-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MNSuN7y4CYWKBiV8hIrTvmxVKkIsXLfvXhvH0XWR/wAqkvtna5RWZRysb3B9D7UF KLdvHqUW8ctLSC/w2aYTug== 0000891618-99-005258.txt : 19991117 0000891618-99-005258.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891618-99-005258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXTOR CORP CENTRAL INDEX KEY: 0000711039 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770123732 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14016 FILM NUMBER: 99758155 BUSINESS ADDRESS: STREET 1: 510 COTTONWOOD DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084321700 10-Q 1 FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED OCTOBER 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-14016 MAXTOR CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0123732 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION) 510 COTTONWOOD DRIVE, MILPITAS, CA 95035 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012 Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 12, 1999, 113,231,782 shares of the registrant's Common Stock, $.01 par value, were issued and outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 MAXTOR CORPORATION FORM 10-Q OCTOBER 2, 1999 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets -- October 2, 1999 and December 26, 1998........................................... 3 Condensed Consolidated Statements of Operations -- Three months and nine months ended October 2, 1999, and September 26, 1998.................................................... 4 Condensed Consolidated Statements of Cash Flows -- Nine months ended October 2, 1999, and September 26, 1998........ 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 26 Item 2. Changes in Securities and Use of Proceeds................... 27 Item 4. Submission of Matters to a Vote of Security Holders......... 27 Item 6. Exhibits and Reports on Form 8-K............................ 28 Signature Page....................................................... 29
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAXTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
OCTOBER 2, DECEMBER 26, 1999 1998 ----------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 171,811 $ 214,126 Marketable securities..................................... 113,205 13,503 Accounts receivable, net of allowance of doubtful accounts of $10,959 at October 2, 1999 and $8,409 at December 26, 1998............................................... 219,187 317,758 Inventories, net.......................................... 123,490 153,192 Prepaid expenses and other................................ 17,849 45,198 ---------- --------- Total current assets.............................. 645,542 743,777 Property, plant and equipment, net.......................... 146,259 108,290 Goodwill, net............................................... 47,654 -- Other intangible assets, net................................ 10,079 -- Other assets................................................ 12,806 11,346 ---------- --------- Total assets...................................... $ 862,340 $ 863,413 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings, including current portion of long-term debt......................................... $ 9,770 $ 5,261 Accounts payable.......................................... 374,382 427,737 Accrued and other liabilities............................. 114,647 115,937 ---------- --------- Total current liabilities......................... 498,799 548,935 Long-term debt due affiliate................................ -- 55,000 Long-term debt.............................................. 113,173 90,046 ---------- --------- Total liabilities................................. 611,972 693,981 Commitments and contingencies Common stock, $0.01 par value, 250,000,000 shares authorized; 113,231,782 shares issued and outstanding at October 2, 1999 and 94,293,499 shares issued and outstanding at December 26, 1998.......................... 1,117 943 Additional paid-in capital.................................. 1,042,246 880,175 Accumulated deficit......................................... (795,922) (741,780) Cumulative other comprehensive income -- unrealized gain on investments in equity securities.......................... 2,927 30,094 ---------- --------- Total stockholders' equity........................ 250,368 169,432 ---------- --------- Total liabilities and stockholders' equity........ $ 862,340 $ 863,413 ========== =========
See accompanying notes. 3 4 MAXTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 1999 1998 ------------ ------------- ------------ ------------- Total revenue.......................... $ 589,321 $ 599,797 $ 1,795,499 $ 1,680,679 Total cost of revenue................ 575,488 526,600 1,678,916 1,482,751 ------------ ----------- ------------ ----------- Gross profit......................... 13,833 73,197 116,583 197,928 Operating expenses: Research and development............. 46,472 40,189 141,897 110,285 Selling, general and administrative.................... 21,092 18,643 63,211 52,958 Stock compensation expense........... 520 1,160 2,017 11,068 Acquired in-process technology....... 7,028 -- 7,028 -- Amortization of goodwill and other intangible assets................. 598 -- 598 -- ------------ ----------- ------------ ----------- Total operating expenses..... 75,710 59,992 214,751 174,311 ------------ ----------- ------------ ----------- Income (loss) from operations.......... (61,877) 13,205 (98,168) 23,617 Interest expense....................... (3,349) (6,573) (9,970) (24,109) Interest and other income.............. 3,088 1,537 11,508 3,936 Gain on sale of investment............. 21,995 -- 44,120 -- ------------ ----------- ------------ ----------- Income (loss) before income taxes...... (40,143) 8,169 (52,510) 3,444 Provision for income taxes............. 132 2,091 1,632 2,269 ------------ ----------- ------------ ----------- Net income (loss)...................... (40,275) 6,078 (54,142) 1,175 Unrealized gain (loss) on investments in equity securities................. 187 (11,688) 16,831 (3,028) Less: reclassification adjustment for gain included in net loss............ (21,995) -- (44,120) -- ------------ ----------- ------------ ----------- Comprehensive income (loss)............ $ (62,083) $ (5,610) $ (81,431) $ (1,853) ============ =========== ============ =========== Net income (loss) per share -- basic... $ (0.38) $ 0.10 $ (0.53) $ 0.06 Net income (loss) per share -- diluted..................... $ (0.38) $ 0.08 $ (0.53) $ 0.02 Shares used in per share calculation -- basic............................. 106,713,093 59,515,691 102,890,681 19,991,259 -- diluted........................... 106,713,093 76,860,814 102,890,681 55,491,542
See accompanying notes. 4 5 MAXTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED -------------------------- OCTOBER 2, SEPTEMBER 26 1999 1998 ---------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ (54,142) $ 1,175 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................. 58,295 48,454 Amortization of goodwill and other intangible assets...... 598 -- Acquired in-process technology............................ 7,028 -- Stock compensation expense................................ 2,017 11,068 Inventory reserves for lower of cost or market............ -- 7,852 Loss (gain) on sale of property, plant and equipment and other assets............................................ (596) 5,897 Gain on sale of investment................................ (44,120) -- Change in assets and liabilities: Accounts receivable..................................... 99,683 13,417 Inventories............................................. 29,950 (4,492) Other current assets.................................... (4,857) (4,459) Accounts payable........................................ (54,835) 132,841 Accrued and other liabilities........................... (6,275) 10,362 --------- --------- Net cash provided by operating activities.......... 32,746 222,115 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment......... 316 3,059 Purchase of property, plant and equipment................... (95,523) (61,600) Cash acquired from acquisition.............................. 710 -- Purchase of marketable securities........................... (99,702) -- Proceeds from sale of investment............................ 44,404 -- Other....................................................... (1,566) 3,175 --------- --------- Net cash used in investing activities.............. (151,361) (55,366) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt, including short-term borrowings................................................ 28,175 69,775 Principal payments of debt, including short-term borrowings................................................ (55,280) (308,849) Principal payments under capital lease obligations.......... (27) -- Net payments under accounts receivable securitization....... -- (111,816) Proceeds from issuance of common stock from public offering, employee stock purchase plan and stock options exercised................................................. 103,432 329,441 --------- --------- Net cash provided by (used in) financing activities... 76,300 (21,449) --------- --------- Net change in cash and cash equivalents..................... (42,315) 145,300 Cash and cash equivalents at beginning of period............ 214,126 16,925 --------- --------- Cash and cash equivalents at end of period.................. $ 171,811 $ 162,225 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.................................................. $ 7,636 $ 24,047 Income taxes.............................................. $ 122 $ 985 SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchase of property, plant and equipment financed by accounts payable.......................................... $ -- $ 7,404 Purchase of property, plant and equipment financed by capital leases............................................ $ -- $ 16 Decrease in receivable from affiliates...................... $ (3,563) $ -- Retirement of debt in exchange for bond redemption.......... $ 5,000 $ -- Decrease in unrealized gain on investments in equity securities................................................ $ (27,167) $ (3,028) Common stock issued for acquisition......................... $ 81 $ --
See accompanying notes. 5 6 MAXTOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Maxtor Corporation ("Maxtor" or the "Company") and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. It is recommended that the interim financial statements be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended December 26, 1998 incorporated in the Company's annual report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year. 2. INVENTORIES
OCTOBER 2, DECEMBER 26, 1999 1998 ---------- ------------ Inventories comprised (in thousands): Raw materials............................................. $ 31,381 $ 51,680 Work-in-process........................................... 3,774 6,308 Finished goods............................................ 88,335 95,204 -------- -------- $123,490 $153,192 ======== ========
3. STOCKHOLDERS' EQUITY In February 1999, the Company completed a secondary public offering of 7.8 million shares of the Company's common stock. The Company received net proceeds of approximately $95.8 million from the offering, after deducting the underwriting discounts and estimated expenses payable by the Company. A portion of the proceeds from the secondary offering were used to prepay without penalty outstanding aggregate principal indebtedness of $55.0 million owing to Hyundai Electronics America under a subordinated note due July 31, 2001 (see Note 10). In June 1999, the Board of Directors amended the Company's Amended and Restated 1996 Stock Option Plan (the "Amended Option Plan"), subject to shareholder approval, to (1) increase the maximum number of shares issuable under the Amended Option Plan by 3,676,367 shares, to a total of 17,475,685 shares, and (2) permit the award of restricted stock grants. In connection therewith, the Board of Directors granted a total of 1,680,000 shares of restricted stock to certain executive officers and key employees under the Amended Option Plan. 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. Compensation cost based on the 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. The Company's stockholders approved the amendments to the Amended Option Plan at the Company's Annual Meeting of Stockholders on August 11, 1999. 4. ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC. During the quarter ended October 2, 1999, the Company acquired all the outstanding common stock of Creative Design Solutions, Inc. ("CDS"), in exchange for 8,129,682 shares of the Company's stock and assumption of outstanding CDS stock options for an aggregate purchase price of approximately $57.6 million, including acquisition expenses. 6 7 MAXTOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition date of September 10, 1999. Approximately $2.7 million of the aggregate recognized purchase price was allocated to net tangible assets consisting primarily of cash, accounts receivable, inventory, prepaids, and property, plant and equipment, and $10.4 million to short-term borrowings, accounts payable, accrued liabilities and deferred revenue. The historical carrying amounts of such net assets approximated their fair values. Approximately $7 million was allocated to acquired in-process technology and was immediately charged to operations at the acquisition date because it had no alternative future use. Approximately $10.3 million was allocated to current products and technology, workforce and customer list, which are amortized over their estimated useful lives ranging from 1 to 7 years. The purchase price in excess of the fair value of identified tangible and intangible assets and liabilities assumed in the amount of $48.1 million was allocated to goodwill and is being amortized over its estimated useful life of 7 years. The Company will evaluate the periods of amortization continually to determine whether later events and circumstances warrant revised estimates of useful lives. The following unaudited pro forma consolidated amounts give effect to the acquisition of CDS as if it had occurred on December 28, 1997 by consolidating the results of operations of CDS with the results of the Company for the three and nine months ended October 2, 1999 and September 26, 1998, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 1999 1998 ------------ ------------- ------------ ------------- (UNAUDITED) Revenues............................ $ 589,657 $ 600,001 $ 1,796,022 $ 1,681,084 Net income (loss)................... (38,593) 1,393 (67,284) (18,522) Net income (loss) per share: Basic............................. (0.34) 0.02 (0.64) (0.66) Diluted........................... (0.34) 0.02 (0.64) (0.66) Shares used in per share calculation Basic............................. 112,877,358 67,645,373 104,945,436 28,120,941 Diluted........................... 112,877,358 84,990,496 104,945,436 28,120,941
The above unaudited pro forma consolidated amounts are not necessarily indicative of the actual results of operations that would have been reported if the event described above had occurred as of the beginning of the periods described above, nor does such information purport to indicate the results of the Company's future operations. In the opinion of management, all adjustments necessary to present fairly such pro forma amounts have been made. 5. GAIN ON SALE OF INVESTMENTS In September 1999, the Company sold its remaining equity investment in Celestica Inc. resulting in approximately a $22 million gain, which was included in other income for the quarter and for the nine months ended October 2, 1999. 6. NET INCOME (LOSS) PER SHARE In accordance with the disclosure requirements of Statements of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", a reconciliation of the numerator and denominator of the basic and 7 8 MAXTOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) diluted net income (loss) per share calculations is provided as follows (in thousands, except share and per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 1999 1998 ------------ ------------- ------------ ------------- (UNAUDITED) NUMERATOR -- BASIC AND DILUTED Net income (loss)................... $ (40,275) $ 6,078 $ (54,142) $ 1,175 ============ =========== ============ =========== Net income (loss) available to common stockholders............... $ (40,275) $ 6,078 $ (54,142) $ 1,175 ============ =========== ============ =========== DENOMINATOR Basic weighted average common shares outstanding....................... 106,713,093 59,515,691 102,890,681 19,991,259 Effect of dilutive securities: Common stock options.............. -- 1,200,781 -- 731,324 Convertible preferred stocks...... -- 16,144,342 -- 34,768,959 ------------ ----------- ------------ ----------- Diluted weighted average common shares............................ 106,713,093 76,860,814 102,890,681 55,491,542 ============ =========== ============ =========== Basic net income (loss) per share... $ (0.38) $ 0.10 $ (0.53) $ 0.06 ============ =========== ============ =========== Diluted net income (loss) per share............................. $ (0.38) $ 0.08 $ (0.53) $ 0.02 ============ =========== ============ ===========
The following securities and contingently issuable shares are excluded in the calculation of diluted shares outstanding as their effects would be antidilutive:
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 1999 1998 ------------ ------------- ------------ ------------- (UNAUDITED) Convertible preferred stock......... -- 16,144,342 -- 34,768,959 Common stock options................ 432,269 1,200,781 2,164,073 731,324
7. CONTINGENCIES The Company is currently involved in a dispute with StorMedia Incorporated ("StorMedia"), which arose out of an agreement among Maxtor, StorMedia and Hyundai Electronics Industries Co. Ltd. ("HEI") which became effective on November 17, 1995. In that agreement, StorMedia agreed to supply disk media to Maxtor. StorMedia's disk media did not meet our specifications and functional requirements as required by the agreement and we ultimately terminated the agreement. After a class action securities lawsuit was filed against StorMedia by certain of its shareholders in September 1996 which alleged, in part, that StorMedia failed to perform under the agreement, StorMedia sued HEI, Mong Hun Chung (HEI's chairman), Dr. Chong Sup Park (Hyundai Electronics America's ("HEA") President and the individual who signed the StorMedia Agreement on behalf of Maxtor) and K.S. Yoo (the individual who signed the StorMedia Agreement on behalf of HEI) (collectively the "Original Defendants") in federal court (the "Federal Suit"). In the Federal Suit, StorMedia alleged that at the time HEI entered into the StorMedia Agreement, it knew that it would not and could not purchase the volume of products it committed to purchase, and that failure to do so caused damages to StorMedia in excess of $206 million. 8 9 MAXTOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In December 1996, we filed a complaint against StorMedia and William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado state court seeking approximately $100 million in damages and alleging, among other claims, breach of contract, breach of implied warranty of fitness and fraud under the StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending resolution of the Federal Suit. The Federal Suit was permanently dismissed early in February 1998. On February 24, 1998, StorMedia filed a new complaint in a California state court for $206 million, alleging fraud and deceit against the Original Defendants and negligent misrepresentation against HEI and Maxtor (the "California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by the Colorado state court. Our motion to dismiss, or in the alternative, stay the California Suit, is pending. On September 9, 1998, the California Suit was stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act. This bankruptcy filing caused an automatic stay of proceedings against StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims against Maxtor since it filed for bankruptcy protection. We believe that we have valid defenses against the claims alleged by StorMedia and intend to defend ourselves vigorously. However, due to the nature of litigation and because the pending lawsuits are in the very early pre-trial stages, we cannot determine the possible loss, if any, that may ultimately be incurred either in the context of a trial or as a result of a negotiated settlement. The litigation could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. After considering the nature of the claims and facts relating to the litigation, including the results of preliminary discovery, our management believes that the resolution of this matter will not have a material adverse effect on our business, financial condition or results of operations. However, the results of these proceedings, including any potential settlement, are uncertain and there can be no assurance that they will not have a material adverse effect on our business, financial position and results of operations. We were sued in the United States District Court for the Northern District of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst") claiming infringement of a number of hard disk drive motor patents. The lawsuit alleges infringement of 15 of the hard disk drive motor patents, which relate to motors that we purchase from motor vendors and the use of such motors in hard disk drives. We filed our Answer and Counterclaim on May 19, 1999, alleging defenses of implied license, patent exhaustion, misuse, invalidity, unenforceability and noninfringement, among others. We have also filed a motion to bifurcate for early discovery the license, exhaustion and misuse defenses. At hearing on July 21, 1999, the Court stayed further action in the case pending the outcome of a motion filed by Papst on July 13, 1999, seeking coordination and transfer of this case with several other actions involving Papst patents. This motion was filed with the Judicial Panel on Multidistrict Litigation in Washington, D.C. The motion was granted October 12, 1999, and the case has been transferred to the Eastern District of Louisiana for coordinated or consolidated pre-trial proceedings with three other actions involving Papst patents. No proceedings have been scheduled as yet in that court. While the final outcome of these claims cannot be determined at this time, we believe that resolution of these claims will not have a material adverse effect on our business, financial condition or results of operations. This statement should be read in conjunction with our Registration Statement on Form S-3 as well as our periodic reports filed with the SEC. No amounts have been reserved in the accompanying condensed consolidated financial statements for any legal claims or actions. 8. LOAN AGREEMENT In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd entered into a 4-year loan agreement with the Economic Development Board (the "Board") of Singapore for SGD48 million, which will amortize in 7 equal semi-annual installments beginning March 2001. Interest will be charged by the Board at 9 10 MAXTOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 1% above the prevailing Central Provident Fund lending rate, subject to a minimum of 3.5% per year. This loan requires a guarantee which is supported by a 2-year guarantee from the Bank of Nova Scotia at an interest rate of 0.15% per year. 9. RECLASSIFICATIONS Certain reclassifications have been made to prior year balances to conform to current year classifications. 10. RELATED PARTY TRANSACTION During the quarter ended April 3, 1999, the Company paid off a $55.0 million note payable to HEA and incurred $2.3 million of interest expense related to the note (see Note 3). As of October 2, 1999, the Company has no outstanding indebtedness to HEA. The cost of revenue includes certain component parts purchased from MMC Technology, Inc., a wholly owned subsidiary of HEA, amounting to $42 million for the quarter ended October 2, 1999 and $121.3 million for the nine months ended October 2, 1999. The cost of component parts purchased from MMC was $33.8 million for the quarter ended September 26, 1998 and $95 million for the nine months ended September 26, 1998. The cost of revenue also includes certain component parts purchased from HEI which to date have not been significant. This report contains forward-looking statements within the meaning of the U.S. federal securities laws that involve risks and uncertainties. The statements contained in this report that are not purely historical, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future, are forward-looking statements including those discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: "Results of Operations"; "Liquidity and Capital Resources"; "Certain Factors Affecting Future Performance"; and elsewhere in this report. In this report, the words "anticipate," "believe," "expect," "intend," "future" and similar expressions also identify forward- looking statements. We make these forward-looking statements based upon information available on the date hereof, and we have no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in this report as a result of certain factors including, but not limited to, those set forth in the following risk factors and elsewhere in this report. Maxtor(R) and No Quibble(R) are registered trademarks of Maxtor. The Maxtor logo, DiamondMax(TM), Formula 4(TM) and MaxAttach(TM) are trademarks of Maxtor. All other brand names and trademarks appearing in this report are the property of their respective holders. 10 11 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I. Financial Information, Item 1. Condensed Consolidated Financial Statements of this report. ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC. The Company acquired privately held Creative Design Solutions, Inc. ("CDS"), a leading participant in the emerging network attached storage market, in the third quarter of 1999. The Company is transitioning from being solely a supplier of hard disk drives for the desktop personal computer market to a company positioned to provide storage solutions in networked environments. See Note 4 to the Condensed Consolidated Financial Statements. Maxtor has formed its Maxtor Network Systems Group ("MNSG") around CDS. MNSG will concentrate in the near future on products and offerings in or related to the Network Attached Storage ("NAS") market segment. NAS is defined as: "A specialized, network-based hardware device designed to perform a single or specialized set of server functions and characterized by running a minimal operating architecture, requiring no per-seat network operating system license and client access independent of any operating system or proprietary protocol. In addition, the device is a 'closed box' delivering extreme ease of installation, minimal maintenance and can be managed remotely by the client via a Web browser." (Source: Dataquest/Gartner) In October, Maxtor announced MaxAttach(TM), MNSG's first NAS product. The MaxAttach network storage appliance is a network file sharing solution for a broad range of office and workgroup environments. The CDS acquisition has been accounted for using the purchase method of accounting. A portion of the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on the respective fair values on the acquisition date. Identifiable intangible assets include (i) amounts allocated to acquired in-process technology and immediately charged to operations; (ii) amounts allocated to current products and technologies and amortized on a straight-line basis over the estimated useful lives of the technology, which ranges from 1 to 3.5 years; and (iii) amounts allocated to workforce and customer list and amortized on a straight-line basis over the estimated period of benefit, which ranges from 6 to 7 years. The portion of the purchase price in excess of tangible and identifiable intangible assets and liabilities assumed has been allocated to goodwill and amortized on a straight line basis over 7 years. The results of operations of CDS are consolidated with those of the Company as of the date the Company acquired effective control of the entity, which occurred upon the formal legal closing of the transaction. REVENUE AND GROSS PROFIT
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 CHANGE 1999 1998 CHANGE ---------- ------------- ------ ---------- ------------- ------ (UNAUDITED) (UNAUDITED) (IN MILLIONS) Total revenue.................... $589.3 $599.8 $(10.5) $1,795.5 $1,680.7 $114.8 Gross profit..................... $ 13.8 $ 73.2 $(59.4) $ 116.6 $ 197.9 $(81.3) Net Income (loss)................ $(40.3) $ 6.1 $(46.4) $ (54.1) $ 1.2 $(55.3) AS A PERCENTAGE OF REVENUE: Total revenue.................... 100.0% 100.0% 100.0% 100.0% Gross profit..................... 2.3% 12.2% 6.5% 11.8% Net Income (loss)................ (6.8)% 1.0% (3.0)% 0.1%
11 12 Revenue Total revenue for the third quarter of fiscal year 1999 decreased 1.8% compared to the same quarter in fiscal year 1998 primarily due to the continuing decrease in average unit prices, partially offset by an increase in total units shipped during the third fiscal quarter of 1999. Total shipments for the third fiscal quarter 1999 were 5.9 million units, which was 1.6 million units or 36.3% higher compared to the third fiscal quarter a year ago. Maxtor remains focused on OEM customers. Revenue from the OEM channel for the quarter ended October 2, 1999 represented 76.2% of total revenue compared to 77.8% for the corresponding quarter in 1998. Revenue from the distribution and retail channel represented 23.7% of total revenue for the third quarter in 1999 compared to 22.2% for the same quarter in fiscal year 1998. For the nine months ended October 2, 1999, total revenue increased by 6.8% compared to the nine months ended September 26, 1998. Revenue and unit volume growth in 1999 were favorably impacted by better time to market performance, expansion of the OEM customer base, and increased penetration of the distribution channel, offset by the continuing decline in average unit prices from $139 in the third quarter of fiscal 1998 to $100 in the current quarter. Gross Profit Gross profit as a percentage of revenue decreased to 2.3% in the third quarter of 1999 from 12.2% in the same quarter of 1998, and gross profit for the first nine months of 1999 declined to 6.5% compared to 11.8% million for the same period a year ago. The continuing decrease in gross profit is due mainly to the deterioration in average unit selling prices throughout the first three quarters of fiscal year 1999. The rapid price erosion is partially offset by the increase in unit volumes and the timely introduction of new, higher margin products such as MaxAttach(TM), which achieved market acceptance and higher manufacturing yields. Gross margin was also favorably affected by improved product designs, which led to improved manufacturing yields and lower component costs. We expect to continue volume growth for the remainder of the fiscal year based on the strength of the OEM portion of our business and the market acceptance of our new products. OPERATING EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 CHANGE 1999 1998 CHANGE ---------- ------------- ------ ---------- ------------- ------ (UNAUDITED) (UNAUDITED) (IN MILLIONS) Research and development............ $46.5 $40.2 $ 6.3 $141.9 $110.3 $31.6 Selling, general and administrative.................... $21.1 $18.6 $ 2.5 $ 63.2 $ 53.0 $10.2 Stock compensation expense.......... $ 0.5 $ 1.2 $(0.7) $ 2.0 $ 11.1 $(9.1) Acquired in-process technology...... $ 7.0 $ -- $ 7.0 $ 7.0 $ -- $ 7.0 Amortization of goodwill and other intangible assets................. $ 0.6 $ -- $ 0.6 $ 0.6 $ -- $ 0.6 AS A PERCENTAGE OF REVENUE: Research and development............ 7.9% 6.7% 7.9% 6.6% Selling, general and administrative.................... 3.6% 3.1% 3.5% 3.2% Stock compensation expense.......... 0.1% 0.2% 0.1% 0.7% Acquired in-process technology...... 1.2% -- 0.4% -- Amortization of goodwill and other intangible assets................. 0.1% -- 0.0% --
Research and Development (R&D) R&D expense as a percentage of revenue increased to 7.9% in the third quarter of 1999 compared to 6.7% for the same quarter in 1998. Similarly, R&D expense for the nine months ended October 2, 1999 as a percentage of revenue increased to 7.9% compared to 6.6% for the same period a year ago. The absolute dollar level of R&D expenditures increased significantly due primarily to our efforts to develop new products for the 12 13 desktop computer market, including our efforts to transition from the magneto-resistive head technology to the giant magneto-resistive head technology, as well as new market segments. Over the past nine months, we have introduced several hard disk drive products including the DiamondMax Plus 5120 and 6800 series, and the cost-optimized DiamondMax VL Lines. Selling, General and Administrative (SG&A) SG&A expense increased, in terms of absolute dollars and as a percentage of revenue, both for the third quarter of 1999 and the first nine months of fiscal 1999 when compared to the same periods of fiscal year 1998. The increase is primarily due to the costs associated with supporting Maxtor's higher sales volume. Stock Compensation In 1996 we adopted the 1996 Stock Option Plan (the "Plan"), pursuant to which substantially all of our domestic employees and certain international employees received options which were required to be accounted for as variable options. These options, which were granted between May 1996 and October 1997, required remeasurement of any intrinsic compensation element at each reporting date determined by the difference between the estimated current fair value of our stock and the exercise price of the options. In the first quarter of 1998, we amended and restated the Plan to remove the variable features and all grants subsequent to October 1997 have been subject to fixed terms. In the second quarter of 1998, we offered and re-issued new fixed-award options in exchange for options previously issued under variable terms, thereby eliminating the requirement to remeasure these options in subsequent periods. In connection therewith, we recorded compensation expense related to the difference between the estimated fair market value of our stock as of March 28, 1998 and the stated value of our 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." Accordingly, we recorded non-cash compensation expense of $11.1 million in the first nine months of 1998 and $2 million in the first nine months of 1999. The remaining unrecognized compensation element will be reflected in quarterly charges, decreasing sequentially through the second quarter of 2001. Acquired in-process technology The acquired in-process technology charge of $7 million resulted from the acquisition of CDS. The value of the acquired in-process technology was determined using a combination of risk-adjusted income approaches and an independent valuation. The total amount of $7 million was charged to operations as the technology had not reached the stage of technological feasibility at the date of acquisition and had no future alternative use to the Company. Amortization of goodwill and other intangible assets Amortization of goodwill and other intangible assets also includes workforce, customer list and other current products and technology in the amount of $0.6 million, which results from the acquisition of CDS. 13 14 INTEREST EXPENSE, INTEREST INCOME AND GAIN ON SALE OF INVESTMENT
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 CHANGE 1999 1998 CHANGE ---------- ------------- ------ ---------- ------------- ------ (UNAUDITED) (UNAUDITED) (IN MILLIONS) Interest expense.................... $(3.3) $(6.6) $ 3.3 $(10.0) $(24.1) $14.1 Interest and other income........... $ 3.1 $ 1.5 $ 1.6 $ 11.5 $ 3.9 $ 7.6 Gain on sale of investment.......... $22.0 $ -- $22.0 $ 44.1 $ -- $44.1 AS A PERCENTAGE OF REVENUE: Interest expense.................... (0.6)% (1.1)% (0.6)% (1.4)% Interest and other income........... 0.5% 0.3% 0.6% 0.2% Gain on sale of investment.......... 3.7% -- 2.5% --
Interest Expense Interest expense as a percentage of revenue declined from 1.1% in the third quarter of 1998 to 0.6% in the third quarter of 1999, and from 1.4% in the first nine months of 1998 to 0.6% in the first nine months of 1999. In absolute dollar terms, interest expense decreased by $3.3 million in the third quarter of 1999 and decreased by $14.1 million for the first nine months of 1999. The decrease in interest expense was due primarily to the retirement of debt as a result of proceeds generated from our public offerings in July 1998 and February 1999. Our total short-term and long-term outstanding borrowings were $150.3 million as of September 26, 1998 and $123.1 million as of October 2, 1999. Interest and Other Income Interest and other income in the third quarter of 1999 and the first nine months of 1999 increased in both absolute dollar amount and as a percentage of revenue when compared to the third quarter of 1998 and to first nine months of 1998. The increase was primarily due to the increase in total cash and cash equivalents and marketable securities, which were generated from our public offerings in July 1998 and February 1999. Our total cash and cash equivalents and marketable securities were $162.2 million as of September 26, 1998 compared to $285 million as of October 2, 1999. Gain on Sale of Investment In September 1999, the Company sold its remaining equity investment in Celestica Inc. resulting in approximately a $22 million gain. For the nine months ended October 2, 1999, total gain from the sale of investment amounted to $44.1 million. PROVISION FOR INCOME TAXES
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, 1999 1998 CHANGE 1999 1998 CHANGE ---------- ------------- ------ ---------- ------------- ------ (UNAUDITED) (UNAUDITED) (IN MILLIONS) Income (loss) before provision for income taxes..................... $(40.1) $8.2 $(48.3) $(52.5) $3.4 $(55.9) Provision for income taxes......... $ 0.1 $2.1 $ (2.0) $ 1.6 $2.3 $ (0.7)
The provision for income taxes consists primarily of federal alternative minimum tax and foreign taxes. Due to our net operating losses (NOL), NOL carryforwards and favorable tax status in Singapore, we have not incurred any significant foreign, U.S. federal, state or local income taxes for prior fiscal periods. Future tax benefits from current operating losses have not been recognized in the current year because of the uncertainty concerning their realization. 14 15 YEAR 2000 COMPLIANCE YEAR 2000 ISSUE DESCRIBED Many currently installed computer systems and software products are coded to accept, store or report only two digit entries in date code fields. Beginning in the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. This is the "Year 2000 Issue." As a result, computer systems and/or software used by many companies, including Maxtor and our vendors and customers, will need to be upgraded to comply with such Year 2000 requirements. We could be impacted by Year 2000 Issues occurring in our own infrastructure or faced by our major distributors, suppliers, customers, vendors and financial service organizations. Such Year 2000 Issues could include information errors, significant information system failures, or failures of equipment, vendors, suppliers or customers. Any disruption in our operations as a result of Year 2000 Issues, whether by us or a third party, could have a material adverse effect on our business, financial condition and results of operations. OUR PRODUCTS COMPLY Hard Disk Drives Our hard disk drives are able to operate in the Year 2000 and beyond. The Year 2000 Issue is only relevant to hardware and software components that use or affect time and date data or system settings. In the case of our hard disk drives, the ability to operate correctly in the next century is dependent on the software and programming loaded on our hard disk drives by the system. Since our hard disk drives have no inherent time or date function, they will not determine whether a given system, or any software on a given system, will operate correctly or incorrectly in the next century. As a result, all of our hard disk drives are able to receive, store and retrieve data, and operate with a system or software that is Year 2000 compliant without modification. MaxAttach Products Our new Network Attached Systems ("NAS") products (developed by the recently acquired Creative Design Solutions, Inc. -- CDS company) are also Y2K compliant and not affected by the actual turn of the century. Our NAS operating system software uses ANSI C time specifications, which stores time as number of seconds since January 1, 1970 using a signed 32-bit number, which is unaffected in or by the Year 2000, but which will roll over in the Year 2038. OUR STATE OF READINESS Overview. To address Year 2000 readiness, we have implemented a corporate program to coordinate efforts across all business functions and geographic areas, which includes addressing risks associated with business partners and other third-party relationships. Our internal Year 2000 readiness program is separated into four phases: (1) Awareness, (2) Inventory, (3) Assessment and (4) Resolution. Additionally, we have formed a Year 2000 Program Office to coordinate the foregoing corporate program and also have engaged external Year 2000 consultants to assist with methodology and process of the inventory, assessment and resolution phases. There can be no assurance that we will be able to complete all four phases in a timely manner, or that the process will adequately address the Year 2000 Issue. Core IT Systems. We have implemented the R3 system from SAP A.G. The SAP system is designed to automate more fully our business processes and is certified by SAP A.G. as Year 2000 compliant. The SAP implementation is now complete for all SAP modules, with the implementation of the SAP Human Resources module for the US and Singapore in July. Other Information Technology Systems. Our other information technology systems include factory information and control systems, computer aided design systems, banking interface systems, electronic data interchange systems, credit card processing, customer call management, human resources systems, non-United States payroll processing, and shipment and just in time delivery management systems. SAP A.G. software supports all of our human resources systems, call management system, non-United States payroll 15 16 processing and supplier just-in-time delivery management systems which, as a result, are now Year 2000 compliant. The inventory and assessment portion of our networked PC's has been completed and we are now in the remediation stage for the hardware and software applications. We will assign the highest resolution priority to repair or replace items that affect new product development, volume production and distribution. Networking Systems. In a recent corporate level business decision, we concluded that instead of upgrading our current Banyan Vines based networking system, it would be much more beneficial to us if we implemented NT-servers and Microsoft Exchange Mailman System. The NT-server/Microsoft Exchange migration was completed by September 30th 1999 (according to plan) and, as a result, all our network attached PC user systems are now Y2K ready. Non-Information Technology Systems. Our non-information technology systems include departmental and personal automated applications used in all of our functional areas, building systems such as heating, cooling, and air purification, component and hard disk drive test equipment, and manufacturing equipment. We have completed the assessment of all our non-information technology systems as of June 30th of this year. Vendors and Suppliers. Our vendors and suppliers include the sources of materials used in our hard disk drives, the JIT (Just In Time) and forward carrier logistics operations, the sources of the equipment and supplies used by us in the conduct of our business, as well as our landlords, financial institutions, and other service providers. Inventory of our material suppliers has been completed and on site assessments of our logistics suppliers have been completed for our disk drive products. The Maxtor Year 2000 Program Office has created an extensive repository of detailed data and information collected from our inventory and remediation activities as well as our supplier assessments. Assessments include determination of the level of risk of business interruption associated with a failure of a vendor or supplier because of the Year 2000 Issue and assignment of priority to resolution activities. Maxtor Network Storage Group ("MNSG"). MNSG is Maxtor's internal designation for the newly acquired CDS company. The Y2K Program Office has already assessed MNSG's PCs and Embedded Systems and recommended that a number of PCs be upgraded to newer Y2K compliant models. This capital request has been approved and is in the process of being implemented. In addition, all the mission critical software applications are based on Microsoft Windows 95/98 and Windows NT and, as a result, are Y2K ready. The Embedded Systems in the MNSG facility were assessed to not have a Y2K dependency. Customers. Our assessment of our Year 2000 issues with our customers will dovetail with similar activities which our customers will engage in with respect to Maxtor. Several of our customers, Dell and IBM for example, have requested written and/or in person assurances that our ability to supply product to them in volume will not be affected by the Year 2000 Issue. At this time we have completed several on site audits and responded to a number of follow up questionnaires. We are still receiving occasional Y2K questionnaires from primarily Asian customers. THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES We made capital expenditures of approximately $33.0 million and incurred related expenses of approximately $7.5 million in fiscal 1998 in connection with our implementation of the SAP system. For our Y2K program we initially estimated capital expenditures of approximately $10.0 million and expenses of approximately $4.0 million in fiscal 1999 in connection with the resolution of our Year 2000 issues. During the first ten months ended October 30, 1999, we incurred approximately $1.5 million in capital expenditures and approximately $3.0 million in expenses related to our Year 2000 issues. Considering that we are about six weeks away from the actual transition, we do not expect that these costs will not change significantly. No significant system projects have been deferred due to Year 2000 issues. In addition, our cost estimates do not include potential costs related to any customer or other claims resulting from our failure to adequately correct our Year 2000 issues. 16 17 THE RISKS OF OUR YEAR 2000 ISSUES We believe that resolution of our Year 2000 Issues has been and will be complex, expensive and time intensive. In addition, resolution of our Year 2000 Issues could be adversely affected by various risk factors, including without limit: - any failure to provide adequate training to employees; - any failure to retain skilled personnel to implement the SAP system or find suitable replacements for such personnel; - any expansion of the scope of the implementation plan due to unanticipated changes in our business; - any failure to devise and run appropriate testing procedures that accurately reflect the demands that will be placed on new systems following implementation; - any failures by vendors or other third parties to accurately assess their own Year 2000 readiness or the Year 2000 readiness of their respective vendors and other third parties and any resulting failures; - any failures by the power companies to supply power to our plans and facilities; and - any failure to develop and implement adequate fall-back, work around or other contingency plans in the event that difficulties or delays arise. It has been widely predicted that a significant amount of litigation surrounding business interruptions will arise out of Year 2000 Issues. It is uncertain whether, or to what extent, we may be affected by such litigation. Because our hard disk drives and network storage appliance products are able to operate in the Year 2000 and beyond, we do not anticipate exposure to material product defect or similar litigation. Any such litigation, however, could have a material adverse effect on our business, financial condition and results of operations. We also may not receive any assistance, damages or other relief as a result of our initiation of any litigation related to the Year 2000 Issue. Our inability to implement our Year 2000 plans or to otherwise address Year 2000 Issues in a timely manner could have a material adverse effect on our business, financial condition and results of operations. OUR CONTINGENCY PLANS As part of the four-step process outlined above, 51 specific contingency plans have been developed in connection with the assessment and resolution of the risks identified. These plans cover information technology, material shortages and logistics related delays, which we identified as potential occurrences as a result of our on-site supplier assessments. We have also developed a Command Center plan, which will serve as a communications center for the entire company on Y2K related events occurring during the actual transition to the new year, that could affect Maxtor's business. There is no assurance that our contingency plans will address risks which may actually arise or that any such contingency plans will properly address their intended purposes if they are implemented. In addition, we do not have and do not anticipate obtaining any insurance policy to provide material coverage for potential injuries or damages related to or caused by the Year 2000 Issue. LIQUIDITY AND CAPITAL RESOURCES As of October 2, 1999, we had $285 million in cash and cash equivalents and marketable securities as compared to $227.6 million as of December 26, 1998. In February 1999, we completed an underwritten secondary public offering of 7,800,000 newly-issued shares of our common stock and received $95.8 million, net of offering costs and expenses. Operating activities provided net cash of $32.7 million for nine months ended October 2, 1999. The cash provided from operating activities was principally generated from collection of accounts receivable and decreases in inventory purchases, which was partially offset by the decrease in accounts payable, accrued expenses. We used $151.4 million in investing activities during the first nine months of 1999, principally for the purchase of marketable securities and property, plant and equipment. During the nine months ended October 2, 1999, we reduced short and long-term debt by $60.0 million using approximately $55.0 million of the proceeds from our February 1999 public offering and cash from operations. 17 18 In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd entered into a 4-year term loan agreement with the Economic Development Board of Singapore for SGD48 million, which will amortize in 7 equal semi-annual installments beginning March 2001. This loan requires a guarantee which is supported by a 2-year guarantee from the Bank of Nova Scotia. As of October 2, 1999, our outstanding debt comprised primarily $90.0 million of publicly-traded Subordinated Debentures, due March 1, 2012. Our outstanding 5.75% Subordinated Debentures are entitled to annual sinking fund payments of $5.0 million, which commenced March 1, 1998. These debentures are no longer convertible into our common stock or any other security of the Company. We also have a $200.0 million asset securitization program with Fleet National Bank under which we sell our eligible trade accounts receivable on a non-recourse basis through a special purpose entity. As of October 2, 1999, $100.0 million of accounts receivable was securitized under the program and excluded from our accounts receivable balance. We believe the existing capital resources, together with cash generated from operations and borrowing capacity, will be sufficient to fund our operations through at least the next 12 months. We require substantial working capital to fund our business, particularly to finance accounts receivable and inventory, and to invest in property, plant and equipment. During 1999, capital expenditures are expected to be between approximately $120.0 million and $125.0 million, to be used principally for adding manufacturing capacity and implementing new and updating existing information technology systems. We intend to seek financing arrangements, including a line of credit, to fund our future capacity expansion plans, as necessary. However, our ability to generate cash will depend on, among other things, demand in the desktop hard disk drive market and pricing conditions. If we need additional capital, there can be no assurance that such additional financing can be obtained, or, if obtained, that it will be available on satisfactory terms. See discussion below under the heading "Certain Factors Affecting Future Performance". CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $795.9 MILLION We have a history of significant losses. During each of the 19 consecutive quarters ended September 27, 1997, we incurred significant operating losses ranging from $125.5 million to $3.1 million per quarter, with net losses ranging from $130.2 million to $4.5 million. These losses were primarily a result of the following: - delayed product introductions; - product performance and quality problems; - low manufacturing yields and under-utilization of manufacturing capacity; - high operating and interest expenses; and - overall market conditions in the hard disk drive industry, including fluctuations in demand and declining average selling prices. We also had a net loss of $40.3 million for the quarter ended October 2, 1999 due primarily to a significant decrease in average unit selling prices. OUR AVERAGE SELLING PRICES ARE DECLINING We anticipate that average selling prices in the hard disk drive industry will continue to decline for the foreseeable future. The average selling price of a hard disk drive rapidly declines over its commercial life due to technological enhancement, productivity improvement, and also increase in industry supply. This is true even for those products that are competitive and introduced into the market in a timely manner. Average selling prices decline even further when competitors lower prices to absorb excess capacity, liquidate excess inventories, restructure or attempt to gain market share. These factors make it very challenging to achieve and maintain profitability and revenue growth in the hard disk drive industry. 18 19 UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES Most of our products are sold to desktop computer manufacturers. Such manufacturers use the quality, storage capacity, performance and price characteristics of hard disk drives to select, or qualify, their hard disk drive suppliers. Such manufacturers typically seek to qualify three or four suppliers for each hard disk drive product generation. To qualify consistently with these manufacturers, and thus succeed in the desktop hard disk drive industry, we must execute consistently on our product development and manufacturing processes to be among the first-to-market introduction and first-to-volume production at leading storage capacity per disk with competitive prices and high quality. Once a manufacturer has chosen its hard disk drive suppliers for a given desktop computer product, it generally will purchase hard disk drives from those suppliers for the commercial life of that product line. If we miss a qualification opportunity, we may not have another opportunity to do business with that manufacturer until we introduce our next generation of products. The effect of missing a product qualification opportunity is magnified by the limited number of high volume manufacturers of personal computers. If we do not reach the market or deliver volume production in a timely manner, we may lose opportunities to qualify our products, our gross margins probably will decline due to rapidly declining average selling prices, and we probably will lose market share. SUBSTANTIAL DEPENDENCE ON THE DESKTOP COMPUTER MARKET While there has been significant growth in the demand for desktop computers over the past several years, according to International Data Corporation, the growth rate in the desktop computer market has slowed in recent quarters. Because of our reliance on the desktop segment of the personal computer market, we will be affected more by changes in market conditions for desktop computers than would a company with a broader range of products. Any decrease in the demand for desktop computers could cause a decrease in the demand for our products. Although our current products are designed for the largest segment of the hard disk drive market, the desktop computer market, demand may shift to other market segments over time. We also believe that to remain a significant supplier of hard disk drives to major manufacturers of personal computers, we will need to offer a broader range of hard disk drive products to our customers. Therefore, we will need to develop and manufacture new products that address additional hard disk drive market segments and emerging technologies to remain competitive in the hard disk drive industry. Examples of potentially important market segments that our current products are not designed to address include: - the client-server market; - lower cost, lower performance personal computer systems (typically below $699); and - laptop personal computers. To specifically address these or additional market segments, we would have to reengineer some of our existing technology and develop new technology. Certain of our competitors have significant advantages over us in one or more of these and other potentially significant new or growing market segments. Any failure by us to successfully develop and introduce new products to address specifically these additional market segments could have a material adverse effect on our business, financial condition and results of operations. A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS We sell most of our products to a limited number of customers. During the nine months ended October 2, 1999, two customers, Dell and IBM, accounted for approximately 25.4% and 9.0%, respectively, of our revenue, and our top ten customers accounted for approximately 67.2% of our revenue. During the nine months ended September 26, 1998, two customers, Dell and IBM, accounted for approximately 27.0% and 16.2%, respectively, of our revenue, and our top ten customers accounted for approximately 79.7% of our revenue. We believe that a relatively small number of customers will continue to account for a significant portion of our revenue for the foreseeable future, and that the proportion of our revenue from such customers could 19 20 continue to increase in the future. These customers have a wide variety of suppliers to choose from and therefore can make substantial demands on us. Even if we successfully qualify a product for a given customer, such customer generally is not obligated to purchase any minimum volume of products from us and generally is able to terminate its relationship with us at any time. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a key customer or if any of our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce costs, our business, financial condition and results of operations could be materially and adversely affected. OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY Our quarterly results may not be indicative of our future performance. Our quarterly operating results have fluctuated significantly in the past and may fluctuate significantly in the future. Our future performance will depend on many factors, including the following: - our ability to be consistently among the first to volume-production with competitive products; - the average unit selling price of our products; - fluctuations in the demand for hard disk drives as a result of the cyclical and seasonal nature of the desktop computer industry; - the availability of and efficient use of manufacturing capacity; - changes in product or customer mix; - our existing competitors introducing better products at competitive prices before we do; - new competitors entering our market; - our ability to manage successfully the complex and difficult process of qualifying our products with our customers; - our customers canceling, rescheduling or deferring significant orders for our products, particularly in anticipation of new products or enhancements from us or our competitors; - the ability of certain of our distribution and retail customers to return unsold products for credit; - the ability of certain of our distribution and retail customers to receive lower prices retroactively on their inventory of our products when we lower prices on our products; - our ability to purchase enough components and raw materials at competitive prices which allows us to make a profit; - the availability of adequate capital resources; - increases in research and development expenditures, particularly as a percentage of revenue, required to maintain our competitive position; - changes in our strategy; - personnel changes; and - other general economic and competitive factors. Many of our operating expenses are relatively fixed and difficult to reduce or modify. As a result, the fixed nature of our operating expenses will magnify any adverse effect of a decrease in revenue on our results of operations. As a result of these and other factors, we believe that period to period comparisons of our historical results of operations are not a good predictor of our future performance. If our future operating results are below the expectations of stock market analysts, our stock price may decline. 20 21 OUR CUSTOMERS ARE PLACING NEW AND COSTLY DEMANDS ON US Our customers are adopting more sophisticated business models that place additional strains on our business. For example, many personal computer manufacturers, including some of our largest personal computer manufacturing customers, are starting to adopt build-to-order manufacturing models that reduce their component inventories and related costs and enable them to tailor their products more specifically to the needs of their customers. Some of our personal computer manufacturing customers also are considering or have implemented a "channel assembly" model in which the manufacturer ships a minimal computer system to the dealer or other assembler, and component suppliers (including hard disk drive manufacturers such as us) ship parts directly to the dealer or other assembler for installation at its location. Finally, certain of our manufacturing customers have adopted just-in-time inventory management processes that require component suppliers to maintain inventory at or near the customer's production facility. These new business models require us to hold our products in inventory longer, which increases our risk of inventory obsolescence and average selling price decline. These changing models also increase our capital requirements and costs, complicate our inventory management strategies, and make it difficult for us to match our manufacturing plans with projected customer demand. THE HARD DISK DRIVE MARKET IS HIGHLY COMPETITIVE The hard disk drive market in general is intensely competitive even during periods when demand is stable. We compete primarily with manufacturers of 3.5-inch hard disk drives for the personal computer industry, including: - Fujitsu Limited; - Quantum Corporation; - Samsung Electronic Company Limited; - Seagate Technology, Inc.; and - Western Digital Corporation. We also could face significant competition from other companies, such as International Business Machines Corporation, in our current markets or in other markets into which we may expand our product portfolio. Many of our competitors have a number of significant advantages over us, including: - a larger market share; - a broader array of product lines; - preferred vendor status with some of our customers; - extensive name recognition and marketing power; and - significantly greater financial, technical and manufacturing resources. Unlike us, some of our competitors make many of their own components which may provide them with certain benefits including lower costs. Our competitors also may: - consolidate or establish strategic relationships among themselves to lower their product costs or to otherwise compete more effectively against us; - lower their product prices to gain market share; or - bundle their products with other products to increase demand for their products. In addition, new competitors could emerge and rapidly capture market share. 21 22 If we fail to compete successfully against current or future competitors, our business, operating results and financial condition may be materially and adversely affected. DEMAND FOR OUR PRODUCTS FLUCTUATES We currently offer a single product family that is designed for desktop computers. As a result, the demand for our products depends on the overall demand for desktop computers. The desktop computer and hard disk drive markets tend to go through periods of rapid growth followed by periods of oversupply and rapid price and gross margin erosion. This environment makes it difficult for us and our customers to reliably forecast demand for our products. We do not have long-term supply contracts with our customers, and our customers often can defer or cancel orders with limited notice and without significant penalty. WE MUST EFFECTIVELY RESPOND TO CHANGING TECHNOLOGY; WE MUST EFFECTIVELY TRANSITION TO GIANT MAGNETO-RESISTIVE HEAD TECHNOLOGY Our future performance will depend on our ability to enhance current products and to develop and introduce volume production of new competitive products on a timely and cost-effective basis. We also must keep pace with and correctly anticipate technological developments and evolving industry standards and methodologies. Advances in magnetic, optical or other technologies, or the development of entirely new technologies, could lead to new competitive products that have better performance and/or lower prices than our products. Examples of such new technologies include giant magneto-resistive head technology (which already has been introduced by IBM and Fujitsu and which Western Digital reportedly will use in its products under an agreement with IBM) and optically-assisted recording technologies (which currently are being developed by companies such as TeraStor Corporation and Seagate). We have incorporated giant magneto-resistive head technology into our newest product. We have decided not to pursue optically-assisted recording technologies at this time. Our inability to introduce or achieve volume production of new competitive products, (regardless of whether they include giant magneto-resistive head technology) on a timely and cost-effective basis has in the past and in the future could have a material adverse effect on our business, financial condition and results of operations. TO DEVELOP NEW PRODUCTS, WE MUST EFFECTIVELY INTEGRATE PARTS FROM THIRD PARTIES Unlike some of our competitors, we do not manufacture any of the parts used in our products. Instead, our products incorporate parts designed by and purchased from third parties. Consequently, the success of our products depends on our ability to gain access to and integrate parts that use leading-edge technology. To successfully manage these integration projects we must: - obtain high quality parts; - hire skilled personnel; - effectively integrate different products from a variety of vendors; and - manage difficult scheduling and delivery problems. Our success will depend on our ability to develop and maintain relationships with key suppliers. WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS A number of the parts used in our products are available from only one or a limited number of outside suppliers. Currently, we purchase digital signal processor/controller and spin/servo integrated circuits only from Texas Instruments, Inc. and purchase channel integrated circuits only from Lucent Technologies Inc. As we have experienced in the past, some of the parts we require may periodically be in short supply. As a result, we must allow for significant ordering lead times for certain parts. In addition, we may have to pay significant cancellation charges to suppliers if we cancel orders for parts because we reduce production due to production cut-backs caused by market oversupply, reduced demand, transition to new products or technologies or for other reasons. We order the majority of our parts on a purchase order basis and only have limited long-term 22 23 volume purchase agreements with certain existing suppliers. If we cannot obtain sufficient quantities of high quality parts when we need them, our business, financial condition and results of operations could be materially and adversely affected. WE DEPEND ON OUR KEY PERSONNEL Our success depends upon the continued contributions of our key employees, many of whom would be extremely difficult to replace. We also do not have key person life insurance on any of our personnel. Most of our senior management and a significant number of our other employees have been with us for less than three years. Worldwide competition for skilled employees in the hard disk drive industry is extremely intense. We believe that some of our competitors recently have made targeted efforts to recruit employees from us and such efforts have resulted in us losing some skilled managers. There is no guarantee that we will be successful in retaining our key employees. If we are unable to retain our existing employees or to hire and integrate new employees, our business, financial condition and results of operations could be materially and adversely affected. WE HAVE ONLY ONE MANUFACTURING FACILITY AND WILL NEED ADDITIONAL CAPACITY IN THE FUTURE Our volume manufacturing operations currently is based in one facility in Singapore. A fire, flood, earthquake or other disaster or condition affecting our facility could have a material adverse effect on our business, financial condition and results of operations. Although we have taken steps to ensure that manufacturing facilities will be available, our inability to obtain a facility or facilities which allow us to meet our customers' demands in a timely manner will limit our growth and could have a material adverse effect on our business, financial condition and results of operations. WE MAY NEED MORE CAPITAL IN THE FUTURE BECAUSE THE HARD DISK DRIVE BUSINESS IS CAPITAL INTENSIVE Our business is capital intensive, and we may need more capital in the future. Our future capital requirements will depend on many factors, including: - the rate of our sales growth; - the level of our profits or losses; - the timing and extent of our spending to support facilities upgrades and product development efforts; - the timing and size of business or technology acquisitions; and - the timing of introductions of new products and enhancements to our existing products. We may issue additional equity to raise capital. Any future equity financing will decrease existing stockholders' percentage equity ownership and may, depending on the price at which the equity is sold, result in significant economic dilution to such stockholders. Furthermore, our board of directors is authorized under our charter documents to issue preferred stock with rights, preferences or privileges senior to those of our common stock without stockholder approval. While we currently do not have a revolving credit facility, it is our goal to obtain one in the near future. However, we believe that current market conditions for such facilities are not as favorable as they have been at certain times in the past, that for various reasons the number of potential lenders actively providing credit facilities to companies in the data storage industry has decreased recently, and that the terms on which the remaining potential lenders are willing to offer such facilities, in many cases, are restrictive and/or costly. Consequently, the terms and conditions under which we might obtain such a facility are uncertain. Any failure to obtain adequate credit facilities on acceptable terms could have a material and adverse effect on our business, financial condition and results of operations. 23 24 PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE FACE RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT We have patent protection on some of our technology. We may not receive patents for our current or future patent applications, and any patents that we have or that are issued to us may be invalidated, circumvented or challenged. Moreover, the rights granted under any such patents may not provide us with any competitive advantages. Finally, our competitors may develop or otherwise acquire equivalent or superior technology. We also rely on trade secret, copyright and trademark laws, as well as the terms of our contracts to protect our proprietary rights. We may have to litigate to enforce patents issued or licensed to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of our proprietary 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 protective measures in these countries may be inadequate to protect our proprietary rights. Any failure to enforce and protect our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations. When we were a majority-owned subsidiary of Hyundai Electronics America, we had the benefit of certain third party intellectual property rights on terms that may have been more favorable than would have been available to us if we had not been a majority-owned subsidiary of Hyundai Electronics America. We may not be able to obtain similar rights in the future on terms as favorable. We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively "Papst") claiming infringement of a number of hard disk drive motor patents. The lawsuit, which was filed in the United States District Court for the Northern District of California, has been transferred to the United States District Court for the Eastern District of Louisiana for coordination or consolidation with pre-trial proceedings with three other actions involving Papst patents. The alleged infringement claimed by Papst involves 15 of the hard disk drive motor patents referenced above and relates to motors that we purchase from motor vendors and the use of such motors in hard disk drives. While we believe that we have valid defenses to the Papst claim, the results of any litigation are inherently uncertain and there is no assurance that Papst will not assert other infringement claims relating to current patents, pending patent applications and future patents or patent applications. Additionally, there is no assurance that we will be able to successfully defend ourselves against any such lawsuit. A favorable outcome for Papst in the lawsuit could result in the issuance of an injunction against us or our products and/or the payment of monetary damages equal to a reasonable royalty or recovered lost profits or, in the case of a finding of a willful infringement, treble damages and could have a material adverse effect on our business, financial condition and results of operations. WE ARE DEPENDENT ON OUR INTERNATIONAL OPERATIONS; WE FACE RISKS FROM OUR INTERNATIONAL SALES We conduct most of our manufacturing and testing operations and purchase a substantial portion of our key parts outside the U.S. We also sell a significant portion of products to foreign distributors and retailers. Our dependence on revenue from international sales and our need to manage international operations each involves a number of inherent risks, including: - economic slowdown and/or downturn in the computer industry in such foreign markets; - international currency fluctuations; - general strikes or other disruptions in working conditions; - political instability; - trade restrictions; 24 25 - changes in tariffs; - the difficulties associated with staffing and managing international operations; - generally longer periods to collect receivables; - unexpected changes in or impositions of legislative or regulatory requirements; - reduced protection for intellectual property rights in some countries; - potentially adverse taxes; and - delays resulting from difficulty in obtaining export licenses for certain technology and other trade barriers. The specific economic conditions in each country will 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 cause our products to become relatively more expensive to distributors and retailers in those countries. 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 results of operations could be materially and adversely affected. WE HAVE EXPOSURE FROM OUR WARRANTIES Our products may contain defects. We generally warrant our products for three years. Our standard warranty contains a limit on damages and an exclusion of liability for consequential damages and for negligent or improper use of the product. We establish a reserve, at the time of product shipment, in an amount equal to our estimated warranty expenses. We had warranty reserves of $45.9 million as of October 2, 1999 and $31.6 million as of September 26, 1998. While we believe that our warranty reserves will be sufficient, the failure to maintain sufficient warranty reserves or the unenforceability of our liability limitations could have a material adverse effect on our business, financial condition and results of operations. OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE Our stock price and the number of shares traded each day has varied greatly. We expect these fluctuations to continue due to factors including: - quarterly fluctuations in operating results; - announcements of new products by us or our competitors; - gains or losses of significant customers; - changes in stock market analysts' estimates; - the presence or absence of short-selling of our common stock; and - events affecting other companies that the market deems comparable to us. Our stock price also may be affected by events relating to Hyundai Electronics America and Hyundai Electronics Industries, including sales of our common stock by Hyundai Electronics America or the perception that such sales may occur (due to the financial condition of Hyundai Electronics America or otherwise). There have been reports that Hyundai Electronics Industries is planning to sell some operations that do not directly relate to its core semiconductor business. Hyundai Electronics America and Hyundai Electronics Industries have informed Maxtor that following the closing of its February 1999 public offering and the expiration of the 90-day period during which Hyundai Electronics America has agreed not to offer or sell additional shares without the consent of Salomon Smith Barney Inc., they may consider selling additional Maxtor shares at a time they deem appropriate. Finally, our stock price may be subject to extreme fluctuations in response to general economic conditions in the U.S., Korea, Southeast Asia and elsewhere, such as interest rates, inflation rates, exchange rates, unemployment rates, and trade surpluses and deficits. It is likely that in 25 26 some future quarter or quarters our operating results will be below the expectations of stock market analysts or investors. In such event, our stock price probably will decline. In February 1999, DECS Trust IV, a newly-formed trust, sold 12,500,000 DECS. The terms of the DECS provide that DECS Trust IV may distribute shares of our common stock owned by Hyundai Electronics America on or about February 15, 2002, or upon earlier liquidation of DECS Trust IV under certain circumstances. We do not know how or whether investors in the DECS offering will resell the DECS. Any market that develops for the DECS could reduce the demand for our common stock or otherwise negatively affect the market for our common stock. UNCERTAINTY AND RISKS RELATING TO INTEGRATION OF CREATIVE DESIGN SOLUTIONS, INC. AND RISKS RELATING TO ACQUISITIONS GENERALLY Part of Maxtor's strategy is to grow through the acquisition of related businesses, such as the recent acquisition of CDS. This strategy involves a number of risks, including the substantial management time devoted to such activities, risks related to the integration of the acquired business, undisclosed liabilities, and failure to achieve anticipated benefits, such as cost savings and synergies. Maxtor intends to combine CDS' operations with Maxtor's operations as quickly as practicable. Maxtor and CDS have different systems and procedures in many operational areas that must be rationalized and integrated. Among other things, Maxtor must integrate product offerings, and coordinate development and sales and marketing efforts. There may be substantial difficulties associated with integrating two separate companies, and there can be no assurance that such integration will be accomplished expeditiously or successfully. The integration of certain operations following an acquisition will require the dedication of management resources that may temporarily detract attention from the day-to-day business of Maxtor. Any costs associated with this type of integration may have an adverse effect on Maxtor's operating results in the periods in which they are incurred. Failure to accomplish the integration of the operations of Maxtor and CDS, or market place uncertainty regarding the acquisition, could have a material adverse effect on Maxtor's business, financial condition and results of operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported, we are currently involved in a dispute with StorMedia Incorporated ("StorMedia"), which arose out of an agreement among Maxtor, StorMedia and Hyundai Electronics Industries Co. Ltd. ("HEI") in which StorMedia agreed to supply disk media to the Maxtor. There have been no material developments in the StorMedia lawsuits during this reporting period. We believe that we have valid defenses against the claims alleged by StorMedia and intend to defend ourselves vigorously. However, due to the nature of litigation and because the pending lawsuits are in the very early pre-trial stages, we cannot determine the possible loss, if any, that may ultimately be incurred either in the context of a trial or as a result of a negotiated settlement. The litigation could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. After considering the nature of the claims and facts relating to the litigation, including the results of preliminary discovery, our management believes that the resolution of this matter will not have a material adverse effect on our business, financial condition or results of operations. However, the results of these proceedings, including any potential settlement, are uncertain and there can be no assurance that they will not have a material adverse effect on our business, financial position and results of operations. We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively "Papst") claiming infringement of a number of hard disk drive motor patents. As previously reported, the lawsuit alleges infringement of 15 of the hard disk drive motor patents, which relate to motors that we purchase from motor vendors and the use of such motors in hard disk drives. Our Answer and Counterclaim, alleging defenses of implied license, patent exhaustion, misuse, invalidity, unenforceability and noninfringement, among others, 26 27 was filed on May 19, 1999. We also filed a motion to bifurcate for early discovery the license, exhaustion and misuse defenses. At hearing on July 21, 1999, the Court stayed further action in the case pending the outcome of a motion filed by Papst on July 13, 1999, seeking coordination and transfer of this case with several other actions involving Papst patents. This motion was filed with the Judicial Panel on Multidistrict Litigation in Washington, D.C. On August 5, 1999, we filed our opposition to the motion. No hearing date has been set in that proceeding. While we believe that our defenses to the Papst claim are valid, the results of any litigation are inherently uncertain and there is no assurance that Papst will not assert other infringement claims relating to current patents, pending patent applications and future patents or patent applications. Additionally, there is no assurance that we will be able to successfully defend ourselves against any such lawsuit. A favorable outcome for Papst in the lawsuit could result in the issuance of an injunction against us or our products and/or the payment of monetary damages equal to a reasonable royalty or recovered lost profits or, in the case of a finding of a willful infringement, treble damages and could have a material adverse effect on our business, financial condition and results of operations. No amounts have been reserved in the accompanying condensed consolidated financial statements for any legal claims or actions. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS USE OF PROCEEDS In February 1999, we completed a secondary public offering of 7.8 million shares of our common stock. We received net proceeds of approximately $95.8 million from the offering, after deducting the underwriting discounts and estimated expenses payable by the Company. During the nine months ended October 2, 1999, we used approximately $55 million of the proceeds and cash from operations to reduce short and long-term debt by $60 million. The remaining proceeds have been applied to working capital. RECENT SALES OF UNREGISTERED SECURITIES During the quarter ended October 2, 1999, Creative Design Solutions, Inc. ("CDS"), a California corporation merged with and into a wholly owned subsidiary of Maxtor, which subsidiary then merged with and into Maxtor. We issued approximately 8,129,700 shares of our common stock in return for all of the outstanding capital stock of CDS as of the date of the acquisition. The issuance was deemed to be exempt from registration with the SEC in reliance upon Regulation D promulgated under the Securities Act of 1933, as amended, based upon the limited number of persons receiving shares and the knowledge and experience of such persons or their representatives in evaluating the proposed investment. In addition, we have reserved approximately 825,000 shares of our common stock for issuance upon exercise of outstanding stock options of CDS, which we assumed in the acquisition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of stockholders held on August 11, 1999, the stockholders elected each of the nominees for Class I director on the Board of Directors. The votes were as follows:
WITHHELD NOMINEE FOR AUTHORITY ------- --- --------- Charles Hill 90,120,528 7,842,567 C.S. Chung 90,154,534 7,808,561
The following directors' terms of office continue until the annual meeting indicated: Thomas Chun, Roger W. Johnson and Y.H. Kim (Class II term expires at the 2000 annual meeting); and C.S. Park, Michael R. Cannon and Charles F. Christ (Class III term expires at the 2001 annual meeting). 27 28 The following matters were also submitted to and approved by a vote of the stockholders with the results of the voting being as shown:
BROKER PROPOSAL FOR AGAINST ABSTAIN NON-VOTES -------- ---------- ---------- ------- --------- Approval of the Company's 1996 Stock Option Plan, as amended, for the purposes of Section 162(m) of the Internal Revenue Code, and to (i) increase by 3,676,367 the aggregate number of shares of Common Stock authorized for issuance under the plan, (ii) increase the size of certain options granted to non-employee directors and (iii) provide for the grant of restricted stock................ 78,535,122 19,118,139 89,997 219,837 Approval of the Company's 1998 Employee Stock Purchase Plan, as amended, to increase by 700,000 the aggregate number of shares of Common Stock authorized for issuance under such plan........................................... 97,054,081 844,330 64,684 -- Approval and ratification of the selection of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending January 1, 2000.................. 97,766,731 106,759 89,605 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. See Index to Exhibits on page 30 hereof. b. On September 24, 1999, we filed a current report on Form 8-K to report the completion of a merger pursuant to which CDS became a wholly owned subsidiary of Maxtor and issuance of Maxtor common stock in exchange for all outstanding shares of CDS capital stock. ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 28 29 SIGNATURES 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. MAXTOR CORPORATION By: /s/ Paul J. Tufano ------------------------------------ Paul J. Tufano Senior Vice President, Finance, Chief Financial Officer and Principal Accounting Officer Date: November 15, 1999 29 30 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ 10.169 Executive Retention Incentive Agreement between Michael R. Cannon and Registrant dated June 23, 1999................... 10.170 Promissory Note between Michael R. Cannon and Registrant dated June 23, 1999......................................... 10.171* Amendment One to Supply Agreement between MMC Technology, Inc. and Registrant......................................... 10.172 Capital Assistant Scheme Loan Agreement between Maxtor Peripherals (S) Pte Ltd and the Economic Development Board of Singapore dated September 9, 1999........................ 10.173 Guarantee Facility Agreement between Maxtor Peripherals (S) Pte Ltd and the Bank of Nova Scotia, Singapore branch dated August 31, 1999............................................. 27 Financial Data Schedule.....................................
* Indicates confidential treatment has been requested for this exhibit. EX-10.169 2 EXECUTIVE RETENTION INCENTIVE AGREEMENT, 6/23/99 1 EXECUTIVE RETENTION INCENTIVE AGREEMENT This Executive Retention Agreement (the "Agreement") is made and entered into as of June 23, 1999 (the "Effective Date"), by and between Maxtor Corporation, a Delaware corporation (the "Company") and Michael R. Cannon ("Executive"). R E C I T A L S A. Executive is the president and chief executive officer of the Company and possesses valuable knowledge of the Company, its business and operations, and the markets in which the Company competes. B. The Company draws upon the knowledge, experience and advice of Executive in order to manage its business for the benefit of the Company's stockholders. C. Executive and the Company have entered into a Retention Agreement dated May 29, 1998 setting forth certain incentives for Executive to remain employed with the Company (the "May 1998 Retention Agreement"). D. The Compensation Committee of the Board of Directors desires to supplement Executive's retention arrangements so as to provide additional compensation and benefits to the Executive to encourage Executive to continue to devote his full attention and dedication to the Company and to create additional incentives to continue his employment with the Company. 1. Loan. (a) As of the Effective Date of this Agreement, the Company will loan Executive the sum of Five Million ($5,000,000.00) (the "Loan"). Except as otherwise provided in this Agreement, the Loan shall be subject to the terms and conditions of the promissory note, attached hereto as Exhibit 1 (the "Promissory Note"). (b) Notwithstanding any other provisions in the Promissory Note to the contrary: (i) In consideration of Executive's future services, on June 22, 2002, Executive's obligation to pay the then outstanding balance of the Loan (including unpaid principal and accrued interest thereon) shall be forgiven and the Promissory Note shall be canceled, provided Executive remains continuously employed through such date; (ii) Upon the occurrence of a termination of Executive's employment by the Company for other than Cause, as that term is defined in the May 1998 Retention Agreement, Executive's obligation to pay the then outstanding balance of the Loan (including unpaid principal and accrued interest thereon) shall be forgiven and the Promissory Note shall be canceled; (iii) Upon the occurrence of a Termination Upon a Change of Control, as that term is defined in the May 1998 Retention Agreement, Executive's obligation to pay the 1 2 then outstanding balance of the Loan (including unpaid principal and accrued interest thereon) shall be forgiven and the Promissory Note shall be canceled; (iv) In the event Executive becomes Permanently Disabled, as that term is defined in the May 1998 Retention Agreement, or dies, Executive's obligation to pay the then outstanding balance of the loan (including unpaid principal and accrued interest thereon) shall be forgiven and the Promissory Note shall be canceled. 2. Payment of Taxes. All payments made to Executive under this Agreement shall be subject to all applicable federal and state income, employment and payroll taxes. At the time the Promissory Note is canceled or any payment thereunder is forgiven, in whole or in part, or at any time thereafter as requested by the Company, Executive hereby authorizes withholding from payroll and any other amounts payable to him, and otherwise agrees to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company, which may arise in connection with such forgiveness or cancellation. Executive acknowledges that, notwithstanding any other provision of the Agreement, no obligations under the Promissory Note shall be forgiven or canceled unless the tax withholding obligations of the Company are satisfied. 3. Parachute Payment. If due to the benefits provided under this Agreement, Executive is subject to any excise tax due to characterization of any amounts payable hereunder as excess parachute payments pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company agrees to offer the Executive the option of (i) receiving the full parachute payment subject to the excise tax, or (ii) receiving a reduced parachute payment that would not be subject to the excise tax (which in some circumstances may maximize the net benefit to Executive). Unless the Company and Executive otherwise agree in writing, any calculation required under this Section 3 shall be made in writing by independent public accountants agreed to by the Company and Executive (the "Accountants"), whose calculation shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of calculating the Executive's options under this Section 3 the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 3 The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 3 4. Arbitration. Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Santa Clara County, California or elsewhere by mutual agreement. The selection of the arbitrator and the arbitration procedure shall be governed by the Commercial Arbitration Rules of the American Arbitration Association. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by the Executive, shall be paid by the Company. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 5. Interpretation. Executive and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of California, without regard to such state's conflict of laws rules. 2 3 6. Conflict in Benefits. This Agreement and the Promissory Note shall supersede all prior arrangements, whether written or oral, and understandings regarding the Loan. This Agreement is not intended to and shall not affect, limit or terminate the May 1998 Retention Agreement which is supplemented hereby and which shall remain in full force and effect as supplemented hereby. Notwithstanding any other provision in the May 1998 Retention Agreement to the contrary, the benefits payable under the May 1998 Retention Agreement upon a Termination Upon Change of Control shall NOT be reduced by any amount of the Loan which may be forgiven upon a Termination Upon Change of Control. Moreover, this Agreement is not intended to and shall not limit (i) any plans, programs, or arrangements of the Company that are regularly made available to a significant number of employees of the Company, (ii) the Company's 1998 Restricted Stock Plan, (iii) any agreement or arrangement with the Executive that has been reduced to writing and which does not relate to the subject matter hereof, (iv) any agreements or arrangements hereafter entered into by the parties in writing, all of which shall remain in full force and effect in accordance with the terms thereof. With respect to the Loan, this Agreement and the Note are the entire agreement and no other documents, understanding or discussion has been relied upon in entering this Agreement or the Note or contain any term or condition of this Agreement or Note. 7. Successors and Assigns. (a) Successors of the Company. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction constitutes a material breach of this Agreement by the Company. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Maxtor Corporation 2190 Miller Drive Longmont, Colorado 80501 Attn: General Counsel and if to the Executive at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 3 4 9. Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 10. Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Executive and the Company. Executive has had the opportunity to consult counsel of Executive's own choosing prior to entering into this Agreement and Note. 11. Ratification. The parties hereto ratify and reaffirm the May 1998 Retention Agreement and the Promissory Note dated June 23, 1999, both of which are incorporated herein by reference. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. MAXTOR CORPORATION Date: June 30, 1999 By: /s/ Glenn H. Stevens ------------------------ ------------------------------------ Vice President, General Counsel Title: and Secretary --------------------------------- EXECUTIVE: Date: June 30, 1999 /s/ Michael R. Cannon ------------------------ ---------------------------------------- Michael R. Cannon Address for Notice: - ------------------------- - ------------------------- - ------------------------- 4 EX-10.170 3 PROMISSORY NOTE 1 PROMISSORY NOTE $5,000,000.00 Milpitas, California June 23, 1999 The undersigned, Michael R. Cannon ("Borrower"), hereby unconditionally promises to pay to the order of Maxtor Corporation, a Delaware corporation (the "Lender"), the sum of Five Million Dollars ($5,000,000.00) plus interest, in accordance with the terms of the Executive Retention Agreement by and between Lender and Borrower effective June 23, 1999 (the "June 1999 Retention Agreement"). The outstanding principal balance of this Note, together with all accrued and unpaid interest hereon, shall be due and payable on June 22, 2002, or upon termination for "Cause" or voluntary termination of employment for reasons other than "Good Reason" as those terms are defined in the June 1999 Retention Agreement. Interest shall accrue on unpaid principal from the date hereof until maturity at a rate of 4.98%, compounded annually. This Note may be prepaid, in whole or in part, at any time or from time to time, without penalty or premium. Any prepayment of principal must be accompanied by then accrued but unpaid interest. Interest shall cease to accrue on amounts of principal so prepaid. Any prepayment of interest shall include all interest accrued to the date of payment, but need not include any payment of principal. All payments of principal or interest shall be made in lawful money of the United States of America to the Lender at the offices of the Lender, or at such other address as the Lender shall specify to Borrower in writing. Any payment shall be deemed made upon receipt by Lender. Upon payment in full of all principal and interest payable hereunder, this Note shall be surrendered to Borrower for cancellation. Borrower waives its rights to impose any defense (other than payment), set-off, counterclaim or cross-claim in any action brought on this Note. Borrower waives presentment, demand for performance, notice of performance, protest, notice of protest, and notice of dishonor. 1 2 If the indebtedness represented by this Note or any part hereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings, or if this Note is placed in the hands of attorneys for collection after default, Borrower agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' and collection fees and costs. This Note is being delivered in and shall be construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Borrower has executed this Note as of the day and year first above written. /s/ Michael R. Cannon ----------------------------------- Michael R. Cannon 2 EX-10.171 4 AMENDMENT ONE SUPPLY AGREEMENT 1 Exhibit 10.171 /***/ INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED Amendment One Supply Agreement This Amendment One ("Amendment") amends the Supply Agreement, dated August 18, 1998 ("Agreement"), is effective /***/ ("Effective Date") and is made by and between Maxtor Corporation, a Delaware corporation, having principal places of business at 510 Cottonwood Drive, Milpitas, California 95035 and 2190 Miller Drive, Longmont, Colorado 80501 ("Maxtor") and MMC Technology, Inc., a California corporation, having its principal place of business at 2001 Fortune Drive, San Jose, California 95131 ("MMC"). WHEREAS, Maxtor is willing to offer an additional share of its business to MMC, which share would be in addition to the share already provided for in the Agreement; and WHEREAS, Maxtor and MMC have also agreed to change the terms of sale of all media, such that /***/; NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND OF WHICH IS HEREBY ACKNOWLEDGED, AND IN CONSIDERATION OF THE ABOVE PREMISES AND THE MUTUAL PROMISES CONTAINED IN THIS AGREEMENT, THE PARTIES AGREE TO AMEND THE AGREEMENT AS FOLLOWS: Paragraph 1.4.2 of the Agreement is amended to read as follows, effective the first day of Maxtor's fourth fiscal quarter of 1999: 1.4.2 Terms of Sale. The terms of sale are as follows: (i) For sales to Maxtor's research, engineering, qualification, development, or NPI facilities, or in any case which is not Just in Time ("JIT"): /***/ (ii) For sales to Maxtor's factory facilities under JIT terms: /***/ The parties understand and agree that New World Freight, Inc. ("New World") is currently performing as the common carrier and warehouser for MMC in the delivery of Product to Maxtor. /***/ Paragraph 1.4.1(A) is amended to read as follows, effective the first day of Maxtor's fourth fiscal quarter of 1999: 1.4.1. Product Price. /***/ Paragraph 2.3.1(A) is amended to read as follows, effective the first day of Maxtor's fourth fiscal quarter of 1999: 2.3.1 Volume Commitment. /***/ 2 THIS AMENDMENT, INCLUDING THE AGREEMENT OF WHICH IT IS A PART, IS A COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, WHICH SUPERSEDES ALL PRIOR OR CONCURRENT PROPOSALS AND UNDERSTANDINGS, WHETHER ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO ITS SUBJECT MATTER. NOTWITHSTANDING ANYTHING CONTRARY IN THE AGREEMENT, IN THE EVENT OF A CONFLICT BETWEEN THIS AMENDMENT AND THE AGREEMENT, THIS AMENDMENT SHALL PREVAIL. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED AND ARE RATIFIED HEREBY. IN WITNESS WHEREOF, the parties have executed this Amendment as of its Effective Date. MAXTOR CORPORATION MMC TECHNOLOGY, INC. By: /s/ DAVE BEAVER By: /s/ N. PIGNATI ----------------------------------- -------------------------------- (signature) (signature) Dave Beaver N. Pignati ----------------------------------- -------------------------------- (print name) (print name) Vice President, Worldwide Materials President & CEO ----------------------------------- -------------------------------- (title) (title) EX-10.172 5 CAPITAL ASSISTANT SCHEME LOAN AGREEMENT 1 If the indebtedness represented by this Note or any part hereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings, or if this Note is placed in the hands of attorneys for collection after default, Borrower agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' and collection fees and costs. This Note is being delivered in and shall be construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Borrower has executed this Note as of the day and year first above written. /s/ Michael R. Cannon ----------------------------------- Michael R. Cannon 2 2 Dated this 9th day of September, 1999 CAPITAL ASSISTANCE SCHEME LOAN BETWEEN MAXTOR PERIPHERALS (S) PTE LTD AND ECONOMIC DEVELOPMENT BOARD 3 THIS AGREEMENT is made the 9th day of September One thousand Nine Hundred and Ninety [ Nine ] (1999 ) Between: MAXTOR PERIPHERALS (S) PTE LTD, a company incorporated in Singapore and having its place of business at 2, Ang Mo Kio Street 63, Ang Mo Kio Industrial Park 3 Singapore 569111 (hereinafter called "the Company") of the one part; And ECONOMIC DEVELOPMENT BOARD, a Corporate Body established in the Republic of Singapore by the Economic Development Board Act (Cap. 85) of 250, North Bridge Road, #24-00 Raffles City Tower Singapore 179101 (hereinafter called "the Board") of the other part. WHEREAS: (1) The Company has applied to the Board for a term loan up to a maximum aggregate principal amount of Singapore Dollars Forty-Eight Million (S$48,000,000) under the Capital Assistance Scheme of the Board. (2) The Board is willing to grant the term loans to the Company, upon the terms and subject to the conditions hereinafter set forth. NOW THIS AGREEMENT WITNESSETH AS FOLLOWS:- 1. DEFINITIONS 1.1 In this Agreement, unless the context otherwise requires, the following words or expressions shall have the following meanings respectively:- (a) "Business Day" means a day on which banks in Singapore are open for business excluding Sunday. (b) "Day" means a calendar day. (c) "Dollars" and the sign "$" respectively mean the lawful currency of the Republic of Singapore. (d) "Drawing" means any, each or all (as the context may require) of the drawings made by the Company under the Term Loan and includes the First Drawing as defined hereof. (e) "Event of Default" and "Events of Default" mean any, each or all (as the context may require) of the Events of the Default described in Clause 15 hereof. (f) "First Drawing" means the first of the drawing made by the Company under the Term Loan. 4 (g) "Fixed Productive Assets" means the building, facilities and equipment, for the manufacture and repair of magnetic disk drives for desktop computer systems. (h) "Guarantee" means a bank guarantee to be issued by a prime bank in Singapore and duly executed under seal and signed by the said bank's authorised signatories, in favour of the Board and in the form and containing terms acceptable to the Board. (i) "Interest Rate" means the rate of interest determined in accordance with Clause 7.2 hereof. (j) "Interest Payment Dates" means the day falling on the first Business Day of March or the first Business Day of September as the case may be and the first Interest Payment Date shall be the Interest Payment Date immediately following the date of the First Drawing of the Term Loan. (k) "Interest Period" means the period or periods determined as follows:- (i) the Interest Period in relation to the First Drawing shall begin on the date on which that Drawing is made hereunder and shall end on the first Interest Payment Date; (ii) the Interest Period in respect of any subsequent Drawing shall begin on the date on which the relevant subsequent Drawing is made and shall end on the Interest payment Date falling immediately thereafter; (iii) each successive Interest Period shall begin on the last Interest Payment Date and shall end on the Interest payment Date falling six (6) months immediately following; (iv) if any Interest Period would otherwise end on a day which is not a Business Day that Interest Period shall be extended to the next succeeding day which is a Business Day; (v) if any Interest Period is extended by the application of (iv) above, the following Interest Period shall (without prejudice to the application of (iv) above) end on the day on which it would have ended if the preceding Interest Period had not been so extended; and (vi) any amount to be repaired under clause 8 shall have a final Interest Period expiring on the relevant Repayment Date (l) "Month" means a calendar month. (m) "person" shall include a company, body of persons, association or body corporate or unincorporated. 5 (n) "Repayment Dates" means the first Day of March and the first Day of September of each year. (o) "Term Loan" means the loan facility in the aggregate amount of Singapore Dollars Forty-Eight Million (S$48,000,000) to be made available to the Company by the Board in accordance with the terms and conditions set out in this Agreement and shall also be deemed to include the whole or any part thereof. (p) "Year" means a calendar year. 1.2 Unless the context otherwise requires, words importing the singular number include the plural number and vice versa. 1.3 The words "hereof", "herein", "hereon" and "hereafter" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement. 1.4 The headings to the Clauses hereof shall not be deemed part thereof or be taken in consideration in the interpretation or construction thereof or of this Agreement. 1.5 Reference herein to Clauses are references to Clauses of this Agreement. 2. TERM LOAN Subject to the provisions of this Agreement and in particular those of Clause 3 hereof, the Board will make available to the Company the Term Loan at the times and in the manner as hereinafter provided. The Term Loan shall be for a period of 4 years, inclusive of a 1 year grace period for repayment of the Term Loan as provided in Clause 8 herein. 3. CONDITIONS PRECEDENT AND AVAILABILITY The right of the Company to make any Drawing or Drawings under the Term Loan, and the obligations of the Board to make available the same shall be subject to the following conditions precedent, that is to say:- (a) There shall not exist at or prior to any Drawing, any Event of Default or any condition, event or act which, with the giving of notice or lapse of time, or both, would, constitute such an Event of Default. (b) All representations, warranties and statements contained herein, or otherwise made in writing in connection herewith or in any certificate or statement furnished pursuant to any provision of this Agreement or in any document referred to herein made by the Company shall be true and 6 correct with the same effect as though made on the date on which the Drawing is to be made. (c) The Board shall have received, in form and substance satisfactory to the Board, the following:- (i) A copy of the Memorandum and Articles of Association of the Company duly certified by a Director and the Secretary of the company to be a true copy thereof; (ii) A copy, certified by a Director and Secretary of the Company, of the resolution of the Board of Directors of the Company, which is in full force and effect, approving the terms and conditions contained in this Agreement and authorising a person or persons to sign this Agreement and any other document to be given to the Board from time to time by the Company; (iii) Specimen signatures of the persons authorised to sign this Agreement on behalf of the Company, and to sign the notices of Drawing and any other document to be given from time to time by the Company, such specimens to be certified be a Director or the Secretary of the Company to be the true signatures of such persons respectively; and (iv) The Guarantee relating to the Term Loan to be made and duly executed. (d) All acts, conditions and things required to be done and performed and to have happened precedent to the execution and delivery of this Agreement and the Guarantee and to constitute this Agreement and the Guarantee legal, valid and binding obligations enforceable in accordance with their respective terms, shall have been done and performed and have happened in compliance with all applicable laws. (e) There is no breach by the Company of any of the terms, conditions and undertakings herein contained. 4. PURPOSE OF THE TERM LOAN 4.1 Subject to the terms and conditions herein contained and in particular to those of the Clause 3, the Term Loan will be made available by the Board to the Company for financing the purchase of machinery and a new building. Under this Agreement, the Company shall be required to invest a minimum of Singapore Dollars One Hundred and Sixty-five Million (S$165,000,000) cumulatively in Fixed Productive Assets (excluding land) by 30 September 2003. 4.2 Upon advance of a Drawing under Clause 5, the Company shall apply all the proceeds thereof for the purposes described in Clause 4.1 above and for no other purpose whatsoever. 7 5. DRAWINGS OF TERM LOAN 5.1 Subject to the terms and conditions of this Agreement and in particular to all the conditions of Clause 3 being complied with the Board will make available drawings under the Term Loan in accordance with a disbursement schedule submitted by the Company and approved by the Board at least 45 days before the First Drawing of the Term Loan. 5.2 The Company shall give notice of Drawing to the Board not later than thirty (30) Business Days prior to the intended date of Drawing and each notice of Drawing shall be substantially in the form set out in the Appendix I hereto and shall:- (i) state the date (which must be a Business Day) and the amount of the proposed Drawing; (ii) be irrevocable; (iii) commit the Company to borrow the amount and on the date stated; and (iv) constitute a representation and warranty that at the date thereof the warranties and representations set out in Clause 12 are true and no Event of Default and no even or act which with the giving of notice or lapse of time or both would constitute such an Event of Default has occurred. 5.3 The First Drawing shall be made not later than 31 December 1999 or such later date as may be approved by chairman EDB or his lawful representative. 6. AVAILABILITY OF TERM LOAN The Term Loan shall be available for Drawing for a period of 18 months from the date of the First Drawing after which date any part of the Term Loan not drawn shall be cancelled. 7. INTEREST 7.1 The Company shall pay to the Board on each Interest Payment Date interest in arrears on the amounts drawn and outstanding under the term Loan from time to time in respect of each Interest Period relating thereto determined in accordance with clause 1.1(k) and at the Interest Rate determined in accordance with sub-clause 7.2 hereof. 8 7.2 Interest will be charged by the Board at the rate 1% above the prevailing CPF lending rate, subject to a minimum of 3.5% per annum (the "Interest Rate") and shall be payable in arrears at six-monthly intervals, the first payment to be made on the Interest Payment Date as defined in Clause 1.1 (j) hereof. 7.3 The amount of interest payable on the drawings under the Term Loan from time to time owing and outstanding shall be calculated at the Interest Rate on the basis of a year of three hundred and sixty five (365) Days for the actual number of Days elapsed. 7.4 The certificate of the Board in writing as to the determination of the amount of interest payable on each Interest Payment Date shall be conclusive and binding upon the parties hereto, save for manifest error. 7.5 The Company recognises and accepts that it is commercial practice for interest on amounts in default to be charged and that the rate of interest to be applied by the Board on the amounts in default shall be three per cent (3%) per annum above the average prevailing prime interest rate as reported by the Monetary Authority of Singapore compounded on a monthly basis, which will represent a genuine estimate of the damage the Board would suffer in the event of a failure by the Company in the payment on the due date of any principal and/or interest on the amounts due and payable to the Board. 8. REPAYMENT OF THE TERM LOAN The company shall repay the principal of the amounts drawn under the Term Loan in 7 consecutive six-monthly instalments on the Repayment Dates. The first of such instalments shall be paid on the first Repayment Date following 1 year from the date of the First Drawing of the Term Loan or such other later date as the Board may determine in its absolute discretion. 9. PAYMENT PROVISIONS 9.1 All payments to be made by the Company under this Agreement shall be made not later than 11 a.m. (Singapore time) on the relevant day to the Board at its address described above or at such other address as the Board may from time to time designate by notice in writing to the Company not less that ten (10) Business Days prior to the date of any such payment hereunder. 9.2 If any sum becomes due for payment under this Agreement on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and all calculation of interest shall be adjusted accordingly. 10. PREPAYMENT 10.1 The Company may prepay in the inverse order of maturity any part of the Term Loan or the entire Term Loan before maturity on paying a fee amounting to a quarter of 9 one percent (1/4 of 1%) of the amount prepaid for every period of six (6) months or any lesser period before maturity or one percent (1%) of the amount prepaid, whichever is the lesser amount. 10.2 The Company shall give the Board seven (7) Days' prior written notice of the intention to prepay any amount described in Clause 10.1. 10.3 In the event the Company is required to prepay the principal sum owing under the Term Loan pursuant to Clause 15.2 (a) hereof the Company shall pay to the Board the fee at the rate described in Clause 10.1 above on the principal sum owing. 11. SECURITY Prior to each Drawing of the Term Loan, the Company shall procure the requisite Guarantee from a Prime Bank with a credit rating which satisfies the Board's requirements and in the event that during the currency of this Agreement the credit rating of the Prime Bank falls below the Board's requirements, the Company shall immediately take steps to replace the Guarantee with one from an approved Prime Bank with the requisite rating. It is also agreed that should the coverage given by the Guarantee(s) be in the Board's opinion insufficient to secure the principal amount, interest and default interest, the Board reserves the right to demand that the Company, within a reasonable time after notification by the Board, furnish fresh security by way of guarantee from an approved Prime Bank(s) for any outstanding amounts. Any failure to meet this demand within the time period allowed by the Board shall constitute an Event of Default under Clause 15 of this Agreement. It is further agreed that if the validity period of the Guarantee is shorter than the length of the Term Loan as defined in Clause 2 of this Agreement, the Company shall furnish a fresh Guarantee at least 6 months prior to the expiration of the existing Guarantee. A failure to replace the Guarantee in the specified time or such other time agreed to by the Board shall result in the entire Term Loan and all outstanding interest amounts becoming immediately due and payable to the Board upon receipt of the Board's written notice for such payment. 12. WARRANTIES AND REPRESENTATIONS 12.1 The Company hereby warrants and represents to the Board as follows:- (a) that it is lawfully incorporated, validly existing and in good standing under the laws of the Republic of Singapore; (b) that it has the corporate power and authority to carry on the business as now being conducted; (c) that it has the corporate power to execute and perform this Agreement and to borrow hereunder; (d) that the execution, delivery and performance of the Agreement and the borrowings hereunder have been duly authorised by all requisite 10 corporate action and will not violate any provision of any agreement or other instrument to which the Company is a party; (e) that its latest balance sheet and financial statements submitted to the Board are correct and complete and accurately represent the financial condition of the Company on the date thereof and the results of its operation for the period then ended and each such balance sheet shows all known present and future liabilities, direct or contingent, of the Company as of the date thereof and each financial statement referred to herein was prepared in accordance with generally accepted accounting principles; (f) that there has been no material adverse change in the business activities, operations or financial condition of the Company since the date of the latest financial statements referred to in sub-paragraph (e) above; (g) save as otherwise disclosed to the Board, there are no actions, suits or proceedings pending or, to the knowledge of the Company threatened against the Company or its parent or any of its subsidiaries at law or in equity (whether or not purportedly on behalf of the Company, its parent or any of its subsidiaries) before any court or competent body adjudicating such matters, which involve the possibility of an judgement or liability which may result in any material adverse change in the business, operations, properties or assets, or in the condition, financial or otherwise of the Company or its parent or any of its subsidiaries an d adversely affect the Company's ability to make repayment of the Term Loan; (h) that to the best of the knowledge of the Company no steps have been taken or are being taken to appoint a receiver and/or manager or judicial manager or liquidator or any other person over it or any of its assets or in any winding up action 12.2 Each of the warranties and representations contained in the preceding sub-clause shall survive and continue to have full force and effect after the execution of this Agreement and that they will be true and correct and fully observed as though made on the date of Drawing or each Interest Payment Date with reference to the facts and circumstances then subsisting. 13. AFFIRMATIVE UNDERTAKING The Company hereby undertakes and agrees with the Board as follows:- (a) that the Term Loan granted by the Board under the provisions of this Agreement and every part thereof shall be used solely for the purpose and in the manner hereinbefore stipulated and not for any other purpose or manner save with the prior written consent of the Board. 11 (b) that it will carry on and conduct its business and affairs with due diligence and efficiency in accordance with sound technical financial industrial and managerial standards and practices including the maintenance of adequate records with qualified personnel and in accordance with its Memorandum and Articles of Association. (c) that it will furnish and provide the Board with and permit the Board to obtain all such statements information explanation and data, except information of a confidential nature, as the Board may reasonably require, by prior written notice, regarding the affairs operations administration financial of other whatsoever state or condition of the Company or any of the matters in the Clause mentioned. (d) that it will furnish to the Board particulars of any kind of immovable property hereafter acquired by the Company. (e) that the Board shall have the right as it may reasonably request, by prior written notice, to inspect any land or premises where the Company carries on its business and inspect the same and all property and assets whatsoever therein or thereon and all accounts records and statements wherever the same may be situate and to make inventories and record thereof. (f) that it will supply to the Board certified copies of all resolutions passed which materially affect the financial state and condition of the Company at general and/or special meetings of the Company within seven (7) Days from the date of the passing of such resolutions. (g) that it will deliver to the Board every year immediately after the issue of a copy of the Company's audited balance sheet and profit and loss accounts audited by a firm of auditors of international reputed together with Auditors' and Directors' Reports and will also deliver to the Board a copy of the annual return which the Company is required by law to file with the Registrar of Companies. (h) that it shall punctually pay all rents rates assessments taxes and all outgoings payable in respect of any land/or premises belonging to the Company or at which it carries on business and obtain all necessary licences and comply with all regulations rules and orders relating to the carrying on of its business on such premises. (i) that it will keep all its plant machinery equipment buildings constructions fixtures fittings implements and other effects in good and substantial repair and proper working condition to the satisfaction of the Board. (j) that it shall not dismantle pull down or remove any part of the buildings fixtures plant machinery and equipment, except in cases where such dismantling pulling down or removal shall in the opinion of the Company be rendered necessary by reason of the same being obsolete 12 worn out or damaged, in which case the Company shall give sufficient written notice to the Board and will replace such property by property of similar nature and value after giving intimation to the Board. (k) that it shall give to the Board such written authorities or other directions and provide such facilities and access as the Board may require for the aforesaid inspection and shall pay all costs fees travelling and other out-of-pocket expenses whether legal or otherwise in respect of such inspection. (l) that insofar as may be necessary the Company shall amend its Memorandum and Articles of Association so as to enable it to observe and perform all the covenants undertakings terms stipulations conditions and other provisions of this Agreement. 14. NEGATIVE UNDERTAKINGS The Company hereby undertakes and agrees with the Board that it shall not without the written consent of the Board, which consent shall not be unreasonably withheld:- (a) embark on any new project or substantial expansion or diversification of its present business and operations, which are not related to its present business activities; (b) invest its funds by way of deposits (other than deposits with banks licensed by the Monetary Authority of Singapore), loans, share capital or otherwise in any other concern or issue or give guarantees for the account or on behalf of any person or otherwise become contingently liable for on in connection with any obligations or indebtedness of any person; (c) effect any form of reconstruction including amalgamation with another company which will result in a change in the control of the Company; (d) create or permit to arise or subsist, any mortgage, charge (whether fixed or floating), pledge, lien or other encumbrances whatsoever (except those which have been specifically disclosed to and approved by the Board respectively) on any of its properties or assets, both present and future whatsoever and wheresoever situate; (e) declare or pay any dividend or make any income or capital distribution, whether in cash or in specie, to its shareholders or any of them; or (f) raise, borrow, take, make, issue or give as the case may be, any loans, debentures, bonds or credits from or to any persons. 15. EVENTS OF DEFAULT 13 15.1 If any one or more of the following Events of Default shall occur, that is to say: (a) save as otherwise approved by the Board, if the Company shall fail to pay or otherwise discharge when due any sums of money, whether principal, interest, fees otherwise, payable under this Agreement; (b) if the Company shall default in the payment of (a) any principal or interest beyond any period of grace provided in respect thereof of any commercial loans from banks or financial institutions or (b) any other indebtedness to its creditors which the Board has determined that such is unjustified in law or circumstance; (c) if any representation or warranty made in or in pursuance of this Agreement or in any certificate, statement or other document delivered in connection with the execution and delivery hereof or in pursuance of this Agreement shall be or become incorrect in any material respect; (d) if the Company defaults in the due performance of any undertaking, condition or obligation on its part to be performed and observed hereunder (other than the payment of any sum due hereunder) and such default (if capable of being rectified) shall not be rectified for a period of thirty (30) Days after the date of receipt by the Company of written notice of such default from the Board; (e) if a petition is presented in any court of competent jurisdiction of a resolution is passed for the winding-up of the Company or its parent or for the filing or any application for placing the Company or its parent under judicial management or any similar or analogous proceedings are taken against any of them and are not withdrawn within thirty (30) Days after being presented; (f) if any encumbrancer or lessor shall take possession or a receiver and/or manager, judicial manager, liquidator or other similar officer is appointed of the whole of the undertaking, property or assets, or any part thereof, of the Company or its parent; (g) if a distress or execution is levied or enforced upon or sued out against any part of the property or assets of the Company and is not discharged within thirty (30) Days of being levied and the Board is of the reasonable opinion that such an event will be materially prejudicial to the interests of the Board; (h) if a judgement or order is made against the Company and is not discharged within sixty (60) Days or if legal proceedings suits or actions of any kind whatsoever (whether criminal or civil) shall be instituted against the parent of the Company and the Board is in that case of the reasonable opinion that the said legal proceedings suits or actions will materially affect the Company's ability to perform and observe its obligations under this Agreement; 14 (i) if the Company becomes insolvent or is unable or deemed unable to pay its debts or admits in writing its inability to pay its debts, as they mature, or enters into composition, compromise or arrangement with its creditors or makes a general assignment for the benefit of its creditors and the Board is of the opinion that any such event will be materially prejudicial to the interests of the Board; (j) if a winding -up petition is presented by or against the guarantor of any Guarantee or analogous proceedings shall be taken by or against it and is not discharged within thirty (30) Days after being presented; (k) if the Company ceases or threatens to cease to carry on its business and the Board is of the opinion that it will materially affect the ability of the Company to perform and observe its obligations under this Agreement; (l) if any license, consent or approval of any authority at any time necessary to enable to Company to comply with and perform its obligations under this Agreement to a material extent shall be revoked, withheld or materially modified or shall otherwise not be granted or fail to remain in full force and effect; (m) if any of the consents, authorities, approvals, waivers or resolutions referred to in Clause 3 shall be modified in a manner unacceptable to the Board or shall be wholly or partly revoked, withdrawn, suspended or terminated or shall expire and not be renewed or shall otherwise fail to remain in full force and its effect and such circumstances are considered by the Board to be material; (n) if without the prior written consent of the Board there is any change in the shareholding of the Company which will result in a change in the control of the Company; (o) if a situation shall have arisen, which in the Board's opinion makes it unlikely that the Company will be able to perform its obligations under this Agreement; (p) if the Board determines in its discretion that its interests under the Guarantee is or are in jeopardy; then and in any of such event, the Board may, by notice in writing to the Company declare that an Event of Default has occurred and such declaration shall be deemed to take effect from the date of such an Event of Default. 15.2 Upon the declaration by the Board that an Event of Default has occurred:- (a) the whole of the principal sum drawndown and owing under the Term Loan, interest thereon and all other sums agreed to be paid this Agreement shall immediately become due and payable without any demand or notice of any kind by the Board to the Company; and 15 (b) it shall be lawful for the Board to exercise all or any rights, powers or remedies under this Agreement, the Guarantee given to the Board or any one or more of them. 15.3 In the event on an occurrence of an Event of Default before the Term Loan shall have been fully drawn or utilised hereunder, the Board's obligations hereunder shall automatically and forthwith cease. 15.4 After the declaration by the Board that an event of an Event of Default has occurred, all moneys received or recovered by the Board (whether such moneys shall have been received or recovered as a result of or arising from its exercise of all or any rights, powers or remedies under this Agreement, the Guarantee or any one or more of them or by way of a set-off or otherwise) shall be held by it and shall be applied as follows:- (a) Firstly, in or towards payment of all costs charges and expenses, if any, incurred in enforcing this Agreement, the Guarantee or any one or more of them. (b) Secondly, in or towards payment to the Board of all moneys and liabilities for the time being due, owing or outstanding under this Agreement and where such moneys and liabilities are of a contingent nature, in or towards making full and adequate provisions for payment of such moneys and liabilities as and when they become due and payable; and (c) Thirdly, any surplus shall be paid to the Company. 16. NOTICES 16.1 Except as otherwise expressly provided herein, any notice, request, demand or other communication to be given or served hereunder by one of the parties hereto to or on the other or others may be delivered at or sent by prepaid registered post or by facsimile to the address or addresses herein specified of the other party or parties and shell be deemed to be duly served: (a) if it is delivered, at the time of delivery, (b) if it is sent by prepaid registered post, one (1) Day after posting thereof, or (c) if it is sent by facsimile, immediately after transmission thereof, if the date of transmission is a Business Day, and if such a date is not a Business Day, then the notice by facsimile shall be deemed to be served on the next succeeding Business Day. 16 Except as otherwise expressly provided herein, all notices, requires, demands or other communications which are required by this Agreement to be in writing may be made by facsimile. 16.2 For the purpose of this Clause 16 each of the parties hereto shall from time to time notify the other party in writing of an address in Singapore where such notice, request, demand or other communications as aforesaid can be given or served and such notification shall be effective only when it is actually received. In the absence of such notification, the notice, request, demand or other communication aforesaid may be given or served at the addresses or the respective parties as stated above. 17. WAIVER NOT TO PREJUDICE RIGHT OF BOARD The board may from time to time and at any time waive either unconditionally or on such terms and conditions as it may deem fit any breach by the Company of any of the undertakings stipulations terms and conditions herein contained and any modification thereof but without prejudice to its powers rights and remedies for enforcement thereof, provided always that:- (a) no neglect of forbearance of the Board to require and enforce and enforce payment of any moneys hereunder or the performance and observance of any undertaking stipulation term or condition herein contained, nor any time which may be given powers or remedies of the Board at any time afterwards to act strictly in accordance with the provisions hereof; (b) no such waiver of any such breach as aforesaid shall prejudice the rights of the Board in respect of any other or subsequent breach of any of the undertakings stipulations terms or conditions aforesaid. 18. INDULGENCE OF THE BOARD The liability of the Company hereunder shall not be impaired or discharged by reason of any time or other indulgence being granted by or with the consent of the Board to any person who or which may be in any way liable to pay any of the moneys secured hereby by any other security in favour of the Board or by reason of any arrangement being entered into or composition accepted by the Board which has the effect of modifying the operation of law or otherwise its rights and remedies under the provisions of the Agreement. 19. SEVERABILITY In case any provision in this Agreement shall be, or at any time shall become invalid, illegal or unenforceable in any respect under any law, such invalidity, illegality or unenforceability shall not in any way affect or impair the other provisions of this 17 Agreement but this Agreement shall be construed as if such invalid or illegal or unenforceable provision contained herein or therein did not form a part of this Agreement. 20. GOVERNING LAW This Agreement shall be governed by and construed in all respects in accordance with the laws of the Republic of Singapore. 21. MISCELLANEOUS 21.1 All legal and other professional fees, out-of-pocket expenses, charges and expenses of and in connection with this Agreement shall be paid by the Company. 21.2 The Company shall further pay all legal fees as between solicitor and client and other costs and disbursements incurred in connection with or demanding and enforcing payment of moneys due under this Agreement and Guarantee and otherwise howsoever in enforcing the performance of any other undertakings stipulations terms conditions or provisions of hereof and thereof. 21.3 A certificate signed by a duly authorised officer for the time being of the Board as to the amount of moneys and liabilities for the time being due to the Board or incurred by the Board under this Agreement and Guarantee shall be conclusive and binding on the Company, save for any computation or clerical error. 21.4 This Agreement shall be binding upon the successor of the Company and shall ensure to the benefit of the Board and its successors and assigns. 18 IN WITNESS WHEREOF the parties hereto have hereunto affixed their respective common seals. The Common Seal of MAXTOR PERIPHERALS (S) PTE LTD was hereunto affixed in the presence of:- ----------------- TEH KEE HONG Director ----------------- PATRICIA SEET Secretary The Common Seal of the ECONOMIC DEVELOPMENT BOARD was hereunto affixed in the presence of:- ----------------- Philip Yeo Chairman ----------------- SUSAN WANG Secretary 19 APPENDIX 1 ECONOMIC DEVELOPMENT BOARD 250 North Bridge Road #24-00 Raffles City tower Singapore 179101 Dear Sirs, NOTICE OF DRAWING TERM LOAN OF S$ [ ] Pursuant to Clause 5 of the EDB Loan Agreement dated 199[ ] in respect of the above Term Loan we hereby give you notice for a Drawing of Dollars [ ] ($ ) on 19 We confirm-- (i) that the conditions precedent under Clause 3 of the EDB Loan Agreement have been complied with in every respect; (ii) that each of the representations and warranties contained in Clause 12 of the EDB Loan Agreement are true and accurate in all respects as though made on the date of this Notice with reference to facts and circumstances presently subsisting and will be true and accurate in all respects on the date of the intended Drawing as though made on the date of the intended Drawing with reference to facts and circumstances then subsisting; and (iii) that as at the date hereof no Event of Default has occurred and no event has occurred which, with the giving of notice and/or the lapse of time and/or upon you making any necessary determination under Clause 15 of the EDB Loan Agreement, might constitute an Event of Default, and we undertake that no Event of Default and none of the events aforesaid will exist at the date of the intended Drawing. In addition to the above documents kindly let us know if you require copies of any opinion approval or other documents. Dated this __ day of _____________19 Yours faithfully Director/Authorised Signatory 19 EX-10.173 6 GUARANTEE FACILITY AGREEMENT DATED AUGUST 31, 1999 1 EXHIBIT 10.173 Execution Copy MAXTOR PERIPHERALS (S) PTE. LIMITED as Borrower THE BANK OF NOVA SCOTIA, SINGAPORE BRANCH as Bank --------------------------------------------------------------------------- S$48,000,000 GUARANTEE FACILITY AGREEMENT --------------------------------------------------------------------------- CLIFFORD CHANCE 2 Execution Copy CONTENTS
CLAUSE PAGE 1. DEFINITIONS AND INTERPRETATION..........................................1 2. THE FACILITY............................................................8 3. UTILIZATION OF THE FACILITY.............................................9 4. GUARANTEE COMMISSION....................................................9 5. BORROWER'S LIABILITIES IN RELATION TO BANK GUARANTEE...................10 6. CANCELLATION...........................................................11 7. TAXES..................................................................11 8. TAX RECEIPTS...........................................................12 9. INCREASED COSTS........................................................13 10. ILLEGALITY.............................................................13 11. MITIGATION.............................................................14 12. REPRESENTATIONS........................................................14 13. SECURITY...............................................................18 14. FINANCIAL INFORMATION..................................................19 15. FINANCIAL CONDITION....................................................21 16. COVENANTS..............................................................22 17. EVENTS OF DEFAULT......................................................25 18. COMMITMENT COMMISSION AND FEES.........................................29 19. COSTS AND EXPENSES.....................................................30 20. DEFAULT INTEREST AND BREAK COSTS.......................................30
3 Execution Copy 21. BORROWER'S INDEMNITIES.................................................31 22. CURRENCY OF ACCOUNT AND PAYMENT........................................32 23. PAYMENTS...............................................................32 24. SET-OFF................................................................32 25. ASSIGNMENTS............................................................33 26. EVIDENCE OF DEBT.......................................................34 27. REMEDIES AND WAIVERS, PARTIAL INVALIDITY...............................34 28. NOTICES................................................................34 29. GOVERNING LAW..........................................................35 30. JURISDICTION...........................................................35
SCHEDULE 1 - CONDITIONS PRECEDENT SCHEDULE 2 - UTILIZATION REQUEST SCHEDULE 3 PART 1 - FORM OF PARENT COMPLIANCE CERTIFICATE SCHEDULE 3 PART 2 - FORM OF BORROWER COMPLIANCE CERTIFICATE SCHEDULE 4 - FORM OF BANK GUARANTEE 4 THIS AGREEMENT is made as of August 31, 1999 BETWEEN (1) MAXTOR PERIPHERALS (S) PTE. LIMITED registered no. 199000789E (the "BORROWER"); and (2) THE BANK OF NOVA SCOTIA, SINGAPORE BRANCH (the "BANK"). IT IS AGREED as follows. 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS In this Agreement: "ACCOUNT" means the account securing the Bank under the Account Charge. "ACCOUNT BANK" means The Bank of Nova Scotia, Hong Kong Branch as account bank under the Account Charge. "ACCOUNT CHARGE" means the account charge dated on or about the same date hereof between the Borrower as chargor, the Bank as secured party and the Account Bank. "AUTHORIZED SIGNATORY" means, in relation to the Borrower or the Parent, any person who is duly authorized (in such manner as may be reasonably acceptable to the Bank) and in respect of whom the Bank has received a certificate signed by a director or another Authorized Signatory of the Borrower or the Parent, as the case may be, setting out the name and signature of such person and confirming such person's authority to act. "AVAILABILITY PERIOD" means the period from and including the date hereof to and including the earlier of (a) the day which is three months after the date hereof and (b) the first Business Day on which the Available Facility is zero. "AVAILABLE FACILITY" means, at any time and save as otherwise provided herein, S$48,000,000 less the maximum principal amount of the EDB Loan guaranteed by the Bank pursuant to the Bank Guarantee which has then been issued hereunder. "BANK GUARANTEE" means a guarantee issued or to be issued by the Bank pursuant to Clause 3 (Utilization of the Facility) substantially in the form set out in Schedule 4 (Form of Bank Guarantee) or in such other form requested by the Borrower which is acceptable to the Bank. "BANK GUARANTEE COMMISSION" means the guarantee commission payable pursuant to Clause 4 (Guarantee Commission). 5 "BANK GUARANTEE COMMISSION RATE" means, if Class A Security is in effect, 0.15% per annum flat and, if Class B Security is in effect, the rate agreed between the Bank and the Borrower, in each case, calculated on the maximum principal amount of the EDB Loan guaranteed by the Bank pursuant to the Bank Guarantee which has then been issued hereunder. "BUSINESS DAY" means a day (other than a Saturday or Sunday) which is not a public holiday and on which banks are open for general business in Hong Kong, New York and Singapore. "CASH DEPOSITS" means on any date the Singapore dollar deposits maintained by the Borrower with the Account Bank and secured in favor of the Bank pursuant to the Account Charge. "CLASS A SECURITY" means the Cash Deposits. "CLASS B SECURITY" means the assets of the Borrower subject to a first priority security interest to be mutually agreed between the Borrower and the Bank and such other collateral to be mutually agreed between the Borrower and the Bank, all such security to be in form, value and substance satisfactory to the Bank. "COMPLIANCE CERTIFICATE" means, in respect of the Parent, a certificate substantially in the form set out in Part 1 of Schedule 3 (Form of Parent Compliance Certificate) and, in respect of the Borrower, a certificate substantially in the form set out in Part 2 of Schedule 3 (Form of Borrower Compliance Certificate). "COMPUTER SYSTEM" means any computer hardware or software or any equipment operated by electronic means. "DISPUTE" means any dispute referred to in Clause 30 (Jurisdiction). "EDB" means the Economic Development Board of Singapore. "EDB LOAN" means the term loan made under the EDB Loan Agreement in an aggregate principal amount up to S$48,000,000 to be granted to the Borrower by EDB under its capital assistance scheme upon the terms and conditions set out in the EDB Offer Letter and the EDB Loan Agreement. "EDB LOAN AGREEMENT" means the agreement to be entered into between the Borrower and EDB pursuant to which EDB will grant the EDB Loan to the Borrower. "EDB OFFER LETTER" means the letter from EDB to the Borrower dated August 7, 1999 offering to make available the EDB Loan. "ENCUMBRANCE" means (a) a mortgage, charge, pledge, lien or other encumbrance securing any obligation of any person, (b) any arrangement under which money or claims to, or the benefit of, a bank or other account may be applied, set off or made subject to a combination of accounts so as to effect discharge of any sum owed or 6 payable to any person or (c) any other type of preferential arrangement (including any title transfer and retention arrangement) having a similar effect. "ENVIRONMENTAL CLAIM" means any claim, proceeding or investigation by any person pursuant to any Environmental Law. "ENVIRONMENTAL LAW" means any applicable law in any jurisdiction in which the Borrower conducts business which relates to the pollution or protection of the environment or harm to or the protection of human health or the health of animals or plants. "ENVIRONMENTAL PERMITS" means any permit, licence, consent, approval and other authorisation and the filing of any notification, report or assessment required under any Environmental Law for the operation of the business of the Borrower conducted on or from the properties owned or used by the Borrower. "EVENT OF DEFAULT" means any circumstance described as an event of default in Clause 17 (Events of Default). "FACILITY" means the Singapore dollar guarantee issuance facility granted to the Borrower hereunder. "FACILITY OFFICE" means the lending office of the Bank identified under the Bank's signature below or such other lending office as it may from time to time select by notice to the Borrower. "FINANCE DOCUMENTS" means this Agreement, any Security Document, any fee letter delivered pursuant to Clause 18 (Commitment Commission and Fees), the Bank Guarantee and any document(s) delivered or to be delivered pursuant to any of the foregoing. "FINANCIAL INDEBTEDNESS" means, without duplication, any indebtedness for or in respect of: (a) Indebtedness for Borrowed Money; (b) any documentary or standby letter of credit facility other than those supporting trade payables in the ordinary course of business due not later than 90 days after the date of determination; (c) any interest rate swap, currency swap, forward foreign exchange transaction, cap, floor, collar or option transaction or any other treasury transaction or any combination thereof or any other transaction entered into in connection with protection against or benefit from fluctuation in any rate or price (and the amount of the Financial Indebtedness in relation to any such transaction shall be calculated by reference to the mark-to-market valuation of such transaction at the relevant time); and 7 (d) any guarantee or indemnity for any of the items referred to in paragraphs (a) to (c) above. "GROUP" means the Parent and its subsidiaries. "INDEBTEDNESS FOR BORROWED MONEY" means, without duplication, any indebtedness for or in respect of: (e) moneys borrowed; (f) any amount raised by acceptance under any acceptance credit facility; (g) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (h) any amount raised pursuant to any issue of shares which are expressed to be redeemable at the option of the holder thereof; (i) the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with generally accepted accounting principles in the relevant jurisdiction, be treated as a capital lease; (j) the amount of any liability in respect of any advance or deferred purchase agreement if one of the primary reasons for entering into such agreement is to raise finance, other than trade payables in the ordinary course of business due not later than 90 days after the date of determination; (k) receivables sold or discounted (other than (i) on a non-recourse basis or (ii) pursuant to the asset securitization program currently in effect with Fleet National Bank, as administrator, and any renewal or replacement thereof on substantially similar terms); (l) any agreement to re-acquire an asset if one of the primary reasons for entering into such agreement is to raise finance; (m) any amount raised under any other transaction (including any forward sale or purchase agreement) having the effect of a borrowing; and (n) the amount of any liability in respect of any guarantee or indemnity for any of the items referred to in paragraphs (a) to (i) above. "INTEREST PERIOD" means, save as otherwise provided herein, in relation to an Unpaid Sum, any of those periods mentioned in Clause 20.1 (Default Interest Periods). "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower or the Parent, as the case may be; (b) the ability of the Borrower to perform its obligations under this Agreement; or (c) the validity or enforceability of this 8 Agreement or any of the other Finance Documents or the rights or remedies of the Bank hereunder or thereunder. "MATERIAL SUBSIDIARY" means one or more subsidiaries of the Parent whose consolidated assets constitute at least 5% of the total assets of the Group or whose consolidated revenues constitute at least 20% of the total revenue of the Group. "MINISTRY OF TRADE" means the Ministry of Trade and Industry of the Republic of Singapore (or any successor thereto). "ORIGINAL FINANCIAL STATEMENTS" means, in respect of the Borrower, the audited financial statements of the Borrower for its financial year ended December 26, 1998 and, in respect of the Parent, the audited consolidated financial statements of the Parent and its consolidated subsidiaries for its financial year ended December 26, 1998. "PARENT" means Maxtor Corporation, a Delaware corporation. "PERMITTED ENCUMBRANCE" means (i) any Encumbrance created under the Finance Documents, (ii) Encumbrances for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, (iii) Encumbrances of materialmen, mechanics, warehousemen, carriers or similar other Encumbrances arising in the ordinary course of business and securing obligations which are not yet delinquent, (iv) judgment or attachment Encumbrances and (v) Encumbrances arising solely by virtue of any statutory or common law provision relating to bankers' liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution. "PIONEER STATUS" means that the Borrower shall continue (i) to be certified as a pioneer enterprise by the Ministry of Trade, (ii) to be entitled to the benefits of the Economic Expansion Incentives (Relief from Income Tax) Act (CAP. 86) of the Republic of Singapore and (iii) to comply with the conditions set forth in Certificate No. 1228 dated June 3, 1998 issued by the Ministry of Trade in order to maintain such certification and entitlement. "POTENTIAL EVENT OF DEFAULT" means any event which may become (with the passage of time, the giving of notice, the making of any determination hereunder or any combination thereof) an Event of Default. "REPAYMENT DATE" means each of the dates specified as such in the EDB Loan Agreement. "SECURITY" means the Class A Security or the Class B Security as selected by the Borrower pursuant to Clause 13 (Security). 9 "SECURITY DOCUMENTS" means any document creating or evidencing a security interest in favor of the Bank (including, without limitation, the Account Charge) and any document(s) delivered pursuant to any of the foregoing. "UNPAID SUM" means the unpaid balance of any of the sums referred to in Clause 20.1 (Default Interest Periods). "UTILIZATION DATE" means the date on which the Bank Guarantee is issued. "UTILIZATION REQUEST" means a notice substantially in the form set out in Schedule 2 (Utilization Request). "YEAR 2000 COMPLIANT" means, in relation to any Computer System, that any reference to or use of a date before, on or after December 31, 1999 in the operation of that Computer System will not have an adverse effect on the use of that Computer System. 1.2 INTERPRETATION Any reference in this Agreement to: the "BANK" shall be construed so as to include its and any subsequent successors in accordance with their respective interests; "CONTINUING", in relation to an Event of Default, shall be construed as a reference to an Event of Default which has not been waived in accordance with the terms hereof and, in relation to a Potential Event of Default, one which has not been remedied within the relevant grace period or waived in accordance with the terms hereof; a "HOLDING COMPANY" of a company or corporation shall be construed as a reference to any company or corporation of which the first-mentioned company or corporation is a subsidiary; "INDEBTEDNESS" shall be construed so as to include any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent; a "LAW" shall be construed as any law (including common or customary law), statute, constitution, decree, judgment, treaty, regulation, directive, bye-law, order or any other legislative measure of any government, supranational, local government, statutory or regulatory body or court; a "MONTH" is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, (a) if any such numerically corresponding day is not a Business Day, such period shall end on the immediately succeeding Business Day to occur in that next 10 succeeding calendar month or, if none, it shall end on the immediately preceding Business Day; and (b) if there is no numerically corresponding day in that next succeeding calendar month, that period shall end on the last Business Day in that next succeeding calendar month; a "PERSON" shall be construed as a reference to any person, firm, company, corporation, government, state or agency of a state or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing; "REPAY" (or any derivative form thereof) shall, subject to any contrary indication, be construed to include "PREPAY" (or, as the case may be, the corresponding derivative form thereof); a "SUBSIDIARY" of a company or corporation shall be construed as a reference to any company or corporation: (c) which is controlled, directly or indirectly, by the first-mentioned company or corporation; (d) more than half the issued share capital of which is beneficially owned, directly or indirectly, by the first-mentioned company or corporation and which is consolidated with the first-mentioned company or corporation in such company or corporation's financial accounts; or (e) which is a subsidiary of another subsidiary of the first-mentioned company or corporation and, for these purposes, a company or corporation shall be treated as being controlled by another if that other company or corporation is able to direct its affairs and/or to control the composition of its board of directors or equivalent body; a "SUCCESSOR" shall be construed so as to include an assignee or successor in title of such party and any person who under the laws of its jurisdiction of incorporation or domicile has assumed the rights and obligations of such party under this Agreement or to which, under such laws, such rights and obligations have been transferred; "TAX" shall be construed so as to include any tax, levy, impost, duty or other charge of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same); "VAT" shall be construed as a reference to value added tax including any similar tax which may be imposed in place thereof from time to time; and the "WINDING-UP", "DISSOLUTION" or "ADMINISTRATION" of a company or corporation shall be construed so as to include any equivalent or analogous proceedings under the law of the jurisdiction in which such company or corporation is incorporated or any 11 jurisdiction in which such company or corporation carries on business including the seeking of liquidation, winding-up, re-organisation, dissolution, administration, arrangement, adjustment, protection or relief of debtors. 1.3 CURRENCY SYMBOLS "S$" and "SINGAPORE DOLLARS" denote lawful currency of the Republic of Singapore and "US$" and "US DOLLARS" denote lawful currency of the United States of America. 1.4 AGREEMENTS AND STATUTES Any reference in this Agreement to: 1.4.1 this Agreement or any other agreement or document shall be construed as a reference to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented; and 1.4.2 a statute or treaty shall be construed as a reference to such statute or treaty as the same may have been, or may from time to time be, amended or, in the case of a statute, re-enacted. 1.5 HEADINGS Clause and Schedule headings are for ease of reference only. 1.6 TIME Any reference in this Agreement to a time of day shall, unless a contrary indication appears, be a reference to Singapore time. 1.7 BASIS OF ACCRUAL Except as otherwise provided in this Agreement, interest, Bank Guarantee Commission, commitment commission and fees shall accrue from day to day and shall be calculated on the basis of a year of 360 days and the actual number of days elapsed. 2. THE FACILITY 2.1 GRANT OF THE FACILITY The Bank grants to the Borrower through the Facility Office, upon the terms and subject to the conditions hereof, a Singapore dollar guarantee issuance facility in an aggregate amount of S$48,000,000. 12 2.2 PURPOSE The Facility is intended to support the obligations of the Borrower under the EDB Loan and accordingly, the Borrower shall utilise the Bank Guarantee solely for this purpose and the Bank shall not be obliged to concern itself with such application. 3. UTILIZATION OF THE FACILITY The Bank Guarantee will be issued by the Bank at the Borrower's request if: 3.1.1 not more than ten nor less than two Business Days before the proposed date for the issuance of the Bank Guarantee, the Bank has received a completed Utilization Request; 3.1.2 the proposed date for the issuance of the Bank Guarantee is a Business Day within the Availability Period; 3.1.3 no prior Bank Guarantee has been issued by the Bank; 3.1.4 the proposed maximum principal amount of the EDB Loan to be guaranteed by the Bank pursuant to the Bank Guarantee is equal to the amount of the Available Facility; 3.1.5 the proposed term of the Bank Guarantee is a period not exceeding two years from the Utilization Date and the proposed form of the Bank Guarantee is satisfactory to the Bank; and 3.1.6 on and as of the proposed date for the issuance of the Bank Guarantee (a) the Bank has received all of the documents and other evidence listed in Schedule 1 (Conditions Precedent) and that each is, in form and substance, satisfactory to the Bank, (b) the EDB Loan Agreement is in full force and effect and all conditions precedent (other than the issuance of the Bank Guarantee) specified therein have been complied with and (c) no Event of Default or Potential Event of Default is continuing. 4. GUARANTEE COMMISSION The Borrower shall, in respect of the Bank Guarantee requested by it, pay to the Bank a guarantee commission at the Bank Guarantee Commission Rate on the maximum principal amount of the EDB Loan guaranteed by the Bank under the Bank Guarantee (taking into account any prior repayments or prepayments under the EDB Loan). Such guarantee commission shall be paid in advance in respect of each successive period of three months (or such shorter period as shall end on the next succeeding Repayment Date) which begins during the period from the Utilization Date until the date on which the Bank's obligations under the Bank Guarantee are terminated, the first such payment to be made on the Utilization Date for the Bank Guarantee and thereafter on the first day of each such period. 13 5. BORROWER'S LIABILITIES IN RELATION TO BANK GUARANTEE 5.1 BORROWER'S INDEMNITY TO BANK The Borrower shall irrevocably and unconditionally as a primary obligation indemnify (on demand of the Bank) the Bank against: 5.1.1 any sum paid or due and payable by the Bank under the Bank Guarantee; and 5.1.2 all liabilities, costs (including, without limitation, any costs incurred in funding any amount which falls due from the Bank under the Bank Guarantee or in connection with the Bank Guarantee), claims, losses and expenses which the Bank may at any time incur or sustain in connection with or arising out of the execution, delivery or performance by the Bank of the Bank Guarantee or the other Finance Documents, provided that such amounts shall not include any amounts payable under Clause 19.1 (Transaction Expenses) or 19.2 (Preservation and Enforcement of Rights). 5.2 PRESERVATION OF RIGHTS Neither the obligations of the Borrower set out in this Clause 5 nor the rights, powers and remedies conferred on the Bank by this Agreement or by law shall be discharged, impaired or otherwise affected by: 5.2.1 the winding-up, dissolution, administration or re-organisation of the Bank or any other person or any change in its status, function, control or ownership; 5.2.2 any of the obligations of the Bank or any other person hereunder or under the Bank Guarantee or under any other security taken in respect of its obligations hereunder or otherwise taken in connection with the Bank Guarantee being or becoming illegal, invalid, unenforceable or ineffective in any respect; 5.2.3 time or other indulgence being granted or agreed to be granted to the Bank or any other person in respect of its obligations hereunder or under or in connection with the Bank Guarantee or under any Security; 5.2.4 any amendment to, or any variation, waiver or release of, any obligation of the Bank or any other person under any Security; or 5.2.5 any other act, event or omission which, but for this Clause 5, might operate to discharge, impair or otherwise affect any of the obligations of the Borrower set out in this Clause 5 or any of the rights, powers or remedies conferred upon the Bank by this Agreement or by law. The obligations of the Borrower set out in this Clause 5 shall be in addition to and independent of every other security which the Bank may at any time hold in respect of the Borrower's obligations hereunder. 14 5.3 SETTLEMENT CONDITIONAL Any settlement or discharge between the Borrower and the Bank shall be conditional upon no security or payment to the Bank by the Borrower, or any other person on behalf of the Borrower, being avoided or reduced by virtue of any laws relating to bankruptcy, insolvency, liquidation or similar laws of general application and, if any such security or payment is so avoided or reduced, the Bank shall be entitled to recover the value or amount of such security or payment from the Borrower subsequently as if such settlement or discharge had not occurred. 5.4 RIGHT TO MAKE PAYMENTS UNDER BANK GUARANTEE The Bank shall be entitled to make any payment in accordance with the terms of the Bank Guarantee without any reference to or further authority from the Borrower or any other investigation or enquiry. The Borrower irrevocably authorises the Bank to comply with any demand under the Bank Guarantee which is valid on its face. 6. CANCELLATION 6.1 CANCELLATION The Borrower may, by giving to the Bank not less than ten Business Days' prior notice to that effect, cancel the whole or any part (being an amount or integral multiple of S$1,000,000) of the Available Facility. 6.2 NOTICE OF CANCELLATION Any notice of cancellation given by the Borrower pursuant to Clause 6.1 (Cancellation) shall be irrevocable, shall specify the date upon which such cancellation is to be made and the amount of such cancellation. 7. TAXES 7.1 TAX GROSS-UP All payments to be made by the Borrower to the Bank under the Finance Documents shall be made free and clear of and without deduction for or on account of tax unless the Borrower is required to make such a payment subject to the deduction or withholding of tax, in which case the sum payable by the Borrower (in respect of which such deduction or withholding is required to be made) shall be increased to the extent necessary to ensure that the Bank receives a sum net of any deduction or withholding equal to the sum which it would have received had no such deduction or withholding been made or required to be made. 7.2 TAX INDEMNITY Without prejudice to Clause 7.1 (Tax Gross-up), if the Bank is required to make any payment of or on account of tax on or in relation to any sum received or receivable 15 under any Finance Document (including any sum deemed for purposes of tax to be received or receivable by the Bank whether or not actually received or receivable) or if any liability in respect of any such payment is asserted, imposed, levied or assessed against the Bank, the Borrower shall, upon demand of the Bank, promptly indemnify the Bank against such payment or liability, together with any interest, penalties, costs and expenses payable or incurred in connection therewith, PROVIDED THAT this Clause 7.2 shall not apply to: 7.2.1 any tax imposed on and calculated by reference to the net income actually received or receivable by the Bank by the jurisdiction in which the Bank is incorporated; or 7.2.2 any tax imposed on and calculated by reference to the net income of the Facility Office of the Bank actually received or receivable by the Bank by the jurisdiction in which the Facility Office is located. 7.3 CLAIMS BY THE BANK If the Bank intends to make a claim pursuant to Clause 7.2 (Tax Indemnity), it shall notify the Borrower of the event giving rise to such claim. 8. TAX RECEIPTS 8.1 NOTIFICATION OF REQUIREMENT TO DEDUCT TAX If, at any time, the Borrower is required by law to make any deduction or withholding from any sum payable by it under the Finance Documents (or if thereafter there is any change in the rates at which or the manner in which such deductions or withholdings are calculated), the Borrower shall promptly notify the Bank. 8.2 EVIDENCE OF PAYMENT OF TAX If the Borrower makes any payment under the Finance Documents in respect of which it is required to make any deduction or withholding, it shall pay the full amount required to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and shall deliver to the Bank, within thirty days after it has made such payment to the applicable authority, an original receipt (or a certified copy thereof) issued by such authority evidencing the payment to such authority of all amounts so required to be deducted or withheld in respect of such payment. 8.3 TAX AND OTHER AFFAIRS No provision of this Agreement shall interfere with the right of the Bank to arrange its tax or any other affairs in whatever manner it thinks fit, oblige the Bank to claim any credit, relief, remission or repayment in respect of any payment under Clause 7 (Taxes) in priority to any other credit, relief, remission or repayment available to it 16 nor oblige the Bank to disclose any information relating to its tax or other affairs or any computations in respect thereof. 9. INCREASED COSTS 9.1 INCREASED COSTS If, by reason of (a) any change in law or in its interpretation or administration and/or (b) compliance with any request or requirement relating to the maintenance of capital or any other request from or requirement of any central bank or other fiscal, monetary or other authority: 9.1.1 the Bank or any holding company of the Bank is unable to obtain the rate of return on its capital which it would have been able to obtain but for the Bank's entering into or assuming or maintaining a commitment, issuing the Bank Guarantee or performing its obligations under the Finance Documents; 9.1.2 the Bank or any holding company of the Bank incurs a cost as a result of the Bank's entering into or assuming or maintaining a commitment, issuing the Bank Guarantee or performing its obligations under the Finance Documents; or 9.1.3 there is any increase in the cost to the Bank or any holding company of the Bank of funding or maintaining any Unpaid Sum or the Bank Guarantee, then the Borrower shall, from time to time on demand of the Bank, promptly pay to the Bank amounts sufficient to indemnify the Bank or to enable the Bank to indemnify its holding company from and against, as the case may be, (i) such reduction in the rate of return of capital, (ii) such cost or (iii) such increased cost. 9.2 INCREASED COSTS CLAIMS If the Bank intends to make a claim pursuant to Clause 9.1 (Increased Costs), it shall notify the Borrower of the event giving rise to such claim. 9.3 EXCLUSIONS Notwithstanding the foregoing provisions of this Clause 9, the Bank shall not be entitled to make any claim in respect of any cost, increased cost or liability compensated by Clause 7 (Taxes). 10. ILLEGALITY If, at any time, it is or will become unlawful for the Bank to make, fund or allow to remain outstanding all or part of the Bank Guarantee, then the Bank shall, promptly after becoming aware of the same, deliver to the Borrower a notice to that effect and: 17 10.1.1 the Bank shall not thereafter be obliged to issue the Bank Guarantee and the amount of the Available Facility shall be immediately reduced to zero; and 10.1.2 if the Bank so requires, the Borrower shall on such date as the Bank shall have specified ensure that the liabilities of the Bank under or in respect of the Bank Guarantee issued by it is reduced to zero. 11. MITIGATION If circumstances arise which would or would upon the giving of notice result in: 11.1.1 an increase in any sum payable to it or for its account pursuant to Clause 7.1 (Tax Gross-up); 11.1.2 a claim for indemnification pursuant to Clause 7.2 (Tax Indemnity) or Clause 9.1 (Increased Costs); or 11.1.3 the reduction of the Available Facility to zero or any repayment to be made by the Borrower pursuant to Clause 10 (Illegality), then, without in any way limiting, reducing or otherwise qualifying the rights of the Bank or the obligations of the Borrower under any of the Clauses referred to above, the Bank shall promptly upon becoming aware of such circumstances notify the Borrower thereof and, in consultation with the Borrower to the extent that it can do so lawfully and without prejudice to its rights hereunder, take reasonable steps (including a change of location of the Facility Office or the transfer of its rights, benefits and obligations hereunder to another financial institution acceptable to the Borrower and willing to participate in the Facility) to mitigate the effects of such circumstances, PROVIDED THAT the Bank shall be under no obligation to take any such action if, in the opinion of the Bank, to do so might have any adverse effect upon its business, operations or financial condition (other than any minor costs and expenses of an administrative nature). 12. REPRESENTATIONS The Borrower makes the representations and warranties set out in Clause 12.1 (Status) to Clause 12.23 (Year 2000) and acknowledges that the Bank has entered into this Agreement in reliance on those representations and warranties. 12.1 STATUS It is a corporation duly organised under the laws of Singapore. 12.2 GOVERNING LAW AND JUDGMENTS In any proceedings taken in its jurisdiction of incorporation in relation to this Agreement, the choice of New York law as the governing law of this Agreement and any judgment obtained in New York will be recognised and enforced. 18 12.3 BINDING OBLIGATIONS It has duly executed and delivered each of the Finance Documents and the obligations expressed to be assumed by it under the Finance Documents are legal and valid obligations binding on it and enforceable against it in accordance with the terms thereof. 12.4 EXECUTION OF THIS AGREEMENT Its execution of the Finance Documents and the EDB Loan Agreement and its exercise of its rights and performance of its obligations thereunder do not and will not: 12.4.1 conflict with any agreement, mortgage, bond or other instrument or treaty to which it is a party or which is binding upon it or any of its assets unless such conflict would not have a Material Adverse Effect; 12.4.2 conflict with its constitutive documents; or 12.4.3 conflict with any applicable law. It has the power to enter into the Finance Documents and the EDB Loan Agreement and all corporate and other action required to authorise the execution of the Finance Documents and the EDB Loan Agreement and the performance of its obligations thereunder has been duly taken. 12.5 NO WINDING-UP Neither the Borrower nor, to the best of the Borrower's knowledge and belief, the Parent has taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against the Borrower or the Parent for its winding-up, dissolution, administration or re-organisation (whether by voluntary arrangement, scheme of arrangement or otherwise) or for the appointment of a receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of it or of any or all of its assets or revenues. 12.6 NO MATERIAL DEFAULTS Neither the Borrower nor, to the best of the Borrower's knowledge and belief, the Parent is in breach of or in default under any agreement to which it is a party or which is binding on it or any of its assets to an extent or in a manner which might have a Material Adverse Effect. 12.7 NO MATERIAL PROCEEDINGS No action or administrative proceeding of or before any court or agency which would reasonably be expected to have a Material Adverse Effect has been started or, to the best of the Borrower's knowledge and belief, threatened against the Borrower or, to 19 the best of the Borrower's knowledge and belief, the Parent except as disclosed in a filing with the Securities and Exchange Commission. 12.8 AUDITED FINANCIAL STATEMENTS The most recent audited financial statements of the Borrower and, to the best of the Borrower's knowledge and belief, the most recent audited consolidated financial statements of the Parent: 12.8.1 were prepared in accordance with accounting principles generally accepted in Singapore (in the case of the Borrower) and the United States of America (in the case of the Parent) and consistently applied; and 12.8.2 save as disclosed therein, are true, accurate and complete and fairly present the financial condition and operations of the Borrower or the Parent (as the case may be) during the relevant financial year. 12.9 NO MATERIAL ADVERSE CHANGE Since the date as at which the most recent audited financial statements of the Borrower and the most recent audited consolidated financial statements of the Parent were stated to be prepared, there has been no material adverse change in the business or financial condition of any member of the Group which has not been disclosed to the Bank or disclosed in a filing with the Securities and Exchange Commission. 12.10 DEBT AGREEMENTS Each of the Borrower and, to the best of the Borrower's knowledge and belief, the Parent is in compliance with its respective material obligations under any agreement in respect of Financial Indebtedness in excess of US$10,000,000. 12.11 PIONEER STATUS It has obtained Pioneer Status. 12.12 WRITTEN INFORMATION All written information supplied by any member of the Group is true, complete and accurate in all material respects as at the date it was given and is not misleading in any respect. 12.13 VALIDITY AND ADMISSIBILITY IN EVIDENCE All acts, conditions and things required to be done, fulfilled and performed in order (a) to enable it lawfully to enter into, exercise its rights under and perform and comply with the obligations expressed to be assumed by it in the Finance Documents and the EDB Loan Agreement, (b) to ensure that the obligations expressed to be assumed by it in the Finance Documents and the EDB Loan Agreement are legal, 20 valid, binding and enforceable and (c) to make the Finance Documents and the EDB Loan Agreement admissible in evidence in its jurisdiction of incorporation have been done, fulfilled and performed. 12.14 CLAIMS PARI PASSU Under the laws of its jurisdiction of incorporation in force at the date hereof, the claims of the Bank against it under the Finance Documents will rank at least pari passu with the claims of all its unsecured and unsubordinated creditors save those whose claims are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application. 12.15 NO FILING OR STAMP TAXES Under the laws of its jurisdiction of incorporation in force at the date hereof, it is not necessary that the Finance Documents be filed, recorded or enrolled with any court or other authority in such jurisdiction or that any stamp, registration or similar tax be paid on or in relation to the Finance Documents except such filings, recordings, enrollment or payments as have been made. 12.16 ENCUMBRANCES Save for Permitted Encumbrances, no Encumbrance exists over all or any part of the Security. 12.17 NO DEDUCTION OR WITHHOLDING Under the laws of its jurisdiction of incorporation in force at the date hereof, it will not be required to make any deduction or withholding from any payment it may make under the Finance Documents to the Bank in Singapore. 12.18 ENVIRONMENTAL COMPLIANCE The Borrower has duly performed and observed in all material respects all Environmental Law, Environmental Permits and all other material covenants, conditions, restrictions or agreements directly or indirectly concerned with any contamination, pollution or waste or the release or discharge of any toxic or hazardous substance in connection with any real property which is or was at any time owned, leased or occupied by the Borrower or on which the Borrower has conducted any activity where failure to do so might reasonably be expected to have a Material Adverse Effect. 12.19 ENVIRONMENTAL CLAIMS No Environmental Claim has been commenced or (to the best of the Borrower's knowledge and belief) is threatened against the Borrower where such claim would be reasonably likely, if determined against the Borrower, to have a Material Adverse Effect. 21 12.20 TAX RETURN It has filed all tax returns required to be filed by it under all applicable laws and has paid all taxes due and payable by it PROVIDED THAT it has not filed a tax return for the fiscal years ending in 1997 and 1998. The Borrower represents and warrants that any fines due and payable as a result of such late filing will be immaterial in amount. 12.21 MATERIAL ADVERSE EFFECT No event has occurred or, to the best of its knowledge, is reasonably anticipated to occur, which is likely to have a Material Adverse Effect. 12.22 OWNERSHIP OF THE BORROWER The Parent owns, directly or indirectly, 100 percent of the issued share capital of the Borrower. 12.23 YEAR 2000 The Borrower believes (having undertaken a comprehensive review and assessment) that all Computer Systems used by any member of the Group are Year 2000 Compliant. The Borrower (having made due enquiry) believes that each of the Group's suppliers and customers (which are of material importance to the business and operations of the Group) will also, on a timely basis, ensure that their Computer Systems are Year 2000 Compliant. 13. SECURITY 13.1 SECURITY The Borrower shall ensure that the Class A Security is in full force and effect from the Utilization Date and at all times thereafter until the Class A Security is replaced with the Class B Security pursuant to Clause 13.2 (Change of Security). The Borrower may elect to replace the Class A Security with the Class B Security or the Class B Security with the Class A Security in accordance with Clause 13.2 (Change of Security). The Borrower shall ensure that at all times during which the Class A Security is in effect, the amount of the Cash Deposits shall equal at least (a) if on such date the interest rate at which the EDB Loan is accruing interest is less than 7.5 percent per annum, S$50,400,000 less (i) 105 percent multiplied by (ii) the aggregate amount of all repayments and prepayments of principal made by the Borrower under the EDB Loan Agreement and (b) if on such date the rate at which the EDB Loan is accruing interest is equal to or greater than 7.5 percent per annum, (i) the sum of (x) 100 percent and (y) such interest rate multiplied by (ii) the aggregate principal amount of the EDB Loan outstanding on such date. By way of example and for the avoidance of doubt, if on a day the rate at which the EDB Loan is accruing interest is 8 percent per annum and no prepayments or repayments shall have been made under the EDB 22 Loan, then the amount of the required Cash Deposits shall equal 108 percent multiplied by S$48,000,000, or S$51,840,000. 13.2 CHANGE OF SECURITY The Security provided by the Borrower may be changed at the Borrower's request if: 13.2.1 not more than 90 nor less than 30 days before the next due date for payment of the Bank Guarantee Commission, the Bank has received a written request from the Borrower to change the Security from Class A Security to Class B Security or vice versa; 13.2.2 the proposed date for the change of Security shall be a date on which the Bank Guarantee Commission is payable pursuant to Clause 4 (Guarantee Commission); 13.2.3 the Borrower has not already requested a change of Security during the immediately preceding three month period PROVIDED THAT the Borrower shall be entitled to make an additional three requests for a change of Security during the effectiveness of this Agreement; 13.2.4 the Bank is satisfied in its sole discretion that its rights under the Facility and in respect of the Security shall not be prejudiced in any way by the change of Security requested by the Borrower; 13.2.5 in the case of a requested change from Class A Security to Class B Security, the identity, value, form and substance of the Class B Security and the related Security Documents and the amount of the applicable Bank Guarantee Commission Rate have been mutually agreed to the satisfaction of the Bank; and 13.2.6 on and as of the proposed date of the change of Security, no Event of Default or Potential Event of Default is continuing, then, save as otherwise provided herein or in the existing Security Documents, the Security will be changed on the next due date for the payment of the Bank Guarantee Commission by the Borrower delivering replacement Security Documents and complying with all other matters required therein. 14. FINANCIAL INFORMATION 14.1 ANNUAL STATEMENTS The Borrower shall as soon as the same become available, but in any event within 180 days after the end of each of its or, as the case may be, the Parent's financial years, deliver to the Bank its consolidated financial statements and the Parent's consolidated financial statements for such financial year, audited by an internationally 23 recognised firm of independent auditors licensed to practise in Singapore (in the case of the Borrower) and the United States of America (in the case of the Parent). 14.2 QUARTERLY STATEMENTS The Borrower shall as soon as the same become available but in any event within 90 days after the end of each quarter of each of the Parent's financial years deliver to the Bank the Parent's consolidated statements for such period. 14.3 REQUIREMENTS AS TO FINANCIAL STATEMENTS The Borrower shall ensure that each set of financial statements delivered by it pursuant to this Clause 14 is: 14.3.1 prepared on the same basis as was used in the preparation of its Original Financial Statements and in accordance with accounting principles generally accepted in Singapore (in the case of the Borrower) or United States of America (in the case of the Parent) and consistently applied; and 14.3.2 certified by an Authorized Signatory of the Borrower or the Parent (as the case may be) as being true, accurate and complete and fairly presenting its financial condition as at the end of the period to which those financial statements relate and of the results of its operations during such period subject, in the case of the financial statements delivered pursuant to Clause 14.2 (Quarterly Statements), to year-end audit adjustments. 14.4 COMPLIANCE CERTIFICATES The Borrower shall ensure that each set of consolidated financial statements delivered by it pursuant to Clause 14.1 (Annual Statements) or Clause 14.2 (Quarterly Statements) is accompanied by a Compliance Certificate signed by a director or senior financial officer of the Borrower and, in the case of the Parent's financial statements, a Compliance Certificate signed by a director or senior financial officer of the Parent. 14.5 OTHER INFORMATION The Borrower shall furnish and provide the Bank with and permit the Bank to obtain all such statements, information, explanations and data, except information of a confidential nature, as the Bank may reasonably require, by prior written notice, regarding the affairs, operations, administration, financial or other state or condition of the Borrower. 14.6 ACCOUNTING POLICIES The Borrower shall ensure that each set of financial statements delivered pursuant to this Clause 14 is prepared using accounting policies, practices, procedures and reference period consistent with those applied in the preparation of the Original Financial Statements unless, in relation to any such set of financial statements, the 24 Borrower notifies the Bank that there have been one or more changes in any such accounting policies, practices, procedures or reference period and the Borrower's or the Parent's (as the case may be) auditors provide: 14.6.1 a description of the changes and the adjustments which would be required to be made to those financial statements in order to cause them to use the accounting policies, practices, procedures and reference period upon which the Original Financial Statements were prepared; and 14.6.2 sufficient information, in such detail and format as may be reasonably required by the Bank, to enable it to make an accurate comparison between the financial position indicated by those financial statements and the Original Financial Statements, and any reference in this Agreement to those financial statements shall be construed as a reference to those financial statements as adjusted to reflect the basis upon which the Original Financial Statements were prepared. 15. FINANCIAL CONDITION 15.1 FINANCIAL CONDITION The Borrower covenants that: 15.1.1 Consolidated Cash Balance shall not at any time be less than US$75,000,000. 15.1.2 Consolidated Tangible Net Worth shall not at any time be less than 50 percent of Consolidated Tangible Net Worth as at July 3, 1999 (or such other date as may be agreed between the parties) plus 75 percent of consolidated positive net income for each successive quarter ended thereafter in respect of which the Parent has issued its consolidated financial statements pursuant to Clause 14.1 (Annual Statements) or 14.2 (Quarterly Statements). 15.2 FINANCIAL DEFINITIONS In Clause 15.1 (Financial Condition) the following terms have the following meanings. "CONSOLIDATED CASH BALANCE" means the aggregate amount of cash, cash equivalents and marketable securities (provided that any marketable securities maturing later than 90 days after the date of determination shall be marked to market every 90 days) held by the Parent and its consolidated subsidiaries (excluding the Cash Deposits and any drawings under any short term or revolving term bank facilities other than the Parent's asset securitization program currently in effect with Fleet National Bank, as administrator, and any renewal or replacement thereof on substantially similar terms). "CONSOLIDATED TANGIBLE NET WORTH" means, without duplication, at any time consolidated shareholders' equity of the Parent and its consolidated subsidiaries (net of 25 any unrealized gains or losses on assets) less (to the extent included) any amount shown in respect of goodwill (including goodwill arising only on consolidation), franchise, licences, patents, tradenames, copyright, service marks, brandnames or other intangible assets of the Parent and its consolidated subsidiaries. "RELEVANT PERIOD" means each period of twelve months ending on the last day of each quarter of the Parent's financial year. 15.3 FINANCIAL TESTING The financial covenants set out in Clause 15.1 (Financial Condition) must be complied with at all times and shall be reported upon quarterly by reference to each of the Parent's consolidated financial statements and each Compliance Certificate delivered pursuant to Clause 14 (Financial Information). 15.4 ACCOUNTING TERMS All accounting expressions which are not otherwise defined herein shall be construed in accordance with generally accepted accounting principles in the United States of America. 16. COVENANTS 16.1 MAINTENANCE OF LEGAL VALIDITY The Borrower shall obtain, comply with the terms of and do all that is necessary to maintain in full force and effect all authorisations, approvals, licences and consents required in or by the laws of its jurisdiction of incorporation to enable it lawfully to operate its business and enter into and perform its obligations under the Finance Documents and the EDB Loan Agreement and to ensure the legality, validity, enforceability or admissibility in evidence in its jurisdiction of incorporation of the Finance Documents and the EDB Loan Agreement, except for such authorisations, approvals, licenses and consents the failure of which to obtain would not be reasonably likely to have a Material Adverse Effect. 16.2 INSURANCE The Borrower shall maintain insurances on and in relation to its business and assets with reputable underwriters or insurance companies against such risks and to such extent as is usual for companies carrying on a business such as that carried on by it. 16.3 ENVIRONMENTAL COMPLIANCE The Borrower shall comply in all material respects with all Environmental Law and obtain and maintain any Environmental Permits and take all reasonable steps in anticipation of known or expected future changes to or obligations under the same, breach of which (or failure to obtain, maintain or take which) might reasonably be expected to have a Material Adverse Effect. 26 16.4 ENVIRONMENTAL CLAIMS The Borrower shall inform the Bank in writing as soon as reasonably practicable upon becoming aware of the same if any Environmental Claim has been commenced or (to the best of the Borrower's knowledge and belief) is threatened against the Borrower in any case where such claim would be reasonably likely, if determined against the Borrower, to have a Material Adverse Effect or of any facts or circumstances which will or are reasonably likely to result in any Environmental Claim being commenced or threatened against the Borrower in any case where such claim would be reasonably likely, if determined against the Borrower, to have a Material Adverse Effect. 16.5 NOTIFICATION OF EVENTS OF DEFAULT, MATERIAL ADVERSE CHANGE, LITIGATION, ETC. The Borrower shall promptly and, in any event not more than 7 days after it becomes aware of such occurrence inform the Bank of the occurrence of: 16.5.1 any Event of Default, Potential Event of Default or default or event of default under the EDB Loan Agreement and, upon receipt of a written request to that effect from the Bank, confirm to the Bank that, save as previously notified to the Bank or as notified in such confirmation, no Event of Default, Potential Event of Default or default or event of default under the EDB Loan Agreement has occurred; 16.5.2 any material adverse change in its condition (financial or otherwise) or of any of its related corporations as reasonably determined by the Borrower, except as disclosed in a filing with the Securities and Exchange Commission; and 16.5.3 the institution of any action or administrative proceeding of or before any court or agency claiming an amount in excess of US$25,000,000. The Borrower shall provide the Bank with copies of all notices, documents or other information provided to, or received from, EDB pursuant to the EDB Loan Agreement. 16.6 CLAIMS PARI PASSU The Borrower shall ensure that at all times the claims of the Bank against it under the Finance Documents rank at least pari passu with the claims of all its unsecured and unsubordinated creditors save those whose claims are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application. 16.7 NEGATIVE PLEDGE The Borrower shall not create or permit to subsist any Encumbrance over all or any part of the Security other than Permitted Encumbrances. 27 16.8 TAXES The Borrower shall duly pay and discharge all rents, rates, taxes, assessments and government charges levied upon the Borrower or against the Borrower's properties prior to the date on which penalties accrue thereon, the non-payment of which would reasonably be likely to have a Material Adverse Effect, unless and to the extent only that the same shall be contested in good faith and in appropriate proceedings by the Borrower. The Borrower shall file tax returns for the fiscal year ending in 1997 by December 31, 1999 and for the fiscal year ending in 1998 by March 31, 2000, and in each case shall pay all applicable fines, if any, arising as a result of such late filing. 16.9 INSPECTION The Borrower shall permit, upon reasonable prior written request of the Bank, the Bank to inspect any land or premises where the Borrower carries on its business and inspect the same and all property and assets whatsoever therein or thereon and all accounts records and statements wherever the same may be situate and to make inventories and record thereof. 16.10 EQUIPMENT The Borrower shall keep all its plant, machinery, equipment, buildings, constructions, fixtures, fittings, implements and other effects in good and substantial repair and proper working condition in accordance with good business practice. 16.11 DISPOSAL OF ASSETS The Borrower shall not sell, transfer or otherwise dispose of all or any part of its assets or properties (whether in a single transaction or in a number of related transactions), except for: (a) disposals in the ordinary course of business on an arms' length basis; (b) disposals of obsolete, worn out or damaged assets; and (c) disposals of assets which, together with all such other disposals of assets pursuant to this clause (c) occurring after the date hereof, do not exceed in the aggregate US$25,000,000. 16.12 INSPECTION AUTHORITIES The Borrower shall give to the Bank such written authorisations or other directions and provide such facilities and access as the Bank may require for the inspection referred to in Clause 16.9 (Inspection) and, during the continuance of an Event of Default, shall pay all costs, fees, travelling and other out-of-pocket expenses whether legal or otherwise in respect of such inspection. 28 16.13 MEMORANDUM AND ARTICLES OF ASSOCIATION Insofar as may be necessary the Borrower shall amend its Memorandum and Articles of Association so as to enable it to observe and perform all the covenants, undertakings, terms, stipulations, conditions and other provisions of this Agreement. 16.14 YEAR 2000 The Borrower shall procure that all Computer Systems used by any member of the Group are (or will by no later than September 30, 1999 be) Year 2000 Compliant. 17. EVENTS OF DEFAULT Each of Clause 17.1 (Failure to Pay) to Clause 17.19 (Material Adverse Change) describes circumstances which constitute an Event of Default for the purposes of this Agreement. 17.1 FAILURE TO PAY The Borrower fails to pay any sum due from it under any Finance Document or the EDB Loan Agreement at the time, in the currency and in the manner specified therein within three days after the due date thereof. 17.2 MISREPRESENTATION Any representation or statement made or deemed to be made by the Borrower or the Parent in any Finance Document or in any notice or other document, certificate or statement delivered by it pursuant thereto or in connection therewith is or proves to have been incorrect or misleading in any material respect when made or deemed to be made. 17.3 SPECIFIC COVENANTS The Borrower fails duly to perform or comply with any of the obligations expressed to be assumed by it in Clause 13 (Security), Clause 14 (Financial Information) or Clause 16.5 (Notification of Events of Default, etc.) and, in the case of the obligations under Clause 13 (Security), the failure, if capable of remedy, is not remedied within two Business Days after the Borrower becomes aware thereof. 17.4 PIONEER STATUS The Borrower ceases at any time to maintain its Pioneer Status and fails to reacquire Pioneer Status within 30 days thereafter. 17.5 OTHER OBLIGATIONS The Borrower fails duly to perform or comply with any other obligation expressed to be assumed by it in any Finance Document and such failure, if capable of remedy, is 29 not remedied within fifteen days after the Bank has given notice thereof to the Borrower. 17.6 CROSS DEFAULT Any Financial Indebtedness of any member of the Group is not paid when due or any creditor of any member of the Group becomes entitled to declare any Financial Indebtedness of any member of the Group due and payable prior to its specified maturity, PROVIDED THAT it shall not constitute an Event of Default if the aggregate amount (or its equivalent in another currency) of all such Financial Indebtedness of all members of the Group is less than US$50,000,000. 17.7 CROSS ACCELERATION Any Financial Indebtedness of any member of the Group is declared to be or otherwise becomes due and payable prior to its specified maturity, PROVIDED THAT it shall not constitute an Event of Default if the aggregate amount (or its equivalent in another currency) of all such Financial Indebtedness of all members of the Group is less than US$10,000,000. 17.8 INSOLVENCY AND RESCHEDULING Any of the Borrower, the Parent or any Material Subsidiary is unable to pay its debts as they fall due, commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of its indebtedness or makes a general assignment for the benefit of or a composition with its creditors. 17.9 WINDING-UP Any of the Borrower, the Parent or any Material Subsidiary takes any corporate action or other steps are taken or legal proceedings are started for its winding-up, dissolution, administration or re-organisation (whether by way of voluntary arrangement, scheme of arrangement or otherwise) for the benefit of or a composition with its creditors or for the appointment of a liquidator, receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of it or of any or all of its revenues and assets. 17.10 EXECUTION OR DISTRESS Any execution or distress is levied against, or an encumbrancer takes possession of, the whole or any part of, the property, undertaking or assets of any of the Borrower, the Parent or any Material Subsidiary or any event occurs which under the laws of any jurisdiction has a similar or analogous effect and is not discharged in full within 30 days of having been so levied. 30 17.11 FAILURE TO COMPLY WITH FINAL JUDGMENT Any member of the Group fails to comply with or pay any sum due from it under any final judgment or any final order made or given by any court of competent jurisdiction in an amount which, together with all such other amounts owing by any other members of the Group, exceeds in the aggregate US$25,000,000 (or its equivalent in another currency) and such judgment or order is not satisfied, discharged or stayed pending appeal within 30 days. 17.12 GOVERNMENTAL INTERVENTION By or under the authority of any government, (a) the management of the Borrower is wholly or partially displaced or the authority of the Borrower in the conduct of its business is wholly or partially curtailed or (b) all or a majority of the issued shares of the Borrower or 5% of its consolidated assets or 20% of its consolidated revenues is seized, nationalised, expropriated or compulsorily acquired. 17.13 OWNERSHIP OF THE BORROWER The Parent ceases to own, directly or indirectly, 100 percent of the issued share capital of the Borrower. 17.14 THE GROUP'S BUSINESS Any member of the Group ceases to carry on the business it carries on at the date hereof or enters into any unrelated business if the assets of such unrelated business constitute more than 50 percent of the assets of the Group after giving effect to such unrelated business. 17.15 REPUDIATION The Borrower repudiates any Finance Document or the EDB Loan Agreement or does or causes to be done any act or thing evidencing an intention to repudiate any Finance Document or the EDB Loan Agreement. 17.16 ILLEGALITY At any time it is or becomes unlawful for the Borrower to perform or comply with any or all of its obligations under any Finance Document or the EDB Loan Agreement or any of the obligations of, or any of the security created by, the Borrower thereunder are not or cease to be legal, valid, binding and enforceable. 17.17 MERGER The Parent merges or consolidates with any other person (where the Parent is not the surviving company), enters into any demerger transaction or participates in any other similar type of corporate reconstruction. 31 17.18 EDB LOAN 17.18.1 The Borrower shall fail to duly and punctually comply with any of its obligations under the EDB Loan Agreement and such failure, if capable of remedy, is not remedied within 30 days after the Bank has given notice to the Borrower requiring the Borrower to remedy such failure. 17.18.2 Any amendment or waiver is made under the EDB Loan Agreement without the Bank's prior written consent which relates to change in the principal amount or currency of the EDB Loan, or a change in any repayment date, or a reduction in the principal amount due on any repayment date; or a change in the currency of any payment of interest in respect of the EDB Loan. 17.19 MATERIAL ADVERSE CHANGE To the extent not contemplated by any of the foregoing Clause 17.1 (Failure to Pay) to Clause 17.18 (EDB Loan), any event or circumstance occurs which the Bank reasonably believes might have a material adverse effect on the ability of the Borrower to perform or comply with its obligations under any of the Finance Documents or the EDB Loan Agreement. 17.20 ACCELERATION AND CANCELLATION During the continuance of an Event of Default (other than an event with respect to the Borrower described in Clause 17.8 (Insolvency and Rescheduling), Clause 17.9 (Winding-up) or Clause 17.10 (Execution or Distress)) and at any time thereafter, the Bank may by notice to the Borrower: 17.20.1 require the Borrower to procure that the liability of the Bank under the Bank Guarantee is promptly reduced to zero and/or declare all or any part of the amounts outstanding and unpaid by the Borrower under the Finance Documents and all liabilities of the Borrower thereunder, present or future, matured or unmatured, contingent or absolute to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower (whereupon the same shall become so payable together with accrued interest thereon and any other sums then owed by the Borrower thereunder) or declare all such amounts to be due and payable on demand of the Bank; and/or 17.20.2 declare that any unutilised portion of the Facility shall be cancelled, whereupon the same shall be cancelled and the Available Facility shall be reduced to zero; and/or 17.20.3 exercise any rights of the Bank under the Account Charge. and in the case of any event with respect to the Borrower described in Clause 17.8 (Insolvency and Rescheduling), 17.9 (Winding-up) or Clause 17.10 (Execution or 32 Distress), the Available Facility shall automatically reduce to zero and all moneys outstanding and unpaid by the Borrower under the Finance Documents and all liabilities of the Borrower thereunder, present or future, matured or unmatured, contingent or absolute shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. 17.21 ADVANCES DUE ON DEMAND If, pursuant to Clause 17.20 (Acceleration and Cancellation), the Bank declares all or any part of the amounts outstanding and unpaid by the Borrower under the Finance Documents and all liabilities of the Borrower thereunder, present or future, matured or unmatured, contingent or absolute to be due and payable on demand of the Bank, then, and at any time thereafter, the Bank may by notice to the Borrower: 17.21.1 require repayment of all or such part of such amount on such date as it may specify in such notice, without presentation, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower (whereupon the same shall become due and payable on the date specified together with accrued interest thereon and any other sums then owed by the Borrower thereunder) or withdraw its declaration with effect from such date as it may specify; and/or 17.21.2 select as the duration of any Interest Period which begins while such declaration remains in effect a period of six months or less. 18. COMMITMENT COMMISSION AND FEES 18.1 COMMITMENT COMMISSION The Borrower shall pay to the Bank a commitment commission on the amount of the Available Facility from day to day during the Availability Period, such commitment commission to be calculated at the rate of 0.25 percent per annum and payable in arrears on the last day of each successive period of three months which ends during the Availability Period and on the last day of the Availability Period PROVIDED THAT if (a) the Class A Security is in full force and effect on the date hereof, (b) the amount of the Cash Deposits is at least equal to S$50,400,000 and (c) the Class A Security is provided by the Borrower throughout the Availability Period, the payment of the commitment commission will be waived. 18.2 CLOSING FEE AND ADMINISTRATION FEE The Borrower shall pay to the Bank the closing fee and administration fee specified in the commitment letter dated August 12, 1999 from the Bank to the Borrower and the Parent at the times, and in the amounts, specified in such letter. 33 19. COSTS AND EXPENSES 19.1 TRANSACTION EXPENSES The Borrower shall, from time to time on demand of the Bank, reimburse the Bank for all reasonable costs and expenses (including legal fees) together with any VAT thereon incurred by it in connection with the negotiation, preparation and execution of the Finance Documents, any change of Security requested pursuant to Clause 13 (Security), any other document referred to in the Finance Documents and the completion of the transactions therein contemplated. 19.2 PRESERVATION AND ENFORCEMENT OF RIGHTS The Borrower shall, from time to time on demand of the Bank, reimburse the Bank for all costs and expenses (including legal fees) on a full indemnity basis together with any VAT thereon incurred in or in connection with the preservation and/or enforcement of any of the rights of the Bank under the Finance Documents and any other document referred to in the Finance Documents (including, without limitation, in the event that the Bank reasonably believes that an Event of Default or Potential Event of Default has occurred, any costs and expenses relating to any investigation thereof or any steps necessary or desirable in connection with any proposal for remedying or otherwise resolving such Event of Default or Potential Event of Default). 19.3 STAMP TAXES The Borrower shall pay all stamp, registration and other taxes to which this Agreement, any other document referred to in this Agreement or any judgment given in connection therewith is or at any time may be subject and shall, from time to time on demand of the Bank, indemnify the Bank against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such tax. 19.4 AMENDMENT COSTS If the Borrower requests any amendment, waiver or consent then the Borrower shall, within five Business Days of demand by the Bank, reimburse the Bank for all reasonable costs and expenses (including legal fees) together with any VAT thereon incurred by such person in responding to or complying with such request. 20. DEFAULT INTEREST AND BREAK COSTS 20.1 DEFAULT INTEREST PERIODS If any sum due and payable by the Borrower hereunder is not paid on the due date therefor in accordance with Clause 23 (Payments) or if any sum due and payable by the Borrower under any judgment of any court in connection herewith is not paid on the date of such judgment, the period beginning on such due date or, as the case may 34 be, the date of such judgment and ending on the date upon which the obligation of the Borrower to pay such sum is discharged shall be divided into successive periods, each of which (other than the first) shall start on the last day of the preceding such period and the duration of each of which shall (except as otherwise provided in this Clause 20) be selected by the Bank. 20.2 DEFAULT INTEREST An Unpaid Sum shall bear interest during each Interest Period in respect thereof at the rate per annum which is two percent per annum above the rate per annum equal to the cost to the Bank of funding such Unpaid Amount from whatever sources it may select. 20.3 PAYMENT OF DEFAULT INTEREST Any interest which shall have accrued under Clause 20.2 (Default Interest) in respect of an Unpaid Sum shall be due and payable and shall be paid by the Borrower on demand of the Bank. 21. BORROWER'S INDEMNITIES 21.1 BORROWER'S INDEMNITY The Borrower undertakes to indemnify the Bank against: 21.1.1 any cost, claim, loss, expense (including legal fees) or liability (including, without limitation, any break costs) together with any VAT thereon, whether or not reasonably foreseeable, which it may sustain or incur as a consequence of the occurrence of any Event of Default; and 21.1.2 any cost or loss (including, without limitation, any break costs) it may suffer or incur as a result of its issuing or making arrangements to issue the Bank Guarantee requested by the Borrower but not made by reason of the operation of any one or more of the provisions hereof. 21.2 CURRENCY INDEMNITY If any sum (a "SUM") due from the Borrower under this Agreement or any other Finance Document is paid in a currency (the "FIRST CURRENCY") other than the currency (the "SECOND CURRENCY") in which such Sum is payable or any order or judgment given or made in relation hereto has to be converted from the First Currency into the Second Currency, the Borrower shall indemnify the Bank from and against any loss suffered or incurred as a result of any discrepancy between (a) the rate of exchange used for such purpose to convert such Sum from the First Currency into the Second Currency and (b) the rate or rates of exchange available to the Bank at the time of receipt of such Sum. 35 22. CURRENCY OF ACCOUNT AND PAYMENT The Singapore dollar is the currency of account and payment for each and every sum at any time due from the Borrower hereunder, PROVIDED THAT: 22.1.1 each payment in respect of costs and expenses shall be made in the currency in which the same were incurred; and 22.1.2 each payment pursuant to Clause 7.2 (Tax Indemnity), Clause 9.1 (Increased Costs) or Clause 21.1 (Borrower's Indemnity) shall be made in the currency specified by the Bank. 23. PAYMENTS 23.1 PAYMENTS TO THE BANK On each date on which this Agreement requires an amount to be paid by the Borrower, the Borrower shall make the same available to the Bank for value on the due date at such time and in such funds and to such account with such bank as the Bank shall specify from time to time. 23.2 ALTERNATIVE PAYMENT ARRANGEMENTS If, at any time, it shall become impracticable (by reason of any action of any governmental authority or any change in law or any similar event) for the Borrower to make any payments in the manner specified in Clause 23.1 (Payments to the Bank), then the Borrower may agree with the Bank alternative arrangements for such payments to be made, PROVIDED THAT, in the absence of any such agreement, the Borrower shall be obliged to make all payments due to the Bank in the manner specified herein. 23.3 NO SET-OFF All payments required to be made by the Borrower hereunder shall be calculated without reference to any set-off or counterclaim and shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim. 24. SET-OFF 24.1 SET-OFF The Bank may, from time to time, apply any credit balance to which the Borrower is entitled on any account of the Borrower with the Bank in satisfaction of any sum due and payable from the Borrower to the Bank hereunder but unpaid PROVIDED THAT such rights of set-off will not extend to any amounts maintained at, or in the possession of, the Bank that relate to vendor remittances being made by the Bank on behalf of any member of the Group and which are contained in Account No. 08213004213 or Account No. 01213004213 at the Bank or any sub-account or successor account 36 thereto. For this purpose, the Bank is authorized to purchase with the moneys standing to the credit of any such account such other currencies as may be necessary to effect such application. 24.2 SET-OFF NOT MANDATORY The Bank shall not be obliged to exercise any right given to it by Clause 24.1. (Set-off). 25. ASSIGNMENTS 25.1 BINDING AGREEMENT This Agreement shall be binding upon and enure to the benefit of each party hereto and its or any subsequent successors and permitted assigns. 25.2 NO ASSIGNMENTS AND TRANSFERS BY THE BORROWER The Borrower shall not be entitled to assign or transfer all or any of its rights, benefits and obligations hereunder. 25.3 ASSIGNMENTS BY THE BANK The Bank may, at any time, assign any of its rights and benefits hereunder to a bank or financial institution PROVIDED THAT the Bank shall not make any such assignment of more than 50% of the amount of the Bank Guarantee without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. 25.4 DISCLOSURE OF INFORMATION The Bank may disclose to any person: 25.4.1 to (or through) whom the Bank assigns (or may potentially assign) all or any of its rights, benefits and obligations hereunder; 25.4.2 with (or through) whom the Bank enters into (or may potentially enter into) any sub-participation in relation to, or any other transaction under which payments are to be made by reference to, this Agreement or the Borrower; or 25.4.3 to whom information may be required to be disclosed by any applicable law, such information about the Borrower or the Group and this Agreement as the Bank shall consider appropriate PROVIDED THAT the Bank shall notify the Borrower of any such disclosure and PROVIDED FURTHER THAT prior to the Bank disclosing any information which is subject to a confidentiality undertaking by the Bank in favor of any member of the Group, the Bank shall first obtain an equivalent confidentiality undertaking from the proposed recipient of such information except in connection with any such disclosure pursuant to Clause 25.4.3. 37 26. EVIDENCE OF DEBT 26.1 EVIDENCE OF DEBT The Bank shall maintain in accordance with its usual practice accounts evidencing the amounts from time to time paid by it under the Bank Guarantee and owing to it hereunder. 26.2 PRIMA FACIE EVIDENCE In any legal action or proceeding arising out of or in connection with this Agreement, the entries made in the accounts maintained pursuant to Clause 26.1 (Evidence of Debt) shall be prima facie evidence of the existence and amounts of the specified obligations of the Borrower. 26.3 CERTIFICATES OF THE BANK A certificate of the Bank as to (a) the amount by which a sum payable to it hereunder is to be increased under Clause 7.1 (Tax Gross-up), (b) the amount for the time being required to indemnify it against any such cost, payment or liability as is mentioned in Clause 7.2 (Tax Indemnity), Clause 9.1 (Increased Costs) or Clause 21.1 (Borrower's Indemnity) shall, in the absence of manifest error, be prima facie evidence of the existence and amounts of the specified obligations of the Borrower. 27. REMEDIES AND WAIVERS, PARTIAL INVALIDITY 27.1 REMEDIES AND WAIVERS No failure to exercise, nor any delay in exercising, on the part of the Bank any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 27.2 PARTIAL INVALIDITY If, at any time, any provision hereof is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions hereof nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 28. NOTICES 28.1 COMMUNICATIONS IN WRITING Each communication to be made hereunder shall be made in writing and, unless otherwise stated, shall be made by fax or letter. 38 28.2 DELIVERY Any communication or document to be made or delivered by one person to another pursuant to this Agreement shall: 28.2.1 if by way of fax (unless that other person has by fifteen days' notice specified another number) be made to such other person to the fax number identified with its signature below and shall be deemed to have been received when transmission has been completed and receipt has been confirmed by telephone; and 28.2.2 if by way of letter (unless that other person has by fifteen days' notice specified another address) be delivered to that other person at the address identified with its signature below and shall be deemed to have been delivered when left at that address or, as the case may be, ten days after being deposited in the post postage prepaid in an envelope addressed to it at that address, PROVIDED THAT any communication or document to be made or delivered to the Bank shall be effective only when received by the Bank. 28.3 ENGLISH LANGUAGE Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation thereof into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 29. GOVERNING LAW This Agreement and all matters arising from or connected with it are governed by the law of the State of New York. 30. JURISDICTION 30.1 SUBMISSION TO JURISDICTION Each party hereto hereby agrees that any suit, action or proceeding with respect to this Agreement, the other Finance Documents or any judgment entered by any court in respect thereof may be brought in the courts of the State of New York, County of New York or the United States District Court for the Southern District of New York; and each party hereto hereby irrevocably submits to the jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. Each party hereto further submits, for the purpose of any such suit, action, proceeding or judgment brought or rendered against it, to the appropriate courts of the jurisdiction of its domicile. 39 30.2 PROCESS AGENT The Borrower hereby agrees that service of all writs, process and summonses in any such suit, action or proceeding brought in the State of New York may be made upon CT Corporation at 1633 Broadway, New York, NY 10017 (or at such other address or at the office of such other authorized agent as the Borrower may designate by written notice to the Bank) (the "PROCESS AGENT"), and the Borrower hereby confirms and agrees that the Process Agent has been duly and irrevocably appointed as its agent and true and lawful attorney-in-fact in its name, place and stead to accept such service of any and all such writs, process and summonses, and agrees that the failure of the Process Agent to give any notice of any such service of process to the Borrower shall not impair or affect the validity of such service or of any judgment based thereon. The Borrower hereby further irrevocably consents to the service of process in any suit, action or proceeding in such courts by the mailing thereof by the Bank by registered or certified mail, postage prepaid, at its address set forth beneath its signature hereto. 30.3 OTHER SERVICE Nothing herein shall in any way be deemed to limit the ability of the Bank to serve any such writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over the Borrower in such other jurisdictions, and in such manner, as may be permitted by applicable law. 30.4 WAIVER OF VENUE The Borrower hereby irrevocably waives any objection that it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Finance Document brought in the courts of the State of New York, County of New York or the United States District Court for the Southern District of New York, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 30.5 WAIVER OF JURY TRIAL EACH OF THE BORROWER AND THE BANK HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 30.6 NO IMMUNITY To the extent that the Borrower may be or become entitled, in any jurisdiction in which judicial proceedings may at any time be commenced with respect to this Agreement or any other Finance Document, to claim for itself or its assets or 40 revenues any immunity from suit, court jurisdiction, attachment prior to judgment, attachment in aid of execution of a judgment, execution of a judgment or from any other legal process or remedy relating to its obligations under this Agreement, or any other Finance Document, and to the extent that in any such jurisdiction there may be attributed such an immunity (whether or not claimed), the Borrower hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity to the fullest extent permitted by the laws of such jurisdiction. 30.7 INTEGRATION This Agreement, together with the other Finance Documents (but only paragraphs 5 and 6 of the commitment letter dated August 12, 1999 from the Bank to the Borrower and the Parent), embodies the entire agreement and understanding among the Borrower and the Bank, and supersedes all prior or contemporaneous agreements and understandings of such persons, verbal or written, relating to the subject matter hereof and thereof. 30.8 COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 41 WITNESS the hands of the duly authorized representatives of the parties hereto the day and year first before written. THE BORROWER MAXTOR PERIPHERALS (S) PTE. LTD. By: -------------------------------- Name: Title: Address: 36 Robinson Road, #18-01 City House Singapore 068877 Tel: (65) 480-1850 Fax: (65) 480-1852 Attention: C.S. Tiong THE BANK THE BANK OF NOVA SCOTIA, SINGAPORE BRANCH By: -------------------------------- Name: Title: Address: #15-01, Ocean Building 10 Collyer Quay Singapore 049315 Tel: (65) 539-4628 Fax: (65) 532-2440 Attention: Manager In addition, a copy of all notices shall be sent to: The Bank of Nova Scotia, Hong Kong Branch 25th Floor, United Centre 95 Queensway Hong Kong Tel: (852) 2861-4828 Fax: (852) 2527-2527 Attention: Vice President & Manager 42 SCHEDULE 1 CONDITIONS PRECEDENT 1. A copy, certified as a true and up-to-date copy by an Authorized Signatory of the Borrower, of its memorandum and articles of association and certificate of incorporation. 2. A copy, certified as a true and up-to-date copy by an Authorized Signatory of the Borrower, of a board resolution of the Borrower approving the execution, delivery and performance of the Finance Documents and the EDB Loan Agreement and the terms and conditions hereof and authorising a named person or persons to sign the Finance Documents and any documents to be delivered by the Borrower pursuant hereto. 3. A certificate of an Authorized Signatory of the Borrower setting out the names and signatures of the persons authorized to sign, on behalf of the Borrower, the Finance Documents and any documents to be delivered by the Borrower pursuant hereto. 4. A certificate of an Authorized Signatory of the Borrower confirming that utilization of the Facility would not breach any restriction on its borrowing powers. 5. A copy, certified as a true copy by an Authorized Signatory of the Borrower, of each consent and approval required in connection with the execution, delivery and performance by the Borrower of the Finance Documents. 6. An opinion of the Borrower's New York counsel satisfactory in form and substance to the Bank. 7. An opinion of the Borrower's Singapore counsel satisfactory in form and substance to the Bank. 8. An opinion of Clifford Chance, counsel to the Bank. 9. A copy, certified as a true copy by an Authorized Signatory of the Borrower, of the Original Financial Statements of the Borrower. 10. A copy, certified as a true copy by an Authorized Signatory of the Parent, of the Original Financial Statements of the Parent. 11. Evidence that the fees, costs and expenses required to be paid by the Borrower pursuant to Clause 18.1 (Commitment Commission), Clause 18.2 (Closing Fee and Administration Fee), Clause 19.1 (Transaction Expenses) and 19.3 (Stamp Taxes) have been paid. 12. Evidence that CT Corporation has agreed to act as the agent of the Borrower for the service of process in New York. 43 13. Evidence that the Cash Deposits have been deposited with the Account Bank at least one day prior to the Utilization Date. 14. A duly executed copy of the Account Charge. 15. A copy, certified as a true and up-to-date copy by an Authorized Signatory of the Borrower, of the EDB Offer Letter and the acceptance thereof by the Borrower. 16. A duly executed copy of the EDB Loan Agreement and the letter dated September 6, 1999 from Barry Sim, Director, Electronics at EDB, to CS Tiong, Vice President, Finance at the Borrower, each certified as a true and up-to-date copy by an Authorized Signatory of the Borrower. 17. A copy of the certificate of Pioneer Status, Certificate No. 1228, issued by the Ministry of Trade on June 3, 1998, certified as a true and up-to-date copy by an Authorized Signatory of the Borrower. 44 SCHEDULE 2 UTILIZATION REQUEST From: Maxtor Peripherals (S) Pte. Ltd. To: The Bank of Nova Scotia, Singapore Branch Dated: Dear Sirs, 1. We refer to the agreement (the "Facility Agreement") dated [ ] 1999 and made between Maxtor Peripherals (S) Pte. Ltd. as borrower and The Bank of Nova Scotia, Singapore Branch as bank. Terms defined in the Facility Agreement shall have the same meaning in this notice. 2. This notice is irrevocable. 3. We hereby give you notice that, pursuant to the Facility Agreement and on [date of proposed utilization], we wish the Bank to issue a Bank Guarantee in the aggregate amount of S$[ ] upon the terms and subject to the conditions contained therein. 4. We confirm that, at the date hereof, no Event of Default or Potential Event of Default is continuing. Yours faithfully ----------------------------- Authorized Signatory for and on behalf of Maxtor Peripherals (S) Pte. Ltd. 45 SCHEDULE 3 PART 1 FORM OF PARENT COMPLIANCE CERTIFICATE To: The Bank of Nova Scotia, Singapore Branch Date: Dear Sirs, We refer to an agreement (the "Facility Agreement") dated [ ], 1999 and made between Maxtor Peripherals (S) Pte. Ltd. and The Bank of Nova Scotia, Singapore Branch as bank. Terms defined in the Facility Agreement shall bear the same meaning herein. We confirm that: (a) the Consolidated Cash Balance as at [ ] is US$[ ]; and (b) the Consolidated Tangible Net Worth as at [ ] is US$[ ] which is equal to at least 50 percent of Consolidated Tangible Net Worth as at July 3, 1999 plus 75 percent of consolidated positive net income for each successive quarter ended thereafter in respect of which the Parent has issued its consolidated financial statements pursuant to Clause 14.1 (Annual Statements) or 14.2 (Quarterly Statements) of the Facility Agreement. Signed: ------------------- --------------------------------- Director Director/Senior Financial Officer 46 SCHEDULE 3 PART 2 FORM OF BORROWER COMPLIANCE CERTIFICATE To: The Bank of Nova Scotia, Singapore Branch Date: Dear Sirs, We refer to an agreement (the "Facility Agreement") dated [ ], 1999 and made between Maxtor Peripherals (S) Pte. Ltd. and The Bank of Nova Scotia, Singapore Branch as bank. Terms defined in the Facility Agreement shall bear the same meaning herein. We confirm that, as at the date hereof, we are in compliance with all terms and conditions of the Facility Agreement and the EDB Loan Agreement and no Event of Default or Potential Event of Default has occurred and is continuing [or describe any non-compliance or default]. Signed: ------------------- --------------------------------- Director Director/Senior Financial Officer 47 SCHEDULE 4 FORM OF BANK GUARANTEE BANK GUARANTEE To: Singapore Economic Development Board 1. In consideration of your advancing to maxtor peripherals (s) pte. limited (the "company") a loan facility in an aggregate amount not exceeding singapore dollars 48,000,000 pursuant and subject to the terms and conditions of the edb loan agreement ("loan agreement") entered into by yourselves and the company dated ______________, we the bank whose name appears in the signature pages hereto unconditionally and irrevocably guarantee as follows: (a) We shall, in respect of the principal amount, in the event that the Company defaults in the repayment of such part or all of the amount of the Guaranteed Principal Sum which is due or owing to you under the terms of the Loan Agreement (including due or owing by reason of your having exercised your rights under Clause 15 of the Loan Agreement) (the "DEFAULTED PRINCIPAL AMOUNT"), pay the Defaulted Principal Amount to yourselves within 3 Business Days of our receipt of such demand, unless such demand is received on a day which is not a Business Day (as defined in the Loan Agreement) or after 12 noon on any Business Day, in which event payment shall be made within 3 Business Days from the next immediately succeeding Business Day. For the purposes of this Guarantee, "GUARANTEED PRINCIPAL SUM" shall mean the principal amount outstanding under the Loan Agreement from time to time. For the avoidance of doubt, the Guaranteed Principal Sum shall equal zero upon termination of this Guarantee pursuant to Clause 10. (b) We shall, in respect of all interest accrued, due or owing under the Loan Agreement (including all default interest), in the event that the Company defaults in the payment of such part or all of the amount of the interest which is accrued, due or owing to you under the terms of the Loan Agreement (including due or owing by reason of your having exercised your rights under Clause 15 of the Loan Agreement) (the "DEFAULTED INTEREST AMOUNT"), pay the Defaulted Interest Amount to yourselves within 3 Business Days of our receipt of such demand, unless such demand is received on a day which is not a Business Day or after 12 noon on any Business Day, in which event payment shall be made within 3 Business Days from the next immediately succeeding Business Day. 48 2. We also agree as primary obligation to indemnify you on demand from and against any loss, cost or expense incurred by you as a result of the obligations guaranteed pursuant hereto being or becoming void, voidable, unenforceable or ineffective for any reason whatsoever, whether or not known to you, the amount of such loss being the amount which you would otherwise have been entitled to recover from us under this guarantee. 3. We represent and warrant that we have full power to enter into this guarantee and have taken all necessary steps to authorise its execution on our behalf and have obtained all necessary governmental and other consents required to enable us to perform our obligations and hereunder and that this guarantee is legal, valid and binding on us. 4. Subject to clause 10 below, this guarantee and indemnity shall be a continuing security and accordingly (i) shall extend to cover the balance of the guaranteed principal sum and interest due at any time from the company to you and (ii) shall not be discharged by an intermediate payment or settlement of account between the borrower and you. 5. It is agreed that a certificate from you as to the amount due from the company by way of principal or interest under the loan agreement at the date of such certificate shall, in the absence of manifest error, be conclusive evidence of the amounts so due for all purposes. 6. You may not assign your rights under this guarantee without our prior written consent. 7. This guarantee shall not be affected by any change in your constitution or the constitution of the company. 8. Any demand to be made on us hereunder shall be made by facsimile or letter to singapore branch,
, and shall specify whether such demand is made in respect of principal or interest or both. 9. This guarantee shall remain in full force and effect until the earliest of (i) the date on which you certify that there is no amount owing, due or payable by the company to you by way of principal under the loan agreement and no amount of interest accrued but unpaid; (ii) the date on which this guarantee is specified to be terminated by us pursuant to a notice given by us following termination of the guarantee issuance facility entered into between ourselves and the company, such notice to be given at least [30] days prior to the termination date; and (iii) the date following two years from the date hereof of (or such later date as may be mutually agreed among the company, maxtor corporation and ourselves). 10. This guarantee shall be governed by and construed in accordance with the laws of the republic of singapore. 49 Dated the -------------------------- Signed: For and on behalf of Singapore Branch [NAME] EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JAN-01-2000 DEC-27-1998 OCT-02-1999 171,811 113,205 230,146 10,959 123,490 645,542 387,392 241,133 862,340 497,441 114,531 0 0 1,117 249,251 862,340 1,795,499 1,795,499 1,678,916 1,678,916 214,751 0 9,970 (52,510) 1,632 (54,142) 0 0 0 (54,142) (0.53) (0.53) Other SE includes additional paid-in capital of $1,042,246 accumulated deficit of $(795,922), and cumulative other comprehensive income of $2,927. Other expenses include R&D of $141,897, SG&A of $63,211, stock compensation expense of $2,017, acquired in-process technology of $7,028, and amortization of goodwill and other intangible assets of $598.
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