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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-14016
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 COTTONWOOD DRIVE, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant's common stock was
$303,281,705 on March 3, 2001 (based on the closing sales price of the
registrant's common stock on that date). Shares of the registrant's common stock
held by each officer and director and each person who owns more than 5% or more
of the outstanding common stock of the registrant have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes. As of
March 3, 2001, 117,046,481 shares of the registrant's Common Stock, $.01 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
(the "Proxy Statement"), to be filed within 120 days of the end of the fiscal
year ended December 30, 2000, are incorporated by reference in Part III hereof.
Except with respect to information specifically incorporated by reference in
this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 1, Business, "Products," "Marketing and Customers,"
"Manufacturing and Suppliers," "Research and Development," and "Competition;"
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Results of Operations," "Liquidity and Capital Resources" and
"Certain Factors Affecting Future Performance;" or elsewhere in this report. In
this report, the words "anticipates," "believe," "expect," "intend," "may,"
"will," "should," "plan," "estimate," "predict," "potential," "future,"
"continue" or similar expressions also identify forward-looking statements.
These statements are only predictions. We make these forward-looking statements
based upon information available on the date hereof, and we have no obligation
(and expressly disclaim any such obligation) to update or alter any such
forward-looking statements, whether as a result of new information, future
events, or otherwise. Our actual results could differ materially from those
anticipated in this report as a result of certain factors including, but not
limited to, those set forth in the following in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Performance" and elsewhere in
this report. Maxtor(R), DiamondMax(R), Formula 4(R) and MaxFax(R) are registered
trademarks -- and No Quibble(R) is a registered servicemark of Maxtor. The
Maxtor logo, MaxAttach(TM) and Reflect-It(TM) are trademarks of Maxtor. All
other brand names and trademarks appearing in this report are the property of
their respective holders.
We are a leading provider of hard disk drive storage products for desktop
computer systems. Our DiamondMax product family, originally announced in 1999,
consists of 3.5-inch hard disk drives. These products have high speed interfaces
for greater data throughput, a robust mechanical design for improved
reliability, magneto-resistive head technology and a digital signal
processor-based electronic architecture that, when combined, provide
industry-leading benchmark performance and storage capacity to the personal
computer marketplace. During 2000, we expanded our DiamondMax Plus product
family to include disk drives targeted for mainstream, entry-level and
high-performance desktop systems. The storage capacities of our current
DiamondMax products range from 30 to 81.5 gigabytes. Some of our top customers
are desktop computer manufacturers, including Dell, Fujitsu, Compaq and IBM;
distributors, including Xander International, Bell Micro, and Ingram; and
retailers including CompUSA.
We formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of Creative Design Solutions, Inc. ("CDS") on September 10, 1999.
MNSG concentrates on products and offerings in or related to the Networked
Attached Storage ("NAS") market segment. Maxtor's NAS products are designed to
enable quick, easy, reliable and cost-effective storage solutions for business
networks and data centers. In October 1999, we announced MaxAttach(TM), MNSG's
first NAS product. In January 2000, we announced the MaxAttach 3000 desktop line
of server appliances with enhanced features that provide data protection (disk
mirroring) and data management (disk spanning) at storage capacities of 20, 40,
and 80 gigabytes. In July 2000, we began shipping the MaxAttach NAS 4000 rack
mount server with storage configurations of 40, 60 and 160 gigabytes. The units
fit into industry standard 19" racks and are only 1.75" (IU) high. The NAS 4000
supports an expanded set of network platforms including Linux and UNIX in
addition to Windows. It is designed to meet the needs of Internet Service
Providers, Application Service Providers and large workgroups. In September
2000, we announced that we had increased the maximum capacity of the NAS 4000 to
320 gigabytes, providing nearly one terabyte of storage in 5.25" of rack space.
In October 2000, we announced our new external storage solution, the Maxtor
1394 External Storage product, which adds up to 80 gigabytes of additional
storage to 1394-equipped PCs and Macintosh personal computers. This product is
an external hard drive that uses the high-speed IEEE 1394 interface and allows
customers to quickly and easily install additional storage to their desktop or
laptop computers. The product is hot swappable and features data transfer rates
up to 400 megabytes per second. It is designed for emerging applications such as
video editing, digital music, digital photos and games.
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COMPANY BACKGROUND
We were founded in 1982 and completed an initial public offering of common
stock in 1986. In the mid-1980's, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive industry during
the 1980's was intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of average
selling prices. In an effort to mitigate the risks associated with these
factors, we pursued all major product segments in the hard disk drive market,
utilizing multiple product families and technology platforms. This costly
strategy added significant complexity to the business, which caused us to delay
or miss a number of key product introductions and ultimately led to the
deterioration of our overall financial condition. As a result of this
deterioration, we sold 40% of our outstanding common stock to Hyundai
Electronics Industries and its affiliates in 1994.
In early 1996, Hyundai Electronics America ("HEA") acquired all of the
remaining publicly held shares of our common stock as well as all of our common
stock then held by Hyundai Electronics Industries and its affiliates. Shortly
thereafter, HEA invested in renewed efforts to revitalize Maxtor. In July 1996,
we hired Michael R. Cannon, our current Chief Executive Officer and President
and a 20 year veteran of the hard drive industry, who had previously served in
senior management positions in the systems storage division at IBM, SyQuest
Technology and Control Data Corporation, to lead a turnaround of the company and
capture business at leading desktop computer manufacturers.
In July 1998, we completed a public offering of 49,731,225 shares of our
common stock, receiving net proceeds of approximately $328.8 million from the
offering. As a result of this offering, our company ceased to be a
majority-owned subsidiary of HEA. In February 1999, we completed a public
offering of 7.8 million shares of common stock with net proceeds to us of
approximately $95.8 million.
PROPOSED MERGER WITH QUANTUM HDD
Maxtor and Quantum Corporation have entered into an Amended and Restated
Agreement and Plan of Merger and Reorganization dated as of October 3, 2000.
Under the Merger Agreement, Quantum has agreed to split off its hard disk drive
business, which will then be combined with Maxtor by a merger. In the merger,
each holder of Quantum HDD common stock will receive 1.52 shares of Maxtor
common stock for each share of Quantum HDD common stock held by such person.
Immediately following the merger, the former holders of Maxtor common stock will
hold not more than 49.9% of the total outstanding common stock of Maxtor and
former holders of Quantum HDD common stock will hold not less than 50.1% of
Maxtor's outstanding common stock. The merger is subject to customary
conditions, including receipt of stockholder approval. The merger proposal and
other matters have been submitted for stockholder approval to the holders of
Quantum and Maxtor common stock at special meetings of stockholders to be held
on March 30, 2001. In connection with the proposed merger, Maxtor filed a
registration statement on Form S-4 with the Securities and Exchange Commission.
INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENT
AND THE PROXY STATEMENT-PROSPECTUS BECAUSE THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE PROPOSED MERGER. Investors and security holders may obtain a free copy
of the registration statement and the proxy statement-prospectus and other
documents filed by Maxtor with the Securities and Exchange Commission at the
Securities and Exchange Commission's web site at http://www.sec.gov. Free copies
of the registration statement and other documents filed by Maxtor with the
Securities and Exchange Commission may also be obtained from Maxtor by directing
a request to Maxtor, Attention: Jenifer Kirtland, 408-432-4270.
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INDUSTRY BACKGROUND
The Desktop Hard Disk Drive Market. According to International Data
Corporation ("IDC"), the desktop computer segment is the largest segment of the
worldwide personal computer market, accounting for approximately 74% of global
personal computer shipments in 2000. The demand for desktop computers and,
therefore, computer hard disk drives, is driven by:
- continued improvements in desktop computing price to performance ratios;
- the rapid accumulation of data resulting from the digitization of
information previously stored in paper form;
- larger file sizes created by multimedia-intensive applications; and
- the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing.
Future demand growth for hard disk drives also may be driven by new and
emerging hard disk drive markets.
Hard Disk Drive Technology. The basic operation of a hard disk drive has
not changed materially since its introduction in the 1950's. To improve the
performance of hard disk drives, hard disk drive manufacturers have concentrated
their efforts on optimizing the performance of the various components of the
hard disk drive.
The main components of the hard disk drive are the hard disk assembly and
the printed circuit board. The head disk assembly includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. These components
are contained in a hard base plate protective package in a contamination-free
environment. The printed circuit board includes custom integrated circuits, an
interface connector to the host computer and a power connector.
The head disk assembly is comprised of one or more disks positioned around
a spindle hub that rotates the disks by a spin motor. Disks are made of a smooth
substrate to which a thin coating of magnetic materials is applied. Each disk
has a head suspended directly above it, which can read data from or write data
to the spinning disk. The sensor element of the head, also known as the slider,
is getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the printed circuit board typically include a
drive interface and a controller. The drive interface receives instructions from
the computer, while the controller directs the flow of data to or from the
disks, and controls the heads. The location of data on each disk is logically
maintained in tracks, divided into sectors. The computer sends instructions to
read data or write data to the disks based on track and sector locations.
Industry standard interfaces are utilized to allow the disk drive to communicate
with the computer.
A key performance metric in the hard disk drive industry is "areal
density," which is the measure of stored bits per square inch on the recording
surface of a disk. An increase in areal density allows a hard disk drive
provider to decrease the price per megabyte stored by increasing overall storage
capacity per disk, thus reducing product costs through reduced component
requirements. During 1996 and 1997, certain hard disk drive providers began
transitioning to magneto-resistive heads. Prior to this transition, most hard
disk drives utilized thin-film inductive recording heads. Magneto-resistive
heads have discrete read and write structures which provide more signal than the
older thin-film inductive heads. This results in significantly higher areal
densities, which increases storage capacity per disk and improves manufacturing
margin and product reliability. Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to further increase
hard disk drive performance and reduce product costs, including attempting to
simplify the electronic architecture by combining the traditional servo-control
functions of the digital signal processor-based electronic architecture and the
error recovery and interface management functions of traditional hard drive
microprocessors on a single integrated circuit. Moreover, to consistently
achieve timely introduction and rapid volume production of new products, some
hard disk drive providers are striving to
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simplify their product design processes by focusing on creating extendible core
technology platforms which utilize common firmware and mechanical designs and
re-use of manufacturing tooling and application specific integrated circuits
across various product generations and product lines.
Hard Disk Drive Market Challenges. Personal computer manufacturers compete
in a consolidating market. The top ten personal computer manufacturers accounted
for greater than 50% of all personal computer units shipped during 1999 and
2000. These personal computer manufacturers use the quality, storage capacity
and performance characteristics of hard drives to select their hard disk drive
providers. Personal computer manufacturers typically seek to qualify three or
four providers for a given hard disk drive product generation. To qualify
consistently with personal computer manufacturers and thus succeed in the
desktop hard drive industry, a hard disk drive provider must consistently
execute on its product development and manufacturing process in order to be
among the first-to-market introduction and first-to-volume production at leading
storage capacity per disk with competitive prices. Failure to reach the market
on time or to deliver timely volume production usually results in significantly
decreased gross margins due to rapidly declining average selling prices and
dramatic losses in market share. Successful achievement on the performance
parameters, however, is only part of the competitive equation. As personal
computer manufacturers seek to develop successful business models, they are also
requiring their hard disk drive vendors to maintain high levels of quality to
enable low cost of ownership and adapt their inventory management models to be
compatible with the emerging build-to-order business model in the personal
computer industry.
OUR SOLUTION
We have established ourselves as a leading provider of high quality, high
performance hard disk drives to major desktop computer manufacturers,
distributors and retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we have been able
to define and implement the key business processes necessary to fulfill the
needs of our customers. These processes focus on the efficient, timely and
cost-effective integration of leading-edge technology to create highly
manufacturable hard disk drives. Moreover, our senior management team vigorously
monitors these processes in an effort to ensure consistent execution and prompt
response to customer demands. We intend to continue our leadership position in
the desktop hard disk drive industry by consistently executing these fundamental
business processes.
We have leveraged our strength in hard drives to provide reliable, easy to
install, cost-effective network attached storage devices to meet the growing
storage needs of business networks and data centers. We intend to expand our
presence in the network attached storage industry by adding functionality and
features to our core product line.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Our strategy to achieve this
goal includes the following elements:
Effectively Integrate New Technology. We augment our traditional product
development teams with an advanced technology group. The advanced technology
group's purpose is to monitor and evaluate advancements in hard disk drive
technology for possible integration into our future products. This group also
works closely with our product development teams and strategic component vendors
to:
- obtain early access to the latest hard disk drive component technology;
- allow for flexibility in choosing state-of-the-art components; and
- ensure viability of new product technologies and components prior to
product design.
Through this process, we intend to continue to integrate new technologies
into our existing core technology platform and to strengthen our ability to
introduce high quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a consistent basis.
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Leverage Design Excellence. Our product development methodology reduces
risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and application specific
integrated circuits. Through this process, we have created a technology
platform, which is used as the common core of each of our current hard disk
drive products and which we believe is extendible into products for new and
emerging hard disk drive market opportunities. To reduce the overall cost of
ownership of our hard disk drive products, we use a robust mechanical
architecture designed to reduce defects that result from customer mishandling
during installation. We also work closely with leading component suppliers in an
effort to ensure that adequate tolerances are designed into our products to
achieve high manufacturing yields and product quality. By utilizing this product
development methodology, we have successfully introduced and achieved timely
volume production of magneto-resistive head hard disk drives.
Capitalize on Flexible Manufacturing. Our Singapore manufacturing facility
utilizes a flexible cell-based process that enables us to:
- dedicate manufacturing cells to particular customers, thereby allowing us
to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and
improved overall customer satisfaction;
- simultaneously manufacture multiple product configurations;
- quickly reconfigure the facility to respond to customer change requests
and changes in product and customer mix;
- effectively adapt our inventory management model to the emerging
build-to-order business model employed by certain of our desktop computer
manufacturer customers; and
- add incremental capacity as needed at a relatively low cost.
This flexible cell-based process, when coupled with our product design
methodology, has enabled us to significantly improve time-to-volume production.
Maintain Strong Market Share With Leading Desktop Computer
Manufacturers. We intend to continue to achieve leading time-to-volume
production of high quality, high performance hard disk drives and maintain our
focus on excellent customer service to continue to support and maintain our
strong market share position with leading personal computer manufacturers. Our
quarterly market share of the desktop hard disk drive market in terms of units
shipped increased from 5.6% in the first quarter of 1997 to 19.7% in the fourth
quarter of 2000 according to IDC. Shipments to Dell, Fujitsu, Compaq and IBM
accounted for 3.8% of our total revenue in the quarter ended June 29, 1996 and
increased to 25.6% in the quarter ended December 30, 2000.
Expand Relationships with Distributors and Retailers. We intend to
strengthen our distribution and retail businesses to capture the higher margin
opportunities offered in these markets. We will continue to build the
infrastructure necessary to better target these markets, including additional
staff and marketing support. We will continue to invest in promotional programs
to generate interest and sales in the distribution and retail channels.
Capture Emerging Opportunities for Hard Drives in Consumer Electronics
Applications. We believe that the demand for hard drives in consumer electronics
applications will grow significantly. Today hard drive storage in consumer
electronics applications has been primarily incorporated into personal video
recorders (PVRs) and set-top boxes. Maxtor has announced agreements with WebTV
and ReplayTV to provide hard disk drives for PVRs. We intend to pursue consumer
electronics opportunities by developing hard drive products appropriate for
these applications and establishing the necessary infrastructure and expertise
to sell to these markets.
Maintain Customer Satisfaction. We believe we distinguish ourselves from
our competitors by focusing on ease of doing business and overall customer
satisfaction. For example, our "No Quibble" service program has been well
received by our customers. We also have begun to place significant attention on
total supply chain management to align our business model with the evolving
build-to-order manufacturing business model of certain desktop computer
manufacturers. We use our flexible, cell-based manufacturing process coupled
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with a just-in-time inventory model to rapidly respond to the changing needs of
our key desktop computer manufacturer customers. To further automate and improve
the efficiency of our total supply chain management, we have installed new
enterprise resource planning and related software.
Broaden Product Portfolio. To capture higher margin opportunities, we
intend to leverage our existing technology platform and product development
methodology to develop hard disk drive products to meet the needs of desktop
computers, storage subsystems, consumer electronics, and other emerging storage
applications. To this end, we currently offer products with two rotational
speeds (5400 and 7200 RPM) with configurations from 1 through 4 disks. This
results in a portfolio with one of the broadest ranges of performance and
capacity in the industry and allows us to target entry, mid-range and high-end
applications in all of the above markets. The 3 and 4-platter designs have been
particularly beneficial to our profit margins and our strategic position, as few
of our competitors offer these high capacity products.
Additionally, in 2000 we announced the MaxAttach NAS 3000 line of server
appliances with enhanced software features that include disk mirroring and disk
spanning at storage capacities ranging from 40 to 81.5 gigabytes. These products
are designed to enable quick, easy, safe and cost-effective addition of storage
to business networks. Our MaxAttach NAS 4000 line of rack mounted server
appliances broadens client support to include UNIX/Linux in addition to Windows.
The MaxAttach 4000 is available in 160 and 320 gigabyte configurations, allowing
us to address the storage needs of larger workgroups, Internet service providers
and departmental market segments.
In October 2000, we announced our new external storage solution, the Maxtor
1394 External Storage product, which adds external storage to 1394-enabled PCs
and Macintosh computers.
PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of our turnaround was
the restructuring of our product development process to separate the enabling
technology development phase from the product design phase. In early 1996, we
suffered from poor product quality and performance and products that were late
to market. This contrasts sharply with today as we now enjoy strong customer
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including:
- working closely with our product design teams and strategic component
suppliers to create a variety of state-of-the-art technologies to be used
in our future products;
- developing early prototypes to ascertain the stability and
manufacturability of our planned products; and
- analyzing the latest head, disk, channel, motor and application specific
integrated circuit technologies and designs to broaden and strengthen our
technology platform.
This group also focuses on leveraging our current proven technology
platform by re-using as much electronic and mechanical technology as possible in
each successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in our products.
Product Design Phase. The creation of the advanced technology group as part
of our turnaround freed our existing product design group from the
responsibility of assessing the viability of new and emerging technologies and
allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing our new product introduction process. This
process is a highly disciplined review procedure designed to ensure that new
product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity and production ramp rates prior to release into volume
production.
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PRODUCTS
We currently provide hard disk drives exclusively for the desktop computer
market. Our DiamondMax product family consists of 3.5-inch hard disk drives with
storage capacities ranging from 5.1 gigabytes to 20.4 gigabytes. Our products
have a number of features including high speed interfaces for greater data
throughput, a robust mechanical design for improved reliability,
magneto-resistive and giant magneto-resistive head technology and a digital
signal processor-based electronic architecture that, when combined, provides
industry-leading performance.
The tables below sets forth key performance metrics for our DiamondMax
products dating from 1999:
DIAMONDMAX MODELS
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PLUS PLUS PLUS
5120* 6800* 6800* VL17 36 VL20 40 40 VL30 60
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Maximum Capacity
(GB).................. 20.4 27.3 27.3 17.4 36.5 20.4 40.9 40.9 30.7 61.4
Capacity per Disk
(GB).................. 5.1 6.8 6.8 9.1 9.1 10.2 10.2 10.2 15.3 15.3
Rotational Speed
(RPM)................. 7200 5400 7200 7200 5400 5400 5400 7200 5400 5400
First Shipment Date.... Mar. 99 Jun. 99 Jul. 99 Sep. 99 Sep. 99 Nov. 99 Nov. 99 Jan. 00 Apr. 00 Apr. 00
DIAMONDMAX MODELS
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PLUS PLUS
45 VL40 80 60
------- ------- ------- -------
Maximum Capacity
(GB).................. 45 40 80 60
Capacity per Disk
(GB).................. 15 20 20 20
Rotational Speed
(RPM)................. 7200 5400 5400 7200
First Shipment Date.... Jul. 00 Jul. 00 Aug. 00 Nov. 00
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* No longer in volume production.
The table below sets forth key performance metrics for our MNSG Products:
MNSG PRODUCTS
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MAXATTACH NAS 3000 NAS 4000 NAS 4000
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Maximum Capacity
(GB)................ 72 80 160 320
Client Support........ Microsoft Microsoft Microsoft, UNIX, Linux Microsoft, UNIX, Linux
Form Factor........... Desktop Desktop Rack Mount Rack Mount
First Shipment Date... 3rd Qtr. 99 1st Qtr. 00 2nd Qtr. 00 3rd Qtr. 00
Our DiamondMax product family has won a number of recent editorial and
industry awards including:
Winmag.com -- USA WinList -- DiamondMax Plus 40 -- January 2000
Computer Shopper -- USA Five Star Review -- DiamondMax Plus 40 -- March 2000
Maximum PC -- USA Kick Ass Product -- DiamondMax Plus 40 -- April 2000
PC/Computing -- USA A-List -- DiamondMax Plus 40 -- April 2000
Computer Shopper -- USA Best Buy -- DiamondMax Plus 40 -- April 2000
Computer Technology Resellers Choice -- DiamondMax 60 and DiamondMax VL30 --
Review -- USA April 2000
Computer Shopper -- USA Best Buy -- DiamondMax Plus 40 -- June 2000
Winmag.com -- USA Win 100 Award 2000 (Recommended Hardware Storage) --
DiamondMax Plus 40 -- June 2000
PC World -- USA PC World -- World Class (Best Hard Drive) -- DiamondMax
60 -- July 2000
Computer Shopper -- USA Best Buy -- DiamondMax 80 -- October 2000
Computer Shopper -- USA Top 100 Products of 2000 -- DiamondMax 60 -- October 2000
Winmag.com -- USA WinList -- DiamondMax Plus 60 -- December 2000
Our MaxAttach products received the following editorial awards in 2000:
Winmag.com -- USA Win 100 Award 2000 (Recommended Hardware Storage) --
MaxAttach 3000 -- June 2000
Computer Reseller News -- USA Editors' Choice -- MaxAttach 4000 -- August 2000
MANUFACTURING/QUALITY
To be competitive, we must manufacture high quality, highly manufacturable,
high performance hard disk drives with industry leading time-to-volume
production at competitive costs. Our hard disk drive
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manufacturing operations consist primarily of the final assembly of high-level
subassemblies built to our specifications and testing of completed products.
Manufacturing. Pilot production of our products, as well as cost reduction,
quality and product improvement engineering on current products, are conducted
at our Longmont, Colorado facility. We manufacture our hard disk drives in
volume at multiple facilities in Singapore, which uses a flexible, cell-based
process. The Singapore facility consists of modular production units ("MPUs"),
each of which contains a number of modular work cells ("MWCs"). Each MWC
essentially is a mini-serial production line consisting of all of the tooling
and test equipment necessary to build and test a hard disk drive. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. We coupled our cell-based manufacturing approach with a
sophisticated factory information system that collects data from each MWC on
various productivity and quality metrics.
In March 1999, we purchased two buildings in Singapore totaling
approximately 39,455 square meters and entered into a long-term lease of the
underlying land from Singapore's Housing Development Board. The property is
located near our current volume manufacturing facilities. Pursuant to a sublease
accompanying the option, we have taken possession of this facility and have
begun volume manufacturing and warehousing operations there.
Quality. Consistent with our goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, we have implemented a
corporate-wide quality program, which focuses on:
- robustness of design and improved design tolerances;
- quality of incoming parts and factory process control; and
- customer feedback, failure analysis and timely response.
In addition, our quality, materials, enabling technology and product
development groups work closely with leading component vendors in an effort to
ensure sufficient tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. Our Singapore facility also is
ISO 9002 certified. Finally, our executives meet regularly with customers to
exchange product quality information to facilitate rapid analysis of customer
failures and timely implementation of corrective actions.
MATERIALS AND SUPPLIES
We have developed and continue to develop strategic relationships with
leading suppliers of many of the key components for our hard disk drive
products. These relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and to reduce
component, inventory and overall product costs. In addition, our strategic
suppliers work closely with our advanced technology group, enabling us to gain
early access to leading-edge hard disk drive technology and to improve the
overall efficiency of our product design process.
We rely on a limited number of leading suppliers for the parts used in the
manufacturing of our products, including magneto-resistive heads and head stack
assemblies, media, custom integrated circuits, read channel integrated circuits,
printed circuit boards and motor/baseplate assemblies. In general, we seek to
have at least two or three suppliers for each of our component requirements.
Custom application specific integrated circuits, including our digital signal
processor controller chips, and channels, however, currently are sole-sourced
from Texas Instruments and Lucent, respectively. Because of their custom nature,
these products require significant design-in periods and long lead times. We
outsource a majority of our printed circuit board assembly to Celestica, Inc., a
successor to our former affiliate, International Manufacturing Services, Inc.
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as being
late to the market, had impacted adversely our ability to win business with
leading desktop computer manufacturers. As a result, we were heavily dependent
on sales to a large number of regional distributors which limited our ability to
forecast periodic shipments and shifted our product mix toward lower
performance, lower margin products. Recogniz-
8
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ing that the majority of the growth in shipments in the desktop computer market
was being captured by a limited number of desktop computer manufacturers, we
simplified our sales channels and focused our sales and marketing efforts on
becoming a significant provider of hard disk drives to leading desktop computer
manufacturers, including Dell, Fujitsu, Compaq, and IBM, and leading
distributors and retailers, including Xander International, Bell Micro, Ingram
and CompUSA. By emphasizing overall customer satisfaction, product quality and
performance and time-to-volume production, we believe that we have established a
strong customer base.
Manufacturers. Shipments to Dell, Fujitsu, Compaq, and IBM, our largest
desktop computer manufacturer customers, accounted for 3.8% of our total revenue
in the quarter ended June 29, 1996 and increased to 25.6% in the quarter ended
December 30, 2000. During the year ended December 26, 1998, two customers, Dell
and IBM, accounted for 27% and 15% of our revenue. During the years ended
January 1, 2000 and December 30, 2000, Dell accounted for 23% and 14% of our
revenue. We believe that our success depends on our ability to maintain and
further develop strong desktop computer manufacturer customer relationships and
to provide products that fit the needs of the desktop computer manufacturer
channel.
Distributors. We use a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed customers which
tend to hold very small market shares of the overall desktop computer market,
including value-added resellers, dealers, system integrators and small desktop
computer manufacturers. Distributors accounted for 15.4% of revenue for the year
ended December 26, 1998; 18.5% of revenue for the year ended January 1, 2000;
and 22.1% of revenue for the year ended December 30, 2000. Distributors
generally enter into non-exclusive agreements with us for purchase and
redistribution of product on a quick turnover basis. Purchase orders are placed
and revised on a weekly basis. We grant certain of our distributors price
protection and limited rights to return product on a rotation basis. Our major
distributors include Bell Micro, Xander International and Ingram.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, we sell our
retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores, and authorized
sales through distributors to smaller retailers. Retailers accounted for 8.1% of
revenue for the year ended December 26, 1998; 6.3% of revenue for the year ended
January 1, 2000; and 8.1% for the year ended December 30, 2000. Our current
retail customer base is in the United States and Canada; however, we have begun
efforts to establish a retail channel presence in the emerging retail markets in
Europe and Asia. We believe the retail channel complements other sales channels.
Retailers supply the after-market "upgrade" sector in which end-users purchase
and install products to upgrade their computers. We grant certain of our
retailers price protection and limited rights to return product on a rotation
basis.
SALES AND MARKETING
We market and sell our products to leading desktop computer manufacturers,
distributors and retailers. Representative offices are located throughout the
U.S. and in Australia, France, Germany, Great Britain, Hong Kong, Japan, Korea,
Singapore and Taiwan. We have formed multi-disciplined, dedicated account and
channel teams focused on each of its current and target strategic desktop
computer manufacturer, distributor and retail accounts. These teams generally
are comprised of representatives from our sales, marketing, engineering and
quality organizations. Our senior management also takes an active role in our
sales efforts. Dedicated field sales and technical support personnel are located
in close proximity to the manufacturing facilities of each of our desktop
computer manufacturer customers.
Our marketing and public relations functions are performed both internally
and through outside firms. Public relations, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments. We
utilize both consumer media and trade publications. We have programs under which
qualifying resellers are reimbursed for certain advertising expenditures. We
also have invested in direct marketing and customer satisfaction programs. We
maintain ongoing contact with end-users through primary and secondary market
research, focus groups, product registrations and technical support databases.
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BACKLOG
We generally sell standard products according to standard agreements or
purchase order terms. Delivery dates are specified by purchase orders. Such
orders may be subject to change, cancellation or rescheduling by the customer
without significant penalties. The quantity actually purchased and shipment
schedules are frequently revised to reflect changes in the customer's needs. In
addition, orders for our products are filled for several large customers from
just-in-time inventory warehouses, whereby orders are not placed ahead of time
on our order entry backlog system. Instead, we receive a periodic forecast of
requirements from the customer. Upon shipment from the just-in-time warehouse,
the customer is invoiced. In light of these factors, backlog reporting as of any
particular date may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor of our future
revenue.
COMPETITION
We compete primarily with manufacturers of 3.5-inch hard disk drives,
including Fujitsu, Quantum, Samsung, Seagate, IBM and Western Digital, some of
which have a larger share of the desktop hard disk drive market than ours.
We believe that important competitive factors in the hard disk drive market
are quality, storage capacity, performance, price, time-to-market introduction,
time-to-volume production, desktop computer manufacturer product qualifications,
breadth of product lines, reliability and technical service and support. We
believe we compete favorably with respect to these factors. See section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Performance."
INTELLECTUAL PROPERTY
We have been granted 181 U.S. and 77 foreign patents related to disk drive
products and technologies, and have additional patent applications pending in
the United States and certain foreign countries. We have patent protection on
certain aspects of our technology and also rely on trade secret, copyright and
trademark laws, as well as contractual provisions to protect our proprietary
rights. There can be no assurance that our protective measures will be adequate
to protect our proprietary rights; that others, including competitors with
substantially greater resources, have not developed or will not independently
develop or otherwise acquire equivalent or superior technology; or that we will
not be required to obtain licenses requiring us to pay royalties to the extent
that our products may use the intellectual property of others, including,
without limitation, our products that may also be subject to patents owned or
licensed by others. There can be no assurance that any patents will be issued
pursuant to our current or future patent applications, or that patents issued
pursuant to such applications or any patents we own or have license to use will
not be invalidated, circumvented or challenged. Moreover, there can be no
assurance that the rights granted under any such patents will provide
competitive advantages to us or be adequate to safeguard and maintain our
proprietary rights. Litigation may be necessary to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights or those of
others. We could incur substantial costs in seeking enforcement of our issued or
licensed patents against infringement or the unauthorized use of our trade
secrets and proprietary know-how by others or in defending ourselves against
claims of infringement by others, which could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
laws of certain countries in which our products are manufactured and sold,
including various countries in Asia, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States, and there can be no assurance that such laws will be enforced in an
effective manner. Any failure by us to enforce and protect our intellectual
property rights could have a material adverse effect on our business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors Affecting
Future Performance."
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EMPLOYEES
As of December 30, 2000, we had 8,551 employees worldwide, including 953 in
engineering, research and development; 207 in marketing, sales and customer
support; 7,210 in manufacturing; and 181 in executive, general management and
administration. As of December 30, 2000, we had 6,806 employees at our
manufacturing facilities in Singapore and 145 employees at our foreign sales
offices. None of our U.S. employees currently are represented by a labor
organization. In May 1997, our Singapore subsidiary recognized a labor union,
the United Workers of Electronic and Electrical Industries, and in November
1998, signed a three-year collective bargaining agreement with that union. We
believe that our employee relations are positive.
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company and their
ages as of March 3, 2000. There are no family relationships between any director
or executive officer of the Company. Executive officers serve at the discretion
of the Board of Directors.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Michael R. Cannon............ 48 President, and Chief Executive Officer
Paul J. Tufano............... 47 Senior Vice President, Finance, and Chief Financial
Officer
Dr. Victor B. Jipson......... 48 President, Network Systems Group
Dr. Pantelis S. 52 Vice President, Advanced Technology and Chief Technology
Alexopoulos................ Officer
David L. Beaver.............. 46 Vice President, Worldwide Materials
Michael D. Cordano........... 36 Vice President, Worldwide Sales
Ted Deffenbaugh.............. 38 Vice President, Consumer Electronics Applications
Phillip C. Duncan............ 50 Vice President, Human Resources and Facilities
Misha Rozenberg.............. 38 Vice President, Quality
Glenn H. Stevens............. 50 Vice President, General Counsel and Secretary
K. H. Teh.................... 46 Vice President, Worldwide Manufacturing & Managing
Director, Singapore
Michael J. Wingert........... 40 Vice President, Desktop Development
Michael R. Cannon has been our President and Chief Executive Officer since
July 1996. From 1993 until he joined us in 1996, Mr. Cannon held several senior
management positions with IBM's Storage Systems division, including Vice
President, Mobile and Desktop Business Unit; Vice President, Product Design; and
Vice President, Worldwide Operations. From May 1991 to January 1993, he served
as Senior Vice President of Syquest, a removable disk drive company, and prior
to joining SyQuest he held the position of Vice President, Southeast Asia
Operations, with Imprimis Technology. He is also director of MMC Technology, a
wholly owned subsidiary of Hyundai Electronics America.
Paul J. Tufano has been our Senior Vice President, Finance since November
1998 and Chief Financial Officer since July 1996. From July 1996 to his
appointment as Senior Vice President, Finance Mr. Tufano served as our Vice
President, Finance. From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM. Mr. Tufano was Manager of Worldwide Logistics for IBM's
storage systems division. Other management positions included Manager of Plans
and Controls for IBM's Desktop and Mobile Storage products business unit, and
Controller for IBM's San Jose, California facility. Until December 30, 1998, Mr.
Tufano was a director of International Manufacturing Services, Inc., a major
electronic manufacturing service company.
Dr. Victor B. Jipson has been President of our Network Systems Group since
October 1999. From December 1995 until his appointment as President, Network
Systems Group, he served as our Senior Vice President, Engineering. From 1991 to
1995, he was General Manager of IBM's Optical Storage Solutions business unit.
From 1975 to 1991, Dr. Jipson held key management positions in research,
technical strategy, product strategy and research and development with IBM.
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Dr. Pantelis S. Alexopoulos has been our Vice President, Advanced
Technology and Chief Technology Officer since April 1997. Before joining Maxtor
in 1996, Mr. Alexopoulus spent 14 years at IBM, the most recent position being
Manager, Head-Disk Interface and Advance Files, Storage Systems and Technology
at the Almaden Research Laboratory.
David L. Beaver has been our Vice President, Materials since May 1998. From
1994 to 1997, he was Director of Operations -- Materials at EMASS, a data
storage company, and from 1991 to 1994, he was Director of Corporate Materials
Procurement at SyQuest.
Michael D. Cordano has been our Vice President, Worldwide Sales since
August 1999. Prior to his promotion, he held the position of Vice President,
Global Sales. Prior to joining Maxtor in 1994, Mr. Cordano held various sales
positions at Conner Peripherals, Inc.
Ted Deffenbaugh has been our Vice President, Consumer Electronics
Applications since May 2000. Prior to joining Maxtor, Mr. Deffenbaugh was with
Quantum Corporation working in the areas of creative strategic alliances,
product planning, technical marketing and standards committee representation. He
also worked at IBM in various management roles in marketing, engineering and
public relations.
Philip C. Duncan has been our Vice President, Human Resources since August
1996. From 1994 to 1996, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems, a software company. From 1992
to 1994, he held senior human resources management positions at SyQuest, and
from 1990 to 1992, he held similar positions at Cirrus Logic, a semiconductor
company.
Misha Rozenberg has been Vice President, Quality since March 1998. From
1996 to 1998, he was Vice President, Supplier Engineering. From 1994 to 1996,
Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner
Peripherals, Inc., a disk drive company. From 1990 to 1994, he was a Manager
with Apple Computer.
Glenn H. Stevens has been our Vice President, General Counsel and Secretary
since June 1994. From 1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal department at U S West,
Inc., a telecommunications products and services provider, including Chief
Counsel and Secretary for its research and development organization and Chief
Intellectual Property Counsel for the family of U S West companies.
K. H. Teh has been our Vice President, Worldwide Manufacturing since May
1997. From 1996 to 1997, he was with Iomega, a removable disk drive company,
where he had been Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was a Managing Director, Malaysia Manufacturing, with Quantum,
and was a Senior Director with Syquest from 1993 to 1994.
Michael J. Wingert has been our Vice President, Desktop Engineering since
November 1999. Previously he was the Vice President, Engineering for five years.
Prior to joining Maxtor in 1994, Mr. Wingert held various senior management
positions in product testing and development at IBM.
ITEM 2. PROPERTIES
Our sales and administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California. HEA is
currently an unconditional guarantor of our facilities lease in Milpitas,
California.
We also maintain 373,457 square feet of engineering and pilot production
facilities as well as administrative, marketing and materials facilities in
Longmont, Colorado. All of our domestic facilities are leased. Our leases for
our Longmont, Colorado facility begin to expire on December 2001. We have
entered into a lease for a new facility in Longmont, Colorado of 450,090 square
feet, to be completed in April 2001. The new lease has a 15-year term and is
renewable for five years. There can be no assurance that we will be able to
obtain additional space that can accommodate our needs.
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Our volume manufacturing facilities are located in buildings in Singapore
totaling approximately 734,000 square feet, which are located on two parcels of
leased land with leases terminating in 2016 (with an option to renew for 30
years) and 2018 (with an option to renew for 30 years).
We also lease various sales and support facilities in Australia, France,
Germany, Hong Kong, Ireland, Japan, Korea, Singapore, Taiwan, United Kingdom,
and the United States. The aggregate rent under all of our leases is currently
$9.1 million per annum.
ITEM 3. LEGAL PROCEEDINGS
We were previously involved in a dispute with StorMedia Incorporated, which
arose out of an agreement among Maxtor, StorMedia and Hyundai Electronics
Industries. On February 8, 2001, the Bankruptcy Court for the Northern District
of California, San Jose Division, entered an order implementing and approving as
fair and reasonable the terms of a settlement agreement, pursuant to which
Hyundai and Maxtor have paid to StorMedia an aggregate of $9.7 million in
settlement of the parties' dispute. This settlement amount is accrued in
Maxtor's fiscal year 2000 financial statements. The settlement is now final and
all cases relating to this matter have been dismissed.
We also have also been in litigation with Magnetic Media Development, LLC,
or MMD, in the United States District Court for the Central District of
California, over assertions that we infringed certain patents owned by MMD. The
patents relate to magnetic media that we purchase from third party media vendors
for use in our hard disk drives. We made a settlement payment on March 26, 2001
to MMD and obtained a release from MMD of all claims asserted or that could have
been asserted against us. Additionally, we have obtained a paid-up license for
any future activities that may come within the scope of the MMD patents. The
pending lawsuit is in the process of being dismissed by the court with
prejudice.
On March 18, 1999, we were sued by Papst Licensing, GmbH, a German
corporation, for infringement of patents that relate to hard disk drives. Papst
has asserted that Maxtor infringes 13 patents. The lawsuit had been pending in
the United States District Court for the Northern District of California, but
was transferred with other litigation involving Papst patents to the United
States District Court for the Eastern District of Louisiana by the Judicial
Panel on Multidistrict Litigation for consolidated or coordinated proceedings.
Papst's infringement allegations are based on spindle motors that Maxtor
purchases from third party motor vendors, and the use of such spindle motors in
hard disk drives. Maxtor purchased the overwhelming majority of the spindle
motors used in its hard disk drives from vendors that were licensed under
Papst's patents.
While we believe that we have valid defenses to Papst's claims, the results
of any litigation are inherently uncertain and other infringement claims
relating to current patents, pending patent applications, and/or future patent
applications or issued patents could be asserted by Papst. Additionally, we
cannot assure you that we will be able to successfully defend ourself against
this or any other Papst lawsuit. The Papst complaint asserts claims to an
unspecified dollar amount of damages. A favorable outcome for Papst in this
lawsuit could result in the issuance of an injunction against us and our
products and/or the payment of monetary damages equal to a reasonable royalty.
In the case of a finding of a willful infringement, we also could be required to
pay treble damages and Papst's attorney's fees. Accordingly, a litigation
outcome favorable to Papst could harm our business, financial condition, and
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 30, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been trading publicly on the Nasdaq National Market
under symbol "MXTR" since July 31, 1998. The table below sets forth the range of
quarterly high and low closing sales prices for our common stock on the Nasdaq
National Market. Our fiscal year end is the last Saturday of December,
conforming to a 52/53-week year methodology.
HIGH LOW
------ -----
Fiscal 2001 First Quarter (through March 3, 2001)........... $ 8.50 $5.09
Fiscal 2000 Fourth Quarter.................................. 11.00 5.13
Fiscal 2000 Third Quarter................................... 11.25 5.50
Fiscal 2000 Second Quarter.................................. 13.75 9.81
Fiscal 2000 First Quarter................................... 14.69 6.25
Fiscal 1999 Fourth Quarter.................................. 7.25 4.94
Fiscal 1999 Third Quarter................................... 7.31 4.69
Fiscal 1999 Second Quarter.................................. 8.25 4.53
Fiscal 1999 First Quarter................................... 19.56 7.78
As of March 3, 2001, there were approximately 190 stockholders of record of
our common stock including The Depository Trust Company which holds shares of
Maxtor common stock on behalf of an indeterminate number of beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our stock and do not anticipate paying
cash dividends in the near future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents the consolidated financial information for the
periods indicated:
NINE MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26, JANUARY 1, DECEMBER 30,
1996(1) 1997 1998 2000 2000
------------ ------------ ------------ ----------- ------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 798.9 $1,424.3 $2,408.5 $2,486.1 $2,704.8
Cost of revenue........................... 888.9 1,352.9 2,108.1 2,287.3 2,328.3
--------- -------- -------- -------- --------
Gross profit (loss).................. (90.0) 71.4 300.4 198.8 376.5
--------- -------- -------- -------- --------
Operating expenses:
Research and development................ 87.8 106.2 158.4(3) 192.8 235.0
Selling, general and administrative..... 60.7 62.6 81.9(3) 90.5 110.5
Acquired in-process technology.......... -- -- -- 7.0 --
Amortization of goodwill and other
intangible assets.................... -- -- -- 3.1 9.9
Other................................... -- -- -- -- --
--------- -------- -------- -------- --------
Total operating expenses........ 148.5 168.8 240.3(3) 293.4 355.4
--------- -------- -------- -------- --------
Income (loss) from operations............. (238.5) (97.4) 60.1(3) (94.6) 21.1
Interest expense.......................... (18.0) (36.5) (28.8) (13.7) (13.7)
Interest and other income................. 1.0 25.0(2) 7.4 15.6 24.3
Gain on sale of investment................ -- -- -- 44.1 1.8
--------- -------- -------- -------- --------
Income (loss) before income taxes......... (255.5) (108.9) 38.7(3) (48.6) 33.5
Provision for income taxes................ 0.8 1.0 7.5 1.5 1.7
--------- -------- -------- -------- --------
Net income (loss)......................... $ (256.3) $ (109.9)(2) $ 31.2(3) $ (50.1) $ 31.8
========= ======== ======== ======== ========
Net income (loss) per share -- basic...... $ -- $ -- $ 0.81 $ (0.48) $ 0.28
Net income (loss) per
share -- diluted(4)..................... $ --(4) $ --(4) $ 0.47 $ (0.48) $ 0.28
========= ======== ======== ======== ========
Shares used in per share calculation (in
thousands):
Basic................................... -- -- 38,295 105,503 113,433
--------- -------- -------- -------- --------
Diluted................................. -- -- 65,814 105,503 119,116
--------- -------- -------- -------- --------
Pro forma net loss per share -- diluted... $ (17.62) $ (3.62) $ 0.47 $ (0.48) $ 0.27
========= ======== ======== ======== ========
Shares used in pro forma calculation (in
thousands).............................. 14,552 30,350 65,814 105,503 119,116
========= ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets.............................. $ 314.5 $ 555.5 $ 863.4 $ 906.3 $1,024.9
Total current liabilities................. 412.9 552.2 548.9 537.2 628.9
Long-term debt............................ 229.1 224.3 145.0 113.8 92.3
Total stockholders' equity (deficit)...... (327.5) (221.0) 169.4 255.3 303.7
- ---------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform our fiscal year to that of Hyundai Electronics America.
(2) Includes recovery of a $20.0 million fully-reserved note from IMS.
(3) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. The charge was allocated equally to research and development
and selling, general and administrative expenses. Without such charge, we
would have had research and development expenses of $152.4 million, selling,
general and administrative expenses of $75.8 million, total operating
expenses of $228.2 million, income from operations of $72.2 million, income
before income taxes of $50.8 million and net income of $43.3 million. Our
1996 Stock Option Plan was amended and restated to remove the variable
features and provide for fixed award options. See Note 10 of notes to
consolidated financial statements.
(4) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 have not been presented since such information is
not meaningful due to the limited number of shares of common stock
outstanding at that time.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 1:
BUSINESS, ITEM 6: SELECTED FINANCIAL INFORMATION AND ITEM 8: CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
OVERVIEW
In February 1999, we completed a public offering of 7.8 million shares of
our common stock. We received net proceeds of approximately $95.8 million from
the offering, net of issuance costs. A portion of the proceeds from the offering
was used to prepay without penalty outstanding aggregate principal indebtedness
of $55 million owing to HEA under a subordinated note due July 31, 2001.
In September 1999, we acquired privately held Creative Design Solutions,
Inc. ("CDS"), a leading participant in the emerging network attached storage
market. We are transitioning from only being a supplier of hard disk drives for
the desktop personal computer market to a company well positioned to provide
storage solutions that will deliver outstanding price and performance values in
networked environments.
We formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of CDS. MNSG concentrates on products and offerings in or related to
the Networked Attached Storage ("NAS") market.
Maxtor and Quantum Corporation have entered into an Amended and Restated
Agreement and Plan of Merger and Reorganization dated as of October 3, 2000.
Under the Merger Agreement, Quantum has agreed to split off its hard disk drive
business, which will then be combined with Maxtor by a merger. In the merger,
each holder of Quantum HDD common stock will receive 1.52 shares of Maxtor
common stock for each share of Quantum HDD common stock held by such person.
Immediately following the merger, the former holders of Maxtor common stock will
hold not more than 49.9% of the total outstanding common stock of Maxtor and
former holders of Quantum HDD common stock will hold not less than 50.1% of
Maxtor's outstanding common stock. The merger is subject to customary
conditions, including receipt of stockholder approval. The merger proposal and
other matters have been submitted for stockholder approval to the holders of
Quantum and Maxtor common stock at special meetings of stockholders to be held
on March 30, 2001. In connection with the proposed merger, Maxtor filed a
registration statement on Form S-4 with the Securities and Exchange Commission.
INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENT
AND THE PROXY STATEMENT-PROSPECTUS BECAUSE THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE PROPOSED MERGER. Investors and security holders may obtain a free copy
of the registration statement and the proxy statement-prospectus and other
documents filed by Maxtor with the Securities and Exchange Commission at the
Securities and Exchange Commission's web site at http://www.sec.gov. Free copies
of the registration statement and other documents filed by Maxtor with the
Securities and Exchange Commission may also be obtained from Maxtor by directing
a request to Maxtor, Attention: Jenifer Kirtland, 408-432-4270.
INTELLECTUAL PROPERTY
When we were a majority-owned subsidiary of HEA, we had the benefit of
certain third-party intellectual property rights on terms that may have been
more favorable than would have been available to us if we have not been a
majority-owned subsidiary of HEA. On June 25, 1998, we entered into an agreement
with HEA whereby we agreed to pay an allocated share of the license fees
associated with certain third party rights in annual installments ranging from
$1.0 million to $2.3 million through 2007. For the year ended December 30, 2000,
we recorded an expense of $1.9 million in connection with this commitment. There
can be no assurance that we will be able to obtain similar rights in the future
on terms as favorable as those currently available to us.
REVENUE RECOGNITION
We generally recognize revenue upon shipment to our customers. Sales to
certain distributors and retailers are governed by agreements providing limited
rights of return, as well as price protection on unsold merchandise.
Accordingly, we record reserves upon shipment for estimated returns, exchanges
and credits for
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price protection. We also record reserves for the estimated cost to repair or
replace products under warranty at the time of sale. We warrant our products
against defects in parts and labor for a period of three years from the date of
shipment, with an additional three months allowed for distributors to account
for "shelf life."
TAX MATTERS
The provision for income taxes consists primarily of state and foreign
taxes. Due to our net operating losses ("NOLs"), NOL carryforwards and favorable
tax status in Singapore, we have not incurred any significant foreign, U.S.
federal, state or local income taxes for any recent fiscal periods. Future tax
benefits from current operating losses have not been recognized in the current
fiscal year because of the uncertainty concerning their realization.
As a result of the July 1998 public offering of our common stock, which
caused an "ownership change" for federal and state income tax purposes, a
significant portion of the NOL carryforwards is restricted in its utilization.
Details are provided in the footnotes to the financial statements.
We were part of the HEA consolidated group for federal income tax purposes
during the period from early 1996 to August 1998. Pursuant to a "Tax Allocation
Agreement" we were liable for our allocable share of the total consolidated tax
return liability during this period. The HEA consolidated group has used
substantial amounts of our NOLs and other tax attributes. Under the Tax
Allocation Agreement, neither HEA nor Maxtor was required to reimburse the other
for any utilization of the other member's NOLs or other tax attributes.
YEARS ENDED
----------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
(IN MILLIONS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................. 2,408.5 2,486.1 2,704.8
Cost of revenue..................................... 2,108.1 2,287.3 2,328.3
------- ------- -------
Gross profit...................................... 300.4 198.8 376.5
------- ------- -------
Operating expenses:
Research and development.......................... 158.4(1) 192.8 235.0
Selling, general and administrative............... 81.9(1) 90.5 110.5
Acquired in-process technology.................... -- 7.0 --
Amortization of goodwill and other intangible
assets......................................... -- 3.1 9.9
------- ------- -------
Total operating expenses.......................... 240.3(1) 293.4 355.4
------- ------- -------
Income (loss) from operations....................... 60.1(1) (94.6) 21.1
Interest expense.................................... (28.8) (13.7) (13.7)
Interest and other income........................... 7.4 15.6 24.3
Gain on sale of investment.......................... -- 44.1 1.8
------- ------- -------
Income (loss) before income taxes................... 38.7(1) (48.6) 33.5
Provision for income taxes.......................... 7.5 1.5 1.7
------- ------- -------
Net income (loss)................................... 31.2(1) (50.1) 31.8
======= ======= =======
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YEARS ENDED
----------------------------------------------
DECEMBER 26, JANUARY 1, DECEMBER 30,
1998 2000 2000
------------ ---------- ------------
(IN MILLIONS)
AS A PERCENTAGE OF REVENUE:
Revenue............................................. 100.0% 100.0% 100.0%
Cost of revenue..................................... 87.5 92.0 86.1
------- ------- -------
Gross profit...................................... 12.5 8.0 13.9
------- ------- -------
Operating expenses:
Research and development.......................... 6.6(1) 7.8 8.7
Selling, general and administrative............... 3.4(1) 3.6 4.0
Acquired in-process technology.................... -- 0.3 --
Amortization of goodwill and other intangible
assets......................................... -- 0.1 0.4
------- ------- -------
Total operating expenses.......................... 10.0(1) 11.8 13.1
------- ------- -------
Income (loss) from operations....................... 2.5(1) (3.8) 0.8
Interest expense.................................... (1.2)(1) (0.6) (0.5)
Interest and other income........................... 0.3 0.6 0.9
Gain on sale of investment.......................... -- 1.8 --
------- ------- -------
Income (loss) before income taxes................... 1.6(1) (2.0) 1.2
Provision for income taxes.......................... 0.3 0.1 0.1
------- ------- -------
Net income (loss)................................... 1.3%(1) (2.0)% 1.1%
======= ======= =======
- ---------------
(1) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. The charge was allocated equally to research and development
and selling, general and administrative expenses. Without such charge, we
would have had research and development expenses of $152.4 million, selling,
general and administrative expenses of $75.8 million, total operating
expenses of $228.2 million, income from operations of $72.2 million, income
before income taxes of $50.8 million and net income of $43.3 million. Our
1996 Stock Option Plan was amended and restated to remove the variable
features and provide for fixed award options. See Note 10 of notes to
consolidated financial statements.
COMPARISON OF 1998, 1999 AND 2000
Revenue. In 1998, we generated revenue of $2,408.5 million compared with
revenue of $2,486.1 million in 1999 and $2,704.8 million in 2000. Revenue
increased 3.2% from 1998 to 1999 and 8.8% from 1999 to 2000. The increase in
revenue in both years was due primarily to an increase in unit shipments arising
from improved time-to-market introduction and time-to-volume production. Revenue
from sales to desktop computer manufacturers was 76.5%, 75.9%, and 69.8% of our
revenue in 1998, 1999 and 2000, respectively. Actual revenue from sales to
desktop computer manufacturers slightly increased in each of these years. The
decline in the percentage of revenue contribution from desktop computer
manufacturers reflects the expansion of our sales to distributors and into the
retail channel. Throughout 1998 and 1999, revenue growth from increased unit
shipments was partially offset by rapid price erosion in the hard disk drive
market as a whole, which resulted in a decline in average selling prices. We
believe that the effect of hard disk drive market average selling price declines
on our average selling prices was contained partially by our improved
time-to-market introduction and time-to-volume production, and by Maxtor's trend
toward shipping higher capacity hard disk drives, which tend to have higher
initial average selling prices. Revenue and unit volume growth in 2000 were
favorably impacted by continued time to market performance, increased
penetration of the distribution channel, a continued trend to shipping higher
capacity drives.
Cost of Revenue; Gross Profit. Gross profit decreased from $300.4 million
in 1998 to $198.8 million in 1999 and increased to $376.5 million in 2000. Gross
margin as a percentage of revenue decreased from 12.5%
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in 1998 to 8.0% in 1999 and increased to 13.9% in 2000. The decrease in gross
margin from 1998 to 1999 was due primarily to rapid price erosion in the hard
disk drive market as a whole, which resulted in a decline in average selling
prices for our products. The increase in gross margin from 1999 to 2000 is due
primarily to manufacturing efficiencies including product designs, lower
component costs, and price moderations.
OPERATING EXPENSES
Research and Development Expense. Research and development ("R&D") expense
as a percentage of revenue was 6.6%, 7.8% and 8.7% in 1998, 1999 and 2000,
respectively. From 1998 to 1999, R&D expense as a percentage of revenue
increased by 1.2% and the absolute dollar level of R&D spending increased from
$158.4 million in 1998 to $192.8 million in 1999. These increases were due to
our continued efforts to develop new products for the desktop computer market
and future products in other hard disk drive segments and the NAS market. From
1999 to 2000, R&D expense as a percentage of revenue increased by 0.9% and the
absolute dollar level of spending increased from $192.8 million to $235.0
million. These increases are primarily due to our continued efforts to maintain
leadership products and to address the requirements of the desktop PC market as
well as investments in the NAS division.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expenses as a percentage of revenue were 3.4%, 3.6% and
4.0% in 1998, 1999 and 2000, respectively. The absolute dollar level of SG&A
expense increased from $81.9 million in 1998 to $90.5 million in 1999 and to
$110.5 million in 2000. The increases in SG&A expenses were primarily due to
costs associated with supporting our higher sales volume and increased emphasis
in the distribution and retail markets.
Acquired In-Process Technology. The acquired in-process technology charge
of $7 million in 1999 resulted from the acquisition of CDS. The value of the
acquired in-process technology was determined using a combination of
risk-adjusted income approaches and an independent valuation. The total amount
of $7 million was charged to operations as the technology had not reached the
stage of technological feasibility at the date of acquisition and had no future
alternative use.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets represents the amortization of goodwill and
other intangible assets related to the acquisition of CDS. Such amortization
amounted to $3.1 million in 1999 and $9.9 million in 2000.
Interest Expense. Interest expense was $28.8 million in 1998 and $13.7
million in 1999 and 2000, representing a 52.4% decrease from 1998 to 1999. As a
percentage of revenue, interest expense was 1.2%, 0.6% and 0.5% in 1998, 1999
and 2000, respectively. The decrease from year to year was due to the reduction
in borrowings.
As of December 26, 1998, January 1, 2000 and December 30, 2000, we had $5.3
million, $5.0 million and $15.4 million of short-term borrowings and $145.0
million , $113.8 million and $92.3 million of long-term indebtedness
outstanding, respectively.
Interest and Other Income. Interest and other income was $7.4 million,
$15.6 million and $24.3 million in 1998, 1999 and 2000, respectively. As a
percentage of revenue, interest and other income was 0.3%, 0.6% and 0.9% in
1998, 1999 and 2000, respectively. The increase was due primarily to the overall
increase in cash and marketable securities as a result of our public offerings
in 1998 and 1999.
Gain on Sale of Investment. During 1999, we sold our equity investment in
Celestica, Inc., resulting on a gain on sale of investment of $44.1 million.
During 2000, we sold our investment in Headway Technologies, Inc., resulting in
a gain on sale of investment of $1.8 million.
YEAR 2000 READINESS
We have not experienced any known material adverse impacts on our current
products, internal information systems, and non-information technology systems
(equipment and systems) as a result of the year 2000 issue. Based on the work
done, we have not incurred material costs to address the year 2000 readiness of
our systems (as a result of relatively new systems) and products.
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LIQUIDITY AND CAPITAL RESOURCES
As of December 30, 2000, we had $376.2 million in cash and cash equivalents
and marketable securities as compared to $353.9 million as of January 1, 2000.
In February 1999, we completed an underwritten secondary public offering of
7,800,000 newly issued shares of our common stock and received $95.8 million,
net of offering costs and expenses.
Operating activities provided net cash of $129.3 million for the year ended
December 30, 2000. The cash provided from operating activities was principally
generated from net income and the increase in accounts payable and accrued
expenses, which was partially offset by the increase in accounts receivable and
other assets. We used $183.4 million in investing activities during 2000,
principally for the purchase of property, plant and equipment and marketable
securities. For the twelve months ended December 30, 2000, we reduced short and
long-term debt by $5.0 million.
As of December 30, 2000, our outstanding debt consisted primarily of $79.9
million in publicly traded 5.75% Subordinated Debentures and a $27.8 million
loan from the Economic Development Board of Singapore. The Debentures, which are
due March 1, 2012, are entitled to annual sinking fund payments of $5.0 million,
which commenced March 1, 1998. The loan from the Economic Development Board of
Singapore is payable in seven equal semi-annual installments beginning March
2001. Interest is payable at 1% above the prevailing Central Provident Fund
lending rate, subject to a minimum of 3.5% per year.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. As of December 30, 2000,
$75.0 million of accounts receivable have been sold under this arrangement and
excluded from our accounts receivable balance.
We believe the existing capital resources, together with cash generated
from operations and borrowing capacity, will be sufficient to fund our
operations through at least the next 12 months. We require substantial working
capital to fund our business, particularly to finance accounts receivable and
inventory, and to invest in property, plant and equipment. In 2001, capital
expenditures are expected to be between approximately $150 million and $200
million, to be used principally for research and development activities, without
giving effect to the Quantum HDD business combination. We intend to seek
financing arrangements, including a line of credit, to fund our future capacity
expansion plans, as necessary. However, our ability to generate cash will depend
on, among other things, demand in the desktop hard disk drive market and pricing
conditions. If we need additional capital, there can be no assurance that such
additional financing can be obtained, or, if obtained, that it will be available
on satisfactory terms. See discussion below under the heading "Certain Factors
Affecting Future Performance."
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Derivatives Instruments and Hedging Activities -- An Amendment of FASB Statement
No. 133." SFAS No. 138 amends the accounting and reporting standards for certain
derivatives and hedging activities such as net settlement contracts, foreign
currency transactions and intercompany derivatives. We are required to adopt
SFAS 133 in the first quarter of fiscal 2001. The initial adoption of SFAS 133
is not material to our financial statements and the impact on future periods
will depend on our future activity.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC issued SAB
No. 101A to defer for one quarter the effective date of implementation of SAB
101 with earlier application encouraged. Subsequently, in June 2000, the SEC
issued SAB No. 101B to defer the implementa-
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tion of SAB 101 until the fourth quarter of 2000. We have adopted the provisions
of SAB 101 in these financial statements for all periods presented and there is
no material impact to the financial statements that results from the adoption of
SAB 101.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions in SFAS 125 without reconsideration. SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities, is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. SFAS 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This Statement is to be
applied prospectively with certain exceptions. We have adopted the provisions of
SFAS No. 140.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
WE HAVE A HISTORY OF LOSSES AND MAY NOT SUSTAIN PROFITABILITY.
We have a history of significant losses. In the last five fiscal years, we
have been profitable in only fiscal years 1998 and 2000. Although we achieved
profitability in the most recent fiscal year, we cannot assure you that we will
sustain such profitability.
THE DECLINE OF AVERAGE SELLING PRICES IN THE HARD DISK DRIVE INDUSTRY COULD
CAUSE OUR OPERATING RESULTS TO SUFFER AND MAKE IT DIFFICULT FOR US TO ACHIEVE
PROFITABILITY.
It is very difficult to achieve and maintain profitability and revenue
growth in the hard disk drive industry because the average selling price of a
hard disk drive rapidly declines over its commercial life as a result of
technological enhancement, productivity improvement and increase in the industry
supply. End-user demand for the computer systems that contain our hard disk
drives has historically been subject to rapid and unpredictable fluctuations. As
a result, the hard disk drive market tends to experience periods of excess
capacity and intense price competition. When competitors lower prices to
liquidate excess inventories, restructure, or attempt to gain market share,
average selling prices also decline. This intense price competition could force
us to lower prices, which would reduce margins, cause operating results to
suffer and make it difficult for us to achieve or maintain profitability. In
addition, the growth of the lower priced personal computer market has forced the
cost of desktop hard disk drives to decline. If we are unable to lower the cost
of our hard disk drives for the lower-priced personal computer market, we will
not be able to compete effectively and our operating results would suffer.
THE MARKET PRICE OF OUR COMMON STOCK FLUCTUATED SUBSTANTIALLY IN THE PAST AND IS
LIKELY TO FLUCTUATE IN THE FUTURE AS A RESULT OF A NUMBER OF FACTORS SUCH AS THE
RELEASE OF NEW PRODUCTS BY US OR OUR COMPETITORS, THE LOSS OR GAIN OF
SIGNIFICANT CUSTOMERS OR CHANGES IN STOCK MARKET ANALYSTS' ESTIMATES.
The market price of our common stock and the number of shares traded each
day has varied greatly. Such fluctuations may continue due to numerous factors
including:
- quarterly fluctuations in operating results;
- announcements of new products by us or our competitors such as products
that address additional hard disk drive segments;
- gains or losses of significant customers such as Dell, Compaq or IBM;
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- changes in stock market analysts' estimates;
- the presence or absence of short-selling of our common stock;
- events affecting other companies that the market deems comparable to
Maxtor;
- general conditions in the semiconductor and electronic systems
industries; and
- general economic conditions in the United States and abroad.
OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SUBSTANTIALLY IN THE PAST AND
ARE LIKELY TO FLUCTUATE IN THE FUTURE.
Our quarterly operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. Our future performance will
depend on many factors, including:
- the average selling price of our products;
- fluctuations in the demand for our products as a result of the cyclical
and seasonal nature of the desktop computer industry;
- the availability, and efficient use, of manufacturing capacity;
- competitors introducing better products at competitive prices before we
do;
- new competitors entering our market;
- our ability to successfully qualify our products with our customers;
- our customers canceling, rescheduling or deferring orders;
- our ability to purchase components at competitive prices;
- the availability of adequate capital resources; and
- other general economic and competitive factors.
Many of our expenses are relatively fixed and difficult to reduce or
modify. As a result, the fixed nature of our operating expenses will magnify any
adverse effect of a decrease in revenue on our operating results. If our future
operating results are below the expectations of stock market analysts, our stock
price may decline.
OUR STOCK PRICE MAY BE AFFECTED BY SALES OF OUR COMMON STOCK BY HYUNDAI
ELECTRONICS AMERICA OR ITS OFFICIALS.
Our stock price may be affected by sales of our common stock by Hyundai
Electronics America or the perception that such sales may occur due to the
financial condition of Hyundai Electronics America affiliates or otherwise.
Hyundai Electronics America has informed us that it may consider selling
additional Maxtor shares at a time it deems appropriate.
In February 1999, DECS Trust IV, a newly formed trust, sold 12,500,000 DECS
to several institutional investors in a registered public offering. The DECS are
securities that represent all of the beneficial interest in DECS Trust IV, which
owns U.S. treasury securities and a prepaid forward contract to purchase Maxtor
common stock from Hyundai Electronics America. The trust will terminate on or
shortly after February 15, 2002, or upon earlier liquidation of DECS Trust IV
under certain circumstances. When the trust terminates, Hyundai Electronics
America will deliver, at its option, either cash or Maxtor common stock to the
trust. If holders of DECS receive shares of Maxtor common stock at the
termination of the trust, such holders may sell those shares distributed to them
in the open market at or after the distribution occurs. We cannot predict
whether Hyundai Electronics America will deliver shares of Maxtor stock to the
trust on its termination or when or whether holders of the DECS will resell any
shares of Maxtor stock they receive. Further, any market that develops for the
DECS could reduce the demand for our common stock or otherwise negatively impact
the market price of our common stock.
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IF WE FAIL TO QUALIFY AS A SUPPLIER TO DESKTOP COMPUTER MANUFACTURERS, THEN
THESE MANUFACTURERS MAY NOT PURCHASE ANY UNITS OF AN ENTIRE PRODUCT LINE WHICH
WILL HAVE A SIGNIFICANT IMPACT ON OUR SALES.
Most of our products are sold to desktop computer manufacturers. These
manufacturers select or qualify their hard disk drive supplies based on quality,
storage capacity, performance and price. Manufacturers typically seek to qualify
three or four suppliers for each hard disk drive product generation. To qualify
consistently with these manufacturers and thus succeed in the desktop hard disk
drive industry, we must consistently be among the first-to-market introduction
and first-to-volume production at leading storage capacity per disk, offering
competitive prices and high quality. Once a manufacturer has chosen its hard
disk drive suppliers for a given desktop computer product, it often will
purchase hard disk drives from those suppliers for the commercial lifetime of
that product line. If we miss a qualification opportunity, we may not have
another opportunity to do business with that manufacturer until it introduces
its next generation of products. The effect of missing a product qualification
opportunity is magnified by the limited number of high volume manufacturers of
personal computers. If we do not reach the market or deliver volume production
in a timely manner, we may lose opportunities to qualify our products. In such
case, our gross margins would decline due to rapidly declining average selling
prices, and we would lose market share. Loss of market share would have a
negative impact on our business, financial condition and operating results.
BECAUSE WE WILL BE SUBSTANTIALLY DEPENDENT ON DESKTOP COMPUTER DRIVE SALES, A
DECREASE IN THE DEMAND FOR DESKTOP COMPUTERS COULD REDUCE DEMAND FOR OUR
PRODUCTS.
Although there has been significant growth in the demand for desktop
computers over the past several years, according to International Data
Corporation, the growth rate in desktop computer sales has slowed in recent
fiscal quarters. Because we will rely substantially on the desktop segment of
the personal computer industry, we will be affected more by changes in market
conditions for desktop computers than a company with a broader range of
products. Any decrease in the demand for desktop computers could reduce the
demand for our products, harming our business.
IF WE DO NOT DIVERSIFY OUR OPERATIONS, EXPAND INTO NEW HARD DRIVE MARKET
SEGMENTS, OR CONTINUE TO MAINTAIN OUR PRESENCE IN THE DESKTOP MARKET, OUR
REVENUES WILL SUFFER.
To remain a significant supplier of hard disk drives to major manufacturers
of personal computers, we will need to offer a broad range of hard disk drive
products to our customers. Although our current products are designed for the
largest segment of the hard disk drive industry, the desktop computer area,
demand may shift to other segments over time. None of our products yet serve the
laptop personal computer segment. Accordingly, we will need to develop and
manufacture new products that address additional hard disk drive segments and
emerging technologies to remain competitive in the hard disk drive industry. We
cannot assure you that we will:
- successfully or timely develop or market any new hard disk drives in
response to technological changes or evolving industry standards;
- avoid technical or other difficulties that could delay or prevent the
successful development, introduction or marketing of new hard disk
drives;
- successfully qualify new hard disk drives, particularly high-end hard
disk drives, with customers by meeting their performance and quality
specifications;
- quickly achieve high volume production of new hard disk drives; or
- achieve market acceptance of our new products.
Any failure to successfully develop and introduce new products for our
existing customers or to address specifically additional market segments could
harm our business, financial condition and operating results.
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THE LOSS OF ONE OR MORE OF OUR SIGNIFICANT CUSTOMERS OR A DECREASE IN THEIR
ORDERS OF PRODUCTS WOULD CAUSE OUR REVENUES TO DECLINE.
We sell most of our products to a limited number of customers. For the
fiscal year ended December 30, 2000, one customer, Dell, accounted for
approximately 14% of our revenue, and our top five customers accounted for
approximately 34% of our revenue. It is expected that a relatively small number
of customers will continue to account for a significant portion of our revenue
after the merger, and the proportion of our revenue from these customers could
continue to increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial demands on us. Even
if we successfully qualify a product for a given customer, the customer
generally will not be obligated to purchase any minimum volume of products from
us and generally will be able to terminate its relationship with us at any time.
Our ability to maintain strong relationships with our principal customers is
essential to our future performance. If we lose a key customer or if any of our
key customers reduce their orders of our products or require us to reduce our
prices before we are able to reduce costs, our revenue would decline, which
would cause our business, financial condition and operating results to suffer.
COSTLY NEW DEMANDS BY OUR CUSTOMERS ARE INCREASING THE RISK OF INVENTORY
OBSOLESCENCE AND DECLINING AVERAGE SELLING PRICES.
Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of the largest personal computer manufacturing
customers, may adopt build-to-order manufacturing models that reduce their
component inventories and related costs and enable them to tailor their products
more specifically to the needs of consumers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers) ship parts directly to the
dealer or other assembler for installation at its location. Finally, some of our
manufacturing customers have adopted just-in-time inventory management processes
that require component suppliers to maintain inventory at or near the customer's
production facility. These new business models require us to hold products in
inventory longer. These changing policies also increase our capital requirements
and costs, complicate inventory management strategies and make it difficult to
match manufacturing plans with projected customer demand. As a result, there is
an increased risk that inventory will become obsolete or average selling price
could decline, either of which could cause our operating results to suffer.
INTENSE COMPETITION IN THE HARD DISK DRIVE SEGMENT COULD REDUCE THE DEMAND FOR
OUR PRODUCTS OR THE PRICES OF OUR PRODUCTS WHICH COULD REDUCE OUR REVENUES.
The desktop computer market segment and the overall hard disk drive market
are intensely competitive even during periods when demand is stable. We compete
primarily with manufacturers of 3.5-inch hard disk drives for the personal
computer industry, including Fujitsu, IBM, Samsung, Seagate Technology and
Western Digital. Many of our competitors historically have had a number of
significant advantages, including larger market shares, a broader array of
product lines, preferred vendor status with customers, extensive name
recognition and marketing power, and significantly greater financial, technical
and manufacturing resources.
Although we are expected to be one of the largest hard disk drive
manufacturers after the merger, our size alone will not eliminate all of the
advantages of our competitors. Some of our competitors make many of their own
components which may provide them with benefits including lower costs. Our
competitors may also:
- consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against us;
- lower their product prices to gain market share; or
- bundle their products with other products to increase demand for their
products.
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Competition could reduce the demand for our products and/or the prices of
our products, which could reduce our revenues. In addition, new competitors
could emerge and rapidly capture market share. If we fail to compete
successfully against current or future competitors, our business, financial
condition and operating results will suffer.
POWER OUTAGES WHICH CURRENTLY IMPACT COMPANIES WITH FACILITIES IN CALIFORNIA MAY
ADVERSELY EFFECT OUR CALIFORNIA FACILITIES.
We conduct substantial operations in the state of California and rely on a
continuous power supply to conduct operations. California's current energy
crisis could substantially disrupt our operations and increase our expenses. In
the event of an acute power shortage, that is, when power reserves for the state
of California fall below 1.5%, California has on some occasions implemented, and
may in the future continue to implement, rolling blackouts throughout the state.
Although state lawmakers are working to minimize the impact, if blackouts
interrupt our power supply, we may be temporarily unable to continue operations
at our facilities. Any such interruption in our ability to continue operations
at our facilities could delay the development of our products and disrupt
communications with our customers, suppliers or our manufacturing operations.
Future interruptions could damage our reputation and could result in lost
revenue, either of which could substantially harm our business and results of
operations. Furthermore, the deregulation of the energy industry instituted in
1996 by the California government and shortages in wholesale electricity
supplies have caused power prices to increase. If wholesale prices continue to
increase, our operating expenses will likely increase which will have a negative
effect on our operating results.
IF WE DO NOT HAVE ADEQUATE MANUFACTURING CAPACITY IN THE FUTURE BECAUSE OF A
NATURAL DISASTER AT ONE OF OUR PLANTS OR AN INABILITY TO ACQUIRE NEEDED
ADDITIONAL MANUFACTURING CAPACITY, OUR GROWTH WILL BE ADVERSELY IMPACTED AND OUR
BUSINESS COULD SUFFER.
Our volume manufacturing operations are based primarily in Singapore. A
flood, earthquake, political instability or other disaster or condition after
the merger affecting either's facilities or ability to manufacture could harm
our business, financial condition and operating results. In addition, we will
need to acquire additional manufacturing capacity in the future. Our inability
to add capacity to allow us to meet customers' demands in a timely manner may
limit our future growth and could harm our business, financial condition and
operating results.
BECAUSE WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS, COMPONENT SHORTAGES
COULD RESULT IN DELAYS OF PRODUCT SHIPMENTS AND DAMAGE OUR BUSINESS AND
OPERATING RESULTS.
A number of the components used in our products are available from a
limited number of suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies Inc. Some required parts may be periodically in short supply. As a
result, we will have to allow for significant ordering lead times for some
components. In addition, we may have to pay significant cancellation charges to
suppliers if we cancel orders for components because we reduce production due to
market oversupply, reduced demand, transition to new products or technologies or
for other reasons. We order the majority of our components on a purchase order
basis and we have limited long-term volume purchase agreements with only some of
our existing suppliers. If we cannot obtain sufficient quantities of high
quality parts when needed, product shipments would be delayed and our business,
financial condition and operating results could suffer.
BECAUSE WE PURCHASE ALL OF OUR PARTS FROM THIRD PARTY SUPPLIERS, WE ARE SUBJECT
TO THE RISK THAT WE MAY BE UNABLE TO ACQUIRE QUALITY COMPONENTS IN A TIMELY
MANNER, OR EFFECTIVELY INTEGRATE PARTS FROM DIFFERENT SUPPLIERS, AND THESE
PROBLEMS WOULD CAUSE OUR BUSINESS TO SUFFER.
Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third party suppliers. Consequently, the
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success of our products depends on our ability to gain access to and integrate
parts that use leading-edge technology. To successfully manage the integration
of parts, we must:
- obtain high quality parts;
- hire skilled personnel;
- effectively integrate different parts from a variety of suppliers;
- manage difficult scheduling and delivery problems; and
- develop and maintain relationships with key suppliers.
If we are unable to successfully integrate parts obtained from third party
suppliers, our business would suffer.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS.
Our success depends upon the continued contributions of key employees, many
of whom would be extremely difficult to replace. We do not have key person life
insurance on any of our personnel. Worldwide competition for skilled employees
in the hard disk drive industry is extremely intense. If we are unable to retain
existing employees or to hire and integrate new employees, our business,
financial condition and operating results could suffer. In addition, companies
in the hard disk drive industry whose employees accept positions with
competitors often claim that the competitors have engaged in unfair hiring
practices. We may be the subject of such claims in the future as we seek to hire
qualified personnel and we could incur substantial costs defending ourself
against those claims.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS OR AT ALL.
Our business is capital intensive and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:
- the rate of our sales growth;
- the level of our profits or losses;
- the timing and extent of our spending to expand manufacturing capacity,
support facilities upgrades and product development efforts;
- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
Any future equity financing will decrease the percentage equity ownership
of our stockholders and may, depending on the price at which the equity is sold,
result in significant economic dilution to them. Our board of directors will be
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of the common stock without
stockholder approval.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED AND IT IS EXPOSED TO THIRD
PARTY CLAIMS OF INFRINGEMENT.
We have patent protection on some of our technologies. After the merger, we
may not receive patents for our pending or future patent applications, and any
patents that we own or that are issued to us may be invalidated, circumvented or
challenged. Moreover, the rights granted under any such patents may not provide
us with any competitive advantages. Finally, our competitors may develop or
otherwise acquire equivalent or superior technology.
We also rely on trade secret, copyright and trademark laws, as well as the
terms of our contracts to protect our proprietary rights. We may have to
litigate to enforce patents issued or licensed to us, to protect trade secrets
or know-how owned by us or to determine the enforceability, scope and validity
of our proprietary
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rights and the proprietary rights of others. Enforcing or defending our
proprietary rights could be expensive and might not bring us timely and
effective relief.
We may have to obtain licenses of other parties' intellectual property and
pay royalties. If we are unable to obtain such licenses, we may have to stop
production of our products or alter our products. In addition, the laws of
certain countries in which we sell and manufacture our products, including
various countries in Asia, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our
remedies in these countries may be inadequate to protect our proprietary rights.
Any failure to enforce and protect our intellectual property rights could harm
our business, financial condition and operating results.
WE ARE SUBJECT TO EXISTING INFRINGEMENT CLAIMS WHICH ARE COSTLY TO DEFEND AND
MAY HARM OUR BUSINESS.
We have been sued by Papst Licensing, GmbH, a German corporation, for
infringement of patents that relate to hard disk drives. Papst has asserted that
we infringe 13 patents. The lawsuit had been pending in the United States
District Court for the Northern District of California, but was transferred with
other litigation involving Papst patents to the United States District Court for
the Eastern District of Louisiana by the Judicial Panel on Multidistrict
Litigation for consolidated or coordinated proceedings. Papst's infringement
allegations are based on spindle motors that we purchase from third party motor
vendors, and the use of such spindle motors in hard disk drives. We purchased
the overwhelming majority of the spindle motors u