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 2, 1995 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 2, 1995 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 30, 1995: 51,660,891. 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 2, July 3, 1995 1994 Sales $941,316 $725,304 Cost of sales 816,827 579,227 Gross profit 124,489 146,077 Operating expenses: Research and development 55,111 28,599 Sales and marketing 33,703 22,760 General and administrative 12,182 10,331 100,996 61,690 Income from operations 23,493 84,387 Other (income) expense: Interest expense 8,147 3,556 Interest and other income (2,882) (2,371) 5,265 1,185 Income before income taxes 18,228 83,202 Income tax provision 5,286 24,961 Net income $12,942 $58,241 Net income per share: Primary $0.25 $1.24 Fully diluted $0.24 $1.03 Weighted average common and common equivalent shares: Primary 51,712,344 46,854,979 Fully diluted 62,238,577 58,562,979 See accompanying notes to consolidated financial statements. QUANTUM CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited) July 2, March 31, 1995 1995 Assets Current assets: Cash and cash equivalents $ 168,884 $ 187,753 Accounts receivable, net of allowance for doubtful accounts of $10,918 and $11,963 537,365 497,887 Inventories 391,859 324,650 Deferred taxes 43,876 44,054 Other current assets 21,958 35,580 Total current assets 1,163,942 1,089,924 Property and equipment, net of accumulated depreciation of $131,174 and $119,831 305,864 280,099 Purchased intangibles, net 90,382 95,818 Other assets 15,186 15,187 $1,575,374 $1,481,028 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 424,960 $355,117 Accrued warranty expense 56,628 57,001 Accrued compensation 36,717 54,917 Income taxes payable (2,164) 17,566 Accrued exit costs 32,213 32,213 Short-term debt 50,000 50,000 Other accrued liabilities 39,434 77,227 Total current liabilities 637,788 644,041 Subordinated debentures 149,056 212,500 Long-term debt 190,000 115,000 Shareholders' equity: Common stock 217,258 141,154 Retained earnings 381,272 368,333 Total shareholders' equity 598,530 509,487 $1,575,374 $1,481,028 See accompanying notes to consolidated financial statements. QUANTUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Three Months Ended July 2, July 3, 1995 1994 Cash flows from operating activities: Net income $ 12,942 $ 58,241 Items not requiring the current use of cash: Depreciation and amortization 21,834 7,265 Changes in assets and liabilities: Accounts receivable (39,478) (54,908) Inventories (67,209) 16,775 Accounts payable 69,843 2,282 Income taxes payable (16,207) 21,196 Accrued warranty expense (373) 644 Other assets and liabilities (46,793) 4,829 Net cash provided by (used in) operating activities (65,441) 56,324 Cash flows from investing activities: Purchase of short-term investments - (17,349) Sales and maturities of short-term investments - 10,060 Investment in property and equipment, net (38,118) (16,803) Net cash provided by (used in) investing activities (38,118) (24,092) Cash flows from financing activities: Proceeds from revolving line of credit and term loan borrowings 85,000 - Principal payments on revolving line of credit (10,000) - Proceeds from issuance of common stock, net 9,690 1,489 Net cash provided by financing activities 84,690 1,489 Net increase in cash and cash equivalents (18,869) 33,721 Cash and cash equivalents at beginning of period 187,753 217,531 Cash and cash equivalents at end of period $168,884 $251,252 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 9,081 $ 6,831 Income taxes $ 21,976 $ 4,247 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, 1995. 2. Inventories Inventories consisted of the following: (In thousands) July 2, March 31, 1995 1995 Materials and purchased parts $156,755 $116,732 Work in process 93,808 42,091 Finished goods 141,296 165,827 $391,859 $324,650 3. Net income per share Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding. For fiscal 1995, 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. During the first quarter of fiscal 1996 ended July 2, 1995, approximately thirty percent of the outstanding debentures were converted to common stock (See Note 4 in Notes to Consolidated Financial Statements). Therefore, net income per share for the first quarter ended July 2, 1995 computed on a fully diluted basis assumes conversion of the outstanding debentures having a principal value of $149,056,000. 4. Debt In October 1994, the Company entered into a three year $350 million senior credit facility structured as a $225 million revolving credit line and a $125 million term loan. The revolving credit is governed by a borrowing base of eligible accounts receivable and inventory, and the term loan amortizes in five equal semiannual installments commencing October 1995. The borrowings, at the ongoing option of the Company bear interest at either LIBOR plus a margin or a base rate with option periods of one to six months. The facility is secured by all the Company's domestic assets and 66% of the Company's ownership of certain of its subsidiaries. The Company was not in compliance with one of the financial covenants in connection with its credit facility as of July 2, 1995; however, the Company has since received a waiver. In June 1995, the Company executed an amendment to the $350 million senior credit facility in order to consolidate a previously separate secured credit agreement of $85 million. As amended, $85 million of the $225 million revolving credit line is available for the issuance of standby letters of credit. The previous secured credit agreement required the Company to pledge cash of $85 million as collateral for the standby letters of credit in exchange for a lower fee structure. The amended credit facility does not require pledged cash as collateral for the standby letters of credit. The Company's convertible subordinated debentures became redeemable at the Company's option on or after April 2, 1995, at prices ranging from 104.5% of the principal to 100% at maturity. Each debenture is convertible, at the option of the holder into the Company's common stock at a conversion price of approximately $18.15 per share. During the first quarter ended July 2, 1995, $63,444,000, approximately 30%, of the outstanding convertible subordinated debentures were converted into the Company's Common Stock. This conversion resulted in the issuance of 3,495,761 shares. 5. Acquisition of businesses from Digital Equipment Corporation On October 3, 1994, Quantum Corporation ("Quantum" or "the Company") acquired the Disks, Heads and Tapes Business of the Storage Business Unit of Digital Equipment Corporation ("the acquired Business"), in a transaction accounted for as a purchase. The operating results of the acquired Business from the date of the purchase through July 2, 1995 have been reflected in the Company's consolidated financial statements. The purchase price of the Acquisition was finalized subsequent to July 2, 1995, resulting in a reduction of the purchase price of approximately $3.2 million. The unaudited pro forma combined condensed results of operations for the Company for the three months ended July 3, 1994, had the acquisition occurred at the beginning of the period and which eliminates the non-recurring charges, are as follows: (In thousands except per share data) Three Months Ended ------------------------- July 2, July 3, 1995 1994 (actual) (pro forma) ---------- ----------- Net sales $941,316 $989,639 Net income (loss) $ 12,942 $ 44,212 Net income (loss) per share: Primary $0.25 $0.94 Fully diluted $0.24 $0.79 The unaudited pro forma results for the three months ended July 3, 1994 exclude the effects of the charge for purchased research and development and other in merger costs of $73 million, as such amounts are non-recurring. The pro forma results for the first quarter of fiscal 1995 and the actual results for the first quarter of fiscal 1996 reflect intangible asset amortization, depreciation of acquired fixed assets, amortization of loan fees and interest expense on the new debt related to the acquisition. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been completed at the beginning of the period indicated, nor is it necessarily indicative of future operating results. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations On October 3, 1994, Quantum acquired the Disks, Heads and Tapes Business of the Storage Business Unit of Digital Equipment Corporation (the "Acquired Businesses"), in a transaction (the "Acquisition") accounted for as a purchase. The operating results of the Acquired Businesses from the date of the purchase through July 2, 1995 have been reflected in the Company's consolidated financial statements. Consolidated sales for the first quarter of fiscal 1996 ended July 2, 1995 were $941 million, compared to $725 million for the corresponding period in fiscal 1995. The increase in consolidated sales is attributable to increased unit shipments due in part to products acquired in the Acquisition, and a change in sales mix to higher-priced products. These increases were partially offset by a decline in average unit sales prices on a comparable unit basis. Unit shipments for the first quarter of fiscal 1996 ended July 2, 1995 increased 22% compared to the corresponding period in fiscal 1995, with sales for the first quarter of fiscal 1996 ended July 2, 1995 increasing 30% over the first quarter of fiscal 1995 ended July 3, 1994. Historically, a limited number of disk drive products have contributed the majority of the consolidated sales for the Company. The Company anticipates that this trend will continue in the future. The Company continues to focus on meeting the needs of major OEM customers. Sales to Digital Equipment Corporation ("Digital") represented 13% of consolidated sales for the first quarter of fiscal 1996 ended July 2, 1995, while Compaq and Apple each represented 12% of consolidated sales. For the first quarter of fiscal 1995 ended July 3, 1994, sales to Compaq Computer, Inc. ("Compaq") and Apple Computer, Inc. ("Apple") represented 16% and 14%, respectively, of total consolidated sales. Sales to Digital represented less than 10% of consolidated sales for the first quarter of fiscal 1995 ended July 3, 1994. Any significant decrease in sales to a major customer or the loss of a major customer could have a material adverse effect on the Company's results of operations. In conjunction with the Acquisition, the Company and Digital signed a multi-year supply agreement pursuant to which the Company will provide a substantial percentage of Digital's internal hard disk drive requirements for its Storageworks subsystems and core computer systems businesses, subject to the Company meeting Digital's qualification standards. There can be no assurance that Digital's future requirements for hard disk products will increase or remain at the current levels or that the Company will be able to meet Digital's qualification requirements on a timely basis. Gross margin for the quarter ended July 2, 1995 decreased to 13.2% from 20.1% for the first quarter of fiscal 1995 ended July 3, 1994. This decrease was a result of slower than anticipated transitions to the newer, higher margin products due to delays in desktop and high capacity product qualifications and component availability issues. The transition delays also resulted in the Company selling a higher percentage of lower gross margin products than in the comparable quarter of the prior year. The Company anticipates that there will continue to be component availability issues through at least the third quarter of fiscal 1996 ending December 31, 1995, which may potentially constrain shipment of product. Although the Company is making efforts to avoid significant component shortages, the Company may not be able to meet all orders for certain products. In the future, gross margin may be affected by pricing and other competitive conditions, as well as the Company's ability to integrate the Acquired Businesses, including phasing out the older, lower gross margin product lines and transitioning the manufacturing of its high capacity disk drive products to its lower-cost facility. Over the past ten years, Quantum has established a strong business relationship 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 MKE, which covers the general terms of the business relationship, was renegotiated during fiscal 1993 for a period of five years. During the first quarter of fiscal 1996 ended July 2, 1995, approximately 72% of the Company's sales were derived from products manufactured by MKE, a decline from 91% of sales in the first quarter of fiscal 1995 ended July 3, 1994. The decline in MKE products as a percentage of sales is a result of the increase in consolidated sales due to the products acquired from Digital and Quantum's manufacturing of those products. There can be no assurance that the increase in Quantum manufactured products will not adversely influence the gross margin rate. In the event MKE is unable to supply such products or increases its prices for manufacturing services, the Company's results of operations would be adversely affected. In conjunction with the acquisition of the thin film heads business from Digital, the Company assumed Digital's relationship with Lafe Computer Magnetics Ltd. ("Lafe") and is in the process of negotiating a manufacturing agreement. In the event Lafe is unable to supply manufacturing services, the Company could experience an interruption in business. The Company's transactions with MKE and Lafe are denominated in U.S. dollars with prices for product purchases negotiated periodically. 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 significant portion of sales for the remainder of fiscal 1996 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 continued 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 inventory 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. Operating Expenses Research and development expenses in the first quarter of fiscal 1996 ended July 2, 1995 were $55 million, or 5.9% of sales, compared to $29 million, or 3.9% of sales in the corresponding period in fiscal 1995. The increase in absolute dollars is due primarily to the Acquired Businesses and reflects spending for both the vertically integrated heads business and the additional high capacity disk drive products, which are more research and development intensive than the Company's other businesses. Principally as a result of the Acquisition, the Company expects to continue this higher level of expenditures for 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 development and timely introduction of new products and technologies. Sales and marketing expenses in the first quarter of fiscal 1996 ended July 2, 1995 were $34 million, or 3.6% of sales, compared to $23 million, or 3.1% of sales in the corresponding period in fiscal 1995. The increase in absolute dollars is principally due to the Acquisition and the costs associated with supporting the higher sales volume and the expanded Company infrastructure. The percentage increase is due to lower than anticipated sales in the first quarter of fiscal 1996. The Company anticipates a continued higher level of absolute dollar spending for sales and marketing related to the Acquisition, with expenditures as a percentage of sales remaining relatively consistent. General and administrative expenses in the first quarter of fiscal 1996 ended July 2, 1995 were $12 million, or 1.3% of sales, compared to $10 million, or 1.4% of sales in the corresponding period in fiscal 1995. The increase in absolute dollars is primarily related to the infrastructure required to operate the Acquired Businesses. The percentage decline is due to the increase in consolidated sales. The Company expects a continued higher level of general and administrative absolute dollar spending principally due to the Acquisition, with expenditures as a percentage of sales remaining relatively consistent. Net interest and other income/expense in the first quarter of fiscal 1996 ended July 2, 1995 was $5.3 million net expense, compared to $1.2 million net expense in the corresponding period in fiscal 1995. The increase in net expense in the fiscal 1996 period can be principally attributed to higher interest expense resulting from Acquisition financing and lower cash balances due to cash used for the Acquisition. The Acquisition will have a future effect on both operating and net income resulting from the amortization of intangibles, depreciation of the acquired fixed assets and interest expense on the debt. The purchase price of the Acquisition was finalized subsequent to July 2, 1995, resulting in a reduction of the purchase price of approximately $3.2 million. The Company estimates that charges for the amortization of intangibles and the depreciation of the fixed assets acquired in the Acquisition, respectively, will approximate $25 million and $30 million over each of the next three fiscal years. Interest expense on the debt will be dependent on the loan balance and interest rate. See Note 4 of Notes to the Financial Statements. The Company has signed a Memorandum of Understanding to sell its La Cie, Ltd. subsidiary to one of the Company's international customers and anticipates the transaction will be completed by the end of the third fiscal quarter. The transaction will not be material to the present or future financial results of the Company. Income Taxes The effective tax rate for the first quarter of fiscal 1996 ended July 2, 1995 was 29%, compared to 30% for the corresponding period in fiscal 1995. The effective tax rates are below the combined federal and state statutory rates primarily as a result of the tax benefit associated with the income of foreign subsidiaries taxed at lower than federal rates. Liquidity and Capital Resources At July 2, 1995, the Company had $169 million in cash and cash equivalents and short-term investments, compared to $188 million at March 31, 1995. The decrease in cash is a result of cash used in operating and investing activities offset by cash provided by financing activities. Cash used in operating and investing activities is primarily a result of increases in accounts receivables and inventories and investing in property and equipment. Cash provided by financing activities is primarily a result of borrowing under the credit facility described below. In October 1994, the Company entered into a three year $350 million senior credit facility structured as a $225 million revolving credit line and a $125 million term loan. The revolving credit is governed by a borrowing base of eligible accounts receivable and inventory, and the term loan amortizes in five equal semiannual installments commencing October 1995. The borrowings, at the ongoing option of the Company bear interest at either LIBOR plus a margin or a base rate with option periods of one to six months. The facility is secured by all the Company's domestic assets and 66% of the Company's ownership of certain of its subsidiaries. In June 1995, the Company executed an amendment to the $350 million senior credit facility in order to consolidate a previously separate secured credit agreement of $85 million. As amended, $85 million of the $225 million revolving credit line is available for the issuance of standby letters of credit. The previous secured credit agreement required the Company to pledge cash of $85 million as collateral for the standby letters of credit in exchange for a lower fee structure. The amended credit facility does not require pledged cash as collateral for the standby letters of credit. The Company was not in compliance with one of the financial covenants in connection with its credit facility as of July 2, 1995; however, the Company has since received a waiver. The Company's convertible subordinated debentures became redeemable at the Company's option on or after April 2, 1995, at prices ranging from 104.5% of the principal to 100% at maturity. Each debenture is convertible, at the option of the holder into the Company's common stock at a conversion price of approximately $18.15 per share. During the first quarter ended July 2, 1995, $63,444,000, approximately 30%, of the outstanding convertible subordinated debentures were converted into the Company's Common Stock. This conversion resulted in the issuance of 3,495,761 shares. At this time, the Company expects to spend approximately $200 million for leasehold improvements, capital equipment and expansion of the Company's facilities during fiscal 1996. Included in this amount is a significant amount of additional capital expenditures that will be required to expand the Asia manufacturing facilities and to support the recording heads business of the acquired Businesses. In conjunction with the Acquisition, the Company recorded an accrual for exit costs related to exiting facilities and operations acquired from Digital. The Company anticipates that cash outlays during fiscal 1996 for the exit activities will be approximately $23 million. During the first quarter of fiscal 1996 ended July 2, 1995, there were no cash outlays related to the exit costs. The Company believes that its existing capital resources, including its credit facilities and any cash generated from operations, will be sufficient to meet all currently planned expenditures and sustain operations through the balance of the calendar year. There can be no assurance, however, that the Company will not be required, or choose, to raise capital in advance of that date. There can be no assurance that the Company will be able to obtain any such financing on acceptable terms, or at all. QUANTUM CORPORATION PART II - OTHER INFORMATION Item 1. Legal proceedings The Company is a co-defendant in a lawsuit filed by Supercom, Inc. and other named plaintiffs on April 17, 1995 in the United States District Court in and for the Northern District of California. The complaint alleges that the defendants were responsible for the initiation and execution of a search warrant relating to Quantum disk drives in the plaintiffs' possession, in violation of the plaintiffs' rights. The complaint includes allegations of malicious prosecution, assault, abuse of process, conspiracy, negligent and intentional interference with contractual relations, negligent and intentional infliction of emotional distress and civil rights violation, and seeks unspecified damages which the plaintiffs' allege are in excess of $500,000. The Company believes that the plaintiffs' claims against Quantum are without merit, and the Company intends to vigorously defend itself. 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 16, 1995 By: /s/ JOSEPH T. RODGERS Executive Vice President, Finance and Chief Financial Officer QUANTUM CORPORATION INDEX TO EXHIBITS Sequentially Exhibit Numbered Number Page 10.30 Second Amendment dated June 26, 1995 to Credit Agreement (dated October 3, 1994), among Quantum Corporation and The Banks named herein and ABN AMRO BANK N.V., San Francisco International Branch, BARCLAYS BANK PLC and CIBC INC. as Managing Agents for the Banks, and CANADIAN IMPERIAL BANK OF COMMERCE as Administrative Agent and Collateral Agent for the Banks XX 11.1 Statement of Computation of Net Income Per Share XX 27 Financial Data Schedule