Maxtor Corporation Form 10-K Year Ended 12/28/02

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 (the “Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

The aggregate market value of the registrant’s common stock, $.01 par value per share, held by non-affiliates of the registrant on June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was $678,901,256 (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 24, 2003, 249,718,271 shares of the registrant’s common stock, $.01 par value per share, were issued and outstanding.

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended December 28, 2002, 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.

Maxtor®, DiamondMax® and Atlas® are registered trademarks of Maxtor Corporation (“Maxtor” or “the Company”). MaXLine^TM, Fireball^TM, Maxtor Personal Storage^TM and Maxtor OneTouch^TM are trademarks of Maxtor. All other brand names and trademarks appearing in this report are the property of their respective holders.

Maxtor is a leading provider of hard disk drives for a variety of applications, including desktop computers, high-performance Intel-based servers, near-line storage systems and consumer electronics.

We offer a broad line of hard disk drives for desktop computers and Intel-based servers. Our desktop products are marketed under the DiamondMax, MaXLine and Fireball brand names and consist of 3.5-inch disk drives with storage capacities that range from 20 to 300 gigabytes. While these drives are used primarily in desktop computers, there is an emerging market for these products in a variety of consumer electronic applications, including personal video recorders, set-top boxes and game consoles, as well as personal storage applications. We also provide a line of high-end 3.5-inch hard disk drives for use in high-performance, storage-intensive applications such as workstations, enterprise servers and storage subsystems. These Intel-based server products are marketed under the Atlas brand name and provide storage capacities of 18.4 to 146.9 gigabytes at speeds of 10,000 RPM and 15,000 RPM.

We were founded in 1982 and completed an initial public offering of common stock in 1986. We sold 40% of our outstanding common stock to Hyundai Electronics Industries (now Hynix Semiconductor, Inc. — “HSI”) and its affiliates in 1994. In early 1996, Hyundai Electronics America (now Hynix Semiconductor America Inc. — “Hynix”) acquired all of the remaining publicly held shares of our common stock as well as all of our common stock then held by Hynix Semiconductor, Inc. and its affiliates. In July 1998, we completed a public offering of 49.7 million shares of our common stock, receiving net proceeds of approximately $328.8 million from the offering. 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.

In April 2001, we completed the acquisition of Quantum Corporation’s Hard Disk Drive Group (“Quantum HDD”). At the closing, each share of Quantum HDD common stock was converted into 1.52 shares of our common stock. As a result, we issued approximately 121.0 million shares of common stock and assumed restricted stock and options to purchase, in the aggregate, approximately 12.8 million shares of common stock. With our acquisition of the Quantum HDD business, we became one of the largest hard disk drive companies in the world in terms of unit shipments and expanded our product line to include disk drives for server products in addition to disk drives for desktop computer systems and consumer electronics applications.

In September 2001, we completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designed, developed and manufactured media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for our acquisition of MMC was to provide us with an assured source of supply of media. MMC provided us with approximately 50% of our media needs for the year ended December 28, 2002.

In October 2001, Hynix sold approximately 23.3 million shares (including the exercise of the underwriters’ over-allotments) of Maxtor stock in a registered public offering. In addition, at the same time and on the same terms as Hynix’s sale of Maxtor’s stock to the public, Maxtor purchased an additional 5.0 million shares from Hynix. We did not receive any of the proceeds from Hynix’s sale of Maxtor stock to the public. Following these transactions, Hynix’s ownership of our outstanding stock was 5.17%. In February 2002, the remaining 12.5 million shares of Maxtor stock owned by Hynix were distributed to holders of a DECS Trust

In August 2002, we shut down the operations of our Network Systems Group, except to fulfill then existing commitments. The network attached storage (“NAS”) market had fragmented since our entrance in 1999, with one segment of the NAS market becoming more commoditized and the other segment placing us in competition with some of our hard disk drive customers.

The Hard Disk Drive Market. We offer a broad line of hard disk drives for desktop computers and Intel-based servers. We generate the majority of our unit shipments and revenue today from our desktop computer business, although a growing portion of our total revenues is from sales to the Intel-based hard disk drive server market. We also see growing demand for hard disk drives in emerging consumer electronics applications. In addition, there is an emerging market for high capacity desktop drives in enterprise near-line and related storage applications.


	•	continued improvements in desktop and enterprise 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;

	•	the growth of non-branded desktop computers in emerging economies, specifically China and other parts of Asia, Russia, Eastern Europe, and Latin America;

	•	increased customer demand for emerging consumer electronics devices that include a hard disk drive, such as personal video recorders and set-top boxes; and

	•	the need to store large amounts of data that are accessed infrequently, as in email archiving, medical images and videoclips.

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 head 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 base plate assembly creating 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 consists 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 or below it, which can read data from or write data to the spinning disk.

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

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. In an attempt to simplify the electronic architecture, some hard disk drive manufacturers are 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 achieve timely introduction and rapid volume production of new products consistently, some hard disk drive providers are striving to simplify their product design processes. This effort includes creating extendible core technology platforms, which utilize common firmware and mechanical designs, and the re-use of manufacturing tooling and application specific integrated circuits across various product generations and product lines.

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 defined and implemented 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 monitors these processes in an effort to ensure consistent execution and prompt response to customer demands. We intend to continue our leadership in the desktop hard disk drive industry by consistently executing these fundamental business processes.

The Intel-based server market has many of the same characteristics for success as the desktop computer market. We have applied the same fundamentals that have allowed us to be successful in the desktop computer market to our growing server business. These fundamentals include strong focus on meeting customer demands through introduction of competitive products, consistent execution and excellent service.

We believe there is an emerging and potentially significant market for hard disk drives in consumer electronics applications, including devices such as personal video recorders and set-top boxes. We are currently supplying hard disk drives to leading consumer electronics manufacturers, including Dish Network, JVC, Panasonic, Pioneer Corporation, Force Holding A.S., Scientific-Atlanta Inc., SONICblue Inc. and TiVo Inc., for use in a variety of consumer electronics devices that are being sold today. Sales into consumer electronics applications, while still a small percentage of our total revenue, have grown steadily. We believe the market for consumer electronics devices using hard disk drives is still in its early stages, and we expect that it will expand over time as consumer acceptance and adoption of these products grow. We intend to leverage our position as a high quality, time-to-volume leader in hard disk drives and pursue relationships with the leaders in consumer electronics to capitalize on the opportunities presented by this new market.

We also believe there is an emerging market with enterprise customers for high capacity, high reliability ATA hard disk drives. These hard disk drives are used in near-line storage applications where data is generated in large volumes and retrieved occasionally, such as e-mail archiving, engineering drawings, medical imaging, scientific data and video images which typically require large storage capacity, but not the speed that high transaction applications need. In this environment, cost per gigabyte is a primary customer requirement, and we can provide this with our high capacity, high reliability MaXLine hard disk drives. We are currently working with leading storage subsystem vendors, including EMC Corporation, Network Appliance, Inc. and StorageTek, to provide hard disk drives for these new emerging applications. We intend to build on these relationships as well as seek out additional customers and applications for this emerging market.

We seek to be a major provider of hard disk drives to leading computer and consumer electronics manufacturers, distributors and retailers. Our strategy to achieve this goal includes the following elements:

Strengthen Relationships with Distributors and Retailers. We intend to further strengthen our relationships with distributors and retailers to capture higher margin opportunities offered in these markets. We have had strong growth in revenues in the distribution channels in emerging economies in China and other parts of Asia, Russia, Eastern Europe and Latin America, attributable in large part to the growth of non-branded desktop computer manufacturers. We intend to further strengthen our presence in these markets through enhanced service and support, targeted promotions and an expanded product line. We will continue to invest in programs to generate interest and sales through the distribution and retail channels. We will continue to introduce higher margin storage products, in addition to hard disk drives, that appeal to distribution and retail channel customers. In the distribution channel, these products include our highest capacity, high reliability MaXLine family of hard disk drives, and in retail, they include personal storage devices, such as our new Personal Storage 5000 and video-editing kits.

Maintain Significant Market Share With Leading Computer Manufacturers. We believe our ability to achieve leading time-to-volume production of high quality, high performance hard disk drives and to provide excellent customer service will enable us to maintain our market share position with leading personal computer and server manufacturers. According to International Data Corporation (“IDC”), in 2002, Maxtor’s share of the hard disk drive market, the desktop hard disk drive market and the Intel-based server market based on units shipped was 23.4%, 30.3% and 8.6%, respectively. Sales to our five largest desktop computer OEM customers represented 23.0% of our total revenue in 2002. In addition, we intend to leverage our relationships with leading desktop computer manufacturers to further expand our presence in the server market. Many of the leading Intel-based server manufacturers have been long-standing customers of Maxtor’s hard disk drives for desktop computers. We intend to build on these relationships with a continued emphasis on quality products, time-to-volume leadership and excellent customer service in our server product line.

Pursue Opportunities in Emerging Markets. We believe the demand for hard disk drives in consumer applications will continue to grow. Today, hard disk drive storage in consumer electronics applications has been primarily incorporated into personal video records, set-top boxes and game consoles. We are supplying Dish Network, JVC, Panasonic, Pioneer Corporation, Force Holding A.S., Scientific-Atlanta Inc., SONICblue Inc., and TiVo Inc. with hard disk drives for a variety of consumer electronic applications. We intend to pursue this market by developing hard disk drive products appropriate for these applications and by expanding our relationships with leading consumer electronics manufacturers throughout the world.

We also believe there is an emerging market in the enterprise for high capacity, high reliability ATA drives in near-line and related storage applications, where data is generated in relatively large volumes and retrieved occasionally. Specific applications include e-mail archiving, engineering drawings, medical imaging, scientific data and video images. In these environments, we believe high capacity, high reliability desktop drives provide the optimal cost per gigabyte metric that enterprise storage customers seek. We currently have relationships with some of the leading storage subsystem vendors, including EMC Corporation, Network Appliance, Inc. and StorageTek, to provide hard disk drives for these applications and we intend to pursue additional customers and applications for this new category of hard disk drive applications.

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.

Improve Manufacturing Efficiencies and Optimize Supply Base to Achieve Cost Savings. In the third quarter of 2002, we transitioned 100% of our desktop hard disk drive manufacturing from Matsushita-Kotobuki Electronics Industries, Ltd. (“MKE”) to Maxtor manufacturing facilities in Singapore. With all of the desktop manufacturing in one location, we have achieved better economies of scale resulting in improved absorption of our fixed costs. In 2003, we will continue to focus on improving our manufacturing processes to enhance operating efficiencies. In addition, we will leverage our higher volume commitments with our supply base to further reduce costs.

Pursue Low-Cost Manufacturing Capacity. We have begun construction of a manufacturing facility in China that will provide us with a low-cost facility to accommodate anticipated future growth. We anticipate that the facility will become operational in the second half of 2004. We have arranged financing for the facility and expect documentation to be finalized in the next few weeks. The China plant will produce desktop hard disk drives. Singapore will remain the center of our manufacturing operations. To ensure we maximize our manufacturing efficiency in China, we will implement the flexible cell-based process that has been successful in Singapore.

We enjoy strong customer relationships, which we believe are due in large part to product quality, time-to-volume production leadership and industry-leading performance. Contributing to these strong relationships, we believe, is our product development process. Our product development effort is separated into two phases — the enabling technology development phase and the product design phase.

Enabling Technology Development Phase. Our advanced technology group is responsible for the enabling technology development phase, which includes:


	•	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 12 to 18 months before such technologies might be included in our products.

Product Design Phase. Our product design group concentrates on achieving required product specifications 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 that is 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.

We currently offer a broad line of hard disk drives for desktop computers and Intel-based servers. Our desktop products are marketed under the Fireball, DiamondMax, and MaXLine brand names and consist of 3.5-inch hard disk drives with storage capacities that range from 20 to 300 gigabytes per platter and speeds of 5,400 RPM and 7,200 RPM. Our desktop drives come in configurations ranging from 1 to 4 platters per drive, allowing us to address a wide range of applications for desktop computers, from entry level to mid-range to the

high-end. In addition, there is an emerging market for these drives in a variety of consumer electronics applications, including set-top boxes, PVRs and game consoles. All of these hard disk drives have a number of features including high speed interfaces for greater data throughput, a robust mechanical design for improved reliability, giant magneto-resistive head technology and a digital signal processor-based electronic architecture.

Our high performance 3.5-inch hard disk drives are for use in storage-intensive applications such as workstations, enterprise servers and storage subsystems. These products are marketed under the Atlas brand name and provide storage capacities of 18.4 to 146.9 gigabytes at speeds of 10,000 RPM and 15,000 RPM. Our most recently introduced high-end drive, the Atlas 10K IV, has been qualified by or is in qualification with several Intel-based server OEMs and is shipping into both the OEM and distribution market. The Atlas 15K is currently in qualification with several server OEMs with volume shipments expected in the second quarter of 2003.

The table below sets forth the key performance characteristics of our hard disk drive products.


*	GB = A gigabyte means 1 billion bytes. Total usable capacity may vary with operating environments.

We also introduced several new external storage products in 2002. Maxtor Personal Storage devices introduced during the year include the 5000LE, 5000XT and 5000DV, which offer external storage solutions for a range of users from the budget conscious to high-performance users. The devices are hot swappable and easy to use. They connect to personal computers or Macintosh computers through 1394 or USB ports and offer up to 250 gigabytes of storage.

To be competitive, we must manufacture high quality high-performance hard disk drives with industry leading time-to-volume production at competitive costs, and we must be able to respond quickly to changes in product delivery schedules. Our hard disk drive manufacturing operations consist primarily of the final assembly of high-level subassemblies built to our specifications and testing of completed products.

Manufacturing. We currently have two sources of production for our hard disk drive products. Our Maxtor-owned Singapore manufacturing facilities utilize a cell-based process, enabling us to dedicate manufacturing cells to a particular product model. We combine our cell-based approach with a sophisticated factory information system that collects data on various product and quality metrics. The cell-based approach


	•	dedicate manufacturing cells to a particular product model, thereby allowing us to better monitor and control process trends, 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 build-to-order business model that many of our desktop computer manufacturer customers have adopted; and

	•	add incremental capacity as needed at a relatively low cost, allowing for better capacity utilization.

This flexible cell-based process, when coupled with our product design methodology, has enabled us to significantly improve time-to-volume production.

We also manufacture media used in our products through MMC’s facility in San Jose, California. In 2003, we plan to add manufacturing capacity for desktop and server products in our Singapore facility and expand our capacity for media manufacturing at MMC.

We also have a relationship with MKE for the manufacture of our 10,000 RPM high-end hard disk drives for Intel-based servers. MKE’s manufacturing processes are highly automated, employing integrated computer networks and advanced control systems.

Maxtor has also begun construction of a manufacturing facility in China that will provide us with a low-cost option to accommodate anticipated future growth. We anticipate that the facility will become operational in the second half of 2004; the China plant will produce desktop hard disk drives. Singapore will remain the center of our manufacturing operations. To ensure we maximize our manufacturing efficiency in China, we will implement the flexible cell-based process that has been successful in Singapore.

Quality. Both Maxtor and MKE manufacturing operations conform to the same high quality standards. These standards are set and measured by us, using consistent measurement and metrics. We are committed to maintain high rankings from our customers on our quality and customer service and maintaining these rankings remains a high priority within the company. To ensure that Maxtor remains a leader in product quality and overall customer satisfaction, we have implemented several corporate-wide quality programs, which focus on:


	•	robustness of design and improved design tolerances;

	•	state-of-the-art product traceability, statistical controls and web-based tools;

	•	quality of incoming parts and factory process controls; and

	•	customer feedback, data 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. All of our manufacturing facilities are ISO 9002 and 14001 certified. Finally, our executives meet regularly with suppliers and customers to exchange product quality information to facilitate rapid analysis of product failure and timely implementation of corrective actions.

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. With respect to MKE, Maxtor oversees the qualification and supply chain management of key components, including heads, media, motors and all of the major electronics components.

We rely on a limited number of suppliers to provide Maxtor specific components for our products. These components include heads, media, custom electronics, motors and mechanical parts. Maxtor will typically qualify two or three sources for these key components for each product in order to meet supply assurance requirements. With our acquisition of MMC in 2001, we have an internal source of media supply, which provided approximately 50% of our media needs for the year ended December 28, 2002. Custom integrated circuits are sourced from Texas Instruments, Agere Systems, and STMicroelectronics, where we have supply agreements and multiple manufacturing locations qualified.

We sell our products directly to leading manufacturers of desktop computer and server systems and consumer electronics devices, through key distributors and through the retail channel. Desktop computer OEM customers include Dell Computer Corporation (“Dell”), Fujitsu Siemens Limited (“Fujitsu”), Hewlett-Packard Company (“Hewlett Packard”), Hon-Hai Precision Industry Co., Ltd., International Business Machines Corporation (“IBM”) and NEC USA, Inc. Leading distributors include Bell Microproducts Inc. (“Bell Microproducts”), Ingram Micro Inc. (“Ingram Micro”), SED International, Inc., Tech Data Corporation (“Tech Data”) and Xander International. Retail chain stores that feature our products include Best Buy, CompUSA and Staples.

Manufacturers. Revenue from our five largest desktop computer OEM customers, represented 23.0%, 24.5% and 28.5% in 2002, 2001 and 2000, respectively. Dell represented 11.5% of our sales in fiscal 2002, 11.3% in fiscal 2001 and 14.2% in fiscal 2000. We believe that our success depends on our ability to maintain and further develop strong customer relationships with desktop, storage and server computer system and consumer electronics manufacturers and to provide products that fit their specific needs.

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 small market shares of the overall desktop and server computer markets. These distributors include value-added resellers, dealers, system integrators and small desktop and server manufacturers. Distributors accounted for 47.2%, 39.3% and 21.9% of our revenue in 2002, 2001 and 2000, respectively. Distributors generally enter into non-exclusive agreements with us for the 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 Microproducts, Ingram Micro, Tech Data and Xander International.

Retailers. To expand awareness of the Maxtor brand and generate typically higher gross profit margins, we sell our retail-packaged products, including hard disk drives and external storage devices, into the retail channel. We sell 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 4.9%, 5.3% and 8.1% of our revenue in 2002, 2001 and 2000, respectively. During 2001, we expanded our retail presence outside of the US and Canada into Europe and parts of Asia. We believe the retail channel complements other sales channels. Retailers supply the after-market “upgrade” sector in which end users purchase and install hard disk drive products to upgrade their computers. Retail distribution is also an important channel for the sale of our external storage products which appeal to the end user interested in emerging consumer applications that have extensive storage requirements, such as digital photography, MP3

We market and sell our products to leading personal computer, Intel-based server, storage subsystem and consumer electronics manufacturers, distributors and retailers. Our representative offices are located throughout the U.S. and in Australia, China, France, Germany, Great Britain, Hong Kong, Japan, Korea, Singapore, Switzerland and Taiwan. We have formed multi-disciplined, dedicated account and channel teams focused on each current and targeted strategic personal computer, Intel-based server, storage subsystem and consumer electronics OEM, as well as regional 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 focused and 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.

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, and 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.

We compete primarily with manufacturers of 3.5-inch hard disk drives for desktop and server computers. Our competitors in the hard disk drive market include Fujitsu, Hitachi, IBM, Samsung, Seagate, and Western Digital. In 2002, according to IDC, we were the second largest provider of hard disk drives worldwide based on units shipped.

We believe that the most important competitive factors in the hard disk drive market are breadth of product lines, introduction of competitive products as measured by storage capacity, performance, quality, price, time-to-market introduction, time-to-volume production, desktop, storage and server manufacturer product qualifications, reliability and technical service and support. We believe we compete favorably with respect to these factors.

The desktop computer market segment and the overall hard disk drive market are intensely competitive even during periods when demand is stable. We compete primarily with manufacturers of 3.5 inch hard disk drives, including Fujitsu, Hitachi, IBM, Samsung, Seagate Technology, and Western Digital. Hitachi and IBM have recently completed the merger of their hard disk drive businesses into a single joint venture, Hitachi Global Storage Technologies. 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


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

	•	lower their product prices to gain market share;

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

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

In addition, some of our competitors produce complete computer systems that contain hard disk drives; these competitors may price a system in a manner which results in sales of hard disk drives at below cost. Some of our competitors offer more products than we do and they can therefore enter into agreements with customers to supply hard disk drives as part of a larger supply agreement.

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

We have been granted, as of February 1, 2003, 686 U.S. and 181 foreign patents related to hard 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. In the case of products offered in rapidly emerging markets, such as consumer electronics, our competitors may file patents more rapidly or in greater numbers, resulting in the issuance of patents that may result in unexpected infringement assertions against us. Moreover, 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. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Affecting Future Performance.”

As of December 28, 2002, we had 12,449 employees worldwide, including 1,682 in engineering, research and development; 327 in marketing, sales and customer technical support; 9,726 in manufacturing; 397 in operational support; and 317 in executive, general management and administration. As of December 28, 2002, we had 8,759 employees at our manufacturing facilities in Singapore, 1,186 employees at our manufacturing facilities in California and 163 employees at our foreign sales offices. None of our U.S. employees are currently represented by a labor organization. In May 1997, our Singapore subsidiary recognized a labor union, the United Workers of Electronic and Electrical Industries (“UWEEI”), and in November 1998, signed a three-year collective bargaining agreement with that union. Thereafter, in September 2001, our Singapore subsidiary concluded negotiations with the UWEEI and entered into a three year collective bargaining agreement. We believe that our employee relations are positive.

The following table lists the names, ages, positions and offices held by, and a brief account of the business experience of, each executive officer of the Company as of March 26, 2003. 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.

Paul J. Tufano was appointed President and Chief Executive Officer and remained as Acting Chief Financial Officer in February 2003. He had been our Executive Vice President and Chief Operating Officer from April 2001 and Chief Financial Officer from July 1996. From November 1998 to his appointment as Chief Operating Officer, Mr. Tufano served as our Senior Vice President, Finance. 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, including Manager of Worldwide Logistics for IBM’s storage systems division, Manager of Plans and Controls for IBM’s Desktop and Mobile Storage products business unit, and Controller for IBM’s San Jose, California facility.

Dr. Pantelis S. Alexopoulos became the Executive Vice President, Desktop Product Development in December 2002. He has been our Chief Technology Officer since April 1997. He was also Executive Vice President, Advanced Technology from November 2001 until December 2002; and Vice President, Advanced Technology from April 1997 until November 2001. Before joining us, Dr. Alexopoulos was the Executive

Michael D. Cordano has been our Executive Vice President, Worldwide Sales and Corporate Marketing since August 2001. From August 1999 until August 2001, Mr. Cordano served as our Vice President, Worldwide Sales. From 1998 until August 1999, he held the position of Vice President, Global Sales. Prior to joining us in 1994, Mr. Cordano held various sales positions at Conner Peripherals, Inc., a disk drive company.

Phillip C. Duncan has been our Executive Vice President, Human Resources and Real Estate since November 2001. From August 1996 until November 2001, Mr. Duncan served as our Vice President, Human Resources and became Executive Vice President, Human Resources and Real Estate in April 2001. 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, a storage company and from 1990 to 1992; he held similar positions at Cirrus Logic, a semiconductor company.

K. H. Teh has been our Executive Vice President, Worldwide Manufacturing, and Singapore Managing Director since November 2001. From May 1997 until November 2001, Mr. Teh served as our Vice President, Worldwide Manufacturing and became Senior Vice President, Manufacturing in April 2001. 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 the Managing Director of Digital Equipment Malaysia, a hard disk drive manufacturer and subsequently Quantum Peripherals Malaysia, a hard disk drive manufacturer. Prior to 1994, Mr. Teh held various senior management positions in multinational corporations in Singapore.

Michael J. Wingert has been our Executive Vice President/ General Manager, Server Products Group since November 2001. From November 1999 until November 2001, Mr. Wingert served as our Vice President, Desktop Engineering and became Senior Vice President, Engineering in April 2001. Before his promotion to Vice President, Desktop Engineering, he was our Vice President, Engineering for five years. Prior to joining us in 1994, Mr. Wingert held various senior management positions in product testing and development at IBM.

David L. Beaver has been our Senior Vice President, Worldwide Materials and Chief Procurement Officer since November 2001. From May 1998 until November 2001, Mr. Beaver served as our Vice President, Worldwide Materials and became Senior Vice President, Worldwide Materials in April 2001. From March 1997 to May 1998, Mr. Beaver was Vice President of Far East Materials and Logistics in our Singapore factory. From 1994 to 1997, he was Director of Operations and Materials at EMASS, an E-systems data storage company. From 1991 to 1994, he was Director of Corporate Materials Procurement at SyQuest, a storage company. He has over 20 years high tech data storage business management experience.

Misha Rozenberg has been our Senior Vice President, and Chief Quality Officer since November 2001. From March 1998 until November 2001, Mr. Rozenberg served as our Vice President, Quality and became Senior Vice President, Worldwide Quality in April 2001. From 1996 to 1998, he served as our Vice President, Supplier Engineering. From 1994 to 1996, Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner Peripherals, Inc. From 1990 to 1994, he was a Manager at Apple Computer.

Glenn H. Stevens has been our Vice President, General Counsel and Secretary since June 1994 and became a Senior Vice President in April 2001. From 1992 to 1994, Mr. Stevens had a private law practice. From 1979 to 1992, he held various positions within the legal department of 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.

Our website address is http://www.maxtor.com. We file reports with the Securities and Exchange Commission (“SEC”), which we make available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such

reports, each of which is provided on our website as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

Our corporate headquarters, sales, marketing and advanced technology operations are located in Milpitas, California. We lease approximately 899,000 square feet in this location. Of the 899,000 square feet, 427,000 support the previously stated ongoing operations. Also in the 899,000 square feet is 472,000 of vacant square feet of which 93,000 will expire in July 2003 and 31,000 is subleased for the remainder of the term. We lease a 158,000 square foot facility in San Jose, California, which we use for the engineering and manufacturing of disk drive media, and we also leased an 180,000 square foot facility in Milpitas, California, which expired in April 2002.

We also maintain 477,000 square feet of engineering and pilot production operations as well as administrative, marketing and materials facilities in Longmont, Colorado. The Longmont facilities lease has a 15-year term and is renewable for five years.

We occupy 672,000 square feet in Shrewsbury, Massachusetts housing design and customer engineering, as well as advanced technology. Maxtor owns the Shrewsbury facility and a portion of that facility is currently subleased to tenants. We also own and sublease an 180,000 square foot facility in Louisville, Colorado. All of our other domestic facilities are leased.

Operations outside of the United States primarily consists of two manufacturing plants in Singapore that produce subassemblies and final assemblies for the Company’s hard disk drive products. The manufacturing facilities are located in two owned buildings in Singapore totaling approximately 560,000 square feet, which are located on two parcels of leased land with leases terminating in 2016 and 2018, both with an option to renew for 30 years. In February 2003, we announced that we would build a new manufacturing facility in the Suzhou Industrial Park in Suzhou, China. Construction began in March 2003, and the approximately 800,000 square feet facility is expected to be completed in the second half of 2004. We have arranged financing for the facility and expect documentation to be finalized in the next few weeks.

We also lease various sales and support facilities in Australia, Canada, the People’s Republic of China, France, Germany, Hong Kong, Ireland, Japan, the Republic of Korea, Scotland, Singapore, Switzerland, Taiwan, United Kingdom and the United States. The aggregate rent under all of our worldwide leases is currently $31.3 million per annum. There can be no assurance that we will be able to obtain additional space to accommodate our future needs or dispose of excess space as required on reasonable terms.

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

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

In February, 2002, Papst and MKE entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus us, with additional defenses to Papst’s patent infringement claims.

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

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, we cannot assure you we will be able to successfully defend ourselves against this or any other Papst lawsuit. Because the Papst complaints assert claims to an unspecified dollar amount of damages, and because we were at an early stage of discovery when the litigation was stayed, we are unable to determine the possible loss, if any, that we may incur as a result of an adverse judgment or a negotiated settlement with respect to the claims against Maxtor. We have made an estimate of the potential liabilities which might arise from the Papst claims against Quantum at the time of the acquisition of the Quantum HDD business. Our estimate will be revised as additional information becomes available. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against us and our products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, we also could be required to pay treble damages and Papst’s attorney’s fees. The litigation could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although we cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

In addition to the Papst lawsuit, on June 13, 2002, we filed suit against Koninklijke Philips Electronics N.V. and several other Philips-related companies in the Superior Court of California, County of Santa Clara. On June 26, 2002, we filed a First Amended Complaint. The lawsuit alleges that an integrated circuit chip supplied by Philips was defective and caused significant levels of failure of the Quantum HDD Corona Plus, Eagle, and Eagle Plus products, each of which is a product line we acquired as part of our acquisition of the Quantum HDD business. Philips’ subsequent motions to dismiss were withdrawn or denied. Philips answered the complaint on March 13, 2003. Discovery is ongoing. In the lawsuit, we are claiming damages of at least $77 million, however, the results of litigation are inherently uncertain and we cannot assure you that we will achieve a favorable outcome.

No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 28, 2002.

Since April 30, 2001, our common stock has been traded on the New York Stock Exchange under the symbol “MXO.” From July 31, 1998 to April 30, 2001, our stock had been traded on the Nasdaq National Market under the symbol “MXTR.” The table below sets forth the range of quarterly high and low sales prices for our common stock as reported by the New York Stock Exchange and the Nasdaq National Market. Our fiscal year end is the last Saturday of December, conforming to a 52/ 53-week year methodology.

As of March 1, 2003, there were approximately 1,140 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.

We have never paid cash dividends on our stock and do not anticipate paying cash dividends in the foreseeable future.

The following table presents the consolidated financial information for the periods indicated:


(1)	Total operating expenses, income from operations, income before income taxes and net income for the year ended December 26, 1998 includes a $12.1 million compensation charge related to certain variable accounting features of our option plan. See note 13 of Notes to Consolidated Financial Statements.

(2)	Includes operations of Quantum HDD since April 2, 2001 and of MMC since September 2, 2001. See note 7 of Notes to Consolidated Financial Statements.

(3)	Commencing in fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard included provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. As a result, the Company reclassified its existing acquired assembled workforce balance to goodwill, as it does not meet the separate recognition criterion according to SFAS 142. See note 12 of Notes to Consolidated Financial Statements.

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.

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. Examples of forward-looking statements in this report include statements regarding our expectations as to average selling prices, demand for our products, capital expenditures, improved profitability, improved working capital position, liquidity, litigation, and our relationships with vendors. 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 section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Affecting Future Performance” and elsewhere in this report.

Maxtor Corporation (“Maxtor” or the “Company”) was founded in 1982 and completed an initial public offering of common stock in 1986. In 1994, we sold 40% of our outstanding common stock to Hyundai Electronics Industries (now Hynix Semiconductors Inc. — “HSI”) and its affiliates. In early 1996, Hyundai Electronics America (now Hynix Semiconductor America Inc. — “Hynix”) acquired all of the remaining publicly held shares of our common stock as well as all of our common stock, then held by Hynix Semiconductor, Inc. and its affiliates. In February 1999, we completed a public offering of 7.8 million shares of our common stock with net proceeds to us of approximately $95.8 million.

On April 2, 2001, we acquired Quantum Corporation’s Hard Disk Drive Group (“Quantum HDD”). The primary reason for our acquisition of Quantum HDD was to create a stronger, more competitive company, with enhanced prospects for continued viability in the storage industry. For additional information regarding the Quantum HDD acquisition, see note 7 of the Notes to Consolidated Financial Statements.

On September 2, 2001, we completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for our acquisition of MMC was to provide us with a reliable source of supply of media. For additional information regarding the MMC acquisition, see note 7 of the Notes to Consolidated Financial Statements.

On October 9, 2001, Hynix sold 23,329,843 shares (including exercise of the underwriters’ over-allotment) of Maxtor common stock in a registered public offering. Maxtor did not receive any proceeds from Hynix’s sale of Maxtor stock to the public. In addition, at the same time and on the same terms as Hynix’s sale of Maxtor stock to the public, we repurchased 5.0 million shares from Hynix for an aggregate purchase price of $20.0 million. These repurchased shares are being held as treasury shares.

On August 15, 2002 we announced our decision to shut down the manufacturing and sale of our MaxAttach^TM branded network attached storage products of our Network Systems Group (“NSG”). We worked with NSG customers for an orderly wind down of the business. The network attached storage market had fragmented since our entrance in 1999, with one segment of the NAS market becoming more commoditized and the other segment placing us in competition with some of our hard disk drive customers. We believe the shut down of the operations of our NSG business will allow us to focus on our core hard disk drive market and further reduce expenses. The NSG business was accounted for as a discontinued operation

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

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


	•	revenue recognition;

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

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

	•	warranty;

	•	inventory reserves;

	•	income taxes; and

	•	restructuring liabilities, litigation and other contingencies.

We derive our revenue from the sale of our products. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period with respect to the amount of reserves for sales returns, allowances and doubtful accounts. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

In recognizing revenue in any period, we apply the provisions of Staff Accounting Bulletin 101 “Revenue Recognition.”

We recognize revenue from the sale of our products when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured; this generally occurs upon shipment.

For all sales we use either a binding purchase order or signed purchase agreement as evidence of an arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. Our arrangements generally do not include acceptance clauses.

We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers.

Delivery generally occurs when product is delivered to a common carrier. Certain of our products are delivered on an FOB destination basis. We defer our revenue associated with these transactions until the delivery has occurred to the customers’ premises.

Sales to original equipment manufacturers (“OEMs”) are subject to agreements allowing limited rights of return and sales incentive programs. Sales incentive programs are typically related to an OEM’s level of purchases. Estimated reductions to revenue for sales incentive programs are provided at the time the revenue is recorded. Returns from OEMs have not been material in any period as the Company’s principal OEM customers have adopted build-to-order manufacturing model or just-in-time inventory management processes.

Sales to distributors and retailers (“resellers”) are subject to agreements allowing limited rights of return, price protection, sales incentive programs and advertising. These programs are generally related to a reseller’s level of sales, order size or point of sale activity. The Company provides for these programs as deductions from revenues at the time the revenue is recorded based on estimated requirements. These estimates are based primarily on estimated future price erosion, customer sell-through levels and program participation. Such estimates are adjusted periodically to reflect actual and anticipated experience.

Estimated product returns are provided in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists.” Resellers have limited rights of return which allow them to return a percentage of the prior quarter’s purchases by these resellers. Accordingly, revenue is not recognized with respect to those shipments which management estimates will be returned. The Company believes that these estimates are reasonably accurate due to the short time period during which the Company’s resellers can return products, the limitations placed on their right to make returns, the Company’s long history of conducting business with resellers on a sell-in basis, the nature of the Company’s historical relationships with resellers and the weekly reporting procedures through which the Company monitors inventory levels at resellers and sales to end-users.

Our management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. The Company believes that these estimates are reasonably accurate due to the short time period during which the Company’s resellers can return products, the limitations placed on their right to make returns, the Company’s long history of conducting business with resellers on a sell-in basis, the nature of the Company’s historical relationships with resellers and the weekly reporting procedures through which the Company monitors inventory levels at resellers and sales to end-users. Nonetheless, material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. The provision for sales returns and other allowances amounted to $82.9 million as of December 28, 2002. Similarly, our management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our allowance for doubtful accounts was $18.3 million as of December 28, 2002. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:


	•	significant under-performance relative to expected historical or projected future operating results;

	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

	•	significant negative industry or economic trends;


	•	significant decline in our stock price for a sustained period; and

	•	our market capitalization relative to net book value.

When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure the potential impairment based on a projected cash flow method. Net intangible assets, long-lived assets, and goodwill amounted to $1,337.5 million as of December 28, 2002.

As required by SFAS No. 142, we completed our impairment analysis as of January 1, 2002, upon our adoption of SFAS 142, and our annual review as of December 28, 2002. We found no instances of impairment of our recorded goodwill on both dates and accordingly no impairment was recorded.

We provide for the estimated cost of product warranties at the time revenue is recognized. We generally warrant our products for a period of one to five years. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We use proprietary statistical modeling software to help estimate the future failure rates by product. As new products are sold to the market, we must exercise considerable judgment in estimating the expected failure rates. This estimating process is based on historical experience of similar products as well as various other assumptions, such as design or assembly complexities, that are believed to be reasonable under the circumstances. We also apply the same estimating techniques to product warranty liabilities assumed from acquisitions. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required and could materially affect our future results of operations.

From time to time, we may be subject to additional costs related to warranty claims from our customers. If and when this occurs, we generally must make significant judgments and estimates in establishing the related warranty liability. This estimating process is based on historical experience, communication with our customers and various assumptions that are believed to be reasonable under the circumstances. This additional warranty reserve would be recorded in the determination of net income in the period in which the additional cost was identified.

We establish reserves to state our inventory at the lower of cost (computed on a first-in, first-out basis) or market. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required which could materially affect our future results of operations.

We account for income taxes in accordance with Statement of Financial Accounting Standard No. 109 (“SFAS 109”), “Accounting for Income Taxes.” As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

In accordance with Emerging Issues Task Force (“EITF”) 93-7 “Uncertainties Related to Income Taxes in a Purchase Business Combination,” we have recorded approximately $196.4 million of deferred tax liabilities in connection with the acquisition of Quantum HDD. We recorded this amount principally to reflect the taxes which would become payable upon repatriation of the cash which was invested abroad for Quantum HDD as of April 2, 2001.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $384.4 million as of December 28, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

We account for our restructuring liabilities in connection with business combination in accordance with EITF 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination.” EITF 95-3 requires that we record an estimated liability if the estimated costs are not associated with or are not incurred to generate revenues of the combined entity after the consummation date and they meet certain criteria defined within EITF 95-3. We accounted for restructuring liabilities initiated in 2002 in accordance with EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which requires us to record the liability resulting from estimated costs that are not associated with or do not benefit activities that will be continued. We account for litigation and contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While we believe that our accruals for these matters are adequate, if the actual losses from loss contingencies or restructuring liabilities are significantly different than the estimated loss, our results of operations may be materially affected.

Revenues. In fiscal year 2002, we generated revenue of $3,779.5 million compared to $3,765.5 million in fiscal year 2001, an increase of 0.4%. Total shipments in fiscal year 2002 were 51.3 million units compared to 45.1 million units in fiscal year 2001, a 13.7% increase. The increase in unit volume in fiscal year 2002 compared to fiscal year 2001 was primarily due to the acquisition of the Quantum HDD business occurring in April 2001, which resulted in fiscal 2001 having one less quarter of contribution from the Quantum HDD business than fiscal 2002. We also successfully introduced several next generation products during fiscal year 2002, which contributed to the overall increase in unit sales and the slight increase in revenue. The positive effect of the Quantum HDD business on fiscal 2002 unit volume was offset by the slowdown in demand for PCs and servers and the resulting reduced demand for hard disk drives and difficulties in ramping up production of next generation products in the third quarter of 2002. The slight increase in revenue was primarily due to the full year contribution from the Quantum HDD business in 2002 compared to nine months’ contribution in 2001. This increase was offset by declining average selling prices in the PC and server markets during the first three fiscal quarters of 2002 as a result of the economic slowdown, and our difficulties in ramping up production of our new products in the third quarter of 2002.

Revenue did not increase at the same rate compared to unit shipments in 2002. This was primarily the result of the decline in average selling prices in the first three fiscal quarters of 2002 due to pricing pressures in the desktop computer market. We have historically experienced seasonal fluctuation in sales volume with a decline typically occurring in the second quarter of the year.

Revenue on a proforma basis (that is, calculating revenue as if we had acquired Quantum HDD on January 1, 2001) was $3,779.5 million in fiscal year 2002, compared to $4,418.6 million in fiscal year 2001, representing a decline of 14.5% on a proforma basis. Although this pro forma presentation does not purport to be indicative of what would have occurred, we believe the decline on a proforma basis was primarily due to the overall slowdown in demand for hard disk drives and the pricing pressures in the desktop computer market in the first three fiscal quarters of 2002.

Sales to the top five customers represented 31.8% and 34.1% of revenue in fiscal years 2002 and 2001, respectively. Sales to one customer were 11.5% and 11.3% of revenue in fiscal years 2002 and 2001; only one customer represented more than 10% of our sales in those years.

Revenue from sales to computer equipment manufacturers represented 48.0% and 55.4% of revenue in fiscal years 2002 and 2001, respectively. The decrease in 2002 was primarily due to increased sales to our distribution channel and retail customers that represented 52.0% and 44.6% of revenue in fiscal years 2002 and 2001, respectively. Revenue from sales to computer equipment manufacturers decreased in absolute dollars by 15.2% in fiscal year 2002 from fiscal year 2001, while revenue from sales to distribution channel and retail customers increased by 17.3% in fiscal year 2002 from fiscal year 2001. The significant increase in revenue from sales to the distribution channel is attributable primarily to our Quantum HDD acquisition and the growth of non-branded PC customers’ market share of the overall current desktop PC market and our effort to accommodate this growth.

Domestic revenue represented 36.3% and 42.0% of total sales in fiscal year 2002 and 2001, respectively. International revenue represented 63.7% and 58.0% of total sales in fiscal year 2002 and 2001, respectively. Our revenue from international sales increased primarily due to our acquisition of the Quantum HDD business and the growth of non-branded PC customers’ market share of overall current desktop PC market and our effort to accommodate this growth. Sales to Europe represented 32.6% and 28.7% of total revenue for fiscal years 2002 and 2001, respectively. In absolute terms, Europe sales increased 13.8% compared to the corresponding period in 2001. Sales to Asia Pacific represented 30.4% and 24.3% of total revenue for fiscal years 2002 and 2001, respectively. Sales to Asia Pacific increased in absolute dollars by 13.3% from fiscal year 2002 to fiscal year 2001. The increase in absolute dollars and as a percentage of total revenue represented by sales in Europe and Asia Pacific were primarily due to the growth in sales to non-branded PC customers who are primarily located outside of the United States and Canada. We plan to continue building our sales efforts in Europe and Asia Pacific over the course of 2003.

Cost of Revenues; Gross Profit. Gross profit increased to $397.4 million in fiscal year 2002 from $362.5 million in fiscal year 2001. Gross profit as a percentage of revenue increased to 10.5% in fiscal year 2002 from 9.6% in fiscal year 2001 as a result of the benefits from our manufacturing transition of our desktop products to our Singapore facility by the end of our third quarter of 2002 and improved yields on our new higher density drives in the fourth quarter of 2002. Our cost of goods sold includes depreciation and amortization of property, plant and equipment.

Research and Development Expense. Research and development (“R&D”) expense in fiscal year 2002 was $401.0 million, or 10.6% of revenue, compared to $411.2 million, or 10.9% of revenue, in fiscal year 2001. The decrease in R&D expense in fiscal year 2002 was primarily due to merger-related costs, such as transitional services and non-recurring merger-related expenses of $10.1 million, as well as amortization of stock-based compensation, associated with our acquisition of the Quantum HDD business incurred during the corresponding period in 2001 and lower compensation expenses resulting from reduced headcount in 2002. This decrease was offset by the inclusion of Quantum HDD and MMC expenses and our on-going effort to maintain leadership products to address the requirements of the PC desktop and Intel-based server markets.

As a result of the Quantum HDD acquisition, R&D expense includes stock compensation charges of $1.8 million and $2.0 million in 2002 and 2001, respectively, resulting from options we issued to Quantum employees who joined Maxtor in connection with the merger on April 2, 2001. Additionally, R&D expense in fiscal years 2002 and 2001 includes $2.8 million and $25.0 million, respectively of stock compensation amortization for Quantum DSS shares issued to Quantum employees who joined Maxtor in connection with the merger.

Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expense as a percentage of revenue was 3.9% and 6.2% in fiscal years 2002 and 2001, respectively. The absolute dollar level of SG&A expense decreased to $148.5 million in fiscal year 2002 from $232.0 million in fiscal year 2001. The decreases in SG&A expense were primarily due to $69.8 million in payments associated with the Quantum HDD business incurred subsequent to the acquisition and reduced compensation expenses.

As a result of the Quantum HDD acquisition, SG&A expense includes stock compensation charges of $0.6 million and $0.7 million in fiscal years 2002 and 2001, respectively, resulting from options we issued to Quantum employees who joined Maxtor in connection with the merger on April 2, 2001. Additionally, SG&A expense in fiscal year 2002 includes $1.0 million and $8.9 million, respectively, of stock compensation amortization for Quantum DSS shares issued to Quantum employees who joined Maxtor in connection with the merger.

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

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


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

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

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

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

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

In addition, Quantum Corporation issued restricted Quantum DSS shares to Quantum employees who joined Maxtor in connection with the merger in exchange for the fair value of Quantum DSS options held by such employees. A portion of the acquisition purchase price has been allocated to this deferred compensation, recorded as prepaid expense, and is amortized to expenses over the vesting period as the vesting of the shares are subject to continued employment with Maxtor. Amortization as of December 28, 2002 was as follows:

Amortization of Goodwill and Other Intangible Assets. Amortization of other intangible assets represents the amortization of customer list and other current products and technology, arising from our acquisitions of the Quantum HDD business in April 2001 and MMC in September 2001. The net book value of these intangibles at December 28, 2002 was $146.9 million. Amortization of other intangible assets was $82.2 million for the year ended December 28, 2002, compared to $207.8 million in the corresponding period in fiscal year 2001. The decrease was due to the cessation of the amortization of goodwill and workforce in 2002, as a consequence of adopting Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).

On December 30, 2001, the Company adopted SFAS 142, which requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. In compliance with SFAS No. 142, we reclassified $31.1 million, net of accumulated amortization, in workforce assets to goodwill and we ceased amortizing the resulting net goodwill balance of $846.0 million. Accordingly, there are no charges for the amortization of goodwill in 2002 or thereafter. Subsequent to the decision to shut down the manufacture and sales of NSG products, the Company wrote off goodwill related to the NSG operations of $32.3 million. As of December 28, 2002, goodwill amounted to $814.0 million.

As required by SFAS No. 142, we completed our impairment analysis as of January 1, 2002, upon our adoption of SFAS 142, and as of December 28, 2002 for the purpose of the annual review. We found no instances of impairment of our recorded goodwill on both dates and accordingly no impairment was recorded.

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

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

The following tables present the impact of SFAS 142 on net loss and net loss per share had we ceased amortization of goodwill beginning the year ended December 29, 2001 (in thousands, except per share amounts):

Purchased In-process Research and Development (“IPR&D”). During fiscal year 2001, we expensed IPR&D costs of $94.7 million as a result of our acquisition of Quantum HDD. Additionally, in connection with the acquisition of MMC in September 2001, we expensed IPR&D costs of $0.5 million. We expensed these amounts because the acquired technology had not yet reached technological feasibility and had no future alternative uses. For additional information regarding the Quantum HDD and MMC acquisitions and the costs associated with purchased in-processed research and development, see note 7 of the Notes to Consolidated Financial Statements.

Interest Expense. Interest expense was $27.0 million and $25.2 million in fiscal years 2002 and 2001, respectively, or an increase of 7.1%. The increase was primarily due to the debt we assumed in conjunction with the acquisitions of MMC and Quantum HDD and our obligation to reimburse Quantum Corporation for interest due on the Quantum HDD pro rata portion of Quantum’s convertible subordinated notes in connection with the acquisition of Quantum HDD.

As of December 28, 2002 and December 29, 2001, short-term borrowings were $41.0 million and $44.2 million, respectively, and long-term indebtedness outstanding was $206.3 million and $244.5 million, respectively.

Interest and Other Income. Interest and other income was $10.1 million and $21.5 million in fiscal years 2002 and 2001, respectively. The decrease is primarily reduced interest income from our investment portfolios

Gain (Loss) on Sale of Investments. During fiscal year 2002, we recorded a $2.3 million gain on the sale of investments. This gain was due to $1.0 million of realized gains on the sale of securities in our investment portfolio and a $1.3 million gain on a previously impaired security in our investment portfolio. During fiscal year 2001, in accordance with our investment policy, we recorded a $7.4 million loss on an investment primarily due to a $6.7 million write-off of a Quantum HDD acquired investment in a high-tech start-up company and a net loss of $0.7 million that includes a $1.3 million impairment charge in other fixed income portfolio investments.

Provision for Income Taxes. During 2002 and 2001, we recorded income tax provisions of $2.2 million and $3.4 million, respectively. The provision for income taxes consists primarily of state and foreign taxes. Due to our net operating losses (“NOL”), NOL carryforwards and favorable tax status in Singapore and Switzerland, we have not incurred any significant foreign, U.S. federal, state or local income taxes for the current or prior fiscal periods. We have not recorded a tax benefit associated with our loss carry-forward because of the uncertainty of realization.

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

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

Pursuant to a “Tax Sharing and Indemnity Agreement” entered into in connection with the Company’s merger with Quantum HDD, Maxtor, as successor to Quantum HDD, and Quantum are allocated their share of Quantum’s income tax liability for periods before the split-off, consistent with past practices and as if the Quantum HDD and Quantum DSS business divisions had been separate and independent corporations. To the extent that the income tax liability attributable to one business division is reduced by using NOLs and other tax attributes of the other business division, the business division utilizing the attributes must pay the other for the use of those attributes. We must also indemnify Quantum for additional taxes related to the Quantum DSS business for all periods before Quantum’s issuance of tracking stock and additional taxes related to the Quantum HDD business for all periods before the split-off, limited in the aggregate to $142.0 million plus 50% of any excess over $142.0 million, excluding any required gross-up payment. Management has determined that, based on the facts available at this time, the likelihood that the payment will exceed $142.0 million is remote. As of December 28, 2002, the Company has reimbursed $3.5 million to Quantum Corporation leaving a balance of $138.5 million on the original indemnity.

We purchased a $340 million insurance policy covering the risk that the split-off of Quantum HDD from Quantum DSS could be determined to be subject to federal income tax or state income or franchise tax. Under the “Tax Sharing and Indemnity Agreement,” the Company agreed to indemnify Quantum for the amount of any tax payable by Quantum as a result of the split-off to the extent such tax is not covered by such insurance policy, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the split-off. The amount of the tax not covered by insurance could be substantial. In addition, if it is determined that Quantum owes federal or state tax as a result of the split-off and the circumstances giving rise to the tax are covered by our indemnification obligations, the Company will be required to pay Quantum the amount of the tax at that time, whether or not reimbursement may be allowed under our tax insurance policy.

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

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

Operating results of the NSG discontinued operations for years ended December 30, 2000, December 29, 2001 and December 28, 2002 are as follows (in millions):

The increase in loss in 2002 was due to the inclusion of the following charges upon the decision to shut down the NSG operations (in millions):

Revenue. In fiscal year 2001, we generated revenue of $3,765.5 million compared to $2,690.9 million in fiscal year 2000, an increase of 39.9%. Total shipments in fiscal year 2001 were 45.1 million units compared to 27.0 million units in fiscal year 2000, a 67.0% increase. The increase in revenue primarily reflected the acquisition of Quantum HDD in April 2001. We also successfully introduced several next generation products during fiscal year 2001, which contributed to the overall increase in unit sales. Revenue did not increase at the same rate compared to unit shipments in 2001. This was primarily the result of the continued decline in average selling prices due to pricing pressures in the desktop computer market.

Revenue on a proforma basis (that is, calculating revenue as if we had acquired Quantum HDD on January 1, 2000) was $4,418.6 million in fiscal year 2001, compared to $5,800.6 million in fiscal year 2000, representing a decline of 23.8% on a proforma basis. Although proforma does not purport to be indicative of what would have occurred, we believe the decline on a proforma basis was primarily due to the overall slowdown in demand for hard disk drives, the continued pricing pressures in the desktop computer market and customers’ efforts to diversify their suppliers in anticipation of our acquisition of Quantum HDD.

Sales to the top five customers represented 34.1% and 34.5% of revenue in fiscal years 2001 and 2000, respectively. Sales to one customer were 11.3% and 14.2% of revenue in fiscal years 2001 and 2000, respectively. There was the only customer with over 10% of revenue during fiscal years 2001 and 2000.

Revenue from sales to computer equipment manufacturers represented 55.4% and 70.0% of revenue in fiscal years 2001 and 2000, respectively. This decrease in 2001 was primarily due to increased sales to our distribution channel and retail customers, which represented 44.6% and 30.0% of revenue in fiscal years 2001 and 2000, respectively. Revenue from sales to computer equipment manufacturers increased by 10.8% in fiscal year 2001 from fiscal year 2000, while revenue from sales to distribution channel and retail customers

Domestic revenue represented 42.0% and 46.1% of total sales in fiscal year 2001 and 2000, respectively. International revenue represented 58.0% and 53.9% of total sales in fiscal year 2001 and 2000, respectively. Our revenue from international sales increased primarily as a result of our stronger presence in Europe’s expanding PC desktop market. Sales to Europe represented 28.7% and 24.0% of total revenue for fiscal years 2001 and 2000, respectively. The increased Europe sales in absolute terms was 67.6% in 2001, compared to 2000. Sales to Asia Pacific increased in absolute dollars by 28.4% from fiscal year 2001 to fiscal year 2000, however, as a percentage of revenue, decreased from 24.3% to 26.5%. We continued building our sales efforts in Europe and Asia Pacific in 2002.

Cost of Revenue; Gross Profit. Gross profit decreased to $362.5 million in fiscal year 2001 from $373.2 million in fiscal year 2000. Gross profit as a percentage of revenue decreased to 9.6% in fiscal year 2001 from 13.9% in fiscal year 2000. The decrease in gross margin primarily reflected a decrease in average selling price compared to the average unit cost and the acceleration of end-of-life sales. Competitive pricing pressures contributed to the overall decrease in gross margins. Our decline in gross margin was partially offset by our transition to lower cost, higher margin product, increased sales to the distribution channel and well-managed inventory levels. Our cost of goods sold includes depreciation and amortization of property, plant and equipment.

Research and Development Expense. Research and development (“R&D”) expense in fiscal year 2001 was $411.2 million, or 10.9% of revenue, compared to $211.8 million, or 7.9% of revenue, in fiscal year 2000. The increase in R&D expense in fiscal year 2001 was primarily the result of the inclusion of Quantum HDD’s R&D expenses. The increase in R&D expense also reflects the inclusion of MMC’s expenses, our on-going effort to maintain leadership products and our investments to expand our Network Systems Group’s product portfolio.

As a result of the Quantum HDD acquisition, R&D expense includes stock compensation charges of $2.0 million in 2001, resulting from options we issued to Quantum employees who joined Maxtor in connection with the merger on April 2, 2001. Additionally, R&D expense in 2001 includes $25.0 million of stock compensation amortization for Quantum DSS shares issued to Quantum employees who joined Maxtor in connection with the merger. R&D expense also includes costs of transitional services and non-recurring merger related expenses related to the Quantum HDD acquisition of $10.1 million.

Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expense as a percentage of revenue was 6.2% and 3.7% in fiscal years 2001 and 2000, respectively. The absolute dollar level of SG&A expense increased to $232.0 million in fiscal year 2001 from $99.6 million in fiscal year 2000. The increases in SG&A expense were primarily due to the inclusion of Quantum HDD’s SG&A expenses, MMC’s SG&A expenses and other post-merger related expenses, including costs of transitional services.

As a result of the Quantum HDD acquisition, SG&A expense includes stock compensation charges of $0.7 million in 2001, resulting from options we issued to Quantum employees who joined Maxtor in connection with the merger on April 2, 2001. Additionally, SG&A expense in 2001 includes $8.9 million of stock compensation amortization for Quantum DSS shares issued to Quantum employees who joined Maxtor in connection with the merger. SG&A expense also includes costs of transitional services and non-recurring merger related expenses related to the Quantum HDD acquisition of $69.8 million.

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


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

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

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

Amortization of Goodwill and Other Intangible Assets. Amortization of goodwill and other intangible assets represents the amortization of goodwill, workforce, customer list and other current products and technology, arising from our acquisitions of Quantum HDD in April 2001 and MMC in September 2001. In accordance with SFAS 142, we have not amortized any goodwill associated with the MMC acquisition. Upon adoption of SFAS 142, effective December 30, 2001, we have discontinued amortizing our goodwill and acquired assembled workforce associated with Quantum HDD. Amortization of goodwill and other intangible assets amounted to $207.8 million and $0 million in fiscal years 2001 and 2000, respectively.

Interest Expense. Interest expense was $25.2 million and $13.7 million in fiscal years 2001 and 2000, respectively, or an increase of 83.5%. The increase was primarily due to the debt we assumed in conjunction with the acquisitions of MMC and Quantum HDD and our obligation to reimburse Quantum Corporation for interest due on the Quantum HDD pro rata portion of Quantum’s convertible subordinated notes in connection with the acquisition of Quantum HDD.

As of December 29, 2001 and December 30, 2000, short-term borrowings were $44.2 million and $15.4 million, respectively, and long-term indebtedness outstanding were $244.5 million and $92.3 million, respectively.

Interest and Other Income. Interest and other income was $21.5 million and $24.3 million in fiscal years 2001 and 2000, respectively. The decrease primarily reflected one-time gains in fiscal year 2000 pertaining to

Gain (Loss) on Sale of Investments. During fiscal year 2001, in accordance with our investment policy, we recorded a $7.4 million loss on an investment, primarily due to a $6.7 million write-off of a Quantum HDD acquired investment in a high-tech start-up company and a net loss of $1.3 million impairment charge in other fixed income portfolio investments. During fiscal year 2000, we sold our investment in Headway Technologies, Inc., resulting in a gain on sale of investment of $1.8 million.

Provision for Income Taxes. During 2001 and 2000, we recorded income tax provisions of $3.4 million and $1.7 million, respectively. The provision for income taxes consists primarily of state and foreign taxes. Due to our net operating losses (“NOL”), NOL carryforwards and favorable tax status in Singapore and Switzerland, we have not incurred any significant foreign, U.S. federal, state or local income taxes for the current or prior fiscal periods. We have not recorded a tax benefit associated with our loss carry-forward because of the uncertainty of realization.

Pursuant to a “Tax Sharing and Indemnity Agreement” entered into in connection with the Company’s merger with Quantum HDD, Maxtor, as successor to Quantum HDD, and Quantum are allocated their share of Quantum’s income tax liability for periods before the split-off, consistent with past practices and as if the Quantum HDD and Quantum DSS business divisions had been separate and independent corporations. To the extent that the income tax liability attributable to one business division is reduced by using NOLs and other tax attributes of the other business division, the business division utilizing the attributes must pay the other for the use of those attributes. We must also indemnify Quantum for additional taxes related to the Quantum DSS business for all periods before Quantum’s issuance of tracking stock and additional taxes related to the Quantum HDD business for all periods before the split-off, limited in the aggregate to $142.0 million plus 50% of any excess over $142.0 million, excluding any required gross-up payment. As of December 29, 2001, $138.5 million remained on the original indemnity. Management determined that, based on the facts available at the time, likelihood that the payment would exceed $142.0 million was remote.

At December 28, 2002, we had $306.5 million in cash and cash equivalents, $56.7 million in restricted cash and $87.5 million in marketable securities, for a combined total of $450.7 million. In comparison, at December 29, 2001 we had $380.0 million in cash and cash equivalents, $98.6 million in restricted cash and $167.2 million in marketable securities, for a combined total of $645.8 million. The restricted cash balance was pledged as collateral for certain stand-by letters of credit issued by commercial banks. We have a net deferred tax liability amounting to $196.5 million, which could become payable upon repatriation of the earnings invested abroad.

The decrease in working capital was due to investments in property, plant and equipment, losses from operations and satisfaction of principal payments due under our long-term debt obligations. Operating activities from continuing operations provided cash of $2.8 million in the twelve months ended December 28, 2002. Sources of cash from operating activities reflect our net loss from continuing operations of $260.6 million offset by non-cash adjustments for depreciation and amortization of $155.8 million, amortization of other intangible assets of $82.2 million, amortization of deferred compensation related to the Quantum HDD acquisition of $4.1 million, stock compensation expense of $5.6 million, a restructuring charge of $9.5 million related to the closure of one of our facilities, offset by $1.6 million of other non-cash items. Sources of cash from operating activities also include a decrease in accounts receivable of $17.4 million due to the decline in revenues of the fourth fiscal quarter of 2002 compared to the fourth fiscal quarter of 2001, a decrease in inventory of $5.6 million due primarily to improved inventory management, a decrease in prepaid expenses and other assets of $10.1 million primarily due to a reduction in prepaid assets of $8.0 million, an increase in accounts payable of $45.3 million primarily due to longer payment terms with our vendors. This was offset by a decrease in accrued expenses and other liabilities of $70.7 million, due to a change in the accrued warranty balance of $34.9 million primarily resulting from the satisfaction of warranty obligations, offset by accruals for warranties issued during the year, a reduction in the balance of accrued expenses of $13.2 million, a reduction in other long-term liabilities of $12.4 million, and $10.2 million in income taxes payable and satisfaction of other liabilities.

Cash used in investing activities was $17.5 million for the twelve months ended December 28, 2002, reflecting investments in property, plant and equipment of $139.1 million, of which approximately 75% was used to support production, 20% used to support product development and 5% used for infrastructure, which was offset by the sale (net of purchases) of marketable securities of $79.4 million and a decrease in restricted cash of $41.9 million due to the reduction of cash secured letters of credit during the third quarter. We expect that our investments in property, plant and equipment in 2003 will range between $150 million and $175 million, primarily to fund our manufacturing operations and product development.

Cash used in financing activities was $27.1 million for the twelve months ended December 28, 2002, primarily due to the repayment of debt and lease obligations of $49.6 million, offset by proceeds of $22.5 million issuance of common stock through the Company’s employee stock purchase plan and stock option exercises.

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


(1)	In the fiscal years beginning in 2003 through 2012, we will make interest payments of $26.6 million.

(2)	In the fiscal years 2003 and 2004, we will make interest payments of $0.3 million.

(3)	In fiscal years 2003 and 2004, we will make interest payments of $10.6 million.

(4)	In the fiscal years beginning 2003 through 2006, we will make interest payments of $11.5 million.

(5)	In the fiscal years 2003 through 2006, we will make interest payments of $1.4 million.

In July 1998, we entered into an accounts receivable securitization program (the “Program”) with a group of commercial banks (the “Banks”). On November 15, 2001, we amended and restated the Program, extending the Program for another three years and increasing the available size of the Program from $200 million to $300 million. On December 30, 2002, following the close of fiscal 2002, we terminated the Program.

Under the Program, the Company sold U.S. and Canadian accounts receivable in securitization transactions and retains a subordinated interest and servicing rights to those receivables. The eligible receivables, net of estimated credit losses, were sold to third party conduits through a wholly owned bankruptcy-remote entity, Maxtor Receivables Corporation (“MRC”) that is consolidated for financial reporting purposes.

The investors in the securitized receivables had no recourse to the Company’s assets as a result of debtor’s defaults except for the retained interests in the securitized accounts receivable. The third party conduits typically issued securities that are structured into several classes with senior classes having priority of payment over subordinated classes. The Company retained the portion of the sold receivables that is in excess of the minimum receivables level required to support the securities issued by the third party conduits, referred to as “retained.” The carrying amount of the Company’s retained interest, which approximated fair value because of the short-term nature of receivables, was recorded in accounts receivable. We serviced the sold receivables and charged the third party conduits a monthly servicing fee at market rates; accordingly, no servicing asset or liability was recorded.

As of December 28, 2002 and December 29, 2001, the outstanding balance of securitized accounts receivable held by the third party conduits totaled $140.3 million and $124.3 million, respectively, of which the Company’s subordinated retained interest was $95.3 million and $79.1 million, respectively. Accordingly, $45.0 million and $45.2 million of accounts receivable balances, net of applicable allowances, were removed from the consolidated balance sheets at December 28, 2002 and December 29, 2001, respectively.

Under this Program we were subject to a minimum tangible net worth test and a requirement to maintain a specified minimum unrestricted cash balance. During 2002, we revised the tangible net worth test in order to remain in compliance. On December 30, 2002 we elected to terminate the Program.

We are in discussions with financial institutions to establish a new program. There can be no assurance that we will be able to negotiate acceptable terms or receive commitments from financial institutions. If we are not able to establish a new financing program, however, we do not believe that the lack of such a program will have a material adverse effect on our liquidity.

We believe the existing cash and cash equivalents, short term investment and capital resources, together with cash generated from operations and available borrowing capacity will be sufficient to fund our operations through at least the next twelve months. We have improved our cost structure by consolidating desktop manufacturing in Singapore and reducing our operating expenses, actions which we believe will result in improved profitability and an improved working capital position during 2003. We require substantial working capital to fund our business, particularly to finance accounts receivable and inventory, and to invest in property, plant and equipment. During 2003, capital expenditures are expected to range between $150 million and $175 million, primarily used to finance expansion of our manufacturing operations in Singapore and development of a new facility in China, and product development. We intend to seek financing arrangements to fund our future capacity expansion and working capital, as necessary. However, our ability to generate cash will depend on, among other things, demand in the 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.

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

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro-forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation expands on the accounting guidance of FAS 5, Accounting for Contingencies, FAS 57, Related Party Disclosures, and FAS 107, Disclosures about Fair Value of Financial Instruments, and incorporates without change the provisions of FIN 34, Disclosure of Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, which is being superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 will be effective to the Company on a

prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently evaluating the impact of this statement on its results of operations and financial position. The Company has adopted the disclosure requirements in this Interpretation, which are effective for financial statements of periods ending after December 15, 2002.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). Under that interpretation, certain entities known as “Variable Interest Entities” (“VIE”) must be consolidated by the “primary beneficiary” of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIE’s in which a significant (but not majority) variable interest is held, certain disclosures are required. FIN 46 requires disclosure of Variable Interest Entities in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date: (1) the Company will be the primary beneficiary of an existing VIE that will require consolidation or, (2) the Company will hold a significant variable interest in, or have significant involvement with, an existing VIE. Any VIEs created after January 31, 2003, are immediately subject to the consolidation guidance in FIN 46. The measurement principles of this interpretation will be effective for the Company’s 2003 financial statements. The Company does not have any entities that require disclosure or new consolidation as a result of adopting the provisions of FIN 46.

In November 2002, the EITF reached a consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF 00-21 establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria consider whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the rights of returns for the delivered item. EITF 00-21 is effective for revenue agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. The Company is currently evaluating the impact of EITF 00-21 on its financial position, results of operations and cash flows.

The unaudited quarterly results of operations reflect NSG as discontinued operations for all periods presented.

We have a history of significant losses and may not achieve profitability. In the last five fiscal years, we were profitable in only fiscal years 1998 and 2000. In the year ended December 28, 2002, our net loss was $334.1 million, which included $82.2 million for the amortization of intangible assets, charges of $7.0 million for stock-based compensation related to our acquisition of the Quantum HDD business, severance charges of $12.3 million, restructuring charges related to facilities closures of $9.5 million and losses of $73.5 million related to the discontinuation of our network attached storage business in the quarter ended September 28, 2002. We have an accumulated deficit of $1,740.6 million.

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

It is very difficult to achieve and maintain profitability and revenue growth in the hard disk drive industry because the average selling price of a hard disk drive rapidly declines over its commercial life as a result of technological enhancement, productivity improvement and increase in the industry supply. End-user demand for the computer systems that contain our hard disk drives has historically been subject to rapid and unpredictable fluctuations. In addition, intense price competition among personal computer manufacturers and Intel-based server manufacturers may cause the price of hard disk drives to decline. As a result, the hard disk drive market tends to experience periods of excess capacity and intense price competition. Competitors’ attempts to liquidate excess inventories, restructure, or gain market share also tend to cause average selling prices to decline. This excess capacity and intense price competition caused us in the first three quarters of fiscal 2002, and will likely continue to cause us in future quarters, to lower prices, which has the effect of reducing margins, causing operating results to suffer and making it difficult for us to achieve or maintain profitability. If we are unable to lower the cost of our hard disk drives to be consistent with the decline of average selling prices, we will not be able to compete effectively and our operating results will suffer.

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


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

	•	lower their product prices to gain market share;

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

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

	•	offer more products than we do and therefore enter into agreements with customers to supply hard disk drives as part of a larger supply agreement.

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

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


	•	the average selling price of our products;

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

	•	market acceptance of our products;

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

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

	•	changes in product and customer mix;

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

	•	our ability to execute future development and production ramps effectively;

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

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

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

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

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

Most of our products are sold to desktop computer and Intel-based server manufacturers or to their subcontractors. These manufacturers select or qualify their hard disk drive suppliers, either directly or through their subcontractors, based on quality, storage capacity, performance and price. Manufacturers typically seek to qualify two or more suppliers for each hard disk drive product generation. To qualify consistently, and thus succeed in the desktop and Intel-based server hard disk drive industry, we must consistently be among the first-to-market introduction and first-to-volume production at leading storage capacity per disk, offering competitive prices and high quality. Once a manufacturer or subcontractor has chosen its hard disk drive suppliers for a given desktop computer or Intel-based server product, it often will purchase hard disk drives from those suppliers for the commercial lifetime of that product line. If we miss a qualification opportunity, we may not have another opportunity to do business with that manufacturer or subcontractor until it introduces its next generation of products. The effect of missing a product qualification opportunity is magnified by the limited number of high-volume manufacturers of personal computers and Intel-based servers. If we do not

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

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

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

We sell most of our products to a limited number of customers. For the fiscal year ended December 28, 2002, one customer, Dell Computer Corporation, accounted for approximately 11.5% of our total revenue, and our top five customers accounted for approximately 31.8% of our revenue. We expect that a relatively small number of customers will continue to account for a significant portion of our revenue, and the proportion of our revenue from these customers could continue to increase in the future. These customers have a wide variety of suppliers to choose from and therefore can make substantial demands on us. Even if we successfully qualify a product for a given customer, the customer generally will not be obligated to purchase any minimum volume of product from us and generally will be able to terminate its relationship with us at any time. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a key customer or if any of our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce costs, our business, financial condition and operating results could suffer. Mergers, acquisitions, consolidations or other significant transactions involving our significant customers may adversely affect our business and operating results.

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

We sell a significant amount of our hard disk drive products through a limited number of key distributors. If we fail to develop, cultivate and maintain relationships with our key distributors, or if these distributors are not successful in their sales efforts, sales of our products may decrease and our operating results could suffer. As our sales through distribution channels continue to increase, we may experience problems typically associated with distribution channels such as unstable pricing, increased return rates and other logistical difficulties. Our distributors also sell products manufactured by our competitors. If our distributors favor our competitors’ products over our products for any reason, they may fail to market our products effectively or continue to devote the resources necessary to provide us with effective sales and, as a result, our operating results could suffer.

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

To remain a significant supplier of hard disk drives to major manufacturers of personal computers and Intel-based servers, we will need to offer a broad range of hard disk drive products to our customers. Although almost all of our current products are designed for the desktop computer and the Intel-based server markets, demand in these segments may shift to products we do not offer or volume demand may shift to other

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

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

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

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

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

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

Unlike some of our competitors, we do not manufacture any of the parts used in our products, other than media as a result of our acquisition of MMC. Instead, our products incorporate parts and components designed by and purchased from third party suppliers. Both we and MKE depend on a limited number of qualified suppliers for components and subassemblies, including recording heads, media and integrated circuits. Currently, we purchase recording heads from three sources, digital signal processor/controllers from

one source and spin/servo integrated circuits from two sources. Although our acquisition of our primary media supplier, MMC, has reduced our dependence on outside suppliers for this component, MMC cannot supply all of our media needs, and therefore we are still required to purchase media from two outside sources. As we have experienced in the past, some required parts may be periodically in short supply. As a result, we will have to allow for significant ordering lead times for some components. In addition, we may have to pay significant cancellation charges to suppliers if we cancel orders for components because we reduce production due to market oversupply, reduced demand, transition to new products or technologies or for other reasons. We order the majority of our components on a purchase order basis and we have limited long-term volume purchase agreements with only some of our existing suppliers. In the event that these suppliers cannot qualify to new leading-edge technology specifications, our ramp up of production for the new products will be delayed, and our business, operating results and financial condition will be adversely affected.

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

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

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

Our Maxtor-owned facilities in Singapore and our relationship with MKE for the manufacture of 10,000 RPM hard disk drives for the enterprise market are currently our only sources of production for our hard disk drive products. MKE manufactures a substantial portion of our enterprise hard disk drives pursuant to a master agreement and a purchase agreement that has been extended through March 31, 2004. If, for any reason, we are unable in some quarters to make purchases in adequate volumes or on terms advantageous to us, our revenue may be lower or our costs may be higher than projected and our operating results would suffer.

We negotiate pricing arrangements with MKE on a quarterly basis. Any failure to reach an agreement on competitive pricing arrangements would also negatively impact our operating results.

If, at the time of termination of our current agreement with MKE we are unable to extend further the agreement on mutually acceptable terms for the manufacture of enterprise hard disk drives, we will need to arrange for alternative manufacturing capacity for our enterprise products. If we fail to make such arrangements in a timely manner, in adequate volumes or on acceptable terms, our revenue might be lower than projected and our business, financial condition and operating results would suffer. In addition, we will need to acquire additional manufacturing capacity in the future. Our inability to add capacity to allow us to meet customers’ demands in a timely manner may limit our future growth and could harm our business, financial condition and operating results. We have begun construction of a manufacturing facility in China that will provide us with a low-cost facility to accommodate anticipated future growth. We anticipate that the facility will become operational in the second half of 2004. We have arranged financing for the facility and expect documentation to be finalized in the next few weeks. A failure to obtain financing on terms acceptable to us could delay the time at which the facility could come on-line, which could in turn result in harm to our business, financial condition and operating results.

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

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

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

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

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

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

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

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

Our protection of our intellectual property is limited. For example, we have patent protection on only some of our technologies. We may not receive patents for our pending or future patent applications, and any patents that we own or that are issued to us may be invalidated, circumvented or challenged. In the case of

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

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

In February 2002, Papst and MKE entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus us, with additional defenses to Papst’s patent infringement claims.

could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although we cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

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


	•	difficulties with staffing and managing international operations;

	•	transportation and supply chain disruptions as a result of terrorist activity, acts of war or hostility;

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

	•	international currency fluctuations;

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

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

	•	general strikes or other disruptions in working conditions;

	•	labor shortages;

	•	political instability;

	•	trade restrictions;

	•	changes in tariffs;

	•	generally longer periods to collect receivables;

	•	unexpected legislative or regulatory requirements;

	•	reduced protection for intellectual property rights in some countries;

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

	•	difficulty in obtaining export licenses and other trade barriers;

	•	seasonality;

	•	increased transportation/shipping costs; and

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

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

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

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

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

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

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


	•	quarterly fluctuations in operating results;

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

	•	gains or losses of significant customers;

	•	changes in stock market analysts’ estimates;

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

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

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

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

	•	general economic conditions in the United States and abroad.

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

We have a number of protective provisions in place designed to provide our board of directors with time to consider whether a hostile takeover is in our best interests and that of our stockholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control of the company and also could diminish the opportunities for a holder of our common stock to participate in tender offers, including offers at a price above the then-current market price for our common stock. These provisions also may inhibit fluctuations in our stock price that could result from takeover attempts.

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

We maintain an investment portfolio of various holdings, types and maturities. These marketable securities are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Part of this portfolio includes investments in bank issues, corporate bonds and commercial papers. For additional information regarding our impairment policy, see note 1 of the Notes to Consolidated Financial Statements.

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

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

The accompanying consolidated financial statements include the accounts of Maxtor Corporation and its wholly-owned subsidiaries (“Maxtor” or the “Company”). All significant inter-company accounts and transactions have been eliminated.

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Saturday closest to December 31. Accordingly, fiscal year 2002 ended on December 28, 2002, fiscal year 2001 ended on December 29, 2001 and fiscal year 2000 ended on December 30, 2000. Fiscal years 2002, 2001 and 2000 comprised 52 weeks, respectively. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

Maxtor develops, manufactures and markets hard disk drives for a variety of applications, including desktop computers, high-performance Intel-based servers and consumer electronics. Customers include original equipment manufacturers (“OEM”s), distributors and retailers.

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

Material differences may result in the amount and timing of the Company’s revenue for any period, if the Company’s management made different judgments or utilized different estimates.

The actual results with regard to warranty expenditures could have a material impact on Maxtor if the actual rate of unit failure or the cost to repair a unit varies significantly from what the Company has used in estimating its warranty expense accrual.

Given the volatility of the market for disk drives and for the Company’s products, the Company makes adjustments to the value of inventories based on estimates of potentially excess and obsolete inventories and negative margin products after considering forecasted demand and forecasted average selling prices. However, forecasts are always subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from such anticipated demand and such differences may have a material impact on the financial statements.

The actual results with regard to the useful lives of property, plant and equipment may vary from their estimated useful lives, which could have a material impact on the Company’s results of operations.

The Company’s revenues are derived from the sale of its hard disk drive products. The markets in which the Company competes are highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect operating results. The Company has historically derived substantially all of its net revenues from the hard disk drive products. As a result of this revenue concentration, the Company’s business could be harmed by a decline in demand for, or in the prices of, these products as a result of, among other factors, any change in pricing model, a maturation in the markets for these products, increased price competition or a failure by the Company to keep up with technological change.

The Company sells a significant amount of its products through intermediaries such as distributors. Revenue from sales to distributors represented 47.6% of total revenues in the year ended December 28, 2002. The Company’s distributor agreements may be terminated by either party without cause. If one of the Company’s significant distributors terminates its distribution agreement, the Company could experience a significant interruption in the distribution of its products.

The Company’s distributors may sell other vendor’s products that are complementary to, or compete with, its products. While the Company encourages its distributors to focus on the Company’s products through market and support programs, these distributors may give greater priority to products of other suppliers, including competitors.

Financial instruments which potentially subject Maxtor to concentrations of credit risk consist primarily of accounts receivable, cash equivalents, restricted cash and marketable securities. The Company has cash equivalents and marketable securities policies that limit the amount of credit exposure to any one financial institution and restricts placement of these funds to financial institutions evaluated as highly credit-worthy. Maxtor’s products are sold worldwide to OEMs, distributors, and retailers. Concentration of credit risk with respect to the Company’s trade receivables is limited by an ongoing credit evaluation process and the geographical dispersion of sales transactions. Therefore, collateral is generally not required from the Company’s customers. The allowance for doubtful accounts is based upon the expected collectibility of all accounts receivable. As of December 28, 2002, the Company had no customer who accounted for more than 10% of the outstanding trade receivables. If the customers fail to perform their obligations to us, such failures would have adverse effects upon Maxtor’s financial position, results of operations, cash flows and liquidity.

The Company purchases a majority of its server hard disk drive finished goods from Matsushita Kotobuki Electronics, Ltd. (“MKE”). If MKE were unable to produce according to the Company’s product delivery schedules, the Company’s operating results could be adversely affected.

For the year ended December 28, 2002, the Company incurred a loss from operations of $243.8 million. As of December 28, 2002, the Company had an accumulated deficit of $1,740.6 million. The Company operates in a highly competitive market characterized by rapidly changing technology. The Company intends to incur significant expenses to continue to develop and promote new products as well as to support existing product sales. Failure to generate sufficient revenues from new and existing products may require the Company to delay, scale back or eliminate certain research and development or marketing programs.

The Company believes that cash, cash equivalents, restricted cash and marketable securities will be sufficient to meet its needs for operations and working capital requirements for the next twelve months through December 27, 2003. To the extent that the Company does not generate sufficient revenues from new and existing products or reduce discretionary expenditures and, as a result, cash generated from operations is insufficient to satisfy liquidity requirements, additional cash may be needed to finance operating and investing needs. However, depending on market conditions, any additional financing needed may not be available on acceptable terms, or at all.

The Company considers all highly liquid investments with a maturity of three months or less at time of purchase to be cash equivalents except restricted cash. Cash and cash equivalents include money market accounts, commercial paper and various deposit accounts. The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of those assets.

The Company’s restricted cash balance was $56.7 million at December 28, 2002. The restricted cash balance was pledged as collateral for certain stand-by letters of credit issued by commercial banks.

The Company’s marketable securities comprise U.S. obligations; U.S. government debt agencies; corporate debt securities; bank issues; and mortgage and asset backed securities. These marketable securities are carried at fair value, in accordance with Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” All marketable securities are held in the Company’s name and are managed primarily under custodial agreements with financial institutions. All of the Company’s marketable securities were classified as available-for-sale. Unrealized gains and losses on these investments are included in other comprehensive income (loss) and disclosed as a separate component of shareholders’ equity. Realized gains and losses on sales of all such investments are reported in results of operations and computed using the specific identification method.

All equity securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on securities classified as available-for-sale are included in other comprehensive income (loss) and are reported as a separate component of stockholders’ equity. Realized gains and losses on sales of all such investments are included in the results of operations computed using the specific identification cost method.

The Company’s investments in equity and marketable securities are monitored on a periodic basis for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in public companies are determined using quoted market prices. Fair values for investments in privately-held companies are estimated based upon one or more of the following: pricing models using historical and forecasted financial information and current market rates, liquidation values, the values of recent rounds of financing, or quoted market prices of comparable public companies. Marketable and equity securities, which are classified as available-for-sale, are summarized as follows, as of December 28, 2002 and December 29, 2001:

Inventories include material and related manufacturing overhead, and are stated at the lower of cost (computed on a first-in, first-out basis) or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Property, plant and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets, which generally range from three to five years, except for buildings, which are depreciated over thirty years. Assets under leasehold improvements are amortized over the shorter of the asset life or the remaining lease term. Upon disposal, the Company removes the asset and accumulated depreciation from its records and recognizes the related gain or loss in results of operations.

Repair and maintenance expenditures, which are not considered improvements and do not extend the useful life of property, plants and equipment, are expensed as incurred.

Goodwill represents the excess of purchase price and acquisition costs over the fair value of net assets of businesses acquired. Other intangible assets represents existing technology, being amortized over the estimated useful lives ranging from three to five years. The Company evaluates the periods of amortization continually to determine whether later events and circumstances warrant renewed estimates of useful lives.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” which is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard included provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. As a result, the Company reclassified its existing acquired assembled workforce balance to goodwill, as it does not meet the separate recognition criterion according to SFAS 142. Commencing in fiscal 2002, the Company adopted SFAS 142.

The Company assesses the impairment of its long-lived assets, other identifiable intangibles and related goodwill periodically in accordance with the provisions of Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the Impairment and Disposal of Long-Lived Assets.” The Company also assesses the impairment of enterprise level goodwill periodically in accordance with the provision of SFAS No. 142 “Goodwill and Other Intangible Assets.”

SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. An impairment review is performed annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could result in an impairment review include but are not limited to, significant underperformance relative to expected historical or projected future operating results, undiscounted cash flows are less than the carrying value, significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and the Company’s market capitalization relative to net book value. The second phase (if necessary), measures the amount of impairment loss by comparing the implied fair value of reporting unit goodwill with

the carrying amount of that goodwill. If the Company determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company will measure any impairment based on the projected discounted cash flow method using a discount rate commensurate with the risk inherent to the Company’s current business model.

We completed our first phase impairment analysis and found no instances of impairment of our recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, was not necessary during 2002.

The Company accounts for its restructuring liabilities in connection with business combinations in accordance with Emerging Issues Task Force No. 95-3 (“EITF 95-3”), “Recognition of Liabilities in Connection with a Purchase Business Combination.” EITF 95-3 requires that the Company record an estimated liability if the estimated costs are not associated with or are not incurred to generate revenues of the combined entity after the consummation date and they meet certain criteria defined within EITF 95-3. The Company accounted for restructuring liabilities initiated in 2002 in accordance with EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which requires the Company to record the liability resulting from estimated costs that are not associated with or do not benefit activities that will be continued. The Company accounts for litigation and contingencies in accordance with Statement of Financial Accounting Standard No. 5 (“SFAS 5”), “Accounting for Contingencies.” SFAS 5 requires that the Company record an estimated loss from a loss contingency when information available prior to issuance of the Company’s financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated.

The Company derives its revenue from the sale of products. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period with respect to the amount of reserves for sales returns, allowances and doubtful accounts. Material differences may result in the amount and timing of the Company’s revenue for any period if its management made different judgments or utilized different estimates.

In recognizing revenue in any period, the Company applies the provisions of Staff Accounting Bulletin 101 “Revenue Recognition.”

Revenue from sales of products is recognized when persuasive evidence of an arrangement exists, including a fixed price to the buyer, delivery has occurred and collectibility is reasonably assured; this generally occurs upon shipment.

For all sales the Company uses either a binding purchase order or signed purchase agreement as evidence of an arrangement. Sales through its distributors are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. The Company’s arrangements generally do not include acceptance clauses.

The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from its customers.

Delivery generally occurs when product is delivered to a common carrier. Certain of the Company’s products are delivered on an FOB destination basis. The Company defers its revenue associated with these transactions until the delivery has occurred to the customers’ premises.

Estimated product returns are provided in accordance with Statement of Financial Accounting Standard No. 48 (“SFAS 48”), “Revenue Recognition When Right of Return Exists.” Resellers have limited rights of return which allow them to return a percentage of the prior quarter’s purchases by these resellers. Accordingly, revenue is not recognized with respect to those shipments which management estimates will be returned. The Company believes that these estimates are reasonably accurate due to the short time period during which the Company’s resellers can return products, the limitations placed on their right to make returns, the Company’s long history of conducting business with resellers on a sell-in basis, the nature of the Company’s historical relationships with resellers and the weekly reporting procedures through which the Company monitors inventory levels at resellers and sales to end-users.

The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty covers cost of repair of the hard drive and the warranty periods generally range from one to five years. The Company has comprehensive processes that it uses to estimate accruals for warranty exposure. The processes include specific detail on hard drives in the field by product type, estimated failure rates and costs to repair. Although the Company believes it has the continued ability to reasonably estimate warranty expenses, unforeseeable changes in factors used to estimate the accrual for warranty could occur. These unforeseeable changes could cause a material change in the Company’s warranty accrual estimate. Such a change would be recorded in the period in which the change was identified. Changes in the Company’s product warranty liability during the year ended December 28, 2002 were as follows (in thousands):

The cost of advertising is expensed as incurred. For the years ended December 28, 2002, December 29, 2001 and December 30, 2000, advertising costs totaled $5.8 million, $8.0 million and $4.2 million, respectively. Advertising and other marketing development costs incurred by the Company’s customers and funded by the Company through purchase volume rebates are accounted for as a reduction of the revenue associated with such customers.

The Company accounts for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax assets and liabilities in the period when tax rates or the provisions of the income tax laws change. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

The functional currency for all foreign operations is the U.S. dollar. As such, all material foreign exchange gains or losses are included in the determination of net income (loss). Net foreign exchange losses included in net income (loss) for the fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002 were immaterial.

Although the majority of the Company’s transactions are in U.S. Dollars, the Company enters into currency forward contracts to manage foreign currency exchange risk associated with its operations primarily in Singapore, Switzerland and Japan. From time to time, the Company purchases short-term, forward exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for operating expenses denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the impact of foreign currency fluctuations on the results of operations. A majority of the increase or decreases in the Company’s local currency operating expenses are offset by gains and losses on the hedges. The contracts generally have maturity dates that do not exceed three months. The Company does not purchase short-term forward exchange contracts for trading purposes.

The Company accounts for derivative instruments and for hedging activities in accordance with Statement of Financial Accounting Standard No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities.” Since the adoption of SFAS 133, the Company has elected not to designate these forward exchange contracts as accounting hedges and any changes in fair value have been recorded through the results of operations for the year ended December 28, 2002.

There were no outstanding forward exchange contracts as of December 28, 2002. The Company had outstanding forward exchange contracts with commercial banks with notional values of $4.6 million as of December 29, 2001.

The Company accounts for non-cash stock-based employee compensation in accordance with APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees and related Interpretations,” and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standard No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation, Transition and Disclosures.” The Company adopted FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB 25” as of July 1, 2000. FIN 44 provides guidance on the application of APB 25 for non-cash stock-based compensation to employees. For fixed grants, under APB 25, compensation expense is based on the excess of the fair value of the Company’s stock over the exercise price, if any, on the date of the grant and is recorded on a straight-line basis over the vesting period of the options, which is generally four years. For variable grants, compensation expense is based on changes in the fair value of the Company’s stock and is recorded using the methodology set out in FASB Interpretation

No. 28 (“FIN 28”), “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an interpretation of APB 15 and APB 25.”

The Company accounts for non-cash stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Investments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

The following proforma net income (loss) information for Maxtor’s stock options and employee stock purchase plan has been prepared following the provisions of SFAS No. 123 (in thousands, except per share data):

For further information on assumptions used in determining the fair value stock option grants, see note 13 of the Notes to Consolidated Financial Statements.

The proforma net income (loss) disclosures made above are not necessarily representative of the effects on pro forma net income (loss) for future years as options granted typically vest over several years and additional option grants are expected to be made in future years. Had we adopted the recognition and measurement provisions of SFAS No. 123 for the years ended December 30, 2000, December 29, 2001 and December 28, 2002, the stock-based employee compensation expense would have been $21.8 million, $38.3 million and $40.0 million, respectively, compared to $4.2 million, $6.1 million and $5.6 million recorded in the Company’s income statement, respectively.

Net income (loss) per share has been computed in accordance with Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”), “Earnings per Share.” Basic net income (loss) per share is computed using the weighted average common shares outstanding during the year, which is exclusive of stock subject to future vesting. Diluted net income (loss) per share is computed using the weighted average common shares and potentially dilutive securities outstanding during the year. Potentially dilutive securities are excluded from the computation of diluted net loss per share for those presented years in which their effect would be anti-dilutive due to the Company’s net losses.

Comprehensive income (loss) as defined includes all changes in equity (net assets) during a period from non-owner sources. Cumulative other comprehensive income (loss), as presented in the accompanying consolidated balance sheets, consists of the net unrealized gains on available-for-sale securities, net of tax, if any. Total comprehensive income (loss) for each of the three years is presented in the following table (in thousands):

Certain reclassifications have been made to prior year balances to conform to current year classifications. These reclassifications had no impact on prior year stockholders’ equity or results of operations.

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

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation expands on the accounting guidance of FAS 5, Accounting for Contingencies, FAS 57, Related Party Disclosures, and FAS 107, Disclosures about Fair Value of Financial Instruments, and incorporates without change the provisions of FIN 34, Disclosure of Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, which is being superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, such as standby letters of credit. It

also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 will be effective to the Company on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently evaluating the impact of this statement on its results of operations and financial position. The Company has adopted the disclosure requirements in this Interpretation, which are effective for financial statements of periods ending after December 15, 2002.

In November 2002, the “EITF” reached a consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF 00-21 establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria consider whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the rights of returns for the delivered item. EITF 00-21 is effective for revenue agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. The Company is currently evaluating the impact of EITF 00-21 on its financial position, results of operations and cash flows.

Depreciation and amortization expense of property, plant and equipment for the years ended December 28, 2002, December 29, 2001 and December 30, 2000 was $155.8 million, $125.6 million and $82.1 million, respectively. Total property, plant and equipment recorded under capital leases was $58.5 million, as of December 28, 2002. Total accumulated depreciation under capital leases was $11.7 million, as of December 28, 2002.

The fair values of cash and cash equivalents approximate carrying values because of their short maturities. The Company’s marketable and equity securities are carried at current market values. The fair values of the Company’s 5.75% subordinated debentures are based on the bid price of the last trade for the fiscal years ended December 29, 2001 and December 28, 2002. The fair value of the Company’s mortgages was based on the estimated present value of the remaining payments, utilizing risk-adjusted market interest rates of similar instruments at the balance sheet date.

The carrying values and estimated fair values of the Company’s financial instruments are as follows (in thousands):

In July 1998, the Company entered into an accounts receivable securitization program (the “Program”) with a group of commercial banks (the “Banks”). On November 15, 2001, the Company amended and restated the Program, extending the Program for another three years and increasing the available size of the Program from $200 million to $300 million. After the year ended December 28, 2002, the Company elected to terminate the Program. Under the Program, the Company sold U.S. and Canadian accounts receivable in securitization transactions and retains a subordinated interest and servicing rights to those receivables. The eligible receivables, net of estimated credit losses, were sold to third party conduits through a wholly owned bankruptcy-remote entity, Maxtor Receivables Corporation (“MRC”) that was consolidated for financial reporting purposes. The investors in the securitized receivables had no recourse to the Company’s assets as a result of debtor’s defaults except for the retained interests in the securitized accounts receivable. The third party conduits typically issued securities that are structured into several classes with senior classes having priority of payment over subordinated classes. The Company retained the portion of the sold receivables that was in excess of the minimum receivables level required to support the securities issued by the third party conduits, referred to as retained. The carrying amount of the Company’s retained interest, which approximated fair value because of the short-term nature of receivables, was recorded in accounts receivable. The Company serviced the sold receivables and charged the third party conduits a monthly servicing fee at market rates; accordingly, no servicing asset or liability was recorded.

The Company accounted for the Program under the FASB’s Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” The Program qualifies for treatment as a sale under SFAS 140. As of December 28, 2002 and December 29, 2001, the outstanding balance of securitized accounts receivable held by the third party conduits totaled $140.3 million and $124.3 million, respectively, of which the Company’s subordinated retained interest was $95.3 million and $79.1 million, respectively. Accordingly, $45.0 million and $45.2 million of accounts receivable balances, net of applicable allowances, respectively, were removed from the consolidated balance sheets at December 28, 2002 and December 29, 2001, respectively. Delinquent amounts and credit losses related to these receivables were not material as of December 28, 2002 and December 29, 2001. Expenses associated with the Program totaled $4.0 million, $7.0 million, and $7.6 million in the years ended December 28, 2002, December 29, 2001, December 30, 2000, respectively, and were included within the interest expense caption of the results of operations statement. In fiscal years ended 2002 and 2001, $1.0 million and $4.5 million of these expenses, respectively, related primarily to the loss on sale of receivables, net of related servicing revenues, with the remainder representing program and facility fees. Net cash flows from sales (repayments) under the Program were $(0.2) million $(29.8) million, and $25.0 million for the years ended December 28, 2002, December 29, 2001, and December 30, 2000, respectively. On December 30, 2002, the Company elected to terminate the Program.

During fiscal year 2002, the Company recorded a $2.3 million gain on the sale of investments. This gain was due to $1.0 million of realized gains on the sale of securities in our investment portfolio and a $1.3 million gain on a security for which the Company had recorded a $1.3 million impairment charge in fiscal year 2001. During fiscal year 2001, in accordance with the Company’s impairment policy, the Company recorded a $7.4 million loss on investments, reflecting a $6.7 million write-off of a Quantum HDD acquired investment in a high-tech start-up company and a net loss of $0.7 million that includes a $1.3 million impairment charge in other fixed income portfolio investments.

On August 15, 2002, the Company announced its decision to shut down the manufacturing and sales of its MaxAttach^TM branded network attached storage products of the Company’s Network Systems Group (“NSG”). The discontinuance of the NSG operations represents the abandonment of a component of an entity as defined in paragraph 47 of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the Company’s financial statements have been presented to reflect NSG as a discontinued operation for all periods presented. Its liabilities (no remaining assets) have been segregated from continuing operations in the accompanying consolidated balance sheet as of December 28, 2002 and its operating results have been segregated and reported as discontinued operations in the accompanying consolidated statements of operations.

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

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

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

included on the balance sheet within accrued and other liabilities. As of December 28, 2002, no payments were made against the original accrual of $8.9 million.

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

In connection with the acquisition, the Company assumed all vested and nonvested Quantum HDD options and restricted stock held by employees who accepted offers of employment with Maxtor, whether or not options or restricted stock have vested. The Company also assumed all vested Quantum HDD options held by Quantum employees whose employment was terminated prior to separation. In addition, Maxtor assumed vested Quantum HDD options held by Quantum employees who continued to provide services during a transitional period.

Vested and unvested options for Quantum HDD common stock assumed in the merger represented options for 7,650,965 shares and 4,655,236 shares of Maxtor common stock, respectively. The fair value of the options was determined to be $102.6 million. This was determined in accordance with APB Opinion No. 16, “Business Combinations” and EITF 99-12 “Accounting for Formula Arrangements under Issue 95-19,” using the Black Scholes methodology.

The restricted stock assumed represent 479,127 shares of Maxtor stock. Fair value of the unvested restricted shares was $4.5 million. This was determined in accordance with APB Opinion No. 16 “Business Combinations,” by multiplying the number of restricted shares granted with the average stock price of $9.40, which in turn was determined based on the average closing market prices of Maxtor’s common stock as of October 4, 2000 (announcement date) and as of the two trading days prior and two trading days subsequent to October 4, 2000.

In addition, Quantum Corporation issued restricted Quantum DSS shares to Quantum employees who joined Maxtor in connection with the merger in exchange for the fair value of Quantum DSS options held by such employees. A portion of the acquisition purchase price has been allocated to this deferred compensation, recorded as prepaid expense, and is amortized to expenses over the vesting period as the vesting of the shares are subject to continued employment with Maxtor. As of December 28, 2002, the amount was fully amortized.

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

The following table summarizes the activity related to the merger-related restructuring costs as of December 28, 2002 (in millions):

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

A portion of the purchase price has been allocated to developed technology and acquired in-process research and development. Developed technology and in-process research and development were identified and valued through analysis of data provided by Quantum HDD concerning developmental products, their stage of development, the time and resources needed to complete them, if applicable, their expected income generating ability, target markets and associated risks. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the developed technology and in-process research and development. Where developmental projects had reached technological feasibility, they were classified as developed technology, and the value assigned to developed technology was capitalized. Where the developmental projects had not reached technological feasibility and had no future alternative uses, they were classified as in-process research and development and were charged to expense upon closing of the merger.

At the time of the merger, Quantum HDD was developing new products that qualify as in-process research and development in multiple product areas. For the purposes of determining which projects qualified as in-process research and development, technological feasibility is defined as being equivalent to completion of design verification testing, when the design is finalized and ready for pilot manufacturing. The following is a general description of in-process research and development efforts: current engineering efforts are focused on developing new products, integrating new technologies, improving designs to enable manufacturing efficiencies, improving product performance and integrating multiple functions into single components and multiple components into modules. The principal products to which research and development efforts are as follows: Self-Servo Writer Technology, Desktop, High-end, Core Technology and other identified projects. There is a risk that these developments will not be competitive with other products using alternative technologies that offer comparable functionality. The analysis of research and development projects was conducted as of April 2, 2001.

Self-Servo Writer Technology: Quantum HDD’s Self-Servo Writer technology was being developed to write servo tracks onto the disk media during the manufacturing process, replacing the need to purchase and use servo writer equipment. Quantum HDD expected the development cycle for the current research and development project with respect to the Self-Servo Writer technology to continue for another 6 months, with expected completion dates in the fourth quarter of the calendar year 2001. The development cycle was approximately 85% complete with estimated cost to complete to be incurred ratably over the remainder of the development cycles.

High End: Quantum HDD’s High-End development efforts supported future generation high-end hard disk drives. Quantum HDD expected the development cycle for the current research and development project

with respect to the High-end technology to continue for another 21 months, with expected completion dates in the first quarter of the calendar year 2003. The development cycle was approximately 40% complete with estimated cost to complete to be incurred ratably over the remainder of the development cycles.

Core Technology: Quantum HDD’s Core technology development efforts supported future generation hard disk drives. Quantum HDD expected the development cycle for the current research and development project with respect to these products to continue for another 21 months with expected completion dates in the first quarter of the calendar year 2003. The development cycle was approximately 44% complete with estimated cost to complete to be incurred ratably over the remainder of the development cycle.

Desktop: Quantum HDD’s core technology development efforts supported the development of 3.5 inch hard disk drives. Quantum HDD expected the development cycle for the current research and development project with respect to the Desktop technology to continue for another 5 months, with expected completion dates in the third quarter of the calendar year 2001. The development cycle was approximately 75% complete with estimated cost to complete to be incurred ratably over the remainder of the development cycles.

The value assigned to in-process research and development was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Quantum HDD and its competitors. The rates utilized to discount the net cash flows to their present value are based on Quantum HDD weighted average cost of capital. Given the nature of the risks associated with the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets, the weighted average cost of capital was adjusted. Based on these factors, a discount rate of 23% for High-end and Desktop and other identified projects and a discount rate of 28% for Core Technology and Self Servo-Writer Technology were deemed appropriate. The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. The assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results. Following were the estimated completion percentages with respect to the research and development efforts and technology lives at the close of the Quantum HDD acquisition:

The values assigned to each acquired in-process research and development project are as follows (in millions):

The acquired existing technology, which comprises products that are already technologically feasible, includes products in most of Quantum HDD’s product lines. The Company is amortizing the acquired core and existing technology of $286.1 million on a straight-line basis over an estimated remaining useful lives of three to five years. For additional information regarding the acquired Quantum HDD existing technology amortization, see note 12 of the Notes to Consolidated Financial Statements.

The acquired assembled workforce was composed of approximately 1,650 skilled employees across Quantum HDD’s Executive, Research and Development, Manufacturing, Supervisor/ Manager, and Sales and Marketing groups. The fair value assigned to the assembled workforce was $43.0 million and was amortized on a straight-line basis over an estimated remaining useful life of three years. Subsequent to the adoption of Statements of Financial Accounting Standards No. 142 (“SFAS 142”) on December 30, 2001, the Company no longer amortize its existing acquired assembled workforce and reclassified the balance to goodwill.

Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets was being amortized on a straight-line basis over an estimated remaining useful life of five years. The Company adopted SFAS 142 effective December 30, 2001, and no longer amortizes its remaining goodwill.

On September 2, 2001, Maxtor completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix Semiconductor America Inc. (“Hynix”). MMC, based in San Jose, California, designed, developed and manufactured media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for Maxtor acquiring MMC was to provide the Company with a reliable source of supply of media. The acquisition was accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1 million, $16 million of loan forgiveness and $0.9 million of estimated direct transaction costs. In connection with the acquisition, the Company had also assumed liabilities of $105.7 million. Included in this amount was $7.3 million owed by MMC to Hynix. On April 5, 2002, the Company paid off this amount. MMC’s results of operations are included in the financial statements from the date of acquisition, and the assets and liabilities acquired were recorded based on their fair values as of the date of acquisition.

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

A portion of the purchase price has been allocated to developed technology and acquired in-process research and development. Developed technology and in-process research and development were identified and valued through analysis of data concerning developmental products, their stage of development, the time and resources needed to complete them, if applicable, their expected income-generating ability, target markets and associated risks. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the developed technology and in-process research and development. Where developmental products had reached technological feasibility, they were classified as developed technology, and the value assigned to developed technology was capitalized. Where the developmental projects had not reached technological feasibility and had no future alternative uses, they were classified as in-process research and development and were charged to expense upon closing of the acquisition.

The value assigned to in-process research and development was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by MMC and its competitors. The rates utilized to discount the net cash flows to their present value were based on an average cost of capital of publicly traded companies comparable to MMC. Given the nature of the risks associated with the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets, the weighted average cost of capital was adjusted. Based on these factors, an average discount rate of 28.5% for the 80GB Project and the 120GB Project was deemed appropriate. The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. The assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results.

The allocation of revenue to existing and in-process technology was based on the obsolescence rate for mechanical and magnetic technology. MMC’s acquired existing technology and in-process research and development consisted of magnetic, mechanical and process technology related primarily to its 80GB and 120GB products. The development cycle for the current research and development with respect to the 80GB Program will continue, with the expected completion dates in the third quarter of calendar year 2002. The development cycle for the current research and development with respect to the 120GB Program will

continue, with expected completion dates by the fourth quarter of calendar year 2003. Following are the estimated completion percentages with respect to the research and development efforts and technology lives:

The Company is amortizing the acquired existing technology of $4.4 million on a straight-line basis over an estimated remaining useful life of five years. For additional information regarding the acquired MMC existing technology amortization, see note 12 of the Notes to Consolidated Financial Statements.

Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets, is reflected in the financial statements of the Company. In accordance with SFAS 142, the Company is not amortizing the amount of goodwill associated with the MMC acquisition. The Company expects that none of the goodwill amount will be deductible for tax purposes.

The following unaudited proforma consolidated amounts for continued operations give effect to the acquisitions of Quantum HDD and MMC, excluding the charges for acquired in-process research and development, as if the acquisitions had occurred on December 31, 1999 and January 1, 2001. On a proforma basis, the results of operations of Quantum HDD and MMC are consolidated with the Company’s results of continued operations for the year ended December 30, 2000 and December 29, 2001. The proforma amounts do not purport to be indicative of what would have occurred had the acquisitions been made as of the beginning of each period or of results which may occur in the future.

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

Subsequent to the decision to shut down its NSG operations, the Company determined that it operates in one reportable segment.

The Company has a worldwide sales, service and distribution network. Products are marketed and sold through a direct sales force to computer equipment manufacturers, distributors and retailers in the United States, Europe, Latin America and Asia Pacific. Maxtor operations outside the United States primarily consist of its manufacturing facilities in Singapore that produce subassemblies and final assemblies for the Company’s disk drive products. Revenue by destination and long-lived asset information by geographic area for each of the three years is presented in the following table:

Long-lived assets located within the United States consist primarily of goodwill and other intangible assets, which amounted to $1,458.6 million and $1,337.5 million as of December 29, 2001 and December 28, 2002, respectively. Long-lived assets located outside the United States consist primarily of the Company’s manufacturing operations located in Singapore, which amounted to $111.5 million, $121.1 million and $127.6 million as of December 30, 2000, December 29, 2001 and December 28, 2002, respectively.

Sales to computer equipment manufacturers represented 70.0%, 55.4% and 48.0% of total revenue for the fiscal years 2000, 2001 and 2002, respectively. Sales to distribution channel and retail customers represented 30.0%, 44.6% and 52.0% in fiscal years 2000, 2001 and 2002, respectively. Sales to one customer were 14.2%, 11.3% and 11.5% of revenue in fiscal years 2000, 2001 and 2002, respectively. There was the only customer with over 10% of revenue during fiscal years 2000, 2001 and 2002.

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

The future minimum annual lease payments on capital leases as of December 29, 2001 and December 28, 2002 are as follows:

The 5.75% Subordinated Debentures due March 1, 2012 require semi-annual interest payments and annual sinking fund payments of $5.0 million, which commenced March 1, 1998. The Debentures are subordinated in right to payment to all senior indebtedness. The Company has fulfilled its sinking fund obligation until March 1, 2005. During the year ended December 28, 2002, the Company repurchased $13.8 million of debentures for $11.0 million. Accordingly, a gain of $2.8 million was recognized on the Company’s income statement within the caption of interest and other income.

In September 1999, Maxtor Peripherals (S) Pte Ltd entered into a four-year Singapore dollar denominated loan agreement with the Economic Development Board of Singapore (the “Board”), which is being amortized in seven equal semi-annual installments ending September 2003. As of December 28, 2002, the balance was equivalent to $9.9 million. The Board charges interest at 1% above the prevailing Central Provident Fund lending rate, subject to a minimum of 3.5% per year (3.5% as of December 28, 2002). This loan is supported by a two-year guaranty from a bank. Cash is currently provided as collateral for this guaranty but the Company may, at its option, substitute other assets as security. As part of this arrangement, the Company had been subject to two financial covenants, the maintenance of minimum unrestricted cash and a tangible net worth test. On January 29, 2003, the loan was amended to remove the tangible net worth covenant. As of December 28, 2002, the Company was in compliance with the covenant regarding maintenance of minimum restricted cash.

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

In connection with the merger with Quantum HDD, the Company acquired real estate and related mortgage obligations. The term of the mortgages is ten years, at an interest rate of 9.2%, with monthly payments based on a twenty-year amortization schedule, and a balloon payment at the end of the 10-year term, which is September 2006. The outstanding balance at December 28, 2002 was $35.6 million.

As of December 28, 2002, the Company had equipment loans and capital leases totaling $45.6 million. These obligations include certain capital equipment loans and leases assumed in connection with the acquisition of MMC, which as of December 28, 2002 amounted to $34.3 million had maturity dates through October 2004 and interest rates averaging 9.9%.

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

The Company leases certain of its principal facilities and certain machinery and equipment under operating lease arrangements. The future minimum annual rental commitments, including amounts accrued in restructuring liabilities as of December 28, 2002 are as follows:

The above commitments extend through fiscal year 2018. Rental expense was approximately $12.7 million, $25.0 million and $29.6 million for fiscal years 2000, 2001 and 2002, respectively.

Following the acquisition of Quantum HDD, the Company entered into a master agreement and a purchase agreement with MKE which provided for MKE to supply certain levels of hard disk drive products according to rolling forecasts and purchase orders provided by the Company. The term of this purchase

agreement has been extended through March 31, 2004. The Company guarantees a minimum production commitment based on this rolling forecast. The Company is liable for the purchase price of products scheduled to be delivered within 30 days of the date of cancellation. In addition, the Company is liable for the actual cost of materials plus a handling fee for orders cancelled within 31-90 days of the date of scheduled delivery. The Company may cancel orders with scheduled delivery more than 120 days from the date of cancellation without liability. To date, the Company has not cancelled any orders pursuant to this purchase agreement since the commencement of the relationship. Had the Company cancelled any such orders, its maximum liability at December 28, 2002 under the cancellation provisions of this purchase agreement would have approximated $40.9 million.

From time to time, the Company has been subject to litigation including the pending litigations described below. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, the Company is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, the Company will assess its potential liability and revise its estimates. Pending or future litigation could be costly, could cause the diversion of management’s attention and could upon resolution, have a material adverse effect on its business, results of operations, financial condition and cash flow.

In addition, the Company is engaged in certain legal and administrative proceedings incidental to our normal business activities and believes that these matters will not have a material adverse effect on our financial position, results of operations or cash flow.

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

In February 2002, Papst and MKE entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus the Company, with additional defenses to Papst’s patent infringement claims.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, there are no assurances that the Company will be able to successfully defend itself against this or any other Papst lawsuit. Because the Papst complaints assert claims to an unspecified dollar amount of damages, and because the Company was at an early stage of discovery when the litigation was stayed, the Company is unable to determine the possible loss, if any, that it may incur as a result of an adverse judgment or a negotiated settlement with respect to the claims against Maxtor. Management made an estimate of the potential liabilities which might arise from the Papst claims against Quantum at the time of the acquisition of the Quantum HDD business. This estimate will be revised as additional information becomes available. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against the Company and its products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, the Company also could be required to pay treble damages and Papst’s attorney’s fees. The litigation could result in significant diversion of time by the Company’s technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although the Company cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on the Company’s business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

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

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

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

principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29, 2001. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid.

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

Maxtor’s cost of revenue also includes certain DRAM chip purchases from Hynix Semiconductor, Inc., “HSI,” formerly HEI. HSI is treated identically to its competitors in the process by which commodity electronics, principally DRAMs, are selected, qualified, and purchased; pricing is negotiated with selected suppliers on the basis of suppliers’ bids and market information. Maxtor’s purchases from HSI totaled $41.6 million in fiscal year 2000, $19.3 million in fiscal year 2001 and $15.5 million from January 1, 2002 through February 2002, the month in which Hynix, HSI’s affiliate, ceased to be a stockholder of Maxtor.

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

Pursuant to a sublicense agreement with HSI, Maxtor is obligated to pay a portion of an IBM license royalty fee otherwise due from HSI. Such payments are due in annual installments through 2007, and are based upon the license fee separately negotiated on an arms’ length basis between HSI and IBM. For the years ended December 30, 2000, December 29, 2001 and December 28, 2002, Maxtor recorded $1.9 million, $1.9 million and $1.6 million, of expenses, respectively, in connection with this obligation.

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

Commencing in fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Goodwill and indefinite lived intangible assets will be subject to an impairment test at least annually.

The Company ceased amortizing goodwill totaling $846.0 million as of the adoption date, including $31.1 million, net of accumulated amortization, of acquired workforce intangibles previously classified as purchased intangible assets. Subsequent to the decision to shut down the manufacture and sales of NSG

products, the Company wrote off goodwill related to the NSG operations of $32.0 million. As of December 28, 2002, goodwill amounted to $814.0 million.

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

In accordance with SFAS No. 142, the Company completed its impairment analysis as of January 1, 2002, upon the adoption of SFAS 142, and as of December 28, 2002 for the purpose of the annual review. The Company found no instances of impairment of the recorded goodwill on both dates and accordingly no impairment was recorded.

The following tables present the impact of SFAS 142 on net income (loss) and net income (loss) per share had the Company ceased to amortize goodwill for the year ended December 30, 2000 (in thousands, except per share amounts):

In March 2001, the Board of Directors approved the increase of the Company’s authorized common stock to 525,000,000 shares.

On April 2, 2001, Maxtor completed with the acquisition of Quantum HDD. Maxtor issued 121.0 million shares of Maxtor common stock and assumed options to purchase 12.8 million shares of Maxtor common stock to effect the acquisition.

On October 9, 2001, Hynix sold 23,329,843 shares (including exercise of the underwriters’ over-allotment) of Maxtor common stock in a registered public offering. Maxtor did not receive any proceeds from Hynix’s sale of Maxtor stock to the public. In addition, at the same time and on the same terms as Hynix’s sale of Maxtor stock to the public, Maxtor repurchased 5.0 million shares from Hynix an aggregate purchase price of $20.0 million. These repurchased shares are being held as treasury shares.

On May 29, 1998, the Company adopted the 1998 Restricted Stock Plan, which provides for awards of shares of common stock to certain executive employees. Restricted stock awarded under this plan vests three years from the date of grant and is subject to forfeiture in the event of termination of employment with the Company prior to vesting. The Company granted 390,000 shares of common stock in June 1998 under this plan. Compensation cost based on fair market value of the Company’s stock at the date of grant is reported as compensation expense on a ratable basis over the vesting periods. For the years ended December 30, 2000, December 29, 2001 and December 28, 2002, compensation expense recorded in connection with the Restricted Stock Plan amounted to $1.8 million, $0.4 million and $0, respectively.

The Company also grants awards of restricted stock pursuant to the Amended and Restated 1996 Stock Option Plan. See “Stock Option Plan” below for further information.

On April 2, 2001, in connection with the Quantum HDD acquisition, the Company assumed 479,127 shares of Quantum HDD restricted stock held by employees who accepted offers of employment with Maxtor, or “transferred employees,” whether or not restricted stock have vested. The intrinsic value of the unvested restricted shares was $3.4 million, determined in accordance with APB Opinion No. 25, by multiplying the number of shares with the closing market price of Maxtor shares of $7.375 on April 1, 2001 (consummation date of the merger).

The Company has adopted the 1998 Employee Stock Purchase Plan (the “Purchase Plan”) and in 1999 reserved 2.4 million shares for issuance under the Purchase Plan. During 2001 and 2000, the Company reserved an additional 3.5 million shares and 2.1 million shares for issuance, respectively. During 2002, the Company reserved an additional 9.0 million shares for issuance. The Company issued 3.7 million, 2.1 million and 1.2 million shares pursuant to the Purchase Plan for the years ended December 28, 2002, December 29, 2001 and December 30, 2000, respectively. The Purchase Plan permits eligible employees to purchase Maxtor’s common stock at a discount, but only through accumulated payroll deductions, during sequential six-month offering periods. Participants purchase shares on the last day of each offering period. In general, the price at which shares are purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of a share of common stock on (a) the first day of the offering period, or (b) the purchase date. Offering periods of the Purchase Plan generally begin on February 16 and August 16 of each year, although the initial offering period under the Purchase Plan commenced on July 30, 1998.

The Company grants options and awards of restricted stock pursuant to the Amended and Restated 1996 Stock Option Plan (the “Option Plan”), which was approved by the Board of Directors in May 1996, and amended by Maxtor’s stockholders at the 1999 Annual Meeting of Stockholders. Options under the Amended Plan expire ten years from the date of grant. Restricted stock vests in one or more installments over a number of years.

In June 1999, the Company granted 1,765,000 shares of restricted common stock under this plan. During 2002 and 2001, the Company granted 30,000 and 140,000 of restricted common stock, respectively. During the years ended December 28, 2002 and December 29, 2001, the number of shares that had been cancelled were none and 213,133, respectively. The Company recorded compensation expense of $2.3 million, $2.4 million and $2.9 million in 2000, 2001 and 2002, respectively, related to this plan.

The Option Plan generally provides for the grant of non-qualified stock options and incentive stock options to eligible employees, consultants, affiliates and directors, as determined by the board of directors, and incentive stock options to Maxtor employees at a price not less than the fair market value at the date of grant. The Option Plan also provides for the grant of restricted stock to eligible employees. The Board of Directors or an executive committee appointed by the Board also approves other terms such as number of shares granted and exercisability thereof. Options granted under the Amended Plan vest over a four-year period with 25% vesting at the first anniversary date of the vest date and 6.25% each quarter thereafter. Restricted stock grants vest in one or more installments over a period of years, and are subject to forfeiture if employment is terminated prior to the time the shares become fully vested and non-forfeitable. During 2000, 2001 and 2002, the Company reserved 5.5 million, 17.0 million and zero shares for issuance, respectively.

In connection with Maxtor’s acquisition of CDS in September 1999, the Company established a separate reserve of 674,477 shares of its common stock for issuance upon the exercise of stock options (the “Assumed Options”) granted under the CDS Incentive Stock Option Plan (the “CDS Plan”). As of December 28, 2002 and December 29, 2001, 18,403 and 72,337 options were outstanding under the CDS Plan, respectively. The Assumed Options are incentive stock options which vest over four years subject to the terms and conditions of the Assumed Options agreement.

The Option Plan was amended in February 1998 to remove certain provisions which had given rise to variable accounting, and offered and modified employee option agreements in the second quarter of 1998 for the majority of employees who had previously held variable options to achieve fixed-award accounting. To comply with the variable plan accounting required prior to these amendments, the Company recorded compensation expense related to the difference between the estimated fair market value of its stock and the stated exercise price of its options. Compensation cost was reflected in accordance with Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”

On April 2, 2001, as part of the Quantum HDD acquisition, the Company assumed all vested and nonvested Quantum HDD options held by employees who accepted offers of employment with Maxtor, whether or not options or restricted stock have vested. The Company also assumed all vested Quantum HDD options held by Quantum employees whose employment was terminated prior to separation. In addition, Maxtor assumed vested Quantum HDD options held by Quantum employees who continued to provide services during a transitional period. The outstanding options to purchase Quantum HDD common stock held by transferred employees and vested options to purchase Quantum HDD common stock held by former Quantum employees, consultants and transition employees were assumed by Maxtor and converted into options to purchase Maxtor common stock according to the exchange ratio of 1.52 shares of Maxtor common stock for each share of Quantum HDD common stock. In connection with the Quantum HDD acquisition, the Company established a reserve of 12,785,328 shares of common stock for the assumption of Quantum

HDD options to purchase Maxtor common stock. Vested and unvested options for Quantum HDD common stock assumed in the merger represented options for 7,650,965 shares and 4,655,236 shares of Maxtor common stock, respectively. The intrinsic value of the 4,655,236 unvested options was determined to be $3.4 million, using the intrinsic value methodology in accordance with EITF 00-23 “Issues Related to the Accounting for Stock Based Compensation under APB Opinion No. 25 and FASB Interpretation No. 44.” As of December 28, 2002, 4,522,105 options were outstanding under the Quantum HDD Merger Plan.

Stock options are granted to employees and directors at an exercise price equal to the fair market value of the Company’s stock at the date of grant. Generally, options vest 25 percent per year, are fully vested four years from the grant date and have a term of ten years. The following table summarizes option activity through December 28, 2002:

There were 5,921,018 shares vested but unexercised as of, December 30, 2000 at a weighted average exercise price of $7.56, and no shares exercised subject to repurchase. There were 14,383,421 shares vested but unexercised as of December 29, 2001 at a weighted average exercise price of $6.78, and no shares exercised subject to repurchase. There were 17,718,564 shares vested but unexercised as of December 28, 2002 at a weighted average exercise price of $7.00, and no shares exercised subject to repurchase.

The following table summarizes information for stock options outstanding as of December 28, 2002:

During 1997, the Company also granted options to the employees of MMC, a wholly owned subsidiary of HEA. As of December 30, 2000, there were 274,032 options outstanding, which are now fully vested, pursuant to these grants which are included in the table above. Prior to the acquisition of MMC in September 2001, 246,115 options were outstanding as of September 1, 2001. Compensation cost for options granted to non-employees is measured at their fair value in accordance with Emerging Issues Task Force No. 96-18. MMC reimbursed Maxtor for any compensation expense arising from these grants.

For information on the proforma net income (loss) for Maxtor’s stock options and employee stock purchase plan, see note 1 of the Notes to Consolidated Financial Statements.

The fair value of option grants has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

The fair value of employee stock purchase plan option grants has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

No dividend yield is assumed as the Company has not paid dividends and has no plans to do so.

The weighted average expected life was calculated based on the respective vesting periods and the expected lives at the date of the option and restricted stock grants. The risk-free interest rates were calculated based on rates prevailing during grant periods and the expected lives of the respective options and restricted stock options at the date of grants. The weighted average fair values of options granted to employees during the years ended December 30, 2000, December 29, 2001 and December 28, 2002 were $6.26, $3.51 and $3.41

respectively. The weighted average fair values of restricted stock options granted to employees during the years ended December 30, 2000, December 29, 2001 and December 28, 2002 were $10.11, $6.32 and $6.58 respectively.

Pursuant to Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” the Company also estimates the fair value of employee’s purchase rights under the Employee Stock Purchase Plan using the Black-Scholes option pricing model. The fair value of purchase rights under the Employee Stock Purchase Plan for the years ended December 30, 2000, December 29, 2001 and December 28, 2002 was $2.74, $2.53 and $1.19, respectively.

Subject to the Company’s continued compliance with certain legal requirements, the Company currently has a tax holiday for its operations in Singapore that has been extended to June 30, 2005.

The provision for income taxes differs from the amount computed by applying the U.S. statutory rate of 35% to the income (loss) before income taxes for the years ended December 30, 2000, December 29, 2001 and December 28, 2002. The principal reasons for this difference are as follows:

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

During the years ended December 30, 2000, December 29, 2001 and December 28, 2002 the valuation allowance for deferred tax assets decreased by $72.6 million, increased by $141.3 million and $12.3 million respectively.

As of December 28, 2002, for federal income tax purposes, the Company had net operating loss carry-forwards of $848.9 million and tax credit carry-forwards of approximately $22.9 million, which will expire beginning in fiscal years 2008 and 2003, respectively. To the extent that net operating loss carry-forward when realized relate to stock option deductions, the resulting benefits will be credited to stockholders’ equity. Certain changes in stock ownership can result in a limitation on the amount of net operating loss and tax credit carry-overs that can be utilized each year. The Company determined it had undergone such an ownership change during 2001. Consequently, utilization of approximately $351.2 million of net operating loss carry-forward and the deduction equivalent of approximately $17.4 million of tax credit carry-forward will be limited to approximately $16.0 million per year from prior ownership change in 1998. Also, approximately $244.3 million of net operating loss carry-forward and the deduction equivalent of approximately $2.9 million of tax credit carryforward will be limited to approximately $42.0 million per year from the change of ownership resulting from the Quantum HDD acquisition.

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

The Company ceased to be a member of the HEA consolidated group as of August 1998. The Company remains liable for its share of the total consolidated or combined tax return liability of the HEA consolidated group prior to August 1998. The Company has agreed to indemnify or reimburse HEA if there is any increase in the Company’s share of the HEA consolidated or combined tax return liability resulting from revisions to the Company’s taxable income.

Pursuant to a “Tax Sharing and Indemnity Agreement” entered into in connection with the Company’s merger with Quantum HDD, Maxtor, as successor to Quantum HDD, and Quantum are allocated their share of Quantum’s income tax liability for periods before the split-off, consistent with past practices and as if the Quantum HDD and Quantum DSS business divisions had been separate and independent corporations. To the extent that the income tax liability attributable to one business division is reduced by using NOLs and other tax attributes of the other business division, the business division utilizing the attributes must pay the other for the use of those attributes. The Company must also indemnify Quantum for additional taxes related to the Quantum DSS business for all periods before Quantum’s issuance of tracking stock and additional taxes related to the Quantum HDD business for all periods before the split-off, limited in the aggregate to $142.0 million plus 50% of any excess over $142.0 million, excluding any required gross-up payment. Currently, $138.5 million remains on the original indemnity. Management has determined that, based on the facts available at this time, the likelihood that the payment will exceed $138.5 million is remote. As of December 28, 2002, the Company has reimbursed $3.5 million to Quantum Corporation leaving a balance of $138.5 million on the original indemnity.

The Company purchased a $340 million insurance policy covering the risk that the split-off of Quantum HDD from Quantum DSS could be determined to be subject to federal income tax or state income or franchise tax. Under the “Tax Sharing and Indemnity Agreement,” the Company agreed to indemnify Quantum for the amount of any tax payable by Quantum as a result of the split-off to the extent such tax is not covered by such insurance policy, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the split-off. The amount of the tax not covered by insurance could be substantial. In addition, if it is determined that Quantum owes federal or state tax as a result of the split-off

and the circumstances giving rise to the tax are covered by the Company’s indemnification obligations, the Company will be required to pay Quantum the amount of the tax at that time, whether or not reimbursement may be allowed under the Company’s tax insurance policy.

In accordance with Emerging Issues Task Force 93-7 “Uncertainties Related to Income Taxes in a Purchase Business Combination,” the Company recorded approximately $196.4 million of deferred tax liabilities in connection with the acquisition of Quantum HDD on April 2, 2001. The deferred taxes were recorded principally to reflect the taxes which would become payable upon the repatriation of the cash which was invested abroad by Quantum HDD.

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

The following securities and restricted shares subject to repurchase are excluded in the calculation of diluted shares outstanding as their effects would be antidilutive:

The Company maintains a retirement and deferred savings plan for its employees (the “401(k) Plan”) which is intended to qualify as a tax-qualified plan under the Code. The 401(k) Plan is a profit sharing plan which is intended to qualify under section 401(a) of the Internal Revenue Code of 1986, as amended, which includes a cash or deferred arrangement intended to satisfy the requirements of Code section 401(k). The 401(k) Plan has been amended from time to time to comply with applicable laws and regulations. Under the 401(k) Plan, in addition to the Company match, the Company may make discretionary contributions. The Company’s contributions to the 401(k) Plan, for the years ended December 30, 2000, December 29, 2001 and December 28, 2002 were $3.1 million, $6.3 million and $6.9 million, respectively. All amounts contributed by participants and the Company, along with earnings on such contributions are fully vested at all times.

In our opinion, the consolidated financial statements listed in the index appearing under Item 8 of this Form 10-K present fairly, in all material respects, the financial position of Maxtor Corporation and its subsidiaries at December 29, 2001 and December 28, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in such index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 12 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” effective December 30, 2001.

The information required by this item with respect to identification of directors is incorporated by reference to the information contained in the section captioned “Election of Directors” in the Proxy Statement. For information with respect to our executive officers, see “Executive Officers” at the end of Item 1, Part I of this report. Information with respect to Item 405 of Regulation S-K is incorporated by reference to the information contained in the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

The information required by this Item is incorporated herein by reference to the information contained in the section captioned “Executive Compensation and Other Matters” in the Proxy Statement.

The information required by this Item is incorporated herein by reference to the information contained in the sections captioned “Stock Ownership of Management and Certain Beneficial Owners” and “Equity Compensation Plans” in the Proxy Statement.

The information required by this Item is incorporated herein by reference to the information contained in the section captioned “Executive Compensation and Other Matters” in the Proxy Statement.

(a) Under the supervision and with the participation of our management, including our President, Chief Executive Officer and Acting Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within the 90 day period prior to the filing date of this report. Based on this evaluation, our President, Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date.

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

(1)-(2) Financial Statements and Financial Statement Schedules — See Index to Consolidated Financial Statements under Item 8 on page 51 of this report.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milpitas, State of California, on the 26th day of March, 2003.


	By	/s/ PAUL J. TUFANO



	Paul J. Tufano
	President, Chief Executive Officer,
	Director and Acting Chief Financial Officer

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

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

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

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


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

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

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

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


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

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

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ PAUL J. TUFANO _______________________________________ Paul J. Tufano
	President, Chief Executive Officer
	and Acting Chief Financial Officer


(1)	Deductions represent recoveries of previously reserved balances and write-offs of fully reserved balances for which collection efforts have been exhausted.

(2)	Reflects reserves acquired from the acquisition of Quantum HDD in 2001.

Allowance for Doubtful Accounts. The provision for doubtful accounts consists of the Company’s estimates with respect to the uncollectability of our receivables, net of recoveries of amounts previously written off. The Company must make estimates of the uncollectability of its accounts receivables. The Company specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Revenue Reserves. The provision for sales returns and allowances consists of the Company’s estimates of potential future product returns related to current period product revenue, and specific provisions for original equipment manufacturer, distributor and retailer sales incentives (“allowances”) that are reductions in the revenue to be realized. The Company analyzes historical returns, current economic trends, and changes in customer demand and acceptance of its products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.


	*	This exhibit (or portions thereof) has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk.


	(1)	Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.

	(2)	Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.

	(3)	Incorporated by reference to exhibits of Form 10-K filed March 27, 1997.

	(4)	Incorporated by reference to exhibits to registration statement on Form S-1, File No. 333-56099, filed June 5, 1998, as amended.

	(5)	Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.


	(6)	Incorporated by reference to exhibits of registration statement on Form S-3, File No. 333-69307, filed December 21, 1998, as amended.

	(7)	Incorporated by reference to exhibits of Form 10-Q filed November 16, 1999.

	(8)	Incorporated by reference to exhibits of Form 10-K filed March 29, 2000.

	(9)	Incorporated by reference to exhibits of registration statement on Form S-4, File No. 333-51592, filed December 11, 2000, as amended.


(10)	Incorporated by reference to exhibit of Form 8-K filed March 2, 2001.

(11)	Incorporated by reference to exhibits of Form 10-K filed March 30, 2001, as amended.

(12)	Incorporated by reference to exhibits of Form 8-K filed April 17, 2001.

(13)	Incorporated by reference to exhibits to registration statement on Form S-3, File No. 333-61770, filed May 29, 2001, as amended.

(14)	Incorporated by reference to exhibits of Form 10-Q filed August 14, 2001, as amended.

(15)	Incorporated by reference to exhibits of Form 10-Q filed November 13, 2001.

(16)	Incorporated by reference to exhibits of Form 10-Q filed August 13, 2002.

(17)	Incorporated by reference to exhibits of Form 10-Q filed November 12, 2002.

EX-10.70 3 f88421exv10w70.txt EXHIBIT 10.70 Exhibit 10.70 MAXTOR CORPORATION AMENDED AND RESTATED 1996 STOCK OPTION PLAN (FIFTH AMENDMENT AND RESTATEMENT APPROVED ON DECEMBER 19, 2002) 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN (a) ESTABLISHMENT. The Maxtor Corporation 1996 Stock Option Plan was initially established effective as of May 1, 1996 (the "EFFECTIVE DATE"), and was previously amended and restated in its entirety as the Maxtor Corporation Amended and Restated 1996 Stock Option Plan (the "INITIAL PLAN"). The Initial Plan is hereby amended and restated in its entirety effective as of January 1, 2003 (the "PLAN"). (b) PURPOSE. The purpose of the Plan is to promote the long-term interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by providing such persons with an additional incentive to promote the financial success of the Participating Company Group. (c) TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board of Directors or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all ISOs shall be granted, if at all, within ten (10) years from the Effective Date. 2. DEFINITIONS Unless otherwise required by the context, the following terms when used in the Plan shall have the meanings set forth in this Section 2: (a) "ANNIVERSARY DATE": Each anniversary of an Outside Director's initial election or appointment to the Board. (b) "AWARD": An award of an Option or a Restricted Share under the Plan. (c) "BOARD OF DIRECTORS": The Board of Directors of the Company. If one or more Committees have been appointed by the Board of Directors to administer the Plan, "Board of Directors" also means such Committee(s). (d) "CODE": The Internal Revenue Code of 1986, as amended from time to time. (e) "COMMITTEE": The Compensation Committee or other committee of the Board of Directors duly appointed to administer the Plan and having such powers as shall be specified by the Board of Directors. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board of Directors granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. 1 (f) "COMPANY": Maxtor Corporation, a Delaware corporation, or any successor thereto. (g) "CONSULTANT": Any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (h) "DIRECTOR": A member of the Board of Directors or of the board of directors of any other Participating Company. (i) "EMPLOYEE": Any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (j) "EXCHANGE ACT": The Securities Exchange Act of 1934, as amended. (k) "EXERCISE PRICE": The price per share at which the shares of Stock subject to an Option may be purchased upon exercise of such Option. (l) "FAIR MARKET VALUE": As applied to a specific date, the fair market value of a share of Stock on such date as determined in good faith by the Board of Directors in the following manner: (i) The average of the high and low prices of the Stock (or the mean of the closing bid and asked prices of the Stock if the Stock is so reported instead) as reported on the New York Stock Exchange or such other national or regional securities exchange or market system constituting the primary market for the Stock, on the most recent trading day to the date in question, or if there are no reported sales on such date, on the last preceding date on which sales were reported; or (ii) In the absence of the foregoing, the Fair Market Value shall be determined by the Board of Directors in its absolute discretion based on an appraisal of the Stock and after giving consideration to the book value, the revenues, and the earnings prospects of the Company in light of market conditions generally. The Fair Market Value determined under one of the preceding paragraphs shall be final, binding and conclusive on all parties for the purposes of this Plan. (m) "ISO": An Option intended to be and which qualifies as an "incentive stock option," as defined in Section 422 of the Code or any statutory provision that may replace such Section. (n) "NQSO": An Option not intended or qualified to be an ISO (i.e., a nonqualified stock option). (o) "OPTION": Any ISO or NQSO granted under the Plan. 2 (p) "OPTION AGREEMENT": A written option agreement between the Company and the Participant evidencing an Option in such form as approved by the Board of Directors pursuant to the Plan. (q) "OUTSIDE DIRECTOR": Any Director of the Company who is not an Employee. (r) "OUTSIDE DIRECTOR OPTION": An Option granted to an Outside Director pursuant to Section 3(b). Outside Director Options shall be NQSOs. (s) "PARENT CORPORATION": Any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (t) "PARTICIPANT": A person who has been granted one or more Awards under the Plan which remain outstanding or who owns shares of Stock as a result of the exercise of an Option. (u) "PARTICIPATING COMPANY": The Company or any Parent Corporation or Subsidiary Corporation. (v) "PARTICIPATING COMPANY GROUP": At any point in time, all corporations collectively which are then Participating Companies. (w) "RESTRICTED SHARE": A share of Stock awarded under Section 7 of the Plan. (x) "RULE 16b-3": Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (y) "SEC": Securities and Exchange Commission. (z) "SECURITIES ACT": The Securities Act of 1933, as amended. (aa) "STOCK GRANT AGREEMENT": A written agreement between the Company and the Participant evidencing an award of Restricted Shares in such form as approved by the Board of Directors pursuant to the Plan. (bb) "STOCK": The common stock of the Company, as adjusted from time to time under Section 4(b). (cc) "SUBSIDIARY CORPORATION": Any present or future "subsidiary corporation" of the Company or the Parent Corporation, as defined in Section 424(f) of the Code. (dd) "TEN PERCENT OWNER": A Participant who, at the time an Award is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 3 3. PARTICIPATION (a) PERSONS ELIGIBLE FOR AWARDS. Awards may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence and with respect to the grant of Options only, "Employees" shall include prospective Employees to whom Options are granted in connection with written offers of employment with the Participating Company Group, and "Consultants" shall include prospective Consultants to whom Options are granted in connection with written offers of engagement with the Participating Company Group. Eligible persons may be granted more than one (1) Award. (b) OUTSIDE DIRECTORS. In addition to any Award which may be granted to an Outside Director pursuant to Section 3(a), each Outside Director shall be granted one or more Options in accordance with this Section 3(b). (i) AUTOMATIC GRANT. Subject to the execution by the Outside Director of an appropriate Option Agreement, Outside Director Options shall be granted automatically and without further action of the Board of Directors, as follows: (1) INITIAL GRANT. Each person who first becomes an Outside Director on or after January 1, 2003, shall be granted an Outside Director Option for seventy-five thousand (75,000) shares of Stock on the date he or she first becomes an Outside Director; provided, however, that any Director of the Company who previously did not qualify as an Outside Director shall not receive an Outside Director Option pursuant to this Section 3(b)(i)(1) in the event that such Director subsequently becomes an Outside Director as a result of the termination of his or her status as an Employee. (2) ANNIVERSARY GRANT. Effective on and after January 1, 2003, each Outside Director shall be granted an Outside Director Option for ten thousand (10,000) shares of Stock upon each Anniversary Date of such Outside Director. Outside Director Options shall be granted pursuant to this Section 3(b)(i)(2) only to a person who, at the time of grant, is an Outside Director. (ii) SPECIAL GRANT. On January 2, 2003, each person serving as an Outside Director on such date who had previously received prior to January 1, 2003 an Outside Director Option pursuant to Section 3(b)(i)(1) (as in effect prior to January 1, 2003) shall be granted a one-time Outside Director Option for forty-five thousand (45,000) shares. (iii) RIGHT TO DECLINE OUTSIDE DIRECTOR OPTIONS. Notwithstanding the foregoing, any person may elect not to receive an Outside Director Option by delivering written notice of such election to the Board of Directors no later than the day prior to the date such Outside Director Option would otherwise be granted. A person so declining an Outside Director Option shall receive no payment or other consideration in lieu of such declined Outside Director Option. A person who has declined an Outside Director Option may revoke such election by delivering written notice of such revocation to the Board of Directors no later than the day prior to the date such Outside Director Option would be granted pursuant to Section 3(b). 4 (iv) EXERCISE PRICE OF OUTSIDE DIRECTOR OPTIONS. The exercise price per share of Stock subject to an Outside Director Option shall be the Fair Market Value of a share of Stock on the date the Outside Director Option is granted. (v) EXERCISABILITY OF OUTSIDE DIRECTOR OPTIONS. Except as otherwise provided in the Plan or in the Option Agreement and provided that the Outside Director's service with the Participating Company Group has not terminated prior to the relevant vesting date, each Outside Director Option granted on or after January 1, 2003 shall vest and become exercisable in installments of 25% on the first anniversary of the date of grant and 6.25% for each additional full calendar quarter of the Outside Director's service. Each Outside Director Option shall terminate and cease to be exercisable on the date ten (10) years after the date of grant of the Outside Director Option unless earlier terminated pursuant to the terms of the Plan or the Option Agreement. (c) GRANT RESTRICTIONS. Any person who is not an Employee of the Company or a Parent Corporation or Subsidiary Corporation of the Company on the effective date of the grant of an Award to such person may be granted only an NQSO or Restricted Shares. An ISO granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted on the date such person commences service with a Participating Company, with an Exercise Price determined as of such date in accordance with Section 5(b). An Outside Director Option may be granted only to a person who, at the time of grant, is an Outside Director. (d) FAIR MARKET VALUE LIMITATION. To the extent that the aggregate Fair Market Value of stock with respect to which options designated as ISOs are exercisable by a Participant for the first time during any calendar year (under all stock option plans of the Participating Company Group, including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as NQSOs. For purposes of this Section, options designated as ISOs shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an ISO in part and as an NQSO in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is exercising and may request that separate certificates representing each such portion be issued upon the exercise of the Option. In the absence of such designation, the Participant shall be deemed to have exercised the ISO portion of the Option first. (e) SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in Section 4(b), at any such time as a Participating Company is a "publicly held corporation" within the meaning of Section 162(m) of the Code, no Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than one million two hundred thousand (1,200,000) shares (the "SECTION 162(m) GRANT LIMIT"). 5 4. SHARES SUBJECT TO PLAN (a) MAXIMUM SHARES. Subject to adjustment by the operation of Section 4(b) hereof, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be Thirty-Nine Million Nine Hundred Seventy-Four Thousand Five Hundred Forty-Eight (39,974,548). Notwithstanding the foregoing, except as adjusted pursuant to Section 4(b), in no event shall more than Ten Million (10,000,000) shares of Stock be cumulatively available for issuance pursuant to the exercise of ISOs (the "ISO SHARE ISSUANCE LIMIT"). If an outstanding Option for any reason expires or is terminated or canceled or shares of Stock acquired pursuant to an Award are reacquired by the Company, the shares of Stock allocable to the unexercised portion of such Option, or such reacquired shares of Stock, shall again be available for issuance under the Plan. (b) ADJUSTMENT OF SHARES AND PRICE. In the event of any stock dividend, stock split, Reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate equitable adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards, in the number and class of shares subject to future Outside Director Options granted pursuant to Section 3(b), in the Section 162(m) Grant Limit and the ISO Share Issuance Limit, and in the Exercise Price per share of any outstanding Options. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4(b) shall be rounded up or down to the nearest whole number, as determined by the Board of Directors, and in no event may the Exercise Price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board of Directors pursuant to this Section 4(b) shall be final, binding and conclusive. 5. GENERAL TERMS AND CONDITIONS OF OPTIONS (a) GENERAL. The Board of Directors shall have full and complete authority and discretion, except as expressly limited by the Plan, to grant Options and to provide the terms and conditions (which need not be identical among Participants) thereof. The terms and conditions governing any Option, as determined by the Board of Directors, shall be set forth in an Option Agreement consistent with this Plan. In particular, the Board of Directors shall prescribe the following terms and conditions: (i) The number of shares of Stock subject to, and the expiration date(s) of, any Option; (ii) The vesting schedule of any Option; (iii) The manner, time and rate (cumulative or otherwise) of exercise of such Option; (iv) Whether such Option is intended to be an ISO or NQSO, subject in any event to applicable provisions of the Code; and (v) The restrictions, if any, to be placed upon such Option or upon shares which may be issued upon exercise of such Option. 6 (b) EXERCISE PRICE. Except as provided in Section 3(b) with respect to Outside Director Options, the Exercise Price for each Option shall be established in the sole discretion of the Board of Directors; provided, however, that (a) the Exercise Price for an ISO shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the Exercise Price for an NQSO shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no ISO granted to a Ten Percent Owner shall have an Exercise Price less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an ISO or an NQSO) may be granted with an Exercise Price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. (c) EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board of Directors and set forth in the Option Agreement evidencing such Option; provided, however, that (i) no ISO shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (ii) no ISO granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (iii) no Option granted to a prospective Employee or prospective Consultant may become exercisable prior to the date on which such person commences service with a Participating Company. 6. EXERCISE OF OPTIONS (a) PAYMENT OF OPTION EXERCISE PRICE. Except as otherwise provided below, payment of the Exercise Price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Participant having a Fair Market Value not less than the Exercise Price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by such other consideration as may be approved by the Board of Directors from time to time to the extent permitted by applicable law, or (v) by any combination thereof. The Board of Directors may at any time or from time to time, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the Exercise Price or which otherwise restrict one or more forms of consideration. (i) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board of Directors, an Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Participant for more than six (6) months or were not acquired, directly or indirectly, from the Company. 7 (ii) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (b) RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares of Stock issuable on exercise of any Option until the date of the issuance of such shares of Stock, as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4(b) hereof. 7. RESTRICTED SHARES. (a) GENERAL. The Board of Directors shall have full and complete authority and discretion, except as expressly limited by the Plan, to grant Restricted Shares and to provide the terms and conditions (which need not be identical among Participants) thereof. The terms and conditions governing any grant of Restricted Shares, as determined by the Board of Directors, shall be set forth in a Stock Grant Agreement consistent with this Plan. (b) PAYMENT FOR AWARDS. Restricted Shares may be awarded under the Plan without requiring monetary payment from the Participant, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. The Board of Directors may also provide that payment may be required to receive a grant of Restricted Shares, with the form of payment set forth in the Stock Grant Agreement. Methods of such payment may include (without limitation), cash, cash equivalents, or full recourse promissory notes. Notwithstanding the foregoing, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the Restricted Shares awarded to the Participant. (c) VESTING CONDITIONS. Each award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon the satisfaction of the conditions specified in the Stock Grant Agreement. A Stock Grant Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. (d) VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Stock Grant Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. 8. TRANSFER OF CONTROL OF THE COMPANY (a) DEFINITIONS. (i) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: 8 (A) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (B) a merger or consolidation in which the Company is a party; (C) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (D) a liquidation or dissolution of the Company. (ii) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board of Directors shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. (b) EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. In the event the Acquiring Corporation elects not to assume or substitute for outstanding Options in connection with a Transfer of Control, any unexercisable or unvested portion of the outstanding Options shall be immediately exercisable and vested in full as of the date ten (10) days prior to the date of the Transfer of Control. The exercise or vesting of any Option that was permissible solely by reason of this Section shall be conditioned upon the consummation of the Transfer of Control. Except as otherwise provided herein, any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of Control. 9. REPURCHASE OPTIONS Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board of Directors in its sole discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, 9 to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 10. RESTRICTIONS ON TRANSFERS; GOVERNMENT REGULATIONS (a) OPTIONS NOT TRANSFERABLE. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant's guardian or legal representative. No Option may be assigned, encumbered, or transferred, except, in the event of the death of a Participant, by will or the laws of descent and distribution. (b) GOVERNMENT REGULATIONS. This Plan, the granting of Awards under this Plan and the issuance or transfer of Stock (and/or the payment of money) pursuant thereto are subject to all applicable foreign, federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including without limitation "no action" positions of the SEC) which may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan, and no Stock shall be issued by the Company, nor cash payments made by the Company, pursuant to or in connection with any such Award, unless and until, in each such case, all legal requirements applicable to the issuance or payment have, in the opinion of counsel to the Company, been complied with. In connection with any stock issuance or transfer, the person acquiring the shares shall, if requested by the Company, give assurances satisfactory to counsel to the Company in respect of such matters as the Company may deem desirable to assure compliance with all applicable legal requirements. The granting of Awards under this Plan and the issuance of Stock pursuant thereto are subject to compliance with all applicable foreign, federal, and/or state laws or regulations with respect to such securities. No Option may be exercised by a Participant if the issuance of Stock pursuant to such Option upon such exercise would constitute a violation of any applicable foreign, federal, or state securities law, rule or regulation or other applicable law or regulation. The inability of the Company to obtain from any regulatory body having the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to any Award shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 11. TAX WITHHOLDING The Company shall have the right to withhold from amounts due Participants, or to collect from Participants directly, the amount which the Company deems necessary to satisfy any taxes required by law to be withheld at any time by reason of participation in the Plan, and the obligations of the Company under the Plan shall be conditional on payment of such taxes. The Participant may, prior to the due date of any taxes, pay such amounts to the Company in cash, or with the consent of the Board of Directors, in Stock (which shall be valued at its Fair Market Value on the date of payment). The Company shall have no obligation to any Participant to determine either (i) the existence of any tax or (ii) the correct amount of any tax. Without limiting the generality of the foregoing, in any case where it determines that a tax is or will be required to be withheld in connection with the issuance, transfer or vesting of Stock issued under 10 this Plan, the Company may, pursuant to such rules as the Board of Directors may establish, reduce the number of shares of Stock so issued or transferred by such number of Stock as the Company may deem appropriate in its sole discretion to accomplish such withholding or make such other arrangements as it deems satisfactory. Notwithstanding any other provision of this Plan, the Board of Directors may impose such conditions on the payment of any withholding obligation as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3. The Company shall have no obligation to deliver shares of Stock, release shares of Stock from an escrow established pursuant to an Option Agreement or Stock Grant Agreement or make any payment pursuant to the Plan until the Participating Company Group's tax withholding obligations have been satisfied by the Participant. 12. ADMINISTRATION OF PLAN (a) ADMINISTRATION BY THE BOARD OF DIRECTORS. The Plan shall be administered by the Board of Directors. All decisions and determinations of the Board of Directors shall be final, conclusive and binding upon all Participants and upon all other persons claiming any rights under the Plan with respect to any Options. (b) BOARD OF DIRECTORS AUTHORITY. In amplification of the Board of Directors' powers and duties, but not by way of limitation, the Board of Directors shall have full authority and power to: (i) Construe and interpret the provisions of the Plan and make rules and regulations for the administration of the Plan not inconsistent with the Plan; (ii) Decide all questions of eligibility for Plan participation and for the grant of Awards; (iii) Adopt forms of agreements and other documents consistent with the Plan; (iv) Engage agents to perform legal, accounting and other such professional services as it may deem proper for administering the Plan; and (v) Take such other actions as may be reasonably required or appropriate to administer the Plan or to carry out the Board of Directors activities contemplated by other sections of this Plan. (c) ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to any person whose transactions in Stock are subject to Section 16 of the Exchange Act, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements of Rule 16b-3, if any. (d) COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m) of the Code, the Board of Directors may establish a Committee of "outside directors" within the meaning of Section 162(m) of the Code to approve the grant of any Award which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m) of the Code. 11 (e) INDEMNIFICATION. In addition to such other rights of indemnification as they may have, members of the Board of Directors and any officers or employees of the Participating Company Group to whom authority to act on behalf of the Board of Directors is delegated shall be indemnified by the Company against the reasonable expenses, including court costs and reasonable attorneys' fees, actually incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted hereunder, and against all amounts paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except where such indemnification is expressly prohibited by applicable law. 13. STOCKHOLDER APPROVAL The Plan or any increase in the maximum number of shares of Stock issuable thereunder as provided in Section 4(a) (the "MAXIMUM SHARES") shall be approved by the stockholders of the Company within twelve (12) months of the date of adoption thereof by the Board of Directors. Options granted prior to stockholder approval of the Plan or in excess of the Maximum Shares previously approved by the stockholders shall become exercisable no earlier than the date of stockholder approval of the Plan or such increase in the Maximum Shares, as the case may be. No Restricted Shares may be issued if such issuance would be in excess of the Maximum Shares previously approved by the stockholders. 14. AMENDMENT AND TERMINATION The Board of Directors may terminate or amend the Plan at any time. However, subject to changes in the law or other legal requirements that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4(b)), (b) no change in the class of persons eligible to receive ISOs, and (c) no other amendment of the Plan which would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Award or any unexercised portion of an Award, without the consent of the Participant, unless such termination or amendment is required to enable an Option designated as an ISO to qualify as an ISO or is necessary to comply with any applicable law or government regulation. 15. MISCELLANEOUS (a) EMPLOYMENT OR SERVICE. Neither the establishment of the Plan nor any amendments thereto, nor the granting of any Award under the Plan, shall be construed as in any way modifying or affecting, or evidencing any intention or understanding with respect to, the terms of the employment or service of any Participant with the Participating Company Group. Nothing in the Plan or any agreement evidencing an Award shall confer upon a Participant any right to continued employment or service with the Participating Company Group or interfere in any way with any right of the Participating Company Group to terminate the Participant's employment or service at any time. No person shall have a right to be granted Awards or, having been selected as a Participant for one Award, to be so selected again. 12 (b) PROVISION OF INFORMATION. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. (c) NO ADVICE. The Company shall not be responsible for providing any Participant with legal, business or tax advice. Any legal or tax liabilities incurred by a Participant as a result of Participant's participation in the Plan shall be the sole responsibility of the Participant. Participants should consult their own attorneys and tax advisors with respect to any questions regarding participation in the Plan. (d) WRITTEN NOTICE. As used herein, any notices required hereunder shall be in writing and shall be given on the forms, if any, provided or specified by the Board of Directors. Written notice shall be effective upon actual receipt by the person to whom such notice is to be given; provided, however, that in the case of notices to Participants and their heirs, legatees and legal representatives, notice shall be effective upon delivery if delivered personally, by electronic or confirmed facsimile delivery, or three (3) business days after mailing, certified or registered first class postage prepaid, to the last known address of the person to whom notice is given. Written notice shall be given to the Board of Directors and the Company at the following address or such other address as may be specified from time to time: Maxtor Corporation 500 McCarthy Blvd. Milpitas, California 95035 Attn: Secretary (e) APPLICABLE LAW, SEVERABILITY. The Plan shall be governed by and construed in all respects in accordance with the laws of the State of California. If any provisions of the Plan shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 13 EX-10.71 4 f88421exv10w71.txt EXHIBIT 10.71 Exhibit 10.71 FIFTH AMENDMENT TO AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT This Fifth Amendment to Amended and Restated Receivables Purchase Agreement dated as of December 13, 2002 (the "Amendment") is among MAXTOR RECEIVABLES CORPORATION, a California corporation ("Seller"), MAXTOR CORPORATION, a Delaware corporation ("Servicer"), the financial institutions named herein (the "Committed Purchasers") and FLEET NATIONAL BANK, a national banking association, as administrator for the Purchasers (in such capacity, the "Administrator"). BACKGROUND 1. Seller, Servicer, the Conduit Purchasers, the Committed Purchasers, the "Agents" and the Administrator are parties to that certain Amended and Restated Receivables Purchase Agreement, dated as of November 15, 2001, as amended by the First Amendment to Amended and Restated Receivables Purchase Agreement, dated as of February 15, 2002, the Second Amendment to Amended and Restated Receivables Purchase Agreement, dated as of March 15, 2002, the Third Amendment to Amended to Restated Receivables Purchase Agreement, dated as of May 28, 2002, the Waiver and Amendment dated as of October 21, 2002 and the Fourth Amendment to Amended and Restated Receivables Purchase Agreement dated as of November 5, 2002 (the "Receivables Purchase Agreement"). 2. The Committed Purchasers, acting in their respective capacities as Liquidity Banks have made Liquidity Fundings for the benefit of the applicable Conduit Purchasers. 3. The parties hereto desire to amend the Receivables Purchase Agreement in certain respects as set forth herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Definitions. Capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings assigned thereto in the Receivables Purchase Agreement. SECTION 2. Termination Date. The definition of "Termination Date" set forth in Appendix A to the Receivables Purchase Agreement is hereby amended by deleting the date set forth in clause (c) thereof and substituting therefor the date "January 3, 2003". SECTION 3. Additional Reporting. On each of December 16, 23 and 30, 2002, Servicer shall deliver to the Administrator a report of the balances in Servicer's account no. 19268 in the Blackrock Provident Institutional Funds, Tempfund 024. Such reports shall be issued or verified by Provident Financial and may be delivered by facsimile. SECTION 4. Representations and Warranties. Each of Parent and Seller hereby represents and warrants that, after giving effect to this Amendment, (i) the representations and warranties contained in Article VI of the Receivables Purchase Agreement are true and correct on and as of the date hereof and shall be deemed to have been made on such date (except that any such representation or warranty that is expressly stated as being made only as of a specified earlier date shall be true and correct in all material respects as of such earlier date) and (ii) no Liquidation Event or Unmatured Liquidation Event has occurred and is continuing. SECTION 5. Miscellaneous. The Receivables Purchase Agreement, as amended hereby, remains in full force and effect. Any reference to the Receivables Purchase Agreement from and after the date hereof shall be deemed to refer to the Receivables Purchase Agreement as amended hereby. This Amendment may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. Seller, on demand, shall pay or reimburse the Administrator for, all of the costs and expenses, including legal fees and disbursements, incurred by the Administrator or any Purchaser in connection with this Amendment. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2 IN WITNESS WHEREOF, each of the undersigned has caused this Amendment to be executed and delivered by its duly authorized officer as of the date first above written. MAXTOR RECEIVABLES CORPORATION By: /s/ Glen Haubl ------------------------------------- Name: Glen Haubl Title: CFO MAXTOR CORPORATION By: /s/ Glen Haubl ------------------------------------- Name: Glen Haubl Title: Treasurer FLEET NATIONAL BANK, as successor to Blue Keel Funding, LLC., as Administrator and as a Committed Purchaser By: /s/ Lee A. Merkle-Raymond ------------------------------------- Name: Lee A. Merkle-Raymond Title: Director COMERICA BANK, as a Committed Purchaser By: /s/ Devin Scattini ------------------------------------- Name: Devin Scattini Title: Vice President THE BANK OF NOVA SCOTIA, as successor to Liberty Street Funding Corp, and as a Committed Purchaser By: /s/ Liz Hanson ------------------------------------- Name: Liz Hanson Title: Director EX-10.72 5 f88421exv10w72.txt EXHIBIT 10.72 Exhibit 10.72 EXECUTION COPY REPURCHASE AGREEMENT REPURCHASE AGREEMENT (the "Agreement") dated as of December 31, 2002 among MAXTOR RECEIVABLES CORPORATION, a California corporation ("Seller"), MAXTOR CORPORATION, a Delaware corporation ("Servicer"), the financial institutions named herein (the "Purchasers") and FLEET NATIONAL BANK, a national banking association, as administrator for the Purchasers (in such capacity, the "Administrator"). PRELIMINARY STATEMENTS. (1) The Seller, the Servicer, Blue Keel Funding, LLC (the "Conduit Purchaser"), the Purchasers and the Administrator are parties to an Amended and Restated Receivables Purchase Agreement dated as of November 15, 2001 (as amended, the "RPA"). Terms not defined herein are used as defined in the RPA. (2) The Conduit Purchaser has assigned all of its right, title and interest under the RPA to the Purchasers in their capacities as Liquidity Providers. (3) The Seller desires (i) to repurchase from the Purchasers all of the Pool Receivables and all of the other Pool Assets, (ii) to repay in full all other amounts due to the Administrator and the Purchasers pursuant to the RPA, and (iii) to terminate the RPA. NOW, THEREFORE, the parties hereto hereby acknowledge and agree as follows: 1. The Purchasers hereby agree to transfer and assign on December 31, 2002 (the "Repurchase Date"), and the Seller hereby agrees to acquire on and as of such date, all of the Purchasers' interest in each of the Pool Receivables and other Pool Assets previously sold and assigned by the Seller to the Purchasers pursuant to the RPA. The purchase price for the interests of the Purchasers in such Pool Receivables and other Pool Assets shall be an amount equal to the sum of (a) the aggregate Capital for all Asset Interests, plus (b) Earned Discount through the Repurchase Date, plus (c) all accrued and unpaid fees due to the Administrator or the Purchasers under the RPA, in each case as set forth in Schedule I hereto. All amounts set forth in Schedule I shall be paid to the Administrator no later than 12:00 noon (New York City time) on the Repurchase Date, and shall be made in immediately available funds in U.S. Dollars by wire transfer to an account designated by the Administrator. The Administrator shall promptly remit the amounts described in clauses (a), (b) and (c) above to the applicable Purchasers. 2. Effective upon the Administrator's receipt of the amounts described in Section 1 above, the RPA shall be terminated (provided, that such termination shall not apply to those provisions of the RPA which, by their express terms survive the termination of the RPA), and other than as set forth herein, the Seller and its Affiliates shall have no further obligations or liabilities thereunder to the Administrator and the Purchasers. Concurrently with its receipt of the amounts described in Section 1 above, all Liens that the Originator or the Seller granted in connection with the RPA and the other Transaction Documents, whether or not specifically referred to herein, shall be automatically released and terminated and shall be of no further force or effect. 3. The Seller further agrees to indemnify and hold harmless the Administrator and the Purchasers (each an "Indemnified Party") from and against any and all damages, losses, claims, liabilities and related costs and expenses including, without limitation, the reasonable fees and disbursements of counsel (all of the foregoing being collectively referred to as "Indemnified Amounts"), growing out of or resulting from this Agreement and any other documents delivered hereunder, excluding, however, (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party, or (b) any income taxes incurred by such Indemnified Party arising out of or as a result of this Agreement and any other documents delivered hereunder. The Seller agrees to pay on demand all reasonable costs and expenses in connection with the preparation, execution, delivery and administration of this Agreement and any other documents to be delivered hereunder including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrator and the Purchasers with respect thereto and with respect to advising the Administrator and the Purchasers as to the rights and remedies of each under this Agreement, and all reasonable costs and expenses, if any (including reasonable counsel fees and expenses), in connection with the enforcement of this Agreement and any other documents to be delivered hereunder. 4. The Administrator and each Purchaser agrees to execute and deliver such further documents and do such further acts as the Seller from time to time may reasonably request for the purpose of further evidencing, confirming, recording or otherwise documenting the retransfers and terminations contemplated by this Agreement, including, without limitation, preparing and filing any necessary UCC termination statements, subject in each case to the Seller's payment on demand by the Administrator of the costs and expenses (including reasonable counsel fees and disbursements) of the Administrator and the Purchasers in connection therewith; provided, however, that no such party shall be required to take any action which exposes the Administrator or the Purchasers to liability or which is contrary to this Agreement or applicable law. Without limiting the foregoing, the Administrator and the Purchasers hereby authorize the Seller to file such UCC termination statements as may be necessary in order to effectuate the transaction contemplated by this Agreement. 5. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. 6. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, except with respect to the conflicts of laws provisions thereof. 2 IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed by their authorized officers thereunto duly authorized, as of the date first above written. MAXTOR RECEIVABLES CORPORATION, as Seller By: /s/ Glen T. Haubl ------------------------------------- Name: Glen T. Haubl Title: CFO MAXTOR CORPORATION, as Servicer By: /s/ Glen Haubl ------------------------------------- Name: Glen T. Haubl Title: Treasurer FLEET NATIONAL BANK, as a Purchaser By: /s/ Lee A. Merkle-Raymond ------------------------------------- Name: Lee A. Merkle-Raymond Title: Director THE BANK OF NOVA SCOTIA, as a Purchaser By: /s/ Liz Hanson ------------------------------------- Name: Liz Hanson Title: Director COMERICA BANK, as a Purchaser By: /s/ Devin Scattini ------------------------------------- Name: Devin Scattini Title: Vice President FLEET NATIONAL BANK, as Administrator By: /s/ Lee A. Merkle-Raymond ------------------------------------- Name: Lee A. Merkle-Raymond Title: Director Signature Page to Repurchase Agreement 3 SCHEDULE I All of the following amounts are computed as of December 31, 2002 (inclusive): Capital $ 25,714,285.43 Earned Discount $ 66,927.59 Liquidity Fee $ 11,759.49 Other Costs and Expenses, including counsel fees $ 4,080.00 TOTAL: $ 25,797,052.51

EX-10.73 6 f88421exv10w73.txt EXHIBIT 10.73 Exhibit 10.73 The Bank of Nova Scotia 10 Collyer Quay #15-01 Ocean Building Singapore 049315 Tel: (65) 535 8688 Fax: (65) 438-3314 (Credit & Marketing) [SCOTIABANK LOGO] January 16, 2003 Maxtor Peripherals (S) Pte Ltd No. 2 Ang Mo Kio Street 63 Ang Mo Kio Street Park 3 Singapore 569111 Attention: Mr. Tiong Chi Sieng, Vice President - Finance Ms. Tan Hui Yah, Director - Finance Dear Sirs: BANK GUARANTEE FACILITY OF SGD17,250,000 DELETION OF THE CONSOLIDATED TANGIBLE NETWORTH COVENANT 1. We refer to the long-term Bank Guarantee Facility of up to SGD17,250,000 (current outstanding amount) ("the Facility") granted under the Guarantee Facility Agreement dated 31 August 1999 as amended by our letter dated 13 September 1999, an Amendment Agreement dated 23 February 2001 a Supplemental Agreement dated 2 May 2001, a Second Supplementary Agreement dated 29 January 2002 and our Amendment Letters dated 15 February 2002, 20 June 2002 and 22 October 2002 (the Guarantee Facility Agreement as amended, "the Facility Agreement"), and the Security Over Cash Agreement dated 8 September 1999. 2. Subject to your Company's acceptance of this letter, we are pleased to advise that at your request, The Bank of Nova Scotia, Singapore Branch ("the Bank"), shall delete the Consolidated Tangible Networth covenant under Clause 15.1.2 of the Facility Agreement. 3. Save for the above, all other terms and conditions stipulated in the Facility Letter and security document stated in Paragraph 1 above shall remain unchanged. 4. An Amendment Fee of US$5,000 (to be billed in SGD equivalence) shall be payable to the Bank after your acceptance of this Letter but no later than 30 January 2003. Maxtor Peripherals (S) Pte Ltd January 16,2003 Bank Guarantee Facility Of SGD17,250,000 _____________________________________________________________________________ 5. This letter shall supercede our letter dated 7 January 2003. If the above are acceptable, please sign and return to us the enclosed copy of this Amendment Letter together with your Company's Board Resolution accepting this Amendment Letter by 30 January 2003, after which this offer shall lapse unless an extension is granted by the Bank in writing. Yours faithfully, /s/ Wah Sun Seong Koon Wah Sun Seong Koon Country Head, VP & Branch Manager We hereby accept and further undertake to observe all the terms and conditions set out and incorporated in this letter. We also hereby confirm that the existing charges over cash deposits under the Security Over Cash Agreement dated 8 September 1999 shall continue to secure the aforesaid all monies payable in connection with the Facility notwithstanding the amendments set out above, or in the subsequent legal documentation (if any). MAXTOR PERIPHERALS (S)PTE LTD /s/ TIONG CHI SIENG Tiong Chi Sieng, Vice President, Finance Company Stamp & Authorized Signatory(ies) 29 January 2003 for and on behalf of Maxtor Peripherals (S)Pte Ltd Date . EX-10.74 7 f88421exv10w74.txt EXHIBIT 10.74 Exhibit 10.74 The Bank of Nova Scotia 10 Collyer Quay #15-01 Ocean Building Singapore 049315 Tel: (65) 535 8688 Fax: (65) 438 3314 (Credit & Marketing) [SCOTIA BANK LOGO] January 16, 2003 Maxtor Peripherals (S) Pte Ltd. No. 2 Ang Mo Kio Street 63 Ang Mo Kio Street Park 3 Singapore 569111 Attention: Mr. Tiong Chi Sieng, Vice President - Finance Ms. Tan Hui Yah, Director - Finance Dear Sirs: REVOLVING BANK GUARANTEE (BG) FACILITY (A) INCREASE IN LIMIT FROM SGD666,000/- TO SGD1,200,000/- (B) DELETION OF CONSOLIDATED TANGIBLE NETWORTH COVENANT 1. We refer to the Revolving Bank Guarantee Facility of up to SGD666,000/- ("the Facility") granted under our Facility Letter of 24 December 2001 as amended by our Amendment Letters dated 15 February 2002, 20 June 2002 and 22 October 2002 (hereinafter collectively called the "the Facility Letter") and the Charge Over Cash Deposits (First Party) document dated 2 January 2002. 2. Subject to your Company's acceptance of this letter, at your request, we, The Bank of Nova Scotia, Singapore Branch ("the Bank") are pleased to advise the following amendments to the Facility Letter: (a) The Revolving Bank Guarantee Facility shall increase from a limit of SGD66,000/- to SGD1,2000,000/-; and (b) The Consolidated Tangible Networth covenant as stipulated under Covenant (e) of the Facility Letter shall be deleted. 3. Save for the above, all other terms and conditions stipulated in the Facility Letter and security document stated in Paragraph 1 above shall remain unchanged. 4. This letter shall supercede our letter dated 7 January 2003. If the above are acceptable, please sign and return to us the enclosed copy of this Amendment Letter together with your Company's Board Resolution accepting this Amendment Letter by 30 January 2003, after which this offer shall lapse unless an extension is granted by the Bank in writing. Yours faithfully, /s/Seong Koon Wah Sun - --------------------- Wah Sun Seong Koon Country Head, VP & Branch Manager We hereby accept and further undertake to observe all the terms and conditions set out and incorporated in this letter. We also hereby confirm that the existing charges over cash deposits under the Charge Over Cash Deposits (First Party) document dated 2 January 2002 shall continue to secure the aforesaid all monies payable in connection with the Facility notwithstanding the amendments set out above, or in the subsequent legal documentation (if any). Maxtor Peripherals(S)Pte Ltd. /s/ Tiong Chi Sieng, VP Finance 29 January 2003 - ------------------------------- --------------- Company Stamp & Authorized Signatory(ies) Date for and on behalf of Maxtor Peripherals(S)Pte Ltd. 1 EX-10.75 8 f88421exv10w75.txt EXHIBIT 10.75 Exhibit 10.75 Texas Instruments Incorporated - -------------------------------------------------------------------------------- [TEXAS INSTRUMENTS LOGO] October 24, 2002 Mr. Mike Thompson VP WW Materials Maxtor Corporation 2452 Clover Basin Drive Longmont, CO 80503 Subject: Extension of Master Business Agreement Dated April 30, 1998 TI proposes that the referenced Agreement be extended through December 31, 2003, under the same terms and conditions as contained in the original Agreement. If this proposal is acceptable to your company, please sign and date this letter in the places provided below and return the Acknowledgment to Tammi Downum, at Texas Instruments Incorporated, 7839 Churchill Way, MS 3999, Dallas, TX 75251, whereupon the referenced Agreement will be considered extended as set forth in this letter. For your convenience, I have included a second original of this letter that you may keep for your files. Sincerely, /s/ C.S. Lee C.S. Lee Senior Vice President Texas Instruments Incorporated ACCEPTED AND AGREED TO: Maxtor By: /s/ Mike Thompson -------------------------------- Title: VP, Strategic Commodities ----------------------------- Date: 12/13/2002 ------------------------------ Enclosure CSL/tbd EX-10.76 9 f88421exv10w76.txt EXHIBIT 10.76 EXHIBIT 10.76 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT PREAMBLE This Maxtor Standard Volume Purchase Agreement ("Agreement"), effective as of January 1, 2002 ("Effective Date") is made by and between Maxtor Corporation, a Delaware corporation, having principal places of business at 510 Cottonwood Drive, Milpitas, California 95035 U.S.A. and 2452 Clover Basin Drive, Longmont, Colorado 80503 U.S.A.("Maxtor"), and Agere Systems Inc., a Delaware company, having a place of business at 2 Oak Way, Berkeley Heights, New Jersey 07922 ("Ageret USA") and Agere Systems Singapore Pte. Ltd. d/b/a Agere Systems Asia Pacific, a Singapore corporation, having a place of business at 77 Science Park Drive, #03-18 Cintech III, Singapore 118256 ("Agere Singapore"), (both Agere entities are referred to herein as "Seller"). RECITALS Whereas, Seller is in the business of designing, manufacturing and selling integrated circuits, both custom and standard, ("Product") for hard disk drives and wishes to sell such Product to manufacturers of disk drives such as Maxtor; Whereas, "Maxtor" shall include Maxtor Peripherals (S) Pte Ltd, having a place of business at No 2 Ang Mo Kio Street 63, Ang Mo Kio Industrial Park 3, Singapore 569111; Whereas, Maxtor wishes to secure a supply of Product and to purchase quantities of such Product from Seller meeting the specifications furnished by Agere in the case of standard products and meeting the specifications agreed to in writing in the case of custom products (the "Specifications") and operating in Maxtor's application ("Application"); Whereas, Maxtor may place orders for Product either on Agere USA or Agere Singapore; Whereas, Seller shall manufacture and deliver to Maxtor, its agents, and/or its subsidiaries, Product as set forth in this Agreement, including its Terms and Conditions; Whereas, the parties recognize that the disk drive market is very demanding of quality, timeliness, and price, and that the essence of the relationship between Maxtor and Seller is flexibility; timely delivery of necessary quantities of qualified, high-yield Products; and low costs; Whereas, if problems should be encountered with respect to any aspect of this Agreement or if the parties should encounter any problems not covered by this Agreement, Maxtor and Seller shall discuss them in a cooperative and sincere spirit and attempt to arrive at a mutually acceptable solution; and Whereas, this Agreement commences on the Effective Date and terminates on December 31, 2004, ("Termination Date") unless terminated earlier; NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND ADEQUACY OF WHICH IS HEREBY ACKNOWLEDGED, AND IN CONSIDERATION OF THE ABOVE PREMISES AND THE MUTUAL PROMISES CONTAINED IN THIS AGREEMENT, THE PARTIES AGREE AS FOLLOWS: MAXTOR/AGERE SYSTEMS CONFIDENTIAL MAXTOR STANDARD VOLUME PURCHASE AGREEMENT TERMS AND CONDITIONS ARTICLE I -- PRODUCTS 1.1 PRODUCT. 1.1.1 Purchase and Supply. Maxtor wishes to secure a supply of Product and to purchase quantities of such Product from Seller meeting the Specifications. Products shall be manufactured by Seller according to the functional, technical and other specifications in the data sheet furnished by Seller, in the case of standard products and those agreed upon by the parties in writing for each custom integrated circuit ("ASIC Product"). As used herein "Product" refers to both standard Products and ASIC Products unless the context suggests otherwise. Seller wishes to supply such Product to Maxtor on such conditions and on the terms and conditions of this Agreement. Therefore, subject to the terms and conditions of this Agreement, Maxtor will purchase and Seller will supply Product as provided herein for the term of this Agreement. Maxtor's obligation to purchase Product from Seller is contingent upon Seller's Product meeting Maxtor's Application requirements, time to market requirements, Product Specifications and functional requirements, price requirements, and the other terms and conditions of this Agreement. Nothing in this Agreement shall be construed as an obligation for Maxtor to purchase any Products, except as expressly provided in any Order (as defined below) issued by Maxtor or as expressly set forth in quotations accepted by Maxtor covering ASIC Products (See Section 1.1.6). This Agreement is not a requirements contract. Any Product purchased from Seller is covered under this Agreement whether or not the Order expressly references this Agreement. 1.1.2 Specification. Specifications for standard Products will be furnished to Maxtor. Specifications for custom integrated circuits or ASIC Products shall be mutually agreed to in writing. 1.1.3 Packing. Unless otherwise specified in this Agreement or an Order, all Products are to be packed and identified in accordance with customary industry practice. Packages shall be constructed for handling with a mechanical device. A complete packing list specifying Maxtor's applicable purchase order number, quantity of Products shipped, and part number shall be enclosed with all shipments under this Agreement. Seller shall mark each container with necessary lifting, loading and shipping information, including the applicable purchase order number, date of shipment, and name and address of Seller and Maxtor. 1.1.4 Freedom of Action. Nothing in this Agreement shall prevent either party from engaging in similar business with other persons, including, without limit, competitors of the other party, provided that the confidentiality terms of this Agreement are not breached. Nothing in this Agreement shall prevent Seller from selling Products or the same or substantially similar goods or materials to other customers, provided that the confidentiality and intellectual property rights terms of this Agreement are not breached. 1.1.5 Sole Source. Nothing in this Agreement will prevent Maxtor from procuring Products or the same or substantially similar goods or materials from other sources than Seller or from providing the same itself, provided that the confidentiality and intellectual property rights terms of this Agreement are not breached. 1.1.6 Design and Development Terms for ASIC Product. From time to time Maxtor may enter into design and development agreements with Seller for ASIC Products. Any such development effort will be the subject of quotations provided by Seller covering the specific terms of such design and development ("Quotation"). The Quotation and the terms contained in Exhibit A apply with respect to any such design and development, in addition to the general terms and conditions contained herein. In the event of any conflict between the general terms of this Agreement and Exhibit A, concerning ASIC Products, Exhibit A prevails (but for all standard Products the general terms and conditions of this Agreement prevails). In the event of any such conflict with the Quotation and this Agreement or Exhibit A, the Quotation prevails. Notwithstanding the foregoing, any separate development agreements entered into between the parties prior to the date of this agreement (e.g. development agreements between Agere (or Lucent Technologies) and Quantum) will continue to govern the particular Products to which they relate, except that any terms and conditions of production will be superseded by the terms contained herein. 1.2 WARRANTY. Each of Seller's warranties made hereunder is materially relied upon by Maxtor in entering into this Agreement or any Order. 1.2.1 Authority Warranty. Each party represents and warrants that all corporate action necessary for the authorization, execution and delivery of this Agreement by such party and the performance of its obligations under this Agreement has been taken. Further, each party represents and warrants that neither the execution of this Agreement nor any performance of this Agreement shall conflict with or be prohibited by any interest, agreement, obligation, contract, order, law, regulation, or duty, oral or written, to which it is a party or by which it is bound. MAXTOR/AGERE CONFIDENTIAL 2 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT 1.2.2 Product Warranty. Seller warrants the product as a production item ("Item"), but not related services or prototypes of any such Items, to be free from defects in material and workmanship and to be in conformance with the written specification, if any, and referenced in an order accepted by Seller. If any defect in material or workmanship or failure to conform to such specification ("Defect") is suspected in any such Items, Maxtor, after obtaining a Returned Material Authorization number from Seller, shall ship suspected defective samples of the Items to Seller, following Seller's instructions regarding the return. No product will be accepted for replacement, credit or refund without the written authorization of and in accordance with Seller's instructions. Seller shall analyze the failures, making use, when appropriate, of technical information provided by Maxtor relating to the circumstances surrounding the failures. Seller will verify whether any Defect appears in the Items. If Seller determines that the returned products are not defective, Maxtor shall pay Seller all costs of handling, inspection, repairs and transportation at Seller's then prevailing rates. Seller shall, at Seller's s option, taking Maxtor's request into reasonable account, either credit or refund the purchase price, or replace the defective product without charge with the same or equivalent product provided: (i) Maxtor notifies Seller in writing of the claimed Defect within thirty (30) days after Maxtor knows or reasonably should know of the claimed Defect, (ii) Seller's examination of the Items discloses that the claimed Defect actually exists and (iii) in the case of any product other than packaged monolithic integrated circuits, the defect appears within twelve (12) months from the date of shipment of the product. In the event of a replacement, Seller shall ship the replacing Items FOB point of origin, freight prepaid to Maxtor's destination. Any replaced Item shall become Seller's property. The method of disposition of any replaced Items will be as mutually agreed by both parties in writing. In no event shall Seller be responsible for deinstallation or reinstallation of any Item or for the expenses thereof. Replacements covered by the above warranty are warranted to be free from defects as set forth above. Inspection and acceptance of Items by Maxtor and/or payment therefor shall not relieve Seller of responsibilities hereunder. The above warranty does not apply to, and Seller makes no warranties with respect to products that: are software programs, experimental products or prototypes (all of which are provided "AS IS") or to Items which have been subjected to misuse, neglect, accident or abuse or operating or environmental conditions that deviate from the parameters established in applicable specifications; or have been improperly installed, stored, maintained, repaired or altered by anyone other than Seller; or have had their serial numbers or month and year of manufacture or shipment removed, defected or altered. This warranty does not extend to any system into which a product is incorporated. NO OTHER WARRANTY, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IS GIVEN WITH RESPECT TO SUCH SERVICE OR ANY OTHER SERVICE PROVIDED BY SELLER UNDER THIS AGREEMENT. This warranty applies only to Maxtor and may not be assigned or extended by Maxtor to any of its customers or other users of the Items. Seller will not accept any returns from Maxtor's customers or users of Maxtor's products. EXCEPT AS STATED IN THE SECTION ENTITLED WARRANTY, SELLER, ITS SUBSIDIARIES AND AFFILIATES, SUBCONTRACTORS AND SUPPLIERS MAKE NO WARRANTIES, EXPRESS OR IMPLIED, AND SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MAXTOR'S SOLE AND EXCLUSIVE REMEDY SHALL BE SELLER'S OBLIGATION TO REPLACE OR CREDIT OR REFUND AS SET FORTH ABOVE. 1.3 REMEDIES. A. For purposes of the exclusive remedies and limitations of liability set forth in this section, Seller shall be deemed to include Agere Systems Inc., its subsidiaries and affiliates and the directors, officers, employees, agents, representatives, subcontractors and suppliers of each of them; and "damages" shall be deemed to refer collectively to all injury, damage, loss or expense incurred. B. Seller's entire liability and Maxtor's exclusive remedies against Seller for any damages caused by any product defect or failure, or arising from the performance or non-performance of any work, regardless of the form of action, whether in contract, tort including negligence, strict liability or otherwise shall be: 1. For infringement, the remedies set forth in the section entitled intellectual property indemnity; 2. For failure of product or work performed, the remedies stated in the section entitled Product Warranty; 3. For failure to deliver or for delays in delivery of production quantities, Seller shall have no liability unless the delivery is delayed by more than fifteen(15) days by causes not attributable either to Maxtor or to conditions beyond Seller's reasonable control, in which case Maxtor shall have the right, as its sole remedy, to cancel the order without incurring cancellation charges; 4. For bodily injury or death to any person proximately caused by Seller, Maxtor's right to proven direct damages; and 5. For claims other than set forth above, seller's liability shall be limited to direct damages that are MAXTOR/AGERE CONFIDENTIAL 3 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT proven, in an amount not to exceed $100,000. C. Notwithstanding any other provision of this agreement, Seller shall not be liable for incidental, indirect, special, exemplary or consequential damages or for lost profits, savings or revenues of any kind, whether or not seller has been advised of the possibility of such damages; provided, however, this limitation shall not apply to a breach of the confidentiality obligations of this Agreement if such breach is the result of intentional misconduct or gross negligence. This provision shall survive failure of an exclusive remedy. 1.4 PRICES; DELIVERY; TAXES. 1.4.1 Prices. The purchase price for Product will be set forth in price quotations provided by Seller to Maxtor from time to time during the term of this Agreement. 1.4.2 Title, Delivery and Risk of Loss. Unless otherwise agreed to by the parties in writing, and provided that Seller's designated carrier is used, Seller will pay for freight to Maxtor's destination indicated on Order. Title (except as provided in Section 3.3, "Rights In Intellectual Property" or in Exhibit D for Consigned Product) and risk of loss or damage to the product shall pass to Maxtor at the time Seller delivers possession of the product to the carrier. Use of a carrier other than Seller's designated carrier shall be at additional cost to Maxtor, except if such other carrier is used because an Order is late. 1.4.3 Taxes. Maxtor shall pay all duties and taxes including sales, use, property, excise, value added and gross receipts levied on this Agreement or the Products. Seller shall not collect an otherwise applicable tax if Maxtor's purchase is exempt from Seller's collection of such tax and a valid tax exemption certificate is furnished by Maxtor to Seller. ARTICLE II -- PROCEDURES 2.1 QUALIFICATION. 2.1.1 Qualification. The respective obligations of the parties pursuant to this Agreement shall be subject to the successful qualification of Seller's Product and its manufacturing process in Maxtor's Application, provided, however, that this will not relieve Maxtor of its obligations respecting any firm orders placed by Maxtor prior to such qualification provided the Product meets the Specifications. Maxtor and Seller shall cooperate to set up the necessary processes and procedures to accomplish and facilitate such qualification. Except for firm orders placed by Maxtor prior to qualification, Seller's Product must complete qualification by Maxtor in order to be tendered under this Agreement, and must consistently perform according to the qualified standard. After Maxtor's approval or acceptance of the initial qualification prototypes of the Products, any changes in the Product design, material or any processes used in producing the Product shall be subject to change notification in accordance with Exhibit B. Maxtor will use its reasonable commercial efforts to qualify and utilize Seller's Product in new or additional Applications. 2.1.2 Changes. Seller shall promptly notify Maxtor in writing of any change in Product design, material, production process or in plant location in accordance with Seller's change notification policy outlined on Exhibit B in order to allow Maxtor to requalify the Product, before any Product is manufactured by the new design, material, process or in the new location and sold to Maxtor. Any Product delivered to Maxtor after such change and without change notification in accordance with Exhibit B may be rejected by Maxtor for a full refund. Notwithstanding the foregoing, in no event will Seller make any circuit design changes to an ASIC Product without Maxtor's written consent. 2.2 Number Not Used 2.3 FORECASTS. Maxtor shall forecast its requirements for Products to Seller, as provided below, on a non-binding basis, and Seller shall use its reasonable commercial efforts to maintain the ability to supply Maxtor's requirements from Seller. Notwithstanding the above, nothing in this Agreement shall be construed as an obligation for Maxtor to purchase any Products, except as expressly provided in any Order issued by Maxtor. MAXTOR/AGERE CONFIDENTIAL 4 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT ARTICLE II -- PROCEDURES 2.3.1 Forecasts. During the term of this Agreement, Maxtor shall provide Seller, on a monthly basis, with a nine (9) month rolling forecast setting forth its estimated requirements and shall provide Orders based on its requirements for the first three (3) months of the forecast. Orders will be placed ninety (90) days in advance of the date as of which the Products are to be delivered. Seller shall be required to accept any Order consistent with the forecast and the terms contained herein. Maxtor may request a shorter lead time and Seller shall use its reasonable commercial efforts to meet such date. Maxtor's forecast is provided solely for Seller's convenience and for its planning purposes; no forecast shall be construed as an authorization by Maxtor to order any materials for, or to allocate any labor or equipment for the manufacture of the Product nor impose on Seller any obligation to supply additional Product. Maxtor will not be responsible for any of Seller's cost or expense for materials, Product, labor, or other commitments or expenses, other than as authorized in Orders or as otherwise expressly provided herein. 2.3.2 Flexible Delivery; Upside capability a. The parties acknowledge that the Flexible Delivery Agreement dated October 30, 2000 between Maxtor and Lucent Technologies Microelectronics Pte. Ltd. and assigned to Agere Singapore effective as of February 1, 2001, is hereby terminated and replaced in its entirety with the Flexible Delivery provisions set forth on Exhibit D, attached hereto and made a part hereof. b. Seller agrees to accept Orders outside the forecast and ordering cycle ("Upside Quantities") as follows: The Upside Quantities will depend upon the requested delivery time of Maxtor from the time the order for Upside Quantities is placed (RDT) and the applicable percentage applied to the quantity of Product ordered by Maxtor for the then current quarter ('CQ").
RDT Upside Quantity * weeks * of CQ * weeks * of CQ * weeks * of CQ
2.4 ORDERS. 2.4.1 Orders. All purchases and sales shall be initiated by Maxtor's issuance of written purchase orders sent via airmail, facsimile or courier ("Order"). Such Orders shall reference this Agreement and state the unit quantities, unit descriptions, price, requested delivery dates and shipment instructions. Such stated items included in an Order shall be consistent with the terms and conditions contained herein. The acceptance or rejection by Seller of an Order shall be indicated by written acknowledgment within five (5) work days. By shipping the Products, or by confirming or accepting an Order, or by performing the work described in an Order Seller agrees to the Order and to the terms and conditions of this Agreement. All Orders meeting the terms and conditions of this Agreement shall be accepted by Seller. Nothing in this Agreement shall be construed as an obligation for Maxtor to purchase any Products, except as expressly provided in any Order issued by Maxtor. 2.4.2 Objections. Each Order is placed subject to the terms and conditions of this Agreement. Accordingly, if Seller objects to any of the terms of an Order, Seller must notify Maxtor in writing stating the specific terms objected to, the reasons for the objection and the wording proposed to be substituted before Seller's acceptance of such Order. Under no circumstances will Seller's objection notice itself constitute a modification of the terms of an Order. No modification of this Agreement will be effective unless made in writing signed by both parties, which expressly intends to modify this Agreement. The preprinted terms and conditions of purchase orders, acceptances, confirmations and similar business documents shall have no effect as amendments of, objections to, or modifications of this Agreement. Any different or additional terms in Orders or Seller's acceptance of this Agreement will be construed as proposals for additions to this Agreement and will not be binding unless agreed to in writing by both parties. 2.4.3 Precedences. Any terms and conditions added or referenced by either party in any purchase order, confirmation, acceptance or any similar document purporting to modify the terms and conditions contained in this Agreement, shall be disregarded unless expressly agreed upon in writing signed by the parties, which expressly amends this Agreement. The preprinted terms and conditions of purchase orders, acceptances, confirmations and similar business documents shall have no effect as amendments of, objections to, or modifications of this Agreement. 2.4.4 End of Life. In the event that Seller determines that a Product is at end of life, Seller shall give Maxtor at least three (3) months advanced notice of such projected end of life. Such notice shall include the planned last purchase order date and the planned last shipment date for the end of life * Indicates portions redacted pursuant to a Confidential Treatment Request filed separately with the Securities and Exchange Commission. MAXTOR/AGERE CONFIDENTIAL 5 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT Product. Notwithstanding the foregoing, during the term of this Agreement, Seller agrees that for Maxtor sole sourced Product, Seller will supply such Products through the life of the Maxtor HDD program or programs that use this Product or either provide a mutually agreeable alternative part that is compatible with the part that is being phased out or give Maxtor at least twelve months advanced notice of such projected end of life. 2.4.5 End of Term. In the event of the expiration or termination of this Agreement, any Orders placed before such expiration or termination shall be completed according to the terms of this Agreement. 2.5 INSPECTION. Maxtor and Seller shall cooperate to inspect Products, and nothing in this section shall limit Maxtor's other rights and remedies. 2.5.1 Inspection by Maxtor. Maxtor may test each lot or Order of Product to ensure that the Products meet the Specifications and acceptance criteria as may be established by mutual agreement, and Seller shall not ship any Products that do not Conform. Any inspection and testing by Maxtor will be performed at Maxtor's facility. However, Seller will permit Maxtor the right to audit its facilities and inspect Product (including raw materials, components, subassemblies and end products) before, during and after manufacture, once a year or more frequently in writing if agreed to by Seller or in the event that there has been a lot rejection under Section 2.5.3. Where applicable, Maxtor may, at its option, inspect all Products or inspect a statistical sample selected from each lot, and Product, lots or Orders may be inspected more than once. 2.5.2 Inspection by Seller. Seller will ensure that all Product are tested to assure that Products meet the applicable Specifications.. Seller will provide only those Product conforming to the Specifications, unless Seller has obtained prior written approval from Maxtor for any deviation from such Specifications. Seller further agrees to maintain adequate authenticated inspection test documents that relate to work performed under this Agreement. Such records shall be retained by Seller for a period of three (3) years after completion of this Agreement and made available to Maxtor upon request. Seller agrees to supply Maxtor with inspection and test reports, certifications or any other inspection and test documents as may be reasonably requested. 2.5.3 In Case of Failure of Inspection. If the above inspection or testing detects Products which nonconform to the Specifications or the requirements of this Agreement, Maxtor and Seller will closely cooperate to identify and find a way to correct the causes of the problem(s). Maxtor may refuse to accept Product which do not conform. Maxtor may reject entire lots or Orders if lot acceptance criteria mutually agreed to by the parties are not fulfilled; provided that any canceled portion of an Order shall nevertheless be counted as purchased for purposes of determining Maxtor's right to any quantity discounts. The rejected Product may, at Maxtor's discretion, be returned to Seller at Seller's expense. Maxtor may immediately stop future shipments of Product until the cause(s) for non-conformity, as mutually determined by parties, has been corrected. Maxtor will use its reasonable commercial efforts to assist Seller in identifying the cause(s) for rejection. 2.6 SHIPPING. 2.6.2 Timeliness. Seller shall use its diligent efforts to meet a one hundred percent (100%) on-time delivery commitment. If Seller's performance falls below one hundred percent (100%) on-time deliveries, then Seller shall implement a corrective action plan acceptable to Maxtor which brings the deliveries back to one hundred percent (100%) on-time. If Seller is unable to deliver any Product on schedule, Seller shall promptly notify Maxtor giving a new delivery date, and Maxtor may: (i.) accept the new delivery date; or (ii.) reschedule the delivery by means of a Change Order; or (iii.) if the delay is in excess of fifteen days, cancel the delayed portion of the Order without liability; provided that any canceled portion of an Order shall nevertheless be counted as purchased for purposes of determining Maxtor's right to any quantity discounts. At Maxtor's request, Seller will provide Maxtor with daily notification of shipping delays or of the progress of delayed Products in transit. Such notification will include action plans to for recovery or expediting of the affected Product. Seller shall provide Maxtor notice of the departure of any shipment of Product from Seller's site. 2.7 DELIVERY. 2.7.1 Delivery Document. Either invoice or delivery order may be used when making deliveries. Each set must contain three (3) copies. Each copy must show this Agreement number, item number and description of Products, purchase order number, and quantity of Products shipped. Bills of Lading shall be mailed in triplicate to the destination address shown on the face of the Order, or to the consignee of the Order on the day shipment is made. All documents accompanying the Products shall reference the purchase order number and; if not, Maxtor shall have the right to reject delivery and return the Products at Seller's expense. MAXTOR/AGERE CONFIDENTIAL 6 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT 2.7.2 Delivery Early or Late. If Seller's deliveries fail to meet schedule, Maxtor, without limiting its other rights and remedies, may: (i.) In the case of late Products: (a.) direct expedited routing, and any excess costs for such expedited routing shall be paid by Seller; or (b.) cancel the delayed portion as permitted under Section 2.6.2; (ii.) In the case of early Products (a.) return the Products at Seller's expense for proper delivery; or (b.) accept the Products, but Maxtor may charge Seller with storage expenses incurred because of the advance delivery. 2.8 ACCEPTANCE. If, after ninety (90) days from the date of receipt by Maxtor, Maxtor has not rejected the Product, it will be deemed to have been accepted by Maxtor. Maxtor also may accept the Product by written notice. The act of inspection or payment by Maxtor for the Product will not be construed as Maxtor's acceptance of any Product. Acceptance of any Product shall not affect the Product warranty or any related remedy. 2.9 RETURNS. Permitted returns of product to Seller are at Seller's expense for packing and shipping. Return shipments are FCA Maxtor, and title and risk of loss pass to Seller upon delivery to the return FCA. Point. If Seller requests, Maxtor will apply Seller's Return Materials Authorization (RMA) or similar number to the returned Products and/or related documentation, provided, however, that Seller must supply such RMA number to Maxtor on a timely basis. 2.10 EPIDEMIC FAILURE. In the event that the Products supplied by Seller to Maxtor should develop any Epidemic Failure, the parties will meet in order to work out technical methods to remedy the problem. Product will undergo failure mode analysis (FMA) by Seller pursuant to the terms of the Warranty provisions to determine whether the Product is in fact defective and the cause of the Epidemic Failure. In such event, shipment of undelivered Orders of Products which are the subject of the Epidemic Failure and FMA will be postponed, at Maxtor's request, until FMA has been performed and the cause of the epidemic has been corrected if the Product is found to be defective. In case upon the expiration of forty-five (45) days from the date of Maxtor's notice regarding the Epidemic Failure and FMA has determined that the Product is defective and Seller has not yet remedied the same, then Maxtor shall be entitled to cancel pending Orders without any liability for such cancellation and return any defective Products under the Warranty provision. As used herein, "Epidemic Failure" means over one half of one percent (.5%) of the Product shall be non-conforming to Specifications over a period of thirty (30) days. 2.11 INVOICING. Seller will issue the invoices for the Products and will date them with a date equal or subsequent to shipment date. Invoices shall reference purchase order number, item number and description of Products, unit price of Products, and total amounts due. 2.12 PAYMENT. 2.12.1 Terms Except as otherwise provided in Exhibit D, invoices shall be due and payable within forty five (45) days after the date of invoice, with a fifteen day grace period for actual receipt of payment. Maxtor's payment advice shall reference Seller's invoice number(s) and date(s). 2.12.2 Currency. Unless expressly provided to the contrary, all amounts stated in this Agreement and all sums payable under this Agreement shall be denominated in United States Dollars and all payments made under this Agreement shall be made by wire transfer, cashier's check, or other ready funds in United States Dollars to payee's account at payee's designated United States bank. 2.12.3 Disputes. Maxtor shall have forty five (45) days after the invoice date to contest in good faith the amounts and items charged. Amounts subject to good faith contest are not due and payable until thirty (30) days after the dispute is resolved. 2.12.4 Bills. Seller's bills shall list all open invoices, invoice dates, and amounts unpaid; payments received, and credits issued. 2.12.5 Payment Applications. Payments shall be applied to open invoices according to Maxtor's payment advice, but, in the event the payment advice does not specify invoices, then payments shall be applied to oldest items first. 2.12.6 Credits. Credits or credit memos shall be paid immediately to Maxtor, unless Maxtor directs in writing that the amounts are to be applied as offsets to any open invoices. MAXTOR/AGERE CONFIDENTIAL 7 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT 2.13 ORDER CHANGES. 2.13.1 Rescheduling Of Orders Maxtor may reschedule an Order pursuant to the following schedule: Days.....Time between date of reschedule request and current factory promise date.
DAYS RESCHEDULE - ---- ---------- * days No rescheduling and no cancellations. (Destination changes permitted except within 48 hours of shipping) * One time purchase order reschedule for delivery through end of the next quarter with no further reschedule or cancellation. * Reschedules and cancellations without limits.
2.13.2 Cancellation Of Orders Should Maxtor cancel any Order which has been acknowledged and a shipping date assigned, either in whole or in part, such cancellation shall be upon terms and conditions that will compensate Seller for any loss or damage resulting from such cancellation. No cancellation will be permitted if a reschedule has been previously negotiated at Maxtor's request, unless the delivery date that was rescheduled was outside lead-time. Compensation by Maxtor for production quantities of the Product shall be according to the following schedule: Days.....Time between date of cancellation and current factory promise date. Liability.....Liability is the percentage of aggregate purchase price of the canceled portion of the Order. Standard Products:
DAYS PERCENT OF LIABILITY - ---- -------------------- * days * * days to Leadtime * for portion consisting of Finished Goods for portion in Die Bank for fab WIP portion * *
ASIC Product:
DAYS PERCENT OF LIABILITY - ---- -------------------- * days * * days to Leadtime * for portion consisting of Finished Goods for portion in wafer or die form (i.e. portion already through fabrication) Remaining liability for WIP will be negotiated * *
2.14 Number not Used 2.15 SHORTAGES. In the event of a shortage of capacity or material that will affect the supply of the Product, Seller may allocate in a fair and reasonable manner, taking into account Seller's contractual commitments, its available production output among itself and its other customers under contract. Seller shall provide Maxtor with as much notice as possible if it anticipates or has reason to believe that Seller's output of the Product will not be sufficient to meet all of Maxtor's requirements for any period based on the forecast furnished by Maxtor. * Indicates portions redacted pursuant to a Confidential Treatment Request filed separately with the Securities and Exchange Commission. MAXTOR/AGERE CONFIDENTIAL 8 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT ARTICLE III -- INTELLECTUAL PROPERTY 3.1 CONFIDENTIALITY. 3.1.1 Confidential Information. "Confidential Information" shall mean any information disclosed by one party to the other pursuant to this Agreement which is in written, graphic, machine readable or other tangible form and is marked "Confidential", "Proprietary" or in some other manner to indicate its confidential nature. Confidential Information may also include oral information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and reduce to a written summary by the disclosing party, within thirty (30) days after its oral disclosure, which is marked in a manner to indicate its confidential nature and delivered to the receiving party. In addition, all technical and confidential information marked in a manner to indicate its confidential nature exchanged prior to the date of this Agreement shall be Confidential Information. Each party shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except as expressly set forth in this Agreement or otherwise authorized in writing, shall implement reasonable procedures to prohibit the disclosure, unauthorized duplication, misuse or removal of the other party's Confidential Information and shall not disclose such Confidential Information to any third person except as may be necessary and required in connection with the rights and obligations of such party under this Agreement, and subject to confidentiality obligations at least as protective as those set forth in this Agreement. Without limiting the above, each of the parties shall use at least the same procedures and degree of care which it uses to prevent the disclosure of its own confidential information of like importance to prevent the disclosure of Confidential Information disclosed to it by the other party under this Agreement, but in no event less than due care. The party disclosing an item of Confidential Information shall be the Discloser ("Discloser"), and the party receiving an item of Confidential Information shall be the Receiver ("Receiver"). Notwithstanding the above, neither party shall have liability to the other with regard to any Confidential Information of the other which: (i.) was generally known and available in the public domain at the time it was disclosed or becomes generally known and available in the public domain through no fault of Receiver; (ii.) was known to Receiver at the time of disclosure; (iii.) is disclosed with the prior written approval of Discloser; (iv.) was independently developed by Receiver without any use of the Confidential Information and by employees or other agents of Receiver who have not been exposed to the Confidential Information; (v.) becomes known to Receiver from a source other than the Discloser without breach of this Agreement by Receiver and otherwise not in violation of the Discloser's rights; or (vi.) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body; provided that Receiver shall provide prompt, advanced notice to Discloser. 3.1.2 Employee Agreements. Each party shall obtain the execution of non-disclosure agreements with its employees, agents and consultants having access to Confidential Information of the other party, and shall diligently enforce such agreements, or shall be responsible for the actions of such employees, agents, and consultants in this respect. 3.1.3 Use of Confidential Information. At all times, and notwithstanding any termination, expiration, or cancellation under this Agreement, Receiver will use the Confidential Information for no purpose other than pursuing the transactions and relationship contemplated by this Agreement. 3.1.4 Return of Materials. Upon termination, cancellation or expiration of this Agreement, or upon written request of the other party, each party shall promptly return to the other all documents or other tangible materials representing the other's Confidential Information, including all whole or partial copies. 3.1.5 Term of Nondisclosure Obligation. Notwithstanding the term of this Agreement, the obligations of Seller and Maxtor under this Agreement with respect to any Confidential Information shall continue for a period of three (3) years after the Termination Date. 3.1.6 Injunctive Relief. If either party breaches any of its obligations with respect to confidentiality and unauthorized use of Confidential Information under this Agreement, it being recognized that the damages flowing from such breach are difficult to ascertain and liquidate, the other party shall be entitled to seek equitable relief to protect its interest in such Confidential Information, including but not limited to injunctive relief, as well as all other rights and remedies. MAXTOR/AGERE CONFIDENTIAL 9 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT 3.1.7 Export Controls. Recipient agrees that it will not knowingly (i.) export or re-export, directly or indirectly, any technical data (as defined by the U.S. Export Administration regulations) received under this Agreement to, (ii.) disclose such technical data for use in, or (iii.) export or re-export, directly or indirectly, as any direct product of such technical data to, any destination to which such export or re-export is restricted or prohibited by U.S. law, without obtaining prior authorization from the U.S. Department of Commerce. 3.1.8 Items Declared Confidential. This Agreement, its terms and conditions, Maxtor's specifications, and all Orders are Confidential Information. 3.2 PUBLICITY. Neither party shall publicly announce or disclose the existence of this Agreement or its terms and conditions, or advertise or release any publicity or press release regarding this Agreement, without the prior written consent of the other party. Nothing in this Agreement shall limit a party from making such disclosures as are required by law or court order, provided notice of such disclosures is given to the other party. 3.3 INTELLECTUAL PROPERTY RIGHTS. Seller exclusively shall own all right, title and interest in and to any inventions, discoveries, improvements, methods, ideas, computer and other apparatus programs and related documentation, other works of authorship fixed in any tangible medium of expression, mask works or other forms of intellectual property, whether or not patentable, copyrightable or subject to mask work rights or other forms of protection, which are made, created, developed, written, conceived or first reduced to practice by Seller solely, jointly or on its behalf, in the course of, arising out of or as a result of work done under this Agreement. Seller hereby grants to Maxtor a nonexclusive, worldwide license to Seller intellectual property to use, sell and distribute the Product purchased from Seller; provided, however, that such license shall not include any license with respect to the combination of the Product with any other product, even if such other product has been purchased from Seller, nor any license to any method or process, even if such method or process is the inherent use of the Product. No title or other ownership rights in any licensed products or any copies thereof shall pass to Maxtor under this Agreement or any performance hereunder. Maxtor agrees that it will not alter any notices on, prepare derivative works based on, or reproduce, reverse engineer, disassemble or decompile any software embodied in licensed products or recorded in the purchased products furnished under this Agreement. Except as expressly set forth in this Agreement, nothing contained in this Agreement shall be deemed to grant, either directly or by implication, estoppel or otherwise, any license on the patents, patent applications, copyrights or proprietary information arising out of any other inventions of either party. 3.4 PROPERTY. Title to all property not otherwise specifically addressed in this Agreement owned by one party ("Furnisher") and furnished to the other party ("Recipient"), shall remain with the Furnisher. Any such property owned by Furnisher and in Recipient's possession or control shall be used only in the performance of this Agreement unless otherwise authorized in writing by the Furnisher. Recipient shall keep adequate records of such property and such records shall be made available to Furnisher upon request, and shall store, protect, preserve, repair, and maintain such property in accordance with sound commercial practice, all at Recipient's expense. Unless otherwise agreed to by Furnisher, Recipient shall insure Furnisher's interest in such material against loss or damage by reason of fire (including extended coverage), flood, accident, theft, riot or civil commotion. In the event that Furnisher's property becomes lost or damaged to any extent while in Recipient's possession, Recipient agrees to indemnify Furnisher or replace such property at Recipient's expense, in accordance with Furnisher's request. At the expiration or termination of this Agreement, Recipient shall request disposition instructions for all such property, whether in original form or otherwise. Recipient agrees to make such property available as directed by Furnisher, including preparation, packaging, and shipping. Preparation for shipment shall be at Furnisher's expense and shipment shall be FOB Recipient. MAXTOR/AGERE CONFIDENTIAL 10 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT ARTICLE IV -- LIABILITIES 4.1 GENERAL INDEMNITY. Seller shall, in the performance of work or services under this Agreement, fully comply with all applicable national, state, and local laws, rules, regulations, and ordinances and shall indemnify and hold harmless Maxtor from and against any loss, claim, damage, liability, expense, or cost (including without limitation attorney's fees and court costs) resulting from failure of such compliance. 4.2 INTELLECTUAL PROPERTY INDEMNITY. Seller will: (i) defend or settle, at its option and expense, any claim against Maxtor alleging that any Product furnished under this Agreement directly infringes any patent, copyright or trademark; (ii) reimburse Maxtor for any costs incurred at Seller's written request relating to such claim; and (iii) pay damages and costs assessed by final judgment against Maxtor and attributable to such claim. In addition, Seller will have the right, at any time and at its option and expense to: (i) procure for Maxtor the right to continue using such Product; (ii) replace or modify any such Product provided or to be provided to be free of the infringement; or (iii) require return of such Product and refund the purchase price. Seller's obligations hereunder are conditioned upon: (i) Maxtor giving Seller written notice within thirty (30) days of any such claim; (ii) Seller having complete control of the defense and settlement thereof; (iii) Maxtor cooperating fully with Seller to facilitate the defense or settlement of such claim; and (iv) Maxtor's full compliance with this Agreement. Notwithstanding the foregoing, Seller shall have no obligation to defend or settle any claim, and Maxtor shall indemnify and save harmless Seller and its suppliers and affiliated companies from all costs, expenses, liabilities and claims, for any such claim: (i) arising from Seller's compliance with Maxtor's specifications, designs or instructions; or (ii) relating to any Product furnished hereunder in combination with item(s), whether or not furnished by Seller, even if such combination results from the Product's necessary or inherent use or the use for which the Product is purchased. The sale of any Product by Seller shall not in any way confer upon Maxtor, or upon anyone claiming under Maxtor, any license (expressly, by implication, by estoppel or otherwise) under any patent claim of Seller or others covering or relating to any combination, machine or process in which such product is or might be used, or to any process or method of making such product. THE FOREGOING STATES THE SOLE AND EXCLUSIVE REMEDY AND OBLIGATION OF THE PARTIES HERETO FOR INFRINGEMENT OR OTHER VIOLATION OF ANY INTELLECTUAL PROPERTY RIGHTS ARISING OUT OF THIS AGREEMENT AND IS IN LIEU OF ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, IN REGARD THERETO. 4.3 STRICT LIABILITY. Each party will indemnify the other against and hold it harmless from any loss, cost, liability or expense (including court costs and reasonable fees of attorneys and other professionals) to the extent it arises out of or in connection with, in whole or in part, any negligence or willful act or omission of it or its employees or agents including but not limited to any such act or omission that contributes to: (i.) any bodily injury, sickness, disease or death; or (ii.) any injury or destruction to tangible or intangible property of the other or any related loss of use. 4.4 LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, OR INCIDENTAL DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING IN ANY WAY OUT OF THIS AGREEMENT OR ANY AGREEMENT, UNDERTAKING, OR PERFORMANCE THAT MAY BE PROMISED, PERFORMED, OR EXECUTED TO IMPLEMENT THIS AGREEMENT, PROVIDED, HOWEVER, THIS LIMITATION SHALL NOT APPLY TO A BREACH OF THE CONFIDENTIALITY OBLIGATIONS OF THIS AGREEMENT IF SUCH BREACH IS THE RESULT OF INTENTIONAL MISCONDUCT OR GROSS NEGLIGENCE. MAXTOR/AGERE CONFIDENTIAL 11 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT ARTICLE V -- DISPUTE RESOLUTION 5.1 ESCALATION. The parties agree that any material dispute between the parties relating to this Agreement and unresolved for a period exceeding thirty days may be submitted to a panel of two senior executives of Maxtor and Agere USA. Either party may initiate this proceeding by notifying the other party pursuant to the notice provisions of this Agreement. Within fifteen days (15) days from the date of receipt of the notice, the parties' executives shall confer (via telephone or in person) in an effort to resolve such dispute. The decision of the executives will be final and binding on the parties. In the event the executives are unable to resolve such dispute within twenty (20) days after submission to them, the parties agree to submit the dispute to a sole mediator selected by the parties or, at any time at the option of a party, to mediation by a mediator selected by the American Arbitration Association ("AAA"). The parties agree to make good faith efforts to resolve disputes by mediation within thirty (30) days. If not thus resolved such dispute shall be settled by means of arbitration as provided below. Each party's executives shall be identified by notice to the other party, and may be changed at any time by notice. 5.2 ARBITRATION. 5.2.1 Binding Arbitration. Any controversy, claim, or action, whether in law or at equity, whether in tort, contract, warranty, or otherwise, arising out of, relating to, or involving this Agreement and any agreement, undertaking, or performance that may be promised, performed, or executed to implement this Agreement will be settled by arbitration, subject to Section 5.1, as follows: (i.) Any arbitration proceeding shall be conducted under the laws of the state of New York and the Federal Arbitration Act, and pursuant to the Commercial Arbitration Rules of the American Arbitration Association insofar as such Commercial Arbitration Rules do not conflict with the provisions of this Section. (ii.) Either party may initiate arbitration by giving notice to the other stating an intention to arbitrate, the issue to be arbitrated, and the relief sought. The site for any arbitration proceeding shall be San Jose, California. Within twenty (20) days from the date of the notice ("Notice Date"), the parties shall agree on one (1) neutral arbitrator. If the parties cannot agree on one (1) neutral arbitrator within such twenty (20) day period, then each shall select one (1) party-appointed arbitrator within thirty five (35) days from the Notice Date. The two (2) party-appointed arbitrators so selected by the parties shall designate the third (3rd) arbitrator within fifty (50) days from the Notice Date. Each arbitrator shall be knowledgeable in the law and technology at issue.. No arbitrator shall have been employed or retained in any capacity or affiliated with either party during the prior two (2) years. (iii.) The arbitrators shall promptly, by majority vote, make such award and determination as is appropriate and in accordance with the terms of this Agreement. The arbitrator shall not have authority to award punitive, exemplary or other damages in excess of compensatory damages and each party irrevocably waives any claim thereto. The parties will faithfully abide by and perform any award rendered by the arbitrators. Further, any such award and determination shall be final and binding upon the parties and enforceable in any court of competent jurisdiction. 5.2.2 Injunctive Relief. Notwithstanding the above, the parties may apply to any court of competent jurisdiction for injunctive relief without breach of this arbitration provision. 5.2.3 Governing Language. The arbitration proceedings and all pleadings and written evidence shall be in the English language. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy. 5.2.4 Costs and Fees. Each party shall bear its own expenses and those of the arbitrator shall be borne equally. The arbitrator, parties, their representatives and other participants shall hold the existence, content and result of the mediation and arbitration in confidence. 5.3 CHOICE OF LAW. 5.3.1 Choice of Law. This Agreement and any agreement, undertaking, or performance that may be promised, performed, or executed to implement this Agreement shall be governed by and construed and construed under the substantive laws, but not the conflicts of law, of the State of New York. The parties expressly agree that this Agreement and any agreement, undertaking, or performance that may be promised, performed, or executed to implement this Agreement shall not be subject to and shall not be interpreted by the United Nations Convention on Contracts for the International Sale of Goods. 5.3.2 Compliance with Laws. Seller shall be responsible for obtaining, at Seller's cost, all necessary administrative and governmental licenses, approvals, and permits and shall generally comply with all laws and regulations for the performance of this Agreement ("Governing Laws"). 5.3.3 Foreign Corrupt Practices Act. Maxtor is subject to the laws and regulations of the United States MAXTOR/AGERE CONFIDENTIAL 12 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT including the Foreign Corrupt Practices Act ("FCPA"). Seller shall not use any payment or other benefit derived from Maxtor to offer, promise or pay any money, gift or any other thing of value to any person for the purpose of influencing official actions or decisions affecting this Agreement or with the intention of obtaining or maintaining any business related to Maxtor, while knowing or having reason to know that any portion of this money, gift or thing will, directly or indirectly, be given, offered or promised to: (i.) An employee, officer or other person acting in an official capacity for any government or its instrumentalities; or (ii.) Any political party, party official or candidate for political office. Further, Seller shall maintain books, records, and systems of accounting and control adequate to insure that Seller's assets and operations are accounted for and that Seller's business is carried out according to the directions of Seller's managers. 5.3.4 Assurances and Compliance. Seller shall provide Maxtor with the assurances and official documents that Maxtor periodically may request to verify Seller's compliance with the Governing Laws or FCPA. Actions violating the Governing Laws or FCPA are material breaches of this Agreement and may result in civil or criminal penalties. 5.3.5 Government Flowdown Provisions. In no event will this Agreement be placed under a U.S. Government Contract which would subject Seller to any additional terms and conditions or liability. 5.3.6 Export Controls. Maxtor agrees that it will not knowingly export or re-export, directly or indirectly, any Product to any destination to which such export or re-export is restricted or prohibited by U.S. law, without obtaining prior authorization from the U.S. Department of Commerce. 5.4 LIMIT OF TIME TO BRING ACTION. No actions or arbitrations, regardless of form, arising out of this Agreement, may be brought by either party more than eighteen (18) months after such actions or arbitrations arose, or in the case of nonpayment, more than eighteen (18) months from the date the last payment was due. ARTICLE VI -- GENERAL 6.1 TERM AND TERMINATION. 6.1.1 Term. This Agreement shall become effective on the Effective Date and shall remain in force until the Termination Date, and on and effective the Termination Date this Agreement shall terminate. 6.1.2 Renewal. The parties may agree in writing to extend this Agreement for one or more terms of one (1) year. 6.1.3 Termination for Convenience. This Agreement or any Order placed under this Agreement may be terminated in whole or in part at any time by Maxtor for its own convenience. Any such termination will not be construed as a breach. Maxtor's exclusive liability and Seller's exclusive remedy for such termination will be compensation owed to Seller (i) as set forth in Section 2.13, (ii) under the terms of any ASIC Quotation, (iii) resulting from volume pricing adjustments (true-ups) and (iv) as may otherwise be set forth in a writing signed by both parties. MAXTOR/AGERE CONFIDENTIAL 13 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT In no event will Maxtor's liability in the aggregate exceed the total price which would have been paid under this Agreement for the work had it not been terminated. Seller's termination claim must be submitted in writing no late than 90 days from the date of receipt of termination notice. 6.1.4 Termination For Cause. This Agreement shall be terminated for cause: (i.) If either party materially defaults in the performance of any provision of this Agreement, then the non-defaulting party may give written notice to the defaulting party that if the default is not cured within thirty (30) calendar days, the Agreement will be terminated at the end of that period and such termination shall not prejudice or limit either party's remedies; or (ii.) If either party violates any intellectual property, confidentiality, or license provision of this Agreement, then the non-defaulting party may give written notice to the defaulting party of such violation and of immediate termination and the Agreement will be terminated when such notice is given and such termination shall not prejudice or limit either party's remedies; or (iii.) Upon: (a.) the institution by or against either party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of its debts; or (b.) either party's making an assignment for the benefit of creditors; or (c.) either party's dissolution, this Agreement shall terminate immediately without notice and shall be deemed to have been terminated by the party not so affected and such termination shall not prejudice or limit either party's remedies. 6.1.5 Duties Upon Termination. Upon any termination or expiration of this Agreement: (i.) all licenses made to Seller under this Agreement shall be terminated according to their terms effective the date of the termination or expiration; (ii.) the parties will return or destroy all Confidential Information received from the other party; and (iii.) neither party shall be liable to the other because of such termination for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, investments, leases or commitments in connection with the business or good will of Maxtor or Seller, or for any other reason growing out of such termination. 6.1.6 Survival. The terms of this Agreement which by their nature may survive the termination or expiration of this Agreement shall survive the termination or expiration of this Agreement. 6.2 GENERAL. 6.2.1 Assignment. Except for either party's right to assign this Agreement to any successor- in- interest to the business of which this Agreement relates, neither party shall assign this Agreement nor any rights or obligations hereunder without the prior written consent of the other party. Any attempted assignment without the other party's consent shall be void and ineffective. 6.2.3 Consents. No consent required to be given under this Agreement shall be unreasonably withheld. 6.2.4 Counterparts. This Agreement shall be prepared in two identical and original counterparts and both of which together shall be one and the same instrument and either of which may be used for purposes of proof. 6.2.5 Cumulation of Remedies. All remedies available to either party under this Agreement are cumulative and may be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed an election of such remedy to the exclusion of other remedies. 6.2.6 Independent Parties. Persons furnished by each party shall be solely the employees or agent of such party and shall be under the sole and exclusive direction and control of the furnishing party. They shall not be considered employees of the other party for any purpose. Each party shall remain an independent contractor and MAXTOR/AGERE CONFIDENTIAL 14 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT shall be responsible for compliance with all laws, rules and regulations involving, but not limited to, employment of labor, hours of labor, health and safety, working conditions and payment of wages. Each party shall also be solely responsible for payment of taxes, including federal, state and municipal taxes, chargeable or assessed with respect to its employees, such as social security, unemployment, worker's compensation, liability insurance and federal and state withholding. Each party shall indemnify the other for any loss, damage, liability, claim, demand or penalty including costs, expenses, and reasonable attorneys' fees assessed against one party that may be sustained by reasons of the other party's failure to comply with the provisions of this Section. Neither party nor its employees, officers, directors, or agents shall hold itself out as the agent, employee, partner, or joint venturer of the other party, and shall make no commitment or engagement on the account of or on behalf of the other party. 6.2.7 Force Majeure. Nonperformance of either party shall be excused to the extent that performance is rendered impossible by strike, fire, flood, governmental acts, orders or restrictions, civil or military authority, explosion, war, strike, embargo, act of God, nature or the public enemy, or any other reason where failure to perform is beyond the control and not caused by the negligence of the nonperforming party. In the event of any delay caused by such contingency, the delayed party may defer any performance or delivery prevented by the force majeure condition for a period equal to the time lost by reason of such delay, provided, however, that the delayed party promptly commences and reasonably and diligently pursues actions to cure or circumvent such cause. Whenever any cause delays or threatens to delay the timely performance of this Agreement, Seller shall immediately notify Maxtor of all relevant information with respect to such cause. If Seller is delayed in any performance or delivery by more than thirty (30) days, Maxtor may terminate the delayed performance or delivery or this Agreement and such termination shall not be a breach of this Agreement and shall be without penalty. 6.2.8 Governing Language. English shall be the language of this Agreement and the English language shall govern all disputes, performance and interpretations. 6.2.9 Headings. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement and shall not affect the interpretation of this Agreement. 6.2.10. Joint Work Product. The parties further acknowledge that they have thoroughly reviewed this Agreement and bargained over its terms and that for convenience, Maxtor has written down the terms of this Agreement. Accordingly, this Agreement shall be construed without regard to the party or parties responsible for its preparation and shall be deemed to have been prepared jointly by the parties. 6.2.11 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to be sufficiently given if delivered by hand or if sent by courier with a receipt requested or by registered air mail, postage prepaid, addressed to Maxtor or to Seller, as the case may be, at the addresses first set forth above or to such other address as may be furnished for such purpose by notice duly given under this Agreement. Such notice shall be deemed to have been given when delivered by hand or two (2) days after deposit with the courier or mail service. Any party may change its address for such communications by giving such notice to the other party in conformance with this section. 6.2.12 Severance. If any provision of this Agreement is held to be invalid by a court of competent jurisdiction, then the remaining provisions shall nevertheless remain in full force and effect. The parties agree to renegotiate any term held invalid and to be bound by the mutually agreed substitute provisions. 6.2.13 Time. Time is of the essence in all performances hereunder. The words day, month, quarter, year, and the like shall mean calendar day, month, quarter, year, and the like, unless expressly provided to the contrary. 6.2.14 Waiver. The failure of any party to this Agreement at any time or times to require performance of any provision of this Agreement shall in no manner affect such party's available remedies or right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise (in any one or more instances) shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or of any remedy or as a waiver of any other condition or as a breach of any other term, covenant, representation or warranty of this Agreement. MAXTOR/AGERE CONFIDENTIAL 15 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT ARTICLE VII -- EXECUTION 7.1 ENTIRE AGREEMENT. The terms and conditions of this Agreement are the entire agreement between the parties and supersede all previous agreements, proposals, and understandings, whether oral or written, between the parties with respect to the subject matter of this Agreement (except for confidentiality agreements governing the exchange of information prior to the Effective Date which shall continue to govern periods prior to the Effective Date) and no agreement or understanding varying or extending the same shall be binding upon either party unless in a written document signed by both parties. This Agreement shall supersede all inconsistent or additional terms contained in any purchase orders, sale acknowledgments or other similar documents delivered by the parties. 7.2 EXECUTION. This Agreement shall not be effective until it has been executed by Seller and accepted by an authorized representative of Maxtor at a principal place of business. 7.3 ELECTRONIC EXECUTION. To expedite the process of entering into this Agreement, the parties acknowledge that Transmitted Copies of this Agreement shall be equivalent to original documents until such time as original documents are completely executed, produced, and delivered, and in the event of the use of Transmitted Copies, each party shall use its best efforts, at its own expense, to execute, produce, and deliver original copies. "Transmitted Copies" shall mean copies which are reproduced or transmitted via photocopy, facsimile, or other process of complete and accurate reproduction and transmission. 7.4 CAPACITY. By it's signature below, Seller represents and warrants as follows, acknowledging that each and every such representation and warranty has been materially relied upon by Maxtor in entering into this Agreement: (i.) SELLER CERTIFIES BY EXECUTION THAT THE SIGNER IS AUTHORIZED TO EXECUTE THIS AGREEMENT AND THAT ALL NECESSARY CONSENTS HAVE BEEN OBTAINED. (ii.) SELLER IS, AND HAS HELD ITSELF OUT TO BE, EXPERIENCED IN DUTIES AND UNDERTAKINGS SIMILAR TO THOSE CONTEMPLATED IN THE AGREEMENT. (iii.) THE AGREEMENT IS IN THE ENGLISH LANGUAGE, AND SELLER (ITSELF OR THROUGH ITS TRANSLATORS) UNDERSTANDS AND IS CAPABLE OF FLUENTLY READING, SPEAKING, AND COMMUNICATING IN THE ENGLISH LANGUAGE. (iv.) SELLER HAS READ AND UNDERSTOOD ALL OF THE PROVISIONS OF THE AGREEMENT. (v.) MAXTOR HAS EXPLAINED EACH AND EVERY TERM OF THE AGREEMENT TO THE SATISFACTION OF SELLER. (vi.) SELLER HAS HAD THE OPPORTUNITY TO SEEK INDEPENDENT ADVICE AND COUNSEL RELATED TO THE AGREEMENT. (vii.) A COMPLETE AND TRUE COPY OF THE AGREEMENT, EXECUTED BY BOTH PARTIES, HAS BEEN DELIVERED TO SELLER AND RECEIPT OF SUCH COPY IS HEREBY ACKNOWLEDGED. In witness whereof, the parties have executed this Agreement as of the Effective Date. MAXTOR CORPORATION Agere Systems Inc. By: /s/ Michael Thompson By: /s/ Joseph O'Hare ------------------------------- ------------------------------- (signature) (signature) Michael Thompson Joseph O'Hare ------------------------------- ------------------------------- (print name) (print name) VP, Electronics VP Storage ------------------------------- ------------------------------- (title) (title) MAXTOR/AGERE CONFIDENTIAL 16 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT Agere Systems Singapore Pte. Ltd., By: /s/ Jeff Mowla ------------------------------ (signature) Jeff Mowla ------------------------------ (print name) VP Singapore Mfg ------------------------------ (title) MAXTOR/AGERE CONFIDENTIAL 17 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT EXHIBIT A ADDITIONAL TERMS AND CONDITIONS FOR ASIC PRODUCTS 1. QUOTATIONS FOR ASIC PRODUCTS Seller will issue quotations ("Quotations") covering the development of application specific integrated circuits ("ASIC"). The Quotation and the Agreement, including this Exhibit A, shall be the entire agreement with respect to the design, development and production of the ASIC on behalf of Maxtor. 2. CHANGE OF QUOTATION TERMS Quoted prices, fees and charges are valid only for the parameters or other particulars relating to the ASIC as stated in the Quotation. If any changes in such parameters or particulars become necessary, including but not limited to revision or redefinition of the specification or variations in quantities, functional description, package type, or testing requirements, Seller may revise such prices by amendment to the Quotation. Other quoted fees and charges are valid only for the respective particulars stated in the Quotation. Seller may also amend the Quotation with respect to any of such quoted fees and charges to make adjustments for changes in Maxtor's requirements. Any such amendments to the Quotations shall reference the Quotations and shall be further identified by their respective dates and shall be accepted by Maxtor in writing. 3. PROTOTYPE APPROVAL Within ninety (90) days after receipt of prototypes for any ASIC covered by this Agreement, Maxtor may return any claimed non-conforming prototypes to Seller with a written rejection statement specifying the alleged failure or failures of the prototypes to meet the acceptance criteria as provided in the mask order sign off sheet or mutually agreed modifications thereof (the "Acceptance Criteria"). If Maxtor does not return the prototypes with a written rejection statement within such ninety (90) day period, then the design and prototypes shall be deemed to have been approved by Maxtor and development work shall be deemed to have been completed by Seller. If any prototype does not meet the Acceptance Criteria and is rejected by Maxtor, Seller shall use commercially reasonable efforts to replace it with one which does comply with the Acceptance Criteria. Seller shall not, however, be obligated to replace any non-complying prototypes of which it has not been notified within ninety (90) days of shipment of same to Maxtor. If Seller, within ninety (90) days after receipt of Maxtor's timely written rejection report, is unable to supply Maxtor with conforming prototypes, then either party may by written notice to the other terminate this Agreement as to such ASIC. Provided Maxtor has fulfilled all "Design Hand-Off Requirements" as defined in the Quotation, if so terminated, unless otherwise provided in the Quotation, all monies paid by Maxtor to Seller with respect to such ASIC will be refunded in full within thirty (30) days. Such refund of monies shall be Maxtor's sole and exclusive remedy and Seller's entire liability with respect to non-conforming prototypes. In the event that delivered prototypes comply with the Acceptance Criteria, but do not function in Maxtor's application (e.g., logic design error, change in required function, etc.), Maxtor shall pay all agreed upon NRE charges incurred for the development of the ASIC and then Maxtor and Seller may negotiate a mutually agreeable redesign schedule and price. 4. ORDERS. No orders for production units will be accepted by Seller until after Maxtor has given written sign-off of prototype acceptance, except to the extent that the parties have agreed in writing on responsibility for risk and associated liability with respect to orders placed prior to prototype acceptance. All orders for the design of the ASIC, for changes, for technical assistance, for production quantities of the ASIC or for any other service by Seller relating to this Agreement shall be in writing, shall reference the Quotation by its number and date and any current amendments thereto by their respective dates, and shall be signed by Maxtor. Seller shall acknowledge all accepted orders in writing, or shall notify Maxtor if, for any reason, an order cannot be accepted by Seller. 5. PROPRIETARY RIGHTS IN TECHNICAL INFORMATION Unless otherwise agreed in writing, Maxtor-supplied design information relating to the ASIC, as incorporated in circuit design information, test vectors, test tapes, special requirements specifications, and/or netlists, shall remain the property of Maxtor. Seller shall use such information and results exclusively for the design, manufacture and sale of the ASIC to Maxtor and in providing related production services. Seller retains all rights in Seller's processing information, mask works, mask sets, macro cells, and the like used in design, production or in filling orders placed by Maxtor hereunder. Maxtor has no rights in or to such processing information, mask works, mask sets, macro cells, and the like. MAXTOR/AGERE CONFIDENTIAL 18 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT EXHIBIT B CHANGE NOTIFICATION POLICY A) Product Change Notification - The changes outlined below which affect the form, fit, or functionality of the Product require at least * calendar days prior written notice to Maxtor before any shipment of Product affected by the change. Maxtor agrees to make every effort to approve or disapprove the proposed changes within * working days after receipt of Product Change Notification. (i) Wafer Fabrication Changes in the appropriate starting material characteristics including resistivity, thickness, and backside surface finish. Changes in doping material source, concentration or process technique. Changes in passivation or glassivation material, dielectric doping concentration, thickness, or technique. Changes in metallization including composition, thickness, or deposition technique. Changes in oxidation or diffusion process including oxide composition or thickness. Changes in the gate formation process, material or technique. Changes in the final backside process including wafer thinning or backside metallization. Technology changes that affect die structure topography (e.g. double-diffused, epitaxial, isolation). Mask changes or redesigns which alter die size, bond pad geometry, active element dimensions, spacing or isolation, or which include the addition of active elements or modification to connections to active elements. Changes in scribing and die separation methods. (ii) Assembly Changes in die attach material, method, or process temperature. Changes in wire material composition. Changes to package dimensions and structure. Changes to seal techniques (materials or sealing process), including lid, lid seals, frame attach, and frame cleaning. Changes in molding compound, molding processes, or chip overcoats. Changes in lead frame design, geometry, material or coating, or lead attach method. Changes in device pin assignment. Change in wire bond method (ultrasonic versus thermal compression). Change in code marking method or pattern. (iii) Silicon Materials Change in the crystal grower furnace type (manufacturer or model). * Indicates portions redacted pursuant to a Confidential Treatment Request filed separately with the Securities and Exchange Commission. MAXTOR/AGERE CONFIDENTIAL 19 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT Change in the use of reclaimed silicon as charge material in the growth of crystals which have not previously used reclaim. Change to less stringent chemical requirements for virgin polycrystalline silicon or elemental dopants. Changes that, in the opinion of the crystal growing engineer, could alter an incompletely specified or unspecified material characteristic. Change in epitaxial reactor type (manufacturer). Changes in process temperatures for epitaxial layer depositions. Change in the material composition of susceptors for epitaxial reactors Change in primary or secondary fiducial orientation or length. Change in the type of lapping abrasive or polishing slurry used. Changes in the mechanical dimensions or surface characteristics of polished substrates. Change in the process temperature for back seal layer deposition. MAXTOR/AGERE CONFIDENTIAL 20 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT EXHIBIT D FLEXIBLE DELIVERY PROVISIONS Agere agrees * for purposes of delivering the Consigned Product (listed below) to Maxtor's contract manufacturers, * located at Singapore; * located at Penang, West Malaysia; and * located at Pattaya, Thailand (the "Designated Contractors"). Agere agrees to ship Consigned Product to the Designated Contractors per the Schedule/Forecast provided by Maxtor on a weekly basis, subject to lead-time requirements and the like. Agere shall not ship in excess of the Schedule/Forecast forecast for a particular week. Pulls for any particular week must reflect the quantity shipped for that week. Agere shall not be obligated to ship against the next week's forecast unless the quantity pulled for the current week, as reported by the Designated Contractors, equals the quantity shipped for that week. Maxtor agrees to provide the following information on a daily basis in an electronic format (Excel) based on information fed back from their Designated Contractors. Daily Receipts (quantity received) Daily Pulls (withdraws form inventory) Daily Balance Inventory (quantity remaining in inventory) Daily Pulls will be considered a release against the Blanket Purchase Order furnished by Maxtor, and Agere will invoice Maxtor for the quantity reflected in the Daily Pulls. Pull quantities must be in standard pack quantities. The Designated Contractors must follow the FIFO with respect to inventory pulls. The Designated Contractor will employ cost effective, state-of-the-art inventory management such as cycle counting and FIFO inventory controls. The Designated Contractor and Maxtor will maintain accurate and complete records with regard to the custody and care of the Consigned Product. The Consigned Product shall remain the property of Agere (or its affiliate or designee) until withdrawn by the Designated Contractor from Consigned Product at which time title to such Consigned Product shall pass to Maxtor. Risk of loss or damage to the Consigned Product shall pass to Maxtor at the time Agere delivers possession or control of the Consigned Product to the Designated Contractor at its facilities. Maxtor will ensure that each of the Designated Contractors provides a secure and segregated space for the Consigned Product in its facility. Maxtor shall be fully responsible for any and all damage to or loss of Consigned Product while the Consigned Product is in the Designated Contractors' care, custody and control. Such loss will be covered by Maxtor and its insurance. As to discrepancies in quantity of Consigned Product which are discovered by Designated Contractor in the receiving process, Maxtor agrees that the following provisions shall apply and will instruct the Designated Contractors accordingly: The Designated Contractor shall (i) complete its normal receiving process on actual quantity of Consigned Product received and (ii) within forty-eight of receipt of the Consigned Product notify Agere immediately of such discrepancy. Whenever loss or damage has occurred to the Consigned Product prior to receipt by the Designated Contractor at its facility, the Designated Contractor should mark the delivery receipt with the appropriate exceptions describing the damage before signing and request the Carrier to inspect the loss or damage and shall within thirty (30) days of receipt of the Consigned Product note the damage or loss on all copies of the delivery receipt. Each copy of the delivery receipt shall be signed by the Designated Contractor and the carrier's agent. The Designated Contractor shall request the delivering carrier to inspect damaged goods and accrue an inspection report or waiver of inspection from the carrier. The Designated Contractor shall within forty-eight hours of its receipt of the Consigned Product notify Agere of the loss or damage. Agere shall file, collect and claim revenue recovery, crediting of common carrier product loss and damage distributed (shipped) to and from Agere facilities. As to incorrect items in shipments of Consigned Product which are discovered by Designated Contractors in the receiving process, the Designated Contractors shall immediately contact Agere for direction on disposition of incorrect item(s). Freight cost to return incorrect items to Agere will be paid by Agere. Agere shall promptly arrange for replacement shipment of correct Consigned Product. * Indicates portions redacted pursuant to a Confidential Treatment Request filed separately with the Securities and Exchange Commission. MAXTOR/AGERE CONFIDENTIAL 21 MAXTOR STANDARD VOLUME PURCHASE AGREEMENT Agere will make every commercially reasonable effort to replace lost, damaged or stolen Consigned Product to meet Maxtor's orders. Either party upon ninety days' prior written notice to the other party may discontinue activities under this Exhibit D. * List of Consigned Products: * Indicates portions redacted pursuant to a Confidential Treatment Request filed separately with the Securities and Exchange Commission. MAXTOR/AGERE CONFIDENTIAL 22 EX-10.77 10 f88421exv10w77.txt EXHIBIT 10.77 Exhibit 10.77 SECOND AMENDMENT TO PURCHASE AGREEMENT BETWEEN MATSUSHITA KOTOBUKI ELECTRONICS INDUSTRIES, LTD. AND MAXTOR CORPORATION DATED APRIL 2, 2001 This Second Amendment ("Second Amendment") to Purchase Agreement between Matsushita Kotobuki Electronics Industries, Ltd., a Japanese corporation, having its principal place of business at 2131-1 Minamigata, Kawauchi-Cho, Onsen-Gun, Ehime 791-0395 Japan ("MKE") and Maxtor Corporation, a Delaware corporation, having its principal place of business at 500 McCarthy Boulevard, Milpitas, California 95035 ("Maxtor") dated April 2, 2001 ("Purchase Agreement") is entered into by and between MKE and Maxtor. WHEREAS, the Purchase Agreement between MKE and Maxtor is due to terminate on November 2, 2001 unless otherwise renewed by the parties. WHEREAS, the parties executed the First Amendment to the Purchase Agreement effective November 2, 2001 to extend the term of the Purchase Agreement for another one year period such that the Purchase Agreement will terminate, unless otherwise renewed by the parties, on November 2, 2002. WHEREAS, MKE and Maxtor are desirous of continuing their business relationship contemplated in the Purchase Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. The term of the Purchase Agreement shall be further extended such that the Purchase Agreement will terminate, unless otherwise renewed by the parties, on March 31, 2004. 2. All of the terms of the Purchase Agreement shall continue to apply to the transactions between MKE and Maxtor except for those terms which are amended by this Second Amendment. 3. This Second Amendment shall be effective as of November 2, 2002 retroactively. MATSUSHITA KOTOBUKI ELECTRONICS INDUSTRIES, LTD. MAXTOR CORPORATION By: /s/ Takao Kanamura By: /s/ Paul Tufano --------------------------- --------------------------- Takao Kanamura Paul Tufano Title: Senior Managing Director Title: President and Chief Executive Officer Date: February 5, 2003 Date: February 5, 2003 ------------------------- ------------------------- EX-21.1 11 f88421exv21w1.txt EXHIBIT 21.1 Exhibit 21.1 MAXTOR CORPORATION SUBSIDIARIES 2002-2003 FOREIGN SUBSIDIARIES: Maxtor Disc Drives Pty. Limited - Australia Maxtor Global Ltd. - Bermuda Maxtor Manufacturing (Suzhou) Co. Ltd. - China Maxtor Europe Sarl - France Maxtor GmbH - Germany Maxtor (Gibraltar) Limited - Gibraltar Maxtor Asia Pacific Limited - Hong Kong Maxtor Ireland Limited - Ireland Maxtor (Japan) Ltd. - Japan Maxtor Korea Ltd. - Korea Maxtor Luxembourg Sarl - Luxembourg Maxtor Peripherals (S) Pte. Limited - Singapore Maxtor International Sarl - Switzerland Maxtor International Manufacturing Sarl - Switzerland Maxtor Taiwan - Taiwan Maxtor Europe Limited - UK DOMESTIC SUBSIDIARIES: MMC Technology, Inc. - California Maxtor Receivables Corporation - California Maxtor Realty Corporation - Massachusetts EX-23.1 12 f88421exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.: 333-08181, 333-61011, 333-87041, and 333-58742) of Maxtor Corporation of our report dated January 29, 2003 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP San Jose, California March 28, 2003 EX-99.1 13 f88421exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Maxtor Corporation (the "Company") on Form 10-K for the year ended December 28, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul J. Tufano, President, Chief Executive Officer and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 28, 2003 /s/ Paul J. Tufano ---------------------------------- Paul J. Tufano President, Chief Executive Officer and Acting Chief Financial Officer [A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----


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

		For the fiscal year ended December 28, 2002

or

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

		For the transition period from to .


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


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Information
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Consolidated Financial Statements and Supplementary Data
MAXTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
	Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
MAXTOR CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INDEX TO EXHIBITS
EXHIBIT 10.70
EXHIBIT 10.71
EXHIBIT 10.72
EXHIBIT 10.73
EXHIBIT 10.74
EXHIBIT 10.75
EXHIBIT 10.76
EXHIBIT 10.77
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 99.1


	High		Low

Fiscal 2003 First Quarter (through March 24, 2003)	$	6.90	$	4.71
Fiscal 2002 Fourth Quarter		6.16		1.77
Fiscal 2002 Third Quarter		5.95		2.61
Fiscal 2002 Second Quarter		7.58		3.95
Fiscal 2002 First Quarter		7.90		5.75
Fiscal 2001 Fourth Quarter		7.20		3.54
Fiscal 2001 Third Quarter		7.33		3.30
Fiscal 2001 Second Quarter		8.38		5.25
Fiscal 2001 First Quarter		8.50		5.09


			Fiscal Year			Fiscal Year			Fiscal Year			Fiscal Year			Fiscal Year
			Ended			Ended			Ended			Ended			Ended
			December 26,			January 1,			December 30,			December 29,			December 28,
			1998			2000			2000			2001(2)			2002(3)


			(In millions, except share and per share amounts)
Consolidated Statements of Operations Data:
Revenues			$	2,408.5		$	2,485.6		$	2,690.9		$	3,765.5		$	3,779.5
Cost of revenues				2,108.1			2,286.7			2,317.7			3,403.0			3,382.1

	Gross profit			300.4			198.9			373.2			362.5			397.4

Operating expenses:
	Research and development			158.4	(1)		189.0			211.8			411.2			401.0
	Selling, general and administrative			81.9	(1)		90.2			99.7			232.0			148.5
	Amortization of goodwill and other intangible assets			—			—			—			207.8			82.2
	Purchased in-process research and development			—			—			—			95.2			—
	Restructuring charge			—			—			—			—			9.5

		Total operating expenses		240.3	(1)		279.2			311.5			946.2			641.2

Income (loss) from operations				60.1	(1)		(80.3	)		61.7			(583.7	)		(243.8	)
Interest expense				(28.8	)		(13.6	)		(13.7	)		(25.2	)		(27.0	)
Interest and other income				7.4			15.6			24.3			21.5			10.1
Gain (loss) on sale of investment				—			44.1			1.8			(7.4	)		2.3

Income (loss) from continuing operations before income taxes				38.7	(1)		(34.2	)		74.1			(594.8	)		(258.4	)
Provision for income taxes				7.5			1.5			1.7			3.4			2.2

Income (loss) from continuing operations				31.2			(35.7	)		72.4			(598.2	)		(260.6	)
Loss from discontinued operations				—			(14.4	)		(40.6	)		(48.2	)		(73.5	)

Net income (loss)			$	31.2	(1)	$	(50.1	)	$	31.8		$	(646.4	)	$	(334.1	)

Net income (loss) per share — basic
Continuing operations			$	0.81		$	(0.34	)	$	0.64		$	(2.89	)	$	(1.09	)
Discontinued operations				—			(0.14	)		(0.36	)		(0.23	)		(0.31	)

Total			$	0.81		$	(0.48	)	$	0.28		$	(3.12	)	$	(1.40	)

Net income (loss) per share — diluted
Continuing operations			$	0.47		$	(0.34	)	$	0.61		$	(2.89	)	$	(1.09	)
Discontinued operations				—			(0.14	)		(0.34	)		(0.23	)		(0.31	)

Total			$	0.47		$	(0.48	)	$	0.27		$	(3.12	)	$	(1.40	)

Shares used in per share calculation (in thousands):
	Basic			38,295			105,503			113,433			206,912			239,474
	Diluted			65,814			105,503			119,116			206,912			239,474


Name	Age		Position with the Company

Paul J. Tufano		49	President, Chief Executive Officer and Acting Chief Financial Officer
Dr. Pantelis S. Alexopoulos		54	Executive Vice President, Desktop Product Development and Chief Technology Officer
Michael D. Cordano		38	Executive Vice President, Worldwide Sales and Corporate Marketing
Phillip C. Duncan		52	Executive Vice President, Human Resources and Real Estate
K. H. Teh		48	Executive Vice President, Worldwide Manufacturing and Singapore Managing Director
Michael J. Wingert		42	Executive Vice President/General Manager, Server Products Group
David L. Beaver		49	Senior Vice President, Worldwide Materials and Chief Procurement Officer
Misha Rozenberg		41	Senior Vice President, Worldwide Quality and Chief Quality Officer
Glenn H. Stevens		52	Senior Vice President, General Counsel and Secretary


Item 4.	*Submission of Matters to a Vote of Security Holders*


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*


	*Sales Returns, Other Sales Allowances and Allowance for Doubtful Accounts*


	*Valuation of Intangibles, Long-Lived Assets and Goodwill*


	*Restructuring Liabilities, Litigation and Other Contingencies*



			Years Ended

			December 30,			December 29,			December 28,
			2000			2001			2002


			(In millions)
Consolidated Statement of Operations Data:
Revenues			$	2,690.9		$	3,765.5		$	3,779.5
Cost of revenues				2,317.7			3,403.0			3,382.1

	Gross profit			373.2			362.5			397.4

Operating expenses:
	Research and development			211.8			411.2			401.0
	Selling, general and administrative			99.7			232.0			148.5
	Amortization of goodwill and other intangible assets			—			207.8			82.2
	Purchased in-process research and development			—			95.2			—
	Restructuring charge			—			—			9.5

		Total operating expenses		311.5			946.2			641.2

Income (loss) from operations				61.7			(583.7	)		(243.8	)
Interest expense				(13.7	)		(25.2	)		(27.0	)
Interest and other income				24.3			21.5			10.1
Gain (loss) on sale of investment				1.8			(7.4	)		2.3

Income (loss) from continuing operations before income taxes				74.1			(594.8	)		(258.4	)
Provision for income taxes				1.7			3.4			2.2

Income (loss) from continuing operations				72.4			(598.2	)		(260.6	)
Loss from discontinued operations				(40.6	)		(48.2	)		(73.5	)

Net income (loss)			$	31.8		$	(646.4	)	$	(334.1	)


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


			Economic		Pro rata Portion of
			Development		Quantum						Principal Facilities
	5.75%		Board of		Corporation’s 7%				Equipment		and Machinery &
	Subordinated		Singapore		Subordinated				Loans and		Equipment Under
	Debentures		Loan due		Convertible Notes				Capital		Operating Lease
	due 2012(1)		March 2004(2)		due 2004(3)		Mortgages(4)		Leases(5)		Arrangements		Total

Fiscal Year Ending
2003	$	5,000	$	6,606	$	—	$	1,445	$	27,991	$	34,119	$	75,161
2004		5,000		3,303		95,833		1,583		13,167		29,036		147,922
2005		5,000		—		—		1,734		4,414		26,406		37,554
2006		5,000		—		—		30,847		35		24,348		60,230
2007		5,000		—		—		—		—		23,969		28,969
Thereafter		35,427		—		—		—		—		134,778		170,205

Total	$	60,427	$	9,909	$	95,833	$	35,609	$	45,607	$	272,656	$	520,041



		Three Months Ended

		March 31,			June 30,			September 29,			December 29,			March 30,			June 29,			September 28,			December 28,
		2001			2001			2001			2001			2002			2002			2002			2002


		(In thousands, except share and per share amounts)
Revenue		$	626,563		$	1,032,612		$	1,035,193		$	1,071,191		$	1,036,100		$	885,350		$	819,716		$	1,038,348
Gross profit			87,778			75,823			79,629			119,278			113,766			59,390			57,529			166,730
Income (loss) from continuing operations			12,843			(308,574	)		(153,177	)		(149,271	)		(55,377	)		(103,303	)		(105,470	)		3,584
Loss from discontinued operations			(11,504	)		(11,194	)		(12,550	)		(12,971	)		(9,661	)		(5,699	)		(58,141	)		—

Net income (loss)		$	1,339		$	(319,768	)	$	(165,727	)	$	(162,242	)	$	(65,038	)	$	(109,002	)	$	(163,611	)	$	3,584

Net income (loss) per share — basic
	Continuing operations	$	0.11		$	(1.30	)	$	(0.64	)	$	(0.63	)	$	(0.23	)	$	(0.43	)	$	(0.44	)	$	0.01
	Discontinued operations		(0.10	)		(0.05	)		(0.05	)		(0.06	)		(0.04	)		(0.03	)		(0.24	)		—

	Total	$	0.01		$	(1.35	)	$	(0.69	)	$	(0.69	)	$	(0.27	)	$	(0.46	)	$	(0.68	)	$	0.01

Net income (loss) per share — diluted
	Continuing operations	$	0.11		$	(1.30	)	$	(0.64	)	$	(0.63	)	$	(0.23	)	$	(0.43	)	$	(0.44	)	$	0.01
	Discontinued operations		(0.10	)		(0.05	)		(0.05	)		(0.06	)		(0.04	)		(0.03	)		(0.24	)		—

	Total	$	0.01		$	(1.35	)	$	(0.69	)	$	(0.69	)	$	(0.27	)	$	(0.46	)	$	(0.68	)	$	0.01

Shares used in per share calculation:
	Basic		114,865,211			236,680,543			238,629,903			235,980,815			236,956,653			238,803,423			240,177,574			241,344,157
	Diluted		118,901,084			236,680,543			238,629,903			235,980,815			236,956,653			238,803,423			240,177,574			243,166,368


Item 1.	*Business*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


	*Revenue Recognition*


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


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

Financial Instruments	$	86,257		$	86,670		$	87,086		$	87,507	$	87,931		$	88,357		$	88,766
% Change		(1.43	)%		(0.96	)%		(0.48	)%				0.48	%		0.97	%		1.44	%


										Fair Value
										as of
	Valuation of Security									December 28,		Valuation of Security
	Given X% Decrease in the									2002		Given X% Increase in the
	Security Price									($000)		Security Price


Corporate equity investments	$	3,295		$	4,942		$	5,601		$	6,589	$	7,577		$	8,236		$	9,884
% Change		(50	)%		(25	)%		(15	)%				15	%		25	%		50	%


Item 8.	*Consolidated Financial Statements and Supplementary Data*


	Page

Consolidated Financial Statements of Maxtor Corporation
Consolidated Balance Sheets — December 29, 2001 and December 28, 2002		52
Consolidated Statements of Operations — Fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002		53
Consolidated Statements of Stockholders’ Equity — Fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002		54
Consolidated Statements of Cash Flows — Fiscal years ended December 30, 2000, December 29, 2001 and December 28, 2002		55
Notes to Consolidated Financial Statements		56
Report of Independent Accountants		93
Financial Statement Schedules:
The following consolidated financial statement schedule of Maxtor Corporation is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Maxtor Corporation:
Schedule II Valuation and Qualifying Accounts		97

Schedules not listed above have been omitted since they are not applicable or are not required or the information required to be set therein is included in the Consolidated Financial Statements or notes thereto.


														Cumulative
		Common Stock				Additional		Deferred						Other						Total
						Paid-in		Stock-based			Accumulated			Comprehensive			Treasury			Stockholders’
		Shares		Amount		Capital		Compensation			Deficit			Income			Stock			Equity

Balance, January 1, 2000			113,428,924	$	1,119	$	1,043,964	$	—		$	(791,928	)	$	2,215		$	—		$	255,370
	Net income		—		—		—		—			31,802			—			—			31,802
	Unrealized gain on investments in equity securities		—		—		—		—			—			588			—			588
Issuance of stock under stock option plan and related benefit plans			2,776,346		43		11,763		—			—			—			—			11,806
Stock-based compensation			—		—		4,172		—			—			—			—			4,172

Balance, December 30, 2000			116,205,270		1,162		1,059,899		—			(760,126	)		2,803			—			303,738
	Net loss		—		—		—		—			(646,398	)		—			—			(646,398	)
	Unrealized gain on investments in equity securities		—		—		—		—			—			1,408			—			1,408
Issuance of stock under stock option plan and related benefit plans			4,742,053		47		21,510		—			—			—			—			21,557
Issuance of stock relating to Quantum HDD acquisition			121,030,472		1,211		1,232,601		—			—			—			—			1,233,812
Deferred compensation relating to Quantum HDD acquisition			—		—		6,785		(6,785	)		—			—			—			—
Stock-based compensation			—		—		3,090		2,976			—			—			—			6,066
Treasury shares repurchased at cost			—		—		—		—			—			—			(20,000	)		(20,000	)

Balance, December 29, 2001			241,977,795		2,420		2,323,885		(3,809	)		(1,406,524	)		4,211			(20,000	)		900,183
	Net loss		—		—		—		—			(334,067	)		—			—			(334,067	)
	Unrealized loss on investments in equity securities		—		—		—		—			—			(1,834	)		—			(1,834	)
Issuance of stock under stock option plan and related benefit plans			5,529,449		55		22,422		—			—			—			—			22,477
Stock-based compensation			—		—		2,946		2,616			—			—			—			5,562

Balance, December 28, 2002			247,507,244	$	2,475	$	2,349,253	$	(1,193	)	$	(1,740,591	)	$	2,377		$	(20,000	)	$	592,321


			Gross		Gross
	Purchase		Unrealized		Unrealized			Aggregate
	Amortized Cost		Gains		Losses			Fair Value


	(In thousands)
2002
US Government debt securities	$	56,050	$	618	$	—		$	56,668
Asset backed securities		10,182		54		—			10,236
Corporate debt securities		12,308		96		—			12,404
Certificate of deposits		8,199		—		—			8,199

Total marketable securities	$	86,739	$	768	$	—		$	87,507

Equity securities	$	4,980	$	1,783	$	(174	)	$	6,589

2001
US Government debt securities	$	91,165	$	754	$	—		$	91,919
Asset backed securities		13,280		167		—			13,447
Corporate debt securities		49,424		527		—			49,951
Certificate of deposits		11,899		1		—			11,900

Total marketable securities	$	165,768	$	1,449	$	—		$	167,217

Equity securities	$	4,980	$	1,671	$	—		$	6,651


		Year Ended
		December 28, 2002

Balance at the beginning of the period		$	(313,894	)
	Accruals for warranties issued during the period		(173,517	)
	Settlements made (in cash or in kind) during the period		208,698

Balance at the end of the period		$	(278,713	)



		December 29, 2001				December 28, 2002

		Carrying		Estimated		Carrying		Estimated
		Amount		Fair Value		Amount		Fair Value

Pro rata portion of Quantum Corporation’s 7%
	Subordinated Convertible Notes		95,833		95,833		95,833		95,833
5.75% Subordinated debentures			74,262		52,726		60,427		49,550
Mortgages			36,926		39,093		35,609		35,657
Economic Development Board of Singapore Loan		$	16,313	$	16,313	$	9,909	$	9,909


Accounts payable	$	1.4
Payroll and other accrued expenses		4.7
Warranty, returns and other		5.5

Total	$	11.6


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

			1,240.6
Transaction costs			28.8

	Total purchase price	$	1,269.4


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

		Total tangible assets			$	1,108.4

Intangible assets acquired:
	Core and other existing technology					286.1
	Assembled workforce					43.0
Deferred compensation						6.8
Goodwill						896.3
In-process research and development						94.7


Liabilities assumed:
	Accounts payable		230.0
	Accruals and other liabilities		364.3
	Deferred taxes		196.2
Long-term debt			132.4
Other long-term liabilities			142.0
Merger-related restructuring costs			101.0

		Total liabilities assumed			(1,165.9	)

		Total purchase price		$	1,269.4


				Severance
	Facility			and			Other
	Costs			Benefits			Costs			Total

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

Balance at December 29, 2001		58.2			13.7			—			71.9
Amounts paid		(4.5	)		(13.7	)		—			(18.2	)

Balance at December 28, 2002	$	53.7		$	—		$	—		$	53.7


	Percent			Expected
	Completed			Technology Life

Self-servo Writer		85	%		3 years
High-end		40	%		4 years
Core Technology		44	%		6 years
Desktop		75	%		4 years
Other identified projects		55-80	%		4 years


Self-servo Writer	$	47.7
High-end		18.2
Core Technology		16.0
Desktop		8.9
Other identified projects		3.9

	$	94.7


Cash paid		$	1.0
Forgiveness of loan consideration			16.0

			17.0
Transaction costs			0.9

	Total purchase price	$	17.9


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

		Total liabilities assumed			(105.7	)

		Total purchase price		$	17.9



				Options Outstanding

	Shares						Wtd Average
	Available						Exercise Price		Aggregate
	For Grant			Shares			Per Share		Value

									(In thousands)
Balance as of January 1, 2000		4,613,615			11,385,252		$	7.47	$	85,047
Options reserved		5,500,000			—			—		—
Options granted		(5,737,687	)		5,737,687			8.15		46,772
Restricted stock granted		(165,000	)		—			—		—
Options exercised		—			(1,156,785	)		5.61		(6,493	)
Options canceled		1,177,148			(1,177,148	)		6.07		(7,143	)
Restricted stock canceled		90,000			—			—		—

Balance as of December 30, 2000		5,478,076			14,789,006			7.96		118,183
Shares reserved — 1996 stock option plan		17,000,000			—			—		—
Shares reserved — Quantum assumed options		12,785,328			—			—		—
Options assumed from acquisition		(12,306,201	)		12,306,201			5.05		62,146
RSP Options assumed from acquisition		(479,127	)		—			—		—
Options granted		(13,329,365	)		13,329,365			5.36		71,747
Restricted stock granted		(140,000	)		—			—		—
Options exercised		—			(2,938,608	)		3.95		(11,607	)
Options canceled — 1996 stock option plan		788,732			(788,732	)		6.51		(17,758	)
Options canceled — Quantum assumed options		—			(2,166,150	)		—		—
Restricted stock canceled		49,000			—			—		—

Balance as of December 29, 2001		9,846,443			34,531,082			6.41		222,711
Options granted		(4,089,058	)		4,089,058			4.98		20,380
Restricted stock granted		(30,000	)		—			—		—
Options exercised		—			(1,987,555	)		4.13		(8,214	)
Options canceled — 1996 stock option plan		3,759,844			(3,759,844	)		7.00		(26,314	)
Options canceled — Quantum assumed options		—			(1,297,687	)		6.25		(8,108	)

Balance as of December 28, 2002		9,487,229			31,575,054		$	6.35	$	200,455



	Options Outstanding
							Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of	Number		Contractual		Exercise		Number		Exercise
Exercise Price	Outstanding		Life		Price		Outstanding		Price

$0.575 — $5.875		12,436,503		7.95	$	4.16		5,032,853	$	4.15
$5.9375 — $7.75		12,442,374		7.08		6.63		7,396,532		6.56
$7.8125 — $13.125		4,441,865		7.08		8.16		3,041,180		8.17
$13.1875 — $19.3113		2,254,312		5.89		13.29		2,247,999		13.28

		31,575,054			$	6.35		17,718,564	$	7.00