 million in fiscal 2003, $37.0 million in fiscal 2004, $21.9 million in fiscal 2005, and $5.8 million in fiscal 2006, at which time the intangible assets will be fully amortized.

Interest expense increased $0.9 million and $5.5 million for the three and nine months ended September 28, 2002, respectively, as compared to the corresponding periods in fiscal year 2001. The increase in interest expense for the three months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the debt assumed in conjunction with the acquisition of MMC on capital equipment loan and leases. The increase in interest expense for the nine months ended September 28, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the debt assumed in conjunction with the acquisition of MMC on capital equipment loan and leases, the obligation to reimburse for the interest due on the Quantum HDD pro rata portion of Quantum’s convertible subordinated notes, and the monthly accretion of interest expense related to facility exit costs in connection with our acquisition of the Quantum HDD business. Total short-term and long-term outstanding borrowings were $251.4 million as of September 28, 2002 compared to $299.5 million as of September 29, 2001.

Interest and other income increased $0.1 and decreased $12.3 million for the three and nine-month periods ended September 28, 2002, respectively, compared to the corresponding periods in fiscal year 2001. The decrease in interest and other income for the nine months of fiscal 2002 compared to the corresponding period in 2001 was largely due to reductions in cash equivalents and marketable securities. Total cash and cash equivalents, restricted cash and marketable securities were $410.5 million as of September 28, 2002 compared to $645.1 million as of September 29, 2001. See the “Liquidity and Capital Resources” discussion for further information.

The provision for income taxes consists primarily of state and foreign taxes. Due to our net operating losses (“NOL”), NOL carryforwards and favorable tax status in Singapore and Switzerland, we have not incurred any significant foreign, U.S. federal, state or local income taxes for the current or prior fiscal periods. We have not recorded a tax benefit associated with our loss carry-forward because of the uncertainty of realization.

We were part of the HEA consolidated group for federal income tax returns for periods from early 1996 to August 1998 (the “Affiliation Period”). As a member of the HEA consolidated group, the Company was subject to a tax allocation agreement. During the Affiliation Period, for financial reporting purposes, our tax loss was computed on a separate tax return basis and, as such, we did not record any tax benefit in its financial statements for the amount of the net operating loss included in the HEA consolidated income tax return.

We ceased to be a member of the HEA consolidated group as of August 1998. We remain liable for our share of the total consolidated or combined tax return liability of the HEA consolidated group prior to August 1998. We have agreed to indemnify or reimburse HEA if there is any increase in our share of the HEA consolidated or combined tax return liability resulting from revisions to our taxable income.

Pursuant to a “Tax Sharing and Indemnity Agreement” entered into in connection with our acquisition of the Quantum HDD business, Maxtor, as successor to Quantum HDD, and Quantum are allocated their share of Quantum’s income tax liability for periods before the split-off, consistent with past practices and as if the Quantum HDD and Quantum DSS business divisions had been separate and independent corporations. To

the extent that the income tax liability attributable to one business division is reduced by using NOLs and other tax attributes of the other business division, the business division utilizing the attributes must pay the other for the use of those attributes. We must also indemnify Quantum for additional taxes related to the Quantum DSS business for all periods before Quantum’s issuance of tracking stock and additional taxes related to the Quantum HDD business for all periods before the split-off, limited in the aggregate to $142.0 million plus 50% of any excess over $142.0 million, excluding any required gross-up payment. The Company recorded approximately $142.0 million in other liabilities associated with Maxtor’s agreement to reimburse Quantum Corporation for income tax liabilities for certain years prior to the acquisition of the Quantum HDD business by Maxtor.

We purchased a $340.0 million insurance policy covering the risk that the split-off of the Quantum HDD business from Quantum DSS could be determined to be subject to federal income tax or state income or franchise tax. Under the “Tax Sharing and Indemnity Agreement,” the Company agreed to indemnify Quantum for the amount of any tax payable by Quantum as a result of the split-off to the extent such tax is not covered by such insurance policy, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the split-off. The amount of the tax not covered by insurance could be substantial. In addition, if it is determined that Quantum owes federal or state tax as a result of the split-off and the circumstances giving rise to the tax are covered by our indemnification obligations, the Company will be required to pay Quantum the amount of the tax at that time, whether or not reimbursement may be allowed under our tax insurance policy.

We recorded approximately $196.4 million of deferred tax liabilities in connection with the acquisition of the Quantum HDD business in April 2001. The deferred taxes were recorded principally to reflect the taxes which would become payable upon the repatriation of the earnings which was invested abroad by Quantum HDD as of April 1, 2001.

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

Operating results of the NSG discontinued operations for the three and nine months ended September 28, 2002 and September 29, 2001 are as follows (in millions):

Included in the 2002 loss from the NSG discontinued operations are the following significant charges (in millions):

Cash, cash equivalents, marketable securities and restricted cash were $410.5 million at September 28, 2002 compared to $645.8 million at December 29, 2001. Our restricted cash balance at September 28, 2002 and December 29, 2001 was $56.5 million and $98.6 million, respectively, which is pledged as collateral for certain stand-by letters of credit issued by commercial banks. The reduction of cash security required for a letter of credit during the third quarter accounted for the decrease in restricted cash of $42.2 million from the previous quarter. We have a net deferred tax liability of $196.4 million, which could become payable upon repatriation of the earnings invested abroad.

Operating activities used cash of $68.8 million in the nine months ended September 28, 2002. Uses of cash from operating activities reflect our net loss of $264.2 million, excluding discontinued operations. This was offset by adjustments for depreciation of $112.9 million, amortization of intangible assets of $61.7 million, restructuring charge of $9.5 million related to the closure of one of our facilities and $7.5 million of other non-cash adjustments.

Sources of cash from operating activities in the nine months ended September 28, 2002 include a $67.2 million decrease in accounts receivable due to the decline in sales activity and a $71.2 million increase in accounts payable primarily due to a shift to vendors with longer payment terms and $4.0 million decrease in other assets. This was offset by a $116.0 million decrease in accrued and other liabilities primarily due to the satisfaction of warranty-related obligations of $61.2 million, change in the balance of accrued expenses of $23.9 million primarily due to acquisition-related facilities expenses, $15.7 million primarily due to acquisition-related severance expenses, $9.5 million due to the closure of one of our facilities and $5.7 million in income taxes payable and other adjustments. In addition, sources of cash from operating activities was offset by $22.6 million increase in inventory and other current assets due to increased factory volumes as a result of the transition to our Singapore manufacturing facility and difficulties encountered in ramping up production of new products. We have made good progress in resolving our manufacturing issues related to our new products.

Net cash provided by investing activities was $19.0 million in the nine months ended September 28, 2002. Investing activities primarily reflects $95.4 million in net proceeds from marketable securities (net of purchases) and a decrease in restricted cash of $42.2 million due to the reduction of cash security required for a letter of credit during the third quarter offset by investments made in property, plant and equipment of $118.7 million.

Net cash used in financing activities was $20.1 million for the nine months ended September 28, 2002. This was primarily attributable to the repayment of debt and capital lease obligations, including the payment in full of the principal balance owed to Hynix in April 2002 and the repayments of capital lease obligations described under “— Related Party Transactions,” and purchase of publicly traded debt in the aggregate amount of $42.4 million, offset by proceeds from employee stock purchases and stock options exercised of $22.9 million.

Net cash used in discontinued operations was $27.6 million for the nine months ended September 28, 2002, compared to $33.6 million for the nine months ended September 29, 2001.

We believe that our existing cash and cash equivalents, short term investment and capital resources, together with cash generated from operations and available borrowing capacity will be sufficient to fund our operations through at least the next twelve months. We require substantial working capital to fund our business, particularly to finance accounts receivable and inventory, and to invest in property, plant and equipment. During 2002, capital expenditures are expected to be in the range of $160 million to $180 million, primarily used for manufacturing upgrades and expansion, product development, and updating our information technology systems. We intend to seek financing arrangements to fund our future capacity expansion and working capital, as necessary. However, our ability to generate cash will depend on, among other things, demand in the hard disk drive market and pricing conditions. If we need additional capital, there can be no assurance that such additional financing can be obtained, or that it will be available on satisfactory terms. See discussion below under the heading “Certain Factors Affecting Future Performance.”

Future payments due under debt and capital lease obligations as of September 28, 2002 are reflected in the following table (in thousands):


(1)	For the remainder of fiscal year 2002 through fiscal year 2012, we will make interest payments of $26.6 million.

(2)	For the remainder of fiscal year 2002 through fiscal year 2004, we will make interest payments of $0.3 million.

(3)	For the remainder of fiscal year 2002 through fiscal years 2003 and 2004, we will make interest payments of $12.3 million.

(4)	For the remainder of fiscal year 2002 through fiscal year 2006, we will make interest payments of $12.3 million.

(5)	For the remainder of fiscal year 2002 through fiscal years 2003 and 2004, we will make interest payments of $4.5 million.

The Company did not enter into any significant operating lease obligations related to principal facilities or machinery and equipment during the three and nine month periods ended September 28, 2002. For additional information regarding the Company’s operating lease obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001.

In July 1998, we entered into an accounts receivable securitization program (the “Program”) with a group of commercial banks (the “Banks”). On November 15, 2001, we amended and restated the Program, extending the Program for another three years and increasing the available size of the Program from $200 million to $300 million. Under the Program, we sell our U.S. and Canadian accounts receivable via a special purpose entity, Maxtor Receivables Corporation (“MRC”). MRC, our wholly-owned subsidiary, sells the Banks an ownership interest in our accounts receivable on a revolving basis, in an amount determined by an “eligible” pool of receivables. The Banks’ purchases of interests in our accounts receivable results in the amount of the purchases being excluded from our consolidated accounts receivable, and the proceeds of the sale being included in our consolidated cash balance. The Banks had purchased a $45.0 million interest in our accounts receivable under this Program at September 28, 2002.

We are subject to certain defined “Liquidation Events” under this Program, including a minimum tangible net worth test and a requirement to maintain a specified minimum unrestricted cash balance. Our Singapore Loan is subject to two financial covenants, including a minimum tangible net worth test, the calculation of which is the same as defined in the Program, and a minimum consolidated cash balance requirement. As of December 29, 2001, we concluded that we would not be in compliance with our tangible

net worth covenant under the Program and under the Singapore loan. We were, however, in compliance with the minimum cash balance requirements under the Program and the Singapore loan.

On February 15, 2002, we received a waiver and amendment from the lender for the Singapore loan relating to the tangible net worth covenant. On the same date, the Banks participating in the Program agreed to a first amendment through May 15, 2002 to the Program. In each case, the definition for calculating tangible net worth was amended to include an adjustment associated with the purchase price accounting for the acquisition of the Quantum HDD business. After giving effect to this first amendment, we were in compliance with the tangible net worth covenant.

On March 15, 2002, the first amendment was superceded by a second amendment reflecting the terms of the first amendment and extending the terms of the first amendment for the duration of the Program. At this time the Program was reduced from $300 million to $210 million due to the withdrawal of one participating bank. In 2002, the Banks’ monthly purchases of interests in our receivables under the Program has fluctuated between $35.5 million and $90.7 million and averaged $55.8 million during the nine months ended September 28, 2002.

On May 28, 2002, the banks participating in the Program approved a third amendment, which modified the tangible net worth covenant and the minimum unrestricted cash requirement. On June 20, 2002, our Singapore loan was amended to the same effect. After giving effect to the third amendment and the amendment of the Singapore loan, the Company was in compliance with all covenants.

As of September 28, 2002, we concluded that we would not be in compliance with the tangible net worth covenant under the Program and the Singapore loan. On October 22, 2002, we received a waiver of the default as to the tangible net worth covenant for the quarter ended September 28, 2002 from the lender of the Singapore loan. After giving effect to this waiver, we were in compliance with the tangible net worth covenant under the Singapore loan. On October 21, 2002, the Banks participating in the Program agreed to waive a violation of the tangible net worth covenant for the period ended September 30, 2002 on condition that we are able to comply with a lower tangible net worth covenant. After giving effect to the waiver, we were in compliance under the Program. Pursuant to the fourth amendment on November 5, 2002, we and the Banks agreed to reduce the Program size from $210 million to $100 million, cap the purchase limit at $45 million and extend the liquidity agreement to December 13, 2002, in anticipation of a new program to be in place by December 13, 2002. We do not expect the reduction in the size of the Program will have a material adverse impact on our liquidity.

We are in discussions with lenders regarding a possible replacement facility for the Program of up to $100 million; however, we do not have a commitment letter for such replacement facility at this time. We believe that if we receive a commitment for such a replacement facility, the Banks will extend the Program as amended for a reasonable period beyond December 13, 2002 to permit us to negotiate a definitive agreement for such facility. If, however, we do not receive a commitment on terms acceptable to us, or at all, or the Banks decline to extend the program beyond December 13, 2002, there could be a liquidation event under the Program in the quarter ending December 29, 2002, and we will not have access to the Program beyond that date.

If a liquidation event or termination of the Program were to occur, the Banks would be entitled to all cash collections on our accounts receivables in the United States until their net investment had been recovered. We do not expect that such an event by itself would have a significant adverse impact on our liquidity, given the fact that we believe the Banks’ net investment would be satisfied shortly following such liquidation event or termination, based on our historical collection rate of receivables. However, we would no longer have access to the Program following such liquidation event or termination. We do not expect that the unavailability of the Program would have a material adverse effect on our liquidity.

We may not satisfy the minimum tangible net worth covenant under the Singapore loan at the end of the quarter ending December 29, 2002. There can be no assurance that the Singapore lender will agree to any amendments or provide a waiver for any such covenant violation. In the event that a default occurs in a financial covenant under our Singapore loan, and we do not receive a waiver, we may be required to repay the

Our failure to meet the tangible net worth covenant under the Program and the Singapore loan may adversely impact our ability in the future to borrow funds on as favorable terms, or at all.

In 1994, Hyundai Electronics Industries “HEI” and certain of its affiliates had purchased 40% of our outstanding common stock for $150.0 million in cash. In early 1996, Hynix, formerly Hyundai Electronics America, or HEA, acquired all of the remaining shares of our common stock in a tender offer and merger for $215.0 million in cash and also acquired all of our common stock held by HEI and its affiliates. We operated as a wholly-owned subsidiary of Hynix until completion of our initial public offering on July 31, 1998, which reduced the ownership interest of Hynix to below 50%. In April 2001 as a result of our acquisition of the Quantum HDD business, Hynix’s ownership in Maxtor was reduced to approximately 17% of the outstanding common stock. As described below, Hynix sold Maxtor shares to the public and to us in October 2001, reducing Hynix’s ownership to 5.17% at December 29, 2001 and distributed the balance of Maxtor shares to the beneficiaries of the DECS Trust in February 2002, and accordingly is no longer an investor in Maxtor.

On September 2, 2001, we completed our acquisition of MMC which had previously been a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor constituted 95% of MMC’s annual revenues. The primary business reason for our acquisition of MMC was to provide us with a reliable source of supply of media for hard disk drives. A fairness opinion was delivered to Maxtor’s Board of Directors by a nationally recognized investment banking firm in connection with the MMC acquisition. The fairness opinion concluded that the consideration to be paid by Maxtor for MMC was fair to Maxtor, from a financial point of view. The acquisition of MMC was approved by the Maxtor Board’s Affiliated Transactions Committee and was determined by the Committee to be fair to and in the best interests of Maxtor and its stockholders. The Affiliated Transactions Committee was comprised entirely of directors with no relationship with Hynix and its affiliates. The acquisition was accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1 million, $16 million of loan forgiveness, and $0.9 million of direct transaction costs. In connection with the acquisition, we also assumed liabilities of $105.7 million. As part of these liabilities, we assumed a note for $7.3 million owing to Hynix, which bore no interest through March 31, 2002; thereafter, unpaid principal amounts bore interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount, representing Hynix’s share of a settlement relating to litigation between Maxtor, Hynix and Stormedia. This note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29, 2001; the outstanding balance under the Maxtor Note was fully paid on April 5, 2002. As a result of the MMC acquisition, MMC’s results of operations are included in our financial statements from the date of acquisition.

In October 2001, Hynix sold approximately 23.3 million shares of Maxtor common stock in a registered public offering. At the same time as Hynix’s sale of Maxtor common stock to the public, we purchased an additional 5.0 million shares of its common stock from Hynix. Our purchase of our shares from Hynix was on the same terms as Hynix’s sale of shares to the public at $4 per share for an aggregate purchase price of $20.0 million. The repurchase of our shares was intended to improve our capital structure, increase shareholder returns, and increase the price of our stock. The repurchase of the shares from Hynix was approved by the Maxtor Board’s Affiliated Transaction Committee and determined to be in the best interest of Maxtor and its stockholders. As a result of Hynix’s sale of its Maxtor shares to the public and to Maxtor, Hynix’s ownership in Maxtor was reduced to 5.17% of the outstanding common stock as of December 29, 2001. In February 2002, Hynix distributed all of its remaining shares of Maxtor common stock to the beneficiaries of the DECS trust and thus is no longer a stockholder of Maxtor.

In connection with the acquisition of MMC, we assumed equipment loans and capital leases. As of June 29, 2002, there was $47.6 million outstanding under these obligations, which have maturity dates ranging from December 2001 to October 2004 and interest rates averaging 9.9%. Hynix is continued as a guarantor on these leases. As a result of the MMC acquisition, MMC’s results of operations are included in our financial statements from the date of acquisition.

Our cost of revenue includes certain component parts Maxtor purchased from MMC. These purchases amounted to $27 million and $99 million for the two and eight months ended September 1, 2001, respectively. In August 1998, Maxtor entered into an agreement with MMC with respect to the pricing of future purchases that provided for pricing discounts in return for a purchase volume commitment based on a percentage of our total media purchases through September 30, 2001. The pricing discounts generally ranged from 2% to 4% off of competitive prices. As described above, Maxtor completed its acquisition of MMC on September 2, 2001.

Our cost of revenue also includes certain DRAM chip purchases from Hynix Semiconductor, Inc., “HSI,” formerly HEI. Hynix is treated identically to its competitors in the process by which commodity electronics, principally DRAMs, are selected, qualified, and purchased; pricing is negotiated with selected suppliers on the basis of suppliers’ bids and market information. Our purchases from HSI totaled $26.5 million in fiscal year 1999, $41.6 million in fiscal year 2000 and $19.3 million in fiscal year 2001.

Pursuant to a sublicense agreement with HEI, we are obligated to pay a portion of an IBM license royalty fee otherwise due from HEI. Such payments are due in annual installments through 2007, and are based upon the license fee separately negotiated on an arms’ length basis between HEI and IBM. For the years ended January 1, 2000, December 30, 2000 and December 29, 2001, we recorded $1.9 million of expenses each year in connection with this obligation.

Hynix was an unconditional guarantor of one of our facilities leases in Milpitas, California. The aggregate rent under the lease was $3.24 million per annum in each of the years ended January 1, 2000, December 30, 2000 and December 29, 2001. The lease rate was established by arms’ length negotiations with the lessor based on applicable market rates. The lease expired on March 31, 2002 and was not extended.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-lived Assets.” SFAS 144 replaces SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The FASB issued SFAS 144 to establish a single accounting model, based on the framework established in SFAS 121, as SFAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, “Reporting The Results of Operations-Reporting The Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 also resolves significant implementation issues related to SFAS 121. Companies are required to adopt SFAS 144 for fiscal year beginning after December 15, 2001, but early adoption is permitted. The adoption of SFAS 144 did not have a significant impact on Maxtor’s financial statements.

On December 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible

Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally one to seven years. The Company expects amortization expense on purchased intangible assets to be $20.6 million for the fourth quarter of fiscal 2002, $82.2 million in fiscal 2003, $37.0 million in fiscal 2004, $21.9 million in fiscal 2005, and $5.8 million in fiscal 2006, at which time purchased intangible assets will be fully amortized.

In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections” (“SFAS 145”). Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company is currently assessing the impact of SFAS 145 on its financial statements.

We have a history of significant losses and may not achieve profitability. In the last five fiscal years, we were profitable in only fiscal years 1998 and 2000 and Quantum HDD was profitable only in fiscal year 1997. In the three and nine month periods ended September 28, 2002, our net loss was $163.6 million, and $337.7 million, respectively, which included $20.6 million and $61.7 million, respectively, for the amortization of intangible assets, charges of $0.6 million and $6.1 million, respectively, for stock-based compensation related to the Quantum HDD acquisition, and restructuring charges related to facilities closures of $9.5 million and $9.5 million, respectively. In addition, the net loss in the three and nine months ended September 28, 2002 included losses of $58.1 million and $73.5 million, respectively, related to the discontinuation of our network attached storage business in the quarter ended September 28, 2002.

The decline of average selling prices in the hard disk drive industry could cause our operating results to suffer and make it difficult for us to achieve profitability.

It is very difficult to achieve and maintain profitability and revenue growth in the hard disk drive industry because the average selling price of a hard disk drive rapidly declines over its commercial life as a result of technological enhancement, productivity improvement and increase in the industry supply. End-user demand for the computer systems that contain our hard disk drives has historically been subject to rapid and unpredictable fluctuations. In addition, intense price competition among personal computer manufacturers and Intel-based server manufacturers may cause the price of hard disk drives to decline. As a result, the hard disk drive market tends to experience periods of excess capacity and intense price competition. Competitors’ attempts to liquidate excess inventories, restructure, or gain market share also tend to cause average selling prices to decline. This excess capacity and intense price competition has caused us in the past several quarters and will likely continue to cause us in future quarters to lower prices, which has the effect of reducing margins, causing operating results to suffer and making it difficult for us to achieve or maintain profitability. If we are unable to lower the cost of our hard disk drives to be consistent with the decline of average selling prices, we will not be able to compete effectively and our operating results will suffer.

Intense competition in the hard disk drive segment could reduce the demand for our products or the prices of our products, which could adversely affect our operating results.

The desktop computer market segment and the overall hard disk drive market are intensely competitive even during periods when demand is stable. We compete primarily with manufacturers of 3.5 inch hard disk drives, including Fujitsu, Hitachi, IBM, Samsung, Seagate Technology, and Western Digital. Hitachi and IBM have recently announced a plan to merge their hard disk drive businesses into a single joint venture. Many of our competitors historically have had a number of significant advantages, including larger market shares, a broader array of product lines, preferred vendor status with customers, extensive name recognition and marketing power, and significantly greater financial, technical and manufacturing resources. Some of our competitors make many of their own components, which may provide them with benefits including lower costs. Our competitors may also:


	•	consolidate or establish strategic relationships among themselves to lower their product costs or to otherwise compete more effectively against us;

	•	lower their product prices to gain market share;

	•	bundle their products with other products to increase demand for their products; or

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

In addition some of our competitors produce complete computer systems that contain hard disk drives; these competitors may price a system in a manner which results in sales of hard disk drives at below cost, or enter into agreements with customers to supply hard disk drive requirements as part of a larger supply agreement.

Increasing competition could reduce the demand for our products and/or the prices of our products by introducing technologically better and cheaper products, which could reduce our revenues. In addition, new competitors could emerge and rapidly capture market share. If we fail to compete successfully against current or future competitors, our business, financial condition and operating results will suffer.

Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate in the future.

Our quarterly operating results have fluctuated significantly in the past and may fluctuate significantly in the future. Our future performance will depend on many factors, including:


	•	the average selling price of our products;

	•	fluctuations in the demand for our products as a result of the seasonal nature of the desktop computer industry and the markets for our customers’ products, as well as the overall economic environment;

	•	market acceptance of our products;

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

	•	changes in purchases from period-to-period by our primary customers, including actions by our customers canceling, rescheduling or deferring orders;

	•	changes in product and customer mix;

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

	•	our ability to execute future development and production ramps and utilize manufacturing assets efficiently;

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

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

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

Many of our expenses are relatively fixed and difficult to reduce or modify. As a result, the fixed nature of our operating expenses will magnify any adverse effect of a decrease in revenue on our operating results. Because of these and other factors, period to period comparisons of our historical results of operations are not a good predictor of our future performance. If our future operating results are below the expectations of stock market analysts, our stock price may decline. Due to current economic conditions and their impact on IT spending, particularly personal computer sales, our ability to predict demand for our products and our financial results for current and future periods may be severely diminished. This may adversely affect both our ability to adjust production volumes and expenses and our ability to provide the financial markets with forward-looking information.

If we fail to qualify as a supplier to computer manufacturers or their subcontractors for a future generation of hard disk drives, then these manufacturers or subcontractors may not purchase any units of an entire product line, which will have a significant impact on our sales.

Most of our products are sold to desktop computer and Intel-based server manufacturers or to their subcontractors. These manufacturers select or qualify their hard disk drive suppliers, either directly or through their subcontractors, based on quality, storage capacity, performance and price. Manufacturers typically seek to qualify two or more suppliers for each hard disk drive product generation. To qualify consistently, and thus succeed in the desktop and Intel-based server hard disk drive industry, we must consistently be among the first-to-market introduction and first-to-volume production at leading storage capacity per disk, offering competitive prices and high quality. Once a manufacturer or subcontractor has chosen its hard disk drive suppliers for a given desktop computer or Intel-based server product, it often will purchase hard disk drives from those suppliers for the commercial lifetime of that product line. If we miss a qualification opportunity, we

may not have another opportunity to do business with that manufacturer or subcontractor until it introduces its next generation of products. The effect of missing a product qualification opportunity is magnified by the limited number of high-volume manufacturers of personal computers and Intel-based servers. If we do not reach the market or deliver volume production in a timely manner, we may lose opportunities to qualify our products and may need to deliver lower margin, older products or products with higher capacity than required in order to meet our customers’ demands. In such case, our business, financial condition and operating results would be adversely affected.

Because we are substantially dependent on desktop computer drive sales, a decrease in the demand for desktop computers could reduce demand for our products.

Our revenue growth and profitability depend significantly on the overall demand for desktop computers and related products and services. In recent quarters, demand for desktop computers has been adversely affected by unfavorable economic conditions. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may experience a further decrease in demand for desktop computers. Because we sell a significant portion of our products to the desktop segment of the personal computer industry, we will be affected more by changes in market conditions for desktop computers than a company with a broader range of products. Any decrease in the demand for desktop computers could reduce the demand for our products, harming our business, financial condition and operating results.

The loss of one or more significant customers or a decrease in their orders of products would cause our revenues to decline.

We sell most of our products to a limited number of customers. For the fiscal year ended December 29, 2001, one customer, Dell Computer Corporation, accounted for approximately 11.3% of our total revenue, and our top five customers accounted for approximately 33.8% of our revenue. We expect that a relatively small number of customers will continue to account for a significant portion of our revenue, and the proportion of our revenue from these customers could continue to increase in the future. These customers have a wide variety of suppliers to choose from and therefore can make substantial demands on us. Even if we successfully qualify a product for a given customer, the customer generally will not be obligated to purchase any minimum volume of products from us and generally will be able to terminate its relationship with us at any time. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a key customer or if any of our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce costs, our business, financial condition and operating results could suffer.

Mergers, acquisitions, consolidations or other significant transactions involving our significant customers may adversely affect our business and operating results. For example, Hewlett-Packard and Compaq, both of which have been key customers, recently merged. As a combined entity, Hewlett-Packard and Compaq may not purchase as many hard disk drives from us in the future as they purchased in the aggregate prior to their merger. In addition, another of our significant customers, IBM, recently announced that it has agreed to merge its hard disk drive business with the hard disk drive business of Hitachi through the formation of a new entity with which IBM has entered into a multi-year purchase agreement. As a result, IBM may decrease its purchases from us in favor of the newly-formed entity.

If we fail to develop and maintain relationships with our key distributors, if we experience problems associated with distribution channels, or if our key distributors favor our competitors’ products over ours, our operating results could suffer.

We sell a significant amount of our hard disk drive products through a limited number of key distributors. If we fail to develop, cultivate and maintain relationships with our key distributors, or if these distributors are not successful in their sales efforts, sales of our products may decrease and our operating results could suffer. As our sales through distribution channels continue to increase, we may experience problems typically associated with distribution channels such as unstable pricing, increased return rates and other logistical

difficulties. Our distributors also sell products manufactured by our competitors. If our distributors favor our competitors’ products over our products for any reason, they may fail to market our products effectively or continue to devote the resources necessary to provide us with effective sales and, as a result, our operating results could suffer.

If we do not expand into new hard drive market segments, or continue to maintain our presence in the hard drive market, our revenues will suffer.

To remain a significant supplier of hard disk drives to major manufacturers of personal computers and Intel-based servers, we will need to offer a broad range of hard disk drive products to our customers. Although almost all of our current products are designed for the desktop computer and the Intel-based server markets, demand in these segments may shift to products we do not offer or volume demand may shift to other segments. Such segments may include laptop computers or handheld consumer products which none of our products currently serves. Products using alternative technologies, such as optical storage, semiconductor memory and other storage technologies, may also compete with our hard disk drive products. While we continually develop new products, the success of our new product introductions is dependent on a number of factors, including market acceptance, our ability to manage the risks associated with product transitions, the effective management of inventory levels in line with anticipated product demand, and the risk that our new products will have quality problems or other defects in the early stages of introduction that were not anticipated in the design of those products. We will need to successfully develop and manufacture new products that address additional hard disk drive market segments or competitor’s technology or feature development to remain competitive in the hard disk drive industry. We cannot assure you that we will successfully or timely develop or market any new hard disk drives in response to technological changes or evolving industry standards. We also cannot assure you that we will avoid technical or other difficulties that could delay or prevent the successful development, introduction or marketing of new hard disk drives. Any failure to successfully develop and introduce new products for our existing customers or to address additional market segments could result in loss of customer business or require us to deliver product not targeted effectively to customer requirements, which in turn could adversely affect our business, financial condition and operating results.

Our customers have adopted a subcontractor model that increases our credit risk and could result in an increase in our operating costs.

Our significant OEM customers have adopted a subcontractor model that requires us to contract directly with companies that provide manufacturing services for the personal computer manufacturers. This exposes us to increased credit risk because these subcontractors are generally less capitalized than the personal computer manufacturers themselves, and our agreements with our customers may not permit us to increase our prices to compensate for this increased credit risk. Any credit losses would increase our operating costs, which could cause our operating results to suffer.

If we fail to match production with product demand or to manage inventory, we may incur additional costs.

We base our inventory purchases and commitments on forecasts from our customers, who are not obligated to purchase the forecast amounts. If actual orders do not match our forecasts, or if any products become obsolete between order and delivery time, we may have excess or inadequate inventory of our products. In addition, our significant OEM customers have adopted build-to-order manufacturing models or just-in-time inventory management processes that require component suppliers to maintain inventory at or near the customer’s production facility. These policies, combined with continued compression of product life cycles, have complicated inventory management strategies that make it more difficult to match manufacturing plans with projected customer demand and cause us to carry inventory for more time and to incur additional costs to manage inventory which could cause our operating results to suffer. If we fail to manage inventory of older products as we or our competitors introduce new products with higher aerial density, we may have excess

Because we purchase a significant portion of our parts from a limited number of third party suppliers, we are subject to the risk that we may be unable to acquire quality components in a timely manner, or effectively integrate parts from different suppliers, and these component shortages or integration problems could result in delays of product shipments and damage our business and operating results.

Unlike some of our competitors, we do not manufacture any of the parts used in our products, other than media as a result of our acquisition of MMC. Instead, our products incorporate parts and components designed by and purchased from third party suppliers. Both we and MKE depend on a limited number of qualified suppliers for components and subassemblies, including recording heads, media and integrated circuits. Currently, we purchase recording heads from three sources, digital signal processor/controllers from two sources and spin/servo integrated circuits from one source. Although our purchase of our primary supplier of media, MMC, has reduced our dependence on outside suppliers for this component, MMC cannot supply all of our media needs, and therefore we are still required to purchase media from a limited number of outside sources. As we have experienced in the past, some required parts may be periodically in short supply. As a result, we will have to allow for significant ordering lead times for some components. In addition, we may have to pay significant cancellation charges to suppliers if we cancel orders for components because we reduce production due to market oversupply, reduced demand, transition to new products or technologies or for other reasons. We order the majority of our components on a purchase order basis and we have limited long-term volume purchase agreements with only some of our existing suppliers. In the event that these suppliers cannot qualify to new leading-edge technology specifications, our ramp up of production for the new products will be delayed, and our business, operating results and financial condition will be adversely affected.

If we cannot obtain sufficient quantities of high-quality parts when needed, product shipments would be delayed and our business, financial condition and operating results could suffer. We cannot assure you that we will be able to obtain adequate supplies of critical components in a timely and economic manner, or at all.

The success of our products also depends on our ability to effectively integrate parts and components that use leading-edge technology. If we are unable to successfully manage the integration of parts obtained from third party suppliers, our business, financial condition and operating results could suffer.

If we are unable to acquire needed additional manufacturing capacity, or MKE does not meet our manufacturing requirements, or if a disaster occurs at one of our or MKE’s plants, our growth will be adversely impacted and our business, financial condition and operating results could suffer.

Our Maxtor-owned facility in Singapore and our relationship with MKE for the manufacture of hard disk drives for the enterprise market are currently our only sources of production for our hard disk drive products. MKE manufactures a substantial portion of our enterprise hard disk drives pursuant to a master agreement and a purchase agreement. The purchase agreement has been extended pursuant to an agreement in principle through November 2, 2002. If we are not able to negotiate a mutually acceptable replacement purchase agreement, we will likely be able to continue to purchase by purchase order, but such purchases may not be in adequate volumes or on terms advantageous to us. In these cases, our revenue may be lower than projected and our operating results would suffer.

We will have to negotiate pricing arrangements with MKE on a quarterly basis. Because pricing may be fixed for a quarter, intra quarter improvements in MKE’s costs may not be shared with us as they occur, which would negatively impact our operating results. Any failure to reach an agreement on competitive pricing arrangements would also negatively impact our operating results.

If we are unable to reach agreement with MKE on mutually acceptable purchase order terms for the manufacture of enterprise hard disk drives, we will need to arrange for alternative manufacturing capacity for our enterprise products. If we fail to make such arrangements in a timely manner, in adequate volumes or on acceptable terms, our revenue might be lower than projected and our business, financial condition and operating results would suffer. In addition, we will need to acquire additional manufacturing capacity in the

future. Our inability to add capacity to allow us to meet customers’ demands in a timely manner may limit our future growth and could harm our business, financial condition and operating results.

In addition, our entire volume manufacturing operations, and a portion of MKE’s, are based in Singapore. A flood, earthquake, political instability, act of terrorism or other disaster or condition in Singapore that adversely affects our or MKE’s facilities or ability to manufacture our hard disk drive products could significantly harm our business, financial condition and operating results.

We are subject to risks related to product defects, which could subject us to warranty claims in excess of our warranty provision or which are greater than anticipated due to the unenforceability of liability limitations.

Our products may contain defects. We generally warrant our products for three to five years and prior to the acquisition, Quantum HDD generally warranted its products for one to five years. We assumed Quantum HDD’s warranty obligations as a result of the acquisition. The standard warranties used by us and Quantum HDD contain limits on damages and exclusions of liability for consequential damages and for negligent or improper use of the products. We generally establish and, prior to the acquisition, Quantum HDD established, a warranty provision at the time of product shipment in an amount equal to estimated warranty expenses. We determined that there were issues with certain Quantum HDD products that we acquired in the acquisition, and which are no longer being manufactured. We have established a warranty provision for these products and have increased goodwill associated with the acquisition to reflect pre-acquisition contingencies related to these issues. We may incur additional operating expenses if these steps do not reflect the actual cost of resolving such issues; and if these expenses are significant, our business, financial condition and results of operations will suffer.

We have asserted claims against Quantum, and Quantum has asserted claims against us, for payment under agreements entered into in connection with our acquisition of the Quantum HDD business. In the event these claims are not resolved favorably in the aggregate, our business, financial condition and operating results could be harmed.

We have asserted multiple claims against Quantum, and Quantum has asserted multiple claims against us, for payment under agreements entered into in connection with our acquisition of the Quantum HDD business, including a tax sharing and indemnity agreement, which provides for the allocation of certain liabilities related to taxes. We disagree with Quantum about the amounts owed by each party under the agreements and we are in negotiations with Quantum to resolve the claims. The parties have commenced dispute resolution procedures under the tax sharing and indemnity agreement. Quantum has also asserted additional claims which we are evaluating. Although we believe that we will be successful in asserting or defending these claims in the aggregate, an unfavorable resolution of such claims in the aggregate could harm our business, financial condition and operating results.

If Quantum incurs non-insured tax as a result of its split-off of Quantum HDD, our financial condition and operating results could be negatively affected.

In connection with our acquisition of the Quantum HDD business, we agreed to indemnify Quantum for the amount of any tax payable by Quantum as a result of the separation of the Quantum HDD business from Quantum Corporation (referred to as a split-off) to the extent such tax is not covered by insurance, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the split-off. The amount of the tax not covered by insurance could be substantial. In addition, if it is determined that Quantum owes federal or state tax as a result of the split-off and the circumstances giving rise to the tax are covered by our indemnification obligations, we will be required to pay Quantum the amount of the tax at that time, whether or not reimbursement may be allowed under the insurance policy. Even if a claim is available, made and pending under the tax opinion insurance policy, there may be a substantial period after we pay Quantum for the tax before the outcome of the insurance claim is finally known, particularly if the claim is denied by the insurance company and the denial is disputed by us and/or Quantum. Moreover, the insurance company could prevail in a coverage dispute. In any of these circumstances, we would have to either use our

existing cash resources or borrow money to cover our obligations to Quantum. In either case, our payment of the tax, whether covered by insurance or not, could harm our business, financial condition, operating results and cash flows.

Our ability to use our equity for financings or acquisitions and our attractiveness as an acquisition target could be limited until April 3, 2003 due to restrictions we must comply with to mitigate the risk of triggering a tax obligation to Quantum for which we are indemnitor.

Under the federal tax rules applicable to the treatment of our acquisition of the Quantum HDD business as a tax-free split-off, the following events occurring during the two-year period after the merger may cause the split-off to become taxable to Quantum under circumstances in which the tax opinion insurance policy will not cover the tax:


	•	we issue our equity securities to acquire other businesses or to raise financing; and

	•	a 50% or greater interest in us is acquired by another party.

In addition, these restrictions could discourage potential acquisition proposals and could delay or prevent a change of control of the company, including offers at a price above the then-current market price for our common stock.

We may need additional capital in the future which may not be available on favorable terms or at all and our ability until April 3, 2003 to issue equity securities has been severely limited by our acquisition of Quantum HDD.

Our business is capital intensive and we may need more capital in the future. Our future capital requirements will depend on many factors, including:


	•	the rate of our sales growth;

	•	the level of our profits or losses;

	•	the timing and extent of our spending to expand manufacturing capacity, support facilities upgrades and product development efforts;

	•	the timing and size of business or technology acquisitions; and

	•	the timing of introductions of new products and enhancements to our existing products.

To mitigate the risk of triggering a tax obligation of Quantum for which we have indemnification obligations as a result of our acquisition of the Quantum HDD business, we are restricted in our ability to issue additional equity securities to raise capital for two years after the split-off and merger, or until April 3, 2003. In the event we decide to raise capital by issuing equity securities, such financing will decrease the percentage equity ownership of our stockholders and may, depending on the price at which the equity is sold, result in significant economic dilution to them. Our board of directors is authorized under our charter documents to issue preferred stock with rights, preferences or privileges senior to those of the common stock without stockholder approval.

If we have a default under the tangible net worth covenant for our asset securitization program and our Singapore loan, we may be required to repay the Singapore loan earlier than expected and may not have access to our asset securitization program or alternative capital on as favorable terms, or at all.

compliance under the Program. Pursuant to the fourth amendment on November 5, 2002, we and the Banks agreed to reduce the Program size from $210 million to $100 million, cap the purchase limit at $45 million and extend the liquidity agreement to December 13, 2002, in anticipation of a new program to be in place by December 13, 2002. We do not expect the reduction in the size of the Program will have a material adverse impact on our liquidity.

We are in discussions with lenders regarding a possible replacement facility for the Program of up to $100 million; however, we do not have a commitment letter for such replacement facility at this time. We believe that if we receive a commitment for such a replacement facility, the Banks will extend the Program as amended for a reasonable period beyond December 13, 2002 to permit us to negotiate a definitive agreement for such facility. If, however, we do not receive a commitment on terms acceptable to us, or at all, or the Banks decline to extend the program beyond December 13, 2002, there could be a liquidation event under the Program in the quarter ending December 29, 2002 and we will not have access to the Program beyond that date.

If a liquidation event or termination of the Program were to occur, the Banks would be entitled to all cash collections on our accounts receivables in the United States until their net investments had been recovered. We do not expect that such an event by itself would have a significant adverse impact on our liquidity, given the fact that we believe the Banks’ net investment would be satisfied shortly following such liquidation event or termination, based on our historical collection rate of receivables. However, we would no longer have access to the Program following such liquidation event or termination. We do not expect that the unavailability of the Program would have a material adverse effect on our liquidity.

Our failure to meet the tangible net worth covenant under the Program and the Singapore loan may adversely impact our ability in the future to borrow funds on as favorable terms, or at all.

Any failure to adequately protect and enforce our intellectual property rights could harm our business.

Our protection of our intellectual property is limited. For example, we have patent protection on only some of our technologies. We may not receive patents for our pending or future patent applications, and any patents that we own or that are issued to us may be invalidated, circumvented or challenged. In the case of products offered in rapidly emerging markets, such as consumer electronics, our competitors may file patents more rapidly or in greater numbers resulting in the issuance of patents that may result in unexpected infringement assertions against us. Moreover, the rights granted under any such patents may not provide us with any competitive advantages. Finally, our competitors may develop or otherwise acquire equivalent or superior technology. We also rely on trade secret, copyright and trademark laws as well as the terms of our contracts to protect our proprietary rights. We may have to litigate to enforce patents issued or licensed to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of our proprietary rights and the proprietary rights of others. Enforcing or defending our proprietary rights could be expensive and might not bring us timely and effective relief. We may have to obtain licenses of other parties’ intellectual property and pay royalties. If we are unable to obtain such licenses, we may have to stop production of our products or alter our products. In addition, the laws of certain countries in which we sell and manufacture our products, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Our remedies in these countries may be inadequate to protect our proprietary rights. Any failure to enforce and protect our intellectual property rights could harm our business, financial condition and operating results.

We are subject to existing infringement claims which are costly to defend and may harm our business.

Prior to our acquisition of the Quantum HDD business, we, on the one hand, and Quantum and MKE, on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against Maxtor was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with other pending litigations involving the Papst patents. The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that Maxtor and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors in hard disk drives. We purchased the overwhelming majority of the spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of our acquisition of the Quantum HDD business, we assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. Papst and MKE recently entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of the Papst patents to MKE which might provide Quantum, and thus us, with additional defenses to Papst’s patent infringement claims.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, we cannot assure you we will be able to successfully defend ourselves against this or any other Papst lawsuit. The Papst complaints assert claims to an unspecified dollar amount of damages. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against us and our products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, we also could be required to pay treble damages and Papst’s attorney’s fees. Accordingly, a litigation outcome favorable to Papst could harm our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

We conduct most of our manufacturing and testing operations and purchase a substantial portion of our key parts outside the United States. In particular, manufacturing operations for our products are concentrated in Singapore, where both our and MKE’s principal manufacturing operations are located. Such concentration of operations in Singapore will likely magnify the effects on us of any disruptions or disasters relating to Singapore. In addition, we also sell a significant portion of our products to foreign distributors and retailers. As a result, we will be dependent on revenue from international sales. Inherent risks relating to our overseas operations include:


	•	difficulties with staffing and managing international operations;

	•	transportation and supply chain disruptions as a result of terrorist activity;

	•	economic slowdown and/or downturn in the foreign markets;

	•	international currency fluctuations;

	•	political and economic uncertainty caused by terrorism or acts of war or hostility;

	•	legislative and regulatory responses to terrorist activity such as increased restrictions on cross-border movement of products and technology;

	•	general strikes or other disruptions in working conditions;

	•	labor shortages;

	•	political instability;

	•	trade restrictions;


	•	changes in tariffs;

	•	generally longer periods to collect receivables;

	•	unexpected legislative or regulatory requirements;

	•	reduced protection for intellectual property rights in some countries;

	•	significant unexpected duties or taxes or other adverse tax consequences;

	•	restrictions on our ability to use cash in other parts of our operations due to adverse tax consequences;

	•	difficulty in obtaining export licenses and other trade barriers;

	•	seasonality;

	•	increased transportation/shipping costs; and

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

The specific economic conditions in each country impact our international sales. For example, our international contracts are denominated primarily in U.S. dollars. Significant downward fluctuations in currency exchange rates against the U.S. dollar could result in higher product prices and/or declining margins and increased manufacturing costs. In addition, we attempt to manage the impact of foreign currency exchange rate changes by entering into short-term, foreign exchange contracts. If we do not effectively manage the risks associated with international operations and sales, our business, financial condition and operating results could suffer.

Our success depends upon the continued contributions of key employees, many of whom would be extremely difficult to replace. Like many other technology companies, we have implemented workforce reductions that have in some cases resulted in the termination of key employees who have substantial knowledge of our business. These and any future workforce reductions may also adversely affect the morale of, and our ability to retain, employees who have not been terminated, which may result in the further loss of key employees. We do not have key person life insurance on any of our personnel. Worldwide competition for skilled employees in the hard disk drive industry is extremely intense. If we are unable to retain existing employees or to hire and integrate new employees, our business, financial condition and operating results could suffer. In addition, companies in the hard disk drive industry whose employees accept positions with competitors often claim that the competitors have engaged in unfair hiring practices. We may be the subject of such claims in the future as we seek to hire qualified personnel and we could incur substantial costs defending ourselves against those claims.

We could be subject to environmental liabilities which could increase our expenses and harm our business, financial condition and results of operations.

Because of the chemicals we use in our manufacturing and research operations, we are subject to a wide range of environmental protection regulations in the United States and Singapore. While we do not believe our operations to date have been harmed as a result of such laws, future regulations may increase our expenses and harm our business, financial condition and results of operations. Even if we are in compliance in all material respects with all present environmental regulations, in the United States environment regulations often require parties to fund remedial action regardless of fault. As a consequence, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. Moreover, we may be subject to liability in connection with our acquisition of the Quantum HDD and MMC businesses to the extent that contamination requiring remediation at our expense is present on properties currently or formerly occupied by those businesses, or those businesses sent wastes to sites at which remediation is required. If we have to make significant capital expenditures or pay significant expense in connection with future remedial actions or to continue to comply with applicable environmental laws, our business, financial condition and operating results could suffer.

The market price of our common stock fluctuated substantially in the past and is likely to fluctuate in the future as a result of a number of factors, including the release of new products by us or our competitors, the loss or gain of significant customers or changes in stock market analysts’ estimates.

The market price of our common stock and the number of shares traded each day have varied greatly. Such fluctuations may continue due to numerous factors, including:


	•	quarterly fluctuations in operating results;

	•	announcements of new products by us or our competitors such as products that address additional hard disk drive segments;

	•	gains or losses of significant customers;

	•	changes in stock market analysts’ estimates;

	•	the presence of short-selling of our common stock;

	•	sales of a high volume of shares of our common stock by our large stockholders;

	•	events affecting other companies that the market deems comparable to us;

	•	general conditions in the semiconductor and electronic systems industries; and

	•	general economic conditions in the United States and abroad.

Anti-takeover provisions in our certificate of incorporation could discourage potential acquisition proposals or delay or prevent a change of control.

We have a number of protective provisions in place designed to provide our board of directors with time to consider whether a hostile takeover is in our best interests and that of our stockholders. For example, in connection with our acquisition of the Quantum HDD business, we amended our certificate of incorporation to eliminate temporarily the requirement that our three classes of directors be reasonably equal in number. As a result of this amendment, a person could not take control of the board until the third annual meeting after the closing of the merger, since a majority of our directors will not stand for election until that third annual meeting. This and other provisions could discourage potential acquisition proposals and could delay or prevent a change in control of the company and also could diminish the opportunities for a holder of our common stock to participate in tender offers, including offers at a price above the then-current market price for our common stock. These provisions also may inhibit fluctuations in our stock price that could result from takeover attempts.

We enter into foreign exchange forward contracts to manage foreign currency exchange risk associated with our operations primarily in Singapore and Switzerland. The foreign exchange forward contracts we enter into generally have original maturities ranging from one to three months. We do not enter into foreign exchange forward contracts for trading purposes. We do not expect gains or losses on these contracts to have a material impact on our financial results.

We maintain an investment portfolio of various holdings, types and maturities. These marketable securities are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Part of this portfolio includes investments in bank issues, corporate bonds and commercial paper.

The following table presents the hypothetical changes in fair values in the financial instruments held September 28, 2002 that are sensitive to changes in interest rates. These instruments are not leveraged and are held for purposes other than trading. The hypothetical changes assume immediate shifts in the U.S. Treasury yield curve of plus or minus 50 basis points (“bps”), 100 bps, and 150 bps.

We are exposed to certain equity price risks on our investments in common stock. These equity securities are held for purposes other than trading. The following table presents the hypothetical changes in fair values of the public equity investments that are sensitive to changes in the stock market. The modeling technique used measures the hypothetical change in fair value arising from selected hypothetical changes in the stock price. Stock price fluctuations of plus or minus 15 percent, plus or minus 25 percent, and plus or minus 50 percent were selected based on the probability of their occurrence.

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

Prior to our acquisition of the Quantum HDD business, we, on the one hand, and Quantum and MKE, on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against Maxtor was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with other pending litigations involving the Papst patents (the “MDL Proceeding”). The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that Maxtor and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors in hard disk drives. We purchased the overwhelming majority of the spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of our acquisition of the Quantum HDD business, we assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. We filed a motion to substitute the Company for Quantum in this litigation. The motion was denied by the Court presiding over the MDL Proceeding, without prejudice to being filed again in the future.

Papst and MKE recently entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus us, with additional defenses to Papst’s patent infringement claims.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, we cannot assure you we will be able to successfully defend ourselves against this or any other Papst lawsuit. The Papst complaints assert claims to an unspecified dollar amount of damages. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against us and our products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, we also could be required to pay treble damages and Papst’s attorney’s fees. Accordingly, a litigation outcome favorable to Papst could harm our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

In addition to the Papst lawsuit, on June 13, 2002, we filed suit against Koninklijke Philips Electronics N.V. and several other Philips-related companies in the Superior Court of California, County of Santa Clara. On June 26, 2002, we filed a First Amended Complaint. The lawsuit alleges that an integrated circuit chip supplied by Philips was defective and caused significant levels of failure of the Quantum HDD Corona Plus, Eagle, and Eagle Plus products, each of which is a product line we acquired as part of our acquisition of the Quantum HDD business. On September 9, 2002, Philips filed responsive pleadings. Discovery is ongoing. In the lawsuit, we are claiming damages of at least $77 million, however, the results of litigation are inherently uncertain and we cannot assure you that we will achieve a favorable outcome.

Maxtor filed a Current Report on Form 8-K on August 13, 2002 in which it reported in Item 9 that both Michael J. Cannon, President and Chief Executive Officer of Maxtor, and Paul J. Tufano, Executive Vice President, Chief Operating Officer and Chief Financial Officer of Maxtor, filed certifications with the Securities and Exchange Commission (the “Commission”) pursuant to Order No. 4-460. Both certifications conformed exactly to the form prescribed by the Commission in Exhibit A to Order No. 4-460, without qualification or modification.

Maxtor filed a Current Report on Form 8-K on August 19, 2002 in which it reported in Item 5 that it is discontinuing the manufacturing and sales of its MaxAttach^TM branded network attached storage products.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


	By	/s/ PAUL J. TUFANO



	Paul J. Tufano
	Executive Vice President,
	Chief Financial Officer, and
	Chief Operating Officer


	1. I have reviewed this quarterly report on Form 10-Q of Maxtor Corporation;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ MICHAEL R. CANNON

	Michael R. Cannon
	President and Chief Executive Officer


	1. I have reviewed this quarterly report on Form 10-Q of Maxtor Corporation;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ PAUL J. TUFANO

	Paul J. Tufano
	Executive Vice-President,
	Chief Operating Officer and
	Chief Financial Officer


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

For the period ended September 28, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		77-0123732
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 McCarthy Boulevard, Milpitas, CA		95035
(Address of principal executive offices)		(Zip Code)


PART I. FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 99.1
EXHIBIT 99.2


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements		2
	Condensed Consolidated Balance Sheets — September 28, 2002, and December 29, 2001		2
	Condensed Consolidated Statements of Operations — Three and nine months ended September 28, 2002, and September 29, 2001		3
	Condensed Consolidated Statements of Cash Flows — Nine months ended September 28, 2002, and September 29, 2001		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50
Item 4.	Controls and Procedures		50
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		51
Item 2.	Changes in Securities		51
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Submission of Matters to a Vote of Security Holders		52
Item 5.	Other Information		52
Item 6.	Exhibits and Reports on Form 8-K		52
Signature Page			53
Certifications			54


			September 28,			December 29,
			2002			2001


			(Unaudited)
			(In thousands, except share
			and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	282,420		$	379,927
	Restricted cash			56,462			98,629
	Marketable securities			71,600			167,217
	Accounts receivable, net of allowance of doubtful accounts of $23,422 at September 28, 2002 and $21,638 at December 29, 2001			313,848			379,918
	Inventories			203,773			185,556
	Prepaid expenses and other			38,821			45,606

		Total current assets		966,924			1,256,853
Property, plant and equipment, net				383,576			366,786
Goodwill				813,951			814,863
Other intangible assets, net				167,458			262,552
Other assets				10,464			14,410

		Total assets	$	2,342,373		$	2,715,464

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings, including current portion of long-term debt		$	42,298		$	44,160
	Accounts payable			668,808			593,263
	Accrued and other liabilities			423,957			532,358
	Liabilities of discontinued operations			15,609			—

		Total current liabilities		1,150,672			1,169,781
Deferred taxes				196,457			196,455
Long-term debt, net of current portion				209,127			244,458
Other liabilities				201,725			204,587

		Total liabilities		1,757,981			1,815,281
Stockholders’ equity:
	Preferred stock, $0.01 par value, 95,000,000 shares authorized; no shares issued or outstanding			—			—
	Common stock, $0.01 par value, 525,000,000 shares authorized; 247,292,239 shares issued and 242,292,239 shares outstanding at September 28, 2002 and 241,977,795 shares issued and 236,977,795 shares outstanding at December 29, 2001			2,473			2,420
Additional paid-in capital				2,347,481			2,323,885
Deferred compensation				(1,792	)		(3,809	)
Accumulated deficit				(1,744,175	)		(1,406,524	)
Cumulative other comprehensive income				405			4,211
Treasury stock (5,000,000 shares) at cost				(20,000	)		(20,000	)

		Total stockholders’ equity		584,392			900,183

		Total liabilities and stockholders’ equity	$	2,342,373		$	2,715,464



			Three Months Ended						Nine Months Ended

			September 28,			September 29,			September 28,			September 29,
			2002			2001			2002			2001


			(Unaudited)
			(In thousands, except share and per share amounts)
Net revenues			$	819,716		$	1,035,193		$	2,741,166		$	2,694,368
Cost of revenues				762,187			955,564			2,510,481			2,451,138

Gross profit				57,529			79,629			230,685			243,230
Operating expenses:
	Research and development			94,095			118,555			301,205			304,644
	Selling, general and administrative			34,754			48,026			111,424			174,497
	Amortization of goodwill and other intangible assets(1)			20,562			60,778			61,686			120,210
	Purchased in-process research and development			—			400			—			95,140
	Restructuring charge			9,495			—			9,495			—

		Total operating expenses		158,906			227,759			483,810			694,491

Loss from operations				(101,377	)		(148,130	)		(253,125	)		(451,261	)
Interest expense				(7,133	)		(6,188	)		(20,241	)		(14,659	)
Interest and other income				2,944			2,784			8,349			20,569
Other gain (loss)				623			(503	)		2,200			(1,109	)

Loss from continuing operations before income taxes				(104,943	)		(152,037	)		(262,817	)		(446,460	)
Provision for income taxes				527			1,140			1,333			2,448

Loss from continuing operations				(105,470	)		(153,177	)		(264,150	)		(448,908	)
Loss from discontinued operations				(58,141	)		(12,550	)		(73,501	)		(35,248	)

Net loss			$	(163,611	)	$	(165,727	)	$	(337,651	)	$	(484,156	)

Net loss per share — basic
Continuing operations			$	(0.44	)	$	(0.64	)	$	(1.11	)	$	(2.28	)
Discontinued operations			$	(0.24	)	$	(0.05	)	$	(0.31	)	$	(0.18	)

Total			$	(0.68	)	$	(0.69	)	$	(1.42	)	$	(2.46	)

Net loss per share — diluted
Continuing operations			$	(0.44	)	$	(0.64	)	$	(1.11	)	$	(2.28	)
Discontinued operations			$	(0.24	)	$	(0.05	)	$	(0.31	)	$	(0.18	)

Total			$	(0.68	)	$	(0.69	)	$	(1.42	)	$	(2.46	)

Shares used in per share calculation
		— basic		240,177,574			238,629,903			238,413,709			196,829,537
		— diluted		240,177,574			238,629,903			238,413,709			196,829,537


Personnel related	$	13.0
Goodwill and other intangibles write-offs		32.5
Non-cancelable purchase commitments		4.2


Accounts payable			2.9
Payroll and other accrued expenses			7.7

Warranty, returns and other			5.0

Total			15.6


Value of securities issued		$	1,133.5
Assumption of Quantum HDD options			107.1

			1,240.6
Transaction costs			28.8

	Total purchase price	$	1,269.4


Tangible assets:
	Cash and cash equivalents		$	315.3
	Restricted cash			93.9
	Accounts receivable			249.1
	Inventories			181.7
	Prepaid expenses and other current assets			120.9
	Property, plant and equipment			126.4
	Other noncurrent assets			21.1

		Total tangible assets	$	1,108.4

Intangible assets acquired:
	Core and other existing technology			286.1
	Assembled workforce			43.0
Deferred stock-based compensation				6.8
Goodwill				896.3
In-process research and development				94.7
Liabilities assumed:
	Accounts payable			230.0
	Accruals and other liabilities			364.3
	Deferred taxes			196.2
Long-term debt				132.4
Other long-term liabilities				142.0
Merger-related restructuring costs				101.0

		Total liabilities assumed		(1,165.9	)

		Total purchase price	$	1,269.4


				Severance
	Facility			and			Other
	Costs			Benefits			Costs			Total


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

Balance at December 29, 2001		58.2			13.7			—			71.9
Amounts paid		(2.0	)		(13.7	)		—			(15.7	)

Balance at September 28, 2002	$	56.2		$	—		$	—		$	56.2


Cash paid		$	1.0
Forgiveness of loan consideration			16.0

			17.0
Transaction costs			0.9

	Total purchase price	$	17.9


Total tangible assets			$	97.7
Existing technology				4.4
Goodwill				21.1
In-process research and development				0.5
Liabilities assumed:
	Accruals and other liabilities			30.6
	Capital lease obligations and debt			75.1

		Total liabilities assumed		(105.7	)

		Total purchase price	$	17.9


10.	Segment, Geography and Major Customers Information


					Pro Rata
			Economic		Portion
			Development		of Quantum
	5.75%		Board of		Corporation’s 7%				Equipment
	Subordinated		Singapore		Subordinated				Loans and
	Debentures		Loan Due		Convertible Notes				Capital
	Due 2012(1)		March 2004(2)		Due 2004(3)		Mortgages(4)		Leases(5)		Total

Fiscal Year Ending
2002 (remaining three months)	$	—	$	—	$	—	$	341	$	7,163	$	7,504
2003		5,000		6,455		—		1,444		23,356		36,255
2004		5,000		3,227		95,833		1,583		11,577		117,220
2005		5,000		—		—		1,734		6,538		13,272
2006		5,000		—		—		30,847		—		35,847
Thereafter		41,327		—		—		—		—		41,327

Total	$	61,327	$	9,682	$	95,833	$	35,949	$	48,634	$	251,425


	*Basis of Presentation*


	*Use of Estimates*


	*Fiscal Calendar*


	*a. Quantum HDD*


										Fair Value
										as of
										September 28,
	+150			+100			+50			2002
	bps			bps			bps			($000)		-50 bps			-100 bps			-150 bps

Financial Instruments		70,662			70,972			71,284			71,600		71,923			72,241			72,560
% Change		(1.31	)%		(0.88	)%		(0.44	)%				0.45	%		0.90	%		1.34	%


10.1		Maxtor Corporation Amended and Restated 1996 Stock Option Plan (Fourth Amendment Approved on October 3, 2000 and Amended and Restated on May 2, 2001).
10.2		Maxtor Corporation Amended and Restated Executive Deferred Compensation Plan effective April 2, 2001.
10.3		Maxtor Corporation Restricted Stock Unit Plan.
10.4		Form of Restricted Stock Unit Award Agreement between the Registrant and Michael R. Cannon (200,000 shares), Paul J. Tufano (140,000 shares), Victor B. Jipson (100,000 shares), Michael Cordano (70,000 shares), K.H. Teh (70,000 shares), Pantelis S. Alexopoulos (70,000 shares), Phillip C. Duncan (50,000 shares), Glenn H. Stevens (50,000 shares), David L. Beaver (50,000 shares), Misha Rozenberg (50,000 shares), each dated as of June 10, 2002.
10.5		Bank Guarantee Facility of SGD 17,250,000, Waiver of the Consolidated Tangible Net Worth Covenant for 3rd Quarter Ended 28 September 2002, dated as of October 22, 2002, by and among the Bank of Nova Scotia and Maxtor Peripherals(s) Pte Ltd.
10.6		Revolving Bank Guarantee Facility of SGD 666,000, Waiver of the Consolidated Tangible Net Worth Covenant for 3rd Quarter Ended 28 September 2002, dated as of October 22, 2002, by and among the Bank of Nova Scotia and Maxtor Peripherals(s) Pte Ltd.
10.7		Fourth Amendment to Amended and Restated Receivables Purchase Agreement and Amendment to Fee Letter, dated as of November 5, 2002, by and among Maxtor Receivables Corporation, Maxtor Corporation, the Committed Purchasers, the Conduit Purchasers, the Agents, and Fleet National Bank.
10.8		Amendment to Liquidity Agreement, dated as of November 5, 2002 by and among Blue Keel Funding, LLC, the Liquidity Institutions, and Fleet National Bank.
10.9		Waiver, dated as of October 21, 2002, by and among Maxtor Receivables Corporation, Maxtor Corporation, the Conduit Purchasers, the Committed Purchasers, the Agents, and Fleet National Bank.
99.1		Certification of Michael R. Cannon, President and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification of Paul J. Tufano, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Exhibit
Number		Description

	10.1	Maxtor Corporation Amended and Restated 1996 Stock Option Plan (Fourth Amendment Approved on October 3, 2000 and Amended and Restated on May 2, 2001).
	10.2	Maxtor Corporation Amended and Restated Executive Deferred Compensation Plan effective April 2, 2001.
	10.3	Maxtor Corporation Restricted Stock Unit Plan.
	10.4	Form of Restricted Stock Unit Award Agreement between the Registrant and Michael R. Cannon (200,000 shares), Paul J. Tufano (140,000 shares), Victor B. Jipson (100,000 shares), Michael Cordano (70,000 shares), K.H. Teh (70,000 shares), Pantelis S. Alexopoulos (70,000 shares), Phillip C. Duncan (50,000 shares), Glenn H. Stevens (50,000 shares), David L. Beaver (50,000 shares), Misha Rozenberg (50,000 shares), each dated as of June 10, 2002.
	10.5	Bank Guarantee Facility of SGD 17,250,000, Waiver of the Consolidated Tangible Net Worth Covenant for 3rd Quarter Ended 28 September 2002, dated as of October 22, 2002, by and among the Bank of Nova Scotia and Maxtor Peripherals(s) Pte Ltd.
	10.6	Revolving Bank Guarantee Facility of SGD 666,000, Waiver of the Consolidated Tangible Net Worth Covenant for 3rd Quarter Ended 28 September 2002, dated as of October 22, 2002, by and among the Bank of Nova Scotia and Maxtor Peripherals(s) Pte Ltd.
	10.7	Fourth Amendment to Amended and Restated Receivables Purchase Agreement and Amendment to Fee Letter, dated as of November 5, 2002, by and among Maxtor Receivables Corporation, Maxtor Corporation, the Committed Purchasers, the Conduit Purchasers, the Agents, and Fleet National Bank.
	10.8	Amendment to Liquidity Agreement, dated as of November 5, 2002 by and among Blue Keel Funding, LLC, the Liquidity Institutions, and Fleet National Bank.
	10.9	Waiver, dated as of October 21, 2002, by and among Maxtor Receivables Corporation, Maxtor Corporation, the Conduit Purchasers, the Committed Purchasers, the Agents, and Fleet National Bank.
	99.1	Certification of Michael R. Cannon, President and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99.2	Certification of Paul J. Tufano, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.