Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to For Quarter Ended Commission File Number July 3, 1994 0-12390 QUANTUM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-2665054 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 500 McCarthy Blvd. Milpitas, California 95035 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 894-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 29, 1994: 45,232,586. QUANTUM CORPORATION 10-Q REPORT INDEX Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION 11 SIGNATURE 12 QUANTUM CORPORATION PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED STATEMENTS OF INCOME (In thousands except share per share data) (unaudited) First Quarter Three Months Ended July 3, July 4, 1994 1993 Sales $725,304 $479,112 Cost of sales 579,227 420,618 Gross p rofit146,077 58,494 Operating expenses: Research and development 28,599 21,695 Sales and marketing 22,760 18,771 General and administrative 10,331 11,379 61,690 51,845 Income from operations 84,387 6,649 Other (income) expense: Interest expense 3,556 3,608 Interest and other income (2,371) (1,994) 1,185 1,614 Income before income taxes 83,202 5,035 Income tax provision 24,961 1,662 Net income $58,241 $ 3,373 Net income per share: Primary $1.24 $0.08 Fully diluted $1.03 $ 0.08 Weighted average common and common equivalent shares: Primary 46,854,979 44,756,490 Fully diluted 58,562,979 44,756,490 See accompanying notes to consolidated financial statements. QUANTUM CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited) July 3, March 31, 1994 1994 Assets Current assets: Cash and cash equivalents $ 251,252 $217,531 Short-term investments 119,797 112,508 Accounts receivable, net of allowance for doubtful accounts of $10,371 and $9,391 379,284 324,376 Inventories 177,308 194,083 Deferred taxes 41,445 32,821 Other current assets 14,283 14,365 Total current assets 983,369 895,684 Property and equipment, net of accumulated depreciation of $79,636 and $72,801 95,611 85,874 Other assets 15,973 15,880 $1,094,953 $997,438 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 269,472 $267,189 Accrued warranty expense 56,261 55,617 Accrued compensation 19, 593 15,315 Income taxes payable 20,833 - Other accrued liabilities 44,929 35,545 Total current liabilities 411,088 373,666 Subordinated debentures 212,500 212,500 Shareholders' equity: Common stock 126,382 124,530 Retained ea rnings 344,983 286,742 Total shareholders' equity 471,365 411,272 $1,094,953 $997,438 See accompanying notes to consolidated financial statements. QUANTUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Three Months Ended July 3, July 4, 1994 1993 Cash flows from operating activities: Net income $ 58,241 $ 3,373 Items not requiring the current use of cash: Depreciation and amortization 7,265 7,225 Changes in assets and liabilities: Accounts receivable (54,908) 17,613 Inventories 16,775 (29,127) Accounts payable 2,282 (24,022) Income taxes payable 21,196 (15,098) Accrued warranty expense 644 4,352 Other assets and liabilities 4,829 10,215 Net cash provided by (used in) operating activities 56,324 (25,469) Cash flows from investing activities: Purchase of short-term investments (17,349) (80,000) Sales and maturities of short-term investments 10,060 138,136 Investment in property and equipment (16,803) (10,762) Net cash provided by (used in) investing activities (24,092) 47,374 Cash flows from financing activities: Repurchase of common stock - (991) Proceeds from issuance of common stock 1,489 1,754 Net cash provided by financing activities 1,489 763 Net increase in cash and cash equivalents 33,721 22,668 Cash and cash equivalents at beginning of period 217,531 121,838 Cash and cash equivalents at end of period $251,252 $144,506 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 6,831 $ 6,837 Income taxes $ 4,247 $ 8,806 See accompanying notes to consolidated financial statements. QUANTUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of presentation The accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year. The accompanying financial statements should be read in conjunction with the audited financial statements of Quantum Corporation for the fiscal year ended March 31, 1994. 2. Cash, Cash Equivalents and Short Term Investments The Company has classified all cash and highly liquid investments with original maturities of three months or less at the date of acquisition as cash equivalents. All other liquid investments are classified as short-term investments. The Company invests primarily in short term debt securities of companies with strong credit ratings from a variety of industries. The Company has not experienced any material losses on its investments. The Company, by Corporate policy, limits the amount of credit exposure to any one issuer and to any one type of investment. 3. Change in Method of Accounting for Certain Investments Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of April 1, 1994 of adopting Statement 115 was immaterial. The Company has classified its entire investment portfolio as available-for-sale. Available-for-sale securities are carried at fair value, with material unrealized gains and losses reported in stockholder's equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income along with interest earned. Realized gains or losses and declines in value judged to be other-than-temporary on available-for-sale securities are reported as investment income or investment expense. The cost of securities sold is based on the specific identification method. The following is a summary of available-for-sale securities at July 3, 1994: Available-for-Sale Securities (In thousands) Cost Corporate commercial paper and bank notes $199,558 Certificates of deposit 89,504 U.S. Treasury securities and obligations of U.S. government agencies 9,687 Other 1,297 $300,046 Amounts included in short-term investments $119,797 Amounts included in cash and cash equivalents 180,249 $300,046 During the three months ended July 3, 1994 there were no sales of securities available-for-sale. In addition, the gross unrealized gains and gross unrealized losses were immaterial to the Company and therefore, no amount was recorded to stockholder's equity for the quarter ended July 3, 1994. As of July 3, 1994, the average portfolio duration is approximately 30 days and no individual security has a maturity which exceeds one year. 4. Inventories Inventories consisted of the following: (In thousands) July 3, March 31, 1994 1994 Materials and purchased parts $ 1 4,205$ 27,841 Work in process 22,636 14,729 Finished goods 140,467 151,513 $177,308 $194,083 5. Net income per share Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding. Net income per share computed on a fully diluted basis assumes conversion of the Company's outstanding 6 3/8% convertible subordinated debentures having a principal value of $212,500,000. For the three months ended July 4, 1993, the primary net income per share is shown in the statement of income as both primary and fully diluted, as the effect of the assumed conversion of the subordinated debentures is anti-dilutive. 6. Subsequent events On July 19, 1994, the Company signed an agreement to purchase Digital Equipment Corporation's magnetic disk drive, tape drive, solid state disk and thin-film heads businesses for $400 million. This transaction includes Digital's 81% interest in Rocky Mountain Magnetics, Inc. which is developing magneto-resistive head technology. The closing date is expected on or about October 3. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated sales for the three months ended July 3, 1994 were $725 million, compared to $479 million for the corresponding period in fiscal 1994. The increase in consolidated sales is attributable to increased unit shipments which were partially offset by a decline in average unit sales prices. Unit shipments for the three months ended July 3, 1994 increased 58% compared to the corresponding period in fiscal 1994 with sales for the first quarter of fiscal 1995 increasing 51% over the first quarter of fiscal 1994. Sales to Compaq Computer, Inc. and Apple Computer, Inc. represented 16% and 14% of consolidated sales for the three months ended July 3, 1994. For the first quarter of fiscal 1994, sales to Compaq Computer, Inc. and Apple Computer, Inc. represented 14% and 29% of total consolidated sales. The Company has no long-term supply arrangements with any customers. A significant decrease in combined sales to the top customers, or the loss of these customers, could have a material adverse effect on the Company's results of operations. Gross margin for the quarter ended July 3, 1994 increased to 20.1% from 12.2% for the first quarter of fiscal 1994. This increase was due to the Company's successful transition of its customers from the ProDrive ELS to the newer more cost effective ProDrive LPS and the return to a more normal pricing environment throughout the industry. However, the Company expects that price declines will be moderately higher during the September quarter primarily because of pricing pressures at certain capacity points. Due to the cyclical nature of the disk drive industry and the Company's dependence on new product introductions, there can be no assurance that the Company will be able to sustain the current gross margin levels. Over the past ten years, Quantum has established a strong business relatio nship with Matsushita-Kotobuki Electronics Industries, Ltd. (MKE) of Japan. This relationship has been built on Quantum's engineering and design expertise and MKE's high-volume, high-quality manufacturing expertise. The Company's master agreement with MK E, which covers the general terms of the business relationship, was renegotiated during fiscal 1993 and was extended for a period of five years. In fiscal 1994 approximately 90% of Quantum's sales were derived from products manufactured by MKE. In the ev ent MKE is unable to supply such products or increases its prices for manufacturing services, the Company's results of operations would be adversely affected. The Company's transactions with MKE are denominated in U.S. dollars with prices for product purc hases negotiated periodically, usually on an annual basis. Thus, fluctuations in the exchange rate have no material short-term impact on Quantum's results of operations. However, such fluctuations may impact future negotiated prices. Quantum operates in an extremely competitive industry and its rapid growth has been the result of the Company's ability to identify customer needs and develop quality products to meet those requirements. The Company expects that sales from new products will account for a si gnificant portion of sales for the latter half of fiscal 1995 and will replace sales of some current products. The Company's ability to produce new products economically and manage the transition of customers to these new products is essential for continu ed success. The hard disk drive industry is characterized by increasingly short product life cycles and is dependent on the strength of unit demand in the personal computer market. As a result, the industry tends to experience periods of excess product i nventory and intense price competition. These and other factors may affect the Company's results of operations, and past financial performance should not be considered a reliable indicator of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Subsequent to July 3, 1994, the Company signed an agreement to purchase Digital Equipment Corporation's magnetic disk drive, tape drive, solid state disk and thin-film heads businesses for $400 million, with the closing date expected on or about October 3. If the acquisition is consummated as planned, the Company's results will reflect the operations of Digital's Storage Business unit commencing the December quarter. Although it is premature to estimate the impact on the financial results of the Company at this time, the Company anticipates that the acquisition will have a dilutive effect on earnings for the December and March quarters in fiscal 1995. Operating Expenses Research and development expenses in the three months ended July 3, 1994 were $29 million, or 3.9% of sales, compared to $22 million, or 4.5% of sales in the corresponding period in fiscal 1994. The percentage decrease is due to higher revenues in the first quarter of fiscal 1995. Quantum intends to continue its investment in research and development. The hard disk drive industry is subject to rapid technological advances and the future success of the Company is dependent upon continued successful and timely introductions of new products and technologies. Sales and marketing expenses in the three months ended July 3, 1994 were $23 million, or 3.1% of sales, compared to $19 million, or 3.9% of sales in the corresponding period in fiscal 1994. The increase in absolute dollars is due to costs associated with supporting the higher sales volume and expanding the Company's international infrastructure. General and administrative expenses in the three months ended July 3, 1994 were $10 million, or 1.4% of sales, compared to $11 million, or 2.4% of sales in the corresponding period in fiscal 1994. The decline in absolute dollars is due to the Company's reorganization in Q2 1994 and subsequently having more streamlined operations. Net interest and other income/expense in the three months ended July 3, 1994 were $1.2 million net expense, compared to $1.6 million net expense in the corresponding period in fiscal 1994. The decrease in net expense in fiscal 1995 is due to increased interest income which resulted from higher cash balances and higher interest rates. Income Taxes The effective tax rate for the quarter ended July 3, 1994 was 30%, compared to 33% for the corresponding period in fiscal 1994. The effective tax rates are below the combined federal and state statutory rates as a result of the tax benefit associated with the income of foreign subsidiaries taxed at lower than statutory rates and the Company's tax exempt income. Liquidity and Capital Resources At July 3, 1994, the Company had $371 million in cash and cash equivalents and short-term investments, compared to $330 million at March 31, 1994. The increase is due primarily to cash generated from operations. The Company plans to finance the $400 million acquisition cost of Digital Equipment Corporation's Storage Business Unit with a combination of cash and debt. The Company expects to spend approximately $22 to $42 million for leasehold improvements, capital equipment and the expansion of the Company's facilities for the remainder of the fiscal year. If the acquisition is consummated as planned, the Company anticipates a significant amount of additional capital expenditures will be required to ramp up the manufacturing facilities in Asia over the next twelve months. The Company is presently in negotiations with a consortium of banks in connection with the Digital acquisition financing. The Company believes that such acquisition financing, as well as cash generated from its operations, will be sufficient to meet these capital requirements as well as working capital requirements during the next twelve months. The Company has an authorization outstanding from the Board of Directors to repurchase 1.5 million shares of its common stock in the open market. QUANTUM CORPORATION PART II - OTHER INFORMATION Item 1. Legal proceedings - Not Applicable. Item 2. Changes in securities - Not Applicable. Item 3. Defaults upon senior securities - Not Applicable. Item 4. Submission of matters to a vote of security holders - Not Applicable. Item 5. Other information - Not Applicable. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying index to exhibits immediately following the signature page are filed as part of this report. (b) Reports on Form 8-K. None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. QUANTUM CORPORATION (Registrant) Date: August 10, 1994 By: Joseph T. Rodgers Executive Vice President, Finance and Chief Financial Officer QUANTUM CORPORATION INDEX TO EXHIBITS Sequentially Exhibit Numbered Number Page 11.1Statement of Computation of Net Income Per Share 14 EXHIBIT 11.1 QUANTUM CORPORATION COMPUTATION OF NET INCOME PER SHARE (In thousands except per share data) Three Months Ended July 3, July 4, 1994 1993 PRIMARY Weighted average number of common shares during the period 44,749 43,439 Incremental common shares attributable to exercise of outstanding options 2,106 1,317 Total shares 46,855 44,756 Net income $58,241 $ 3,373 Net income per share $1.24 $0.08 FULLY DILUTED Weighted average number of common shares during the period 44,749 43,439 Incremental common shares attributable to exercise of outstanding options and conversion of 6 3/8% convertible subordinated debentures 13,814 13,025 Total shares 58,563 56,464 Net income: Net income $58,241 $ 3,373 Add 6 3/8% convertible subordinated debentures interest, net of income tax effect 2,093 2,151 Net income, as adjusted $60,334 $ 5,524 Net income per share $1.03 $0.10 * * The primary net income per share is shown in the statement of income as both primary and fully diluted, as the effect of the assumed conversion of the subordinated debentures is anti dilutive.