SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
DATE OF REPORT July 28, 1997
-----------------
QUANTUM CORPORATION
(Exact name of registrant as specified in its charter)
0-12390
(Commission File Number)
Delaware 94-2665054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 McCarthy Boulevard
Milpitas, CA 95035
(Address of principal executive offices, with zip code)
(408) 894-4000
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
On July 21, 1997, Quantum Corporation, a Delaware corporation (the
"Company") announced its financial results for the quarter ended June 29, 1997.
Set forth below are the Company's Financial Statements (including the
notes thereto) and Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") for the quarter ended June 29, 1997. On or
about August 14, 1997, the Company intends to file its quarterly report on Form
10-Q for the quarter ended June 29, 1997 which will include the financial
statements and MD&A set forth herein.
-2-
SIGNATURES
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 thereunto duly authorized.
QUANTUM CORPORATION
Date: July 28, 1997 By: /s/ Richard L. Clemmer
------------------------
Richard L. Clemmer
Chief Financial Officer
-3-
QUANTUM CORPORATION
8-K REPORT
INDEX
PAGE
NUMBER
------
FINANCIAL INFORMATION
Financial Statements
Condensed Consolidated Statements of Income 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(unaudited)
THREE MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
---------- -----------
Sales $1,446,144 $ 1,153,502
Cost of sales 1,170,210 1,012,223
---------- -----------
Gross profit 275,934 141,279
Operating expenses:
Research and development 74,029 66,665
Sales and marketing 41,732 36,195
General and administrative 27,473 21,487
---------- -----------
143,234 124,347
Income from operations 132,700 16,932
Other (income) expense:
Interest expense 6,035 11,032
Interest and other income, net (3,759) 707
---------- -----------
2,276 11,739
Income before income taxes 130,424 5,193
Income tax provision 33,910 1,350
---------- -----------
Net income $ 96,514 $ 3,843
========== ===========
Net income per share:
Primary $0.69 $0.03
Fully diluted $0.61 $0.03
Weighted average common and
common equivalent shares:
Primary 140,881 115,692
Fully diluted 162,511 115,692
See accompanying notes to condensed consolidated financial statements.
2
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 29, MARCH 31,
1997 1997
----------- ----------
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 365,973 $ 345,125
Accounts receivable, net of allowance for
doubtful accounts of $10,539 and $10,610 887,389 887,477
Inventories 295,251 252,802
Deferred taxes 122,899 122,899
Other current assets 49,105 80,116
---------- ----------
Total current assets 1,720,617 1,688,419
Property and equipment, net of accumulated
depreciation of $177,957 and $226,691 231,845 407,206
Purchased intangibles, net 8,945 42,131
Investment in joint venture 134,944 --
Other assets 17,079 20,507
---------- ----------
$2,113,430 $2,158,263
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 472,354 $ 502,069
Accrued warranty expense 97,651 94,989
Accrued compensation 56,340 63,093
Income taxes payable 47,091 31,153
Current portion of long-term debt 872 44,229
Other accrued liabilities 123,124 80,045
---------- ----------
Total current liabilities 797,432 815,578
Deferred taxes 34,264 33,587
Convertible subordinated debt 241,350 241,350
Long-term debt 40,694 177,668
Redeemable preferred stock 3,888 3,888
Shareholders' equity:
Common stock 472,896 459,800
Retained earnings 522,906 426,392
---------- ----------
Total shareholders' equity 995,802 886,192
---------- ----------
$2,113,430 $2,158,263
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
THREE MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 96,514 $ 3,843
Items not requiring the current use of
cash:
Depreciation 21,094 21,423
Amortization 3,802 6,731
Deferred income taxes 677 --
Compensation related to stock plans 669 365
Changes in assets and liabilities:
Accounts receivable 93 (19,114)
Inventories (42,449) 10,017
Accounts payable (29,715) (33,252)
Income taxes payable 15,938 (87)
Accrued warranty expense 2,662 (13,948)
Other assets and liabilities 42,323 (61,367)
--------- ---------
Net cash provided by (used in) operating
activities 111,608 (85,389)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (33,282) (43,980)
Proceeds from disposition of property 4,176 --
and equipment
Proceeds from repayment of note 18,000 --
receivable
Proceeds from sale of interest in
recording heads operations 94,000 --
--------- ---------
Net cash provided by (used in) investing
activities 82,894 (43,980)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term credit -- 125,000
facilities
Principal payments on credit facilities (180,331) (31,349)
Proceeds from issuance of common stock 6,677 11,002
--------- ---------
Net cash provided by (used in) financing
activities (173,654) 104,653
--------- ---------
Net increase (decrease) in cash and cash 20,848 (24,716)
equivalents
Cash and cash equivalents at beginning of
period 345,125 164,752
--------- ---------
Cash and cash equivalents at end of period $ 365,973 $ 140,036
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Conversion of debentures -- $ 35,583
Cash paid during the period for:
Interest $ 3,433 $ 9,611
Income Taxes $ 637 $ 1,494
See accompanying notes to condensed consolidated financial statements.
4
QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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. Certain
prior period amounts have been reclassified to conform to the current period's
presentation. The condensed consolidated balance sheet as of March 31, 1997 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
financial statements should be read in conjunction with the audited financial
statements of Quantum Corporation for the fiscal year ended March 31, 1997.
2. INVENTORIES
Inventories consisted of the following:
(In thousands)
JUNE 29, MARCH 31,
1997 1997
-------- --------
Materials and purchased parts $ 41,720 $39,898
Work in process 17,249 48,005
Finished goods 236,282 164,899
-------- --------
$295,251 $252,802
======== ========
3. NET INCOME PER SHARE
Net income per share amounts are computed by dividing income or loss amounts
by the weighted average of common and common equivalent shares (when dilutive)
outstanding during the period. Primary net income per share computations for the
three month periods ended June 29, 1997 and June 30, 1996 were computed based on
weighted average shares outstanding, including the dilutive impact of common
stock equivalents, which consist of outstanding stock options. Net income per
share computed on a fully diluted basis for the three month periods ended June
29, 1997 and June 30, 1996 assumes conversion of the Company's outstanding
convertible subordinated debentures as of the beginning of the respective
periods. Net income per share reflects the effect of the two-for-one stock
split effected as a stock dividend in June 1997.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted in the Company's
fiscal quarter ending
5
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements, primary earnings per share is replaced by
basic earnings per share, for which the dilutive effect of stock options will be
excluded. Under Statement 128, basic earnings per share will exceed previously
computed primary earnings per share in periods with net income. The impact of
Statement 128 on the calculation of fully diluted earnings per share is not
expected to be material.
4. DEBT & CAPITAL
The previously outstanding revolving credit line, term loan, and equipment loan,
which had carrying amounts of $110 million, $56 million, and $14 million, as of
March 31, 1997, respectively, were repaid and terminated in the first fiscal
1998 quarter.
In June 1997, the Company entered into an unsecured senior credit facility which
provides a $500 million revolving credit line and expires in June 2000. At the
option of the Company, borrowings under the revolving credit line bear interest
at either LIBOR plus a margin determined by a total funded debt ratio, or a base
rate, with option periods of one to six months. As of June 29, 1997, there was
no outstanding balance drawn on this line.
The Company has filed a registration statement pursuant to which the Company may
issue debt or equity securities, in one or more series or issuances, limited to
$450 million aggregate public offering price or its equivalent in one or more
foreign currencies, currency units or composite currencies as may be designated
by the Company. Debt securities which may be offered under the registration may
be either senior or subordinated, and the specific terms would be set pursuant
to a specific offering. The number of shares of common stock, par value $0.01
per share, which may be issued under the registration, as well as the initial
public offering price or method of determining the initial public offering
price, would be set pursuant to a specific offering. The registration statement
became effective on July 24, 1997.
6
5. LITIGATION
The Company and certain of its current and former officers and directors have
been named as defendants in two class action lawsuits, one filed on August 28,
1996 in the Superior Court of Santa Clara County, California, and one filed on
August 30, 1996 in the U.S. District Court for the Northern District of
California. The plaintiff in both class actions purports to represent a class of
all persons who purchased the Company's common stock between February 26, 1996
and June 13, 1996. The complaints allege that the defendants violated various
federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about the Company and that
individual defendants sold shares of the Company's stock based upon material
nonpublic information.
On February 25, 1997, in the Santa Clara County action, the Court sustained
defendants' demurrer to most of the causes of action in the complaint, with
leave to amend. At a June 12, 1997 demurrer hearing in state court, the judge
dismissed the action as to four of the individual defendants with prejudice and
as to three of the individual defendants without prejudice. The demurrer as to
the Company was overruled. Defendants' motion that the action not be permitted
to proceed as a class action was denied without prejudice and the hearing on
class certification has been continued for ninety days.
In the federal action, plaintiff's motion for appointment of lead plaintiff was
granted on April 4, 1997. Defendants filed their motion to dismiss the federal
complaint on April 16, 1997 and it is scheduled to be heard on July 30, 1997.
Certain of the Company's current and former officers and directors have also
been named as defendants in a derivative lawsuit, which was filed on November 8,
1996 in the Superior Court of Santa Clara County, California. The derivative
complaint is based on factual allegations substantially similar to those alleged
in the class action lawsuits. The complaint alleges that the defendants violated
the California Corporations Code and state common law by concealing and/or
misrepresenting material adverse information about the Company and by selling
shares of the Company's stock based upon material nonpublic information.
Defendants filed a demurrer to the derivative complaint on February 24, 1997.
Oral argument was held on April 8, 1997. The demurrer was sustained without
prejudice and the plaintiffs have not amended the complaint .
6. MKE/QUANTUM JOINT VENTURE
On May 16, 1997, the Company sold a controlling interest in its recording heads
operations (RHO) to MKE. RHO designs, develops, and manufactures MR recording
heads used in the Company's disk drive products. The sale was achieved through
MKE acquiring a 51% interest in a new joint venture (JV) entity, MKE-Quantum
Components LLC, that was formed to hold the operations, assets, and certain
liabilities of RHO.
Pursuant to the terms of the transaction, Quantum contributed certain RHO assets
and operations and leased certain premises to the JV and retained a 49%
ownership interest in the JV; the JV assumed $51 million of debt payable to
Quantum; and MKE paid Quantum $94 million and contributed $110 million to the JV
in exchange for a 51% controlling ownership interest in the JV.
7
The RHO assets which Quantum contributed to the JV are primarily comprised of
inventory, equipment, accounts receivable, and intangibles, which aggregated
approximately $210 million and the third party liabilities totaled approximately
$32 million. In addition, the JV will lease certain premises from Quantum, and
RHO employees will become employees of the JV. One of these leases results, in
substance, in a transfer of premises with an approximate carrying value of $48
million to the JV.
MKE and the Company will share pro rata in the capital funding requirements, if
any, and results of operations of the JV. The Company plans to continue to
utilize the recording heads manufactured by the JV in its disk drive products
manufactured by MKE.
Effective May 16, 1997, the Company began to account for its 49% interest in the
JV using the equity method of accounting. The Company's equity interest in the
operating results of the JV were reported in interest and other income, net. The
results of RHO through May 15, 1997 were consolidated.
UNAUDITED PRO FORMA INFORMATION
Giving effect to the above-noted sale transaction as if it had occurred on April
1, 1996, the pro forma effect on the Company's consolidated balance sheet at
March 31, 1997, would not have been significant, and net income for the three
month period ended June 29, 1997 would have been approximately $99 million or
$0.62 per share, fully diluted compared to $10 million or $0.09 per share, fully
diluted for the three month period ended June 30, 1996. This unaudited pro
forma information is intended for information purposes only and is not
necessarily indicative of the future results of operations of the JV or the
results of the Company that would have occurred had the JV arrangement been in
effect for the full fiscal quarter presented.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis includes:
- - Business overview.
- - Strategic developments.
- - A comparison of Quantum's results of operations in the quarter ended June
29, 1997 with the results in the quarter ended June 30, 1996.
- - A discussion of Quantum's operating liquidity and capital resources.
- - A discussion of trends and uncertainties, which include those related to
the information storage industry and those related to more specific
characteristics of Quantum.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually contain the
words "estimate," "anticipate," "expect" or similar expressions. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties. These uncertainties could
cause actual results to differ materially from those expected for the reasons
set forth below under Trends and Uncertainties. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
BUSINESS OVERVIEW
Quantum Corporation ("Quantum" or the "Company"), operating in a single business
segment, designs, develops, and markets information storage products, including
high-performance, high-quality hard disk drives, half-inch cartridge tape
drives, tape drive related products, and solid state disk drives. The half-inch
cartridge tape drives and solid state disk drives are manufactured by the
Company. The Company combines its engineering and design expertise with the
high-volume manufacturing capabilities of its exclusive manufacturing partner,
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") of Japan, a subsidiary
of Matsushita Electric Industrial Co., Ltd., to produce high-quality hard disk
drives. Quantum is also involved in the manufacture of magnetoresistive ("MR")
recording heads that are used in hard disk drives produced for the Company.
The Company's strategy is to offer a diversified product portfolio that features
leading-edge technology and high-quality manufacturing for a broad range of
market applications. Inherent in this strategy is a focus on meeting and
anticipating customers' information storage needs and on the research and
development of storage product technology.
9
The Company markets its products worldwide to major original equipment
manufacturers ("OEMs"), a broad range of distributors, resellers, and systems
integrators.
The Company's information storage business currently includes the following four
components:
DESKTOP AND PORTABLE STORAGE PRODUCTS. Quantum designs, develops, and
markets hard disk drives designed to meet the storage needs of desktop
systems. These products are designed for entry-level to high-end desktop
personal computers ("PCs") for use in both home and business environments.
WORKSTATION AND SYSTEMS STORAGE PRODUCTS. Quantum designs, develops, and
markets technologically advanced hard disk drives for the demanding
storage needs of network servers, workstations, storage subsystems,
high-end desktop systems, and minicomputers. These products are designed
for storage-intensive applications, such as graphics, disk arrays, desktop
publishing systems, multimedia computing systems, and networked data bases
and file servers.
SPECIALTY STORAGE PRODUCTS. Quantum designs, develops, manufactures, and
markets half-inch cartridge tape drives and solid state disk drives. The
tape drives use advanced linear recording technology and a highly accurate
tape guide system to perform data backup for mid-range and high-end
computer systems. The solid state disk drives have the high execution
speeds required for applications such as imaging, multimedia,
video-on-demand, on-line transaction processing, material requirements
planning, and scientific modeling.
RECORDING HEADS. Quantum is involved in the design, development, and
manufacture of MR recording heads used in the Company's products. The
Company believes that MR technology, which provides higher capacity per
disk than conventional thin-film heads, will replace thin-film heads as
the leading recording head technology. The Company does not currently
market thin-film or MR heads to other companies. Effective May 16, 1997,
the Company's involvement in the design, development, and manufacture of
recording heads is through a 49% ownership interest in a joint venture
with MKE as discussed in the Strategic Developments section.
Quantum operates in an industry characterized by rapid technological change. The
Company is currently concentrating its product development efforts on broadening
its existing disk and tape drive product lines through the introduction of new
products, including new tape drives, new high-capacity hard disk drive products
to be manufactured by MKE, as well as new products targeted specifically for the
increasing storage needs of the desktop market. The Company is also focusing its
efforts on applying its MR technology to new generations of disk drives.
10
STRATEGIC DEVELOPMENTS
MKE/QUANTUM RECORDING HEADS JOINT VENTURE. On May 16, 1997, MKE and Quantum
formed a recording heads joint venture company, MKE-Quantum Components LLC.
Pursuant to the terms of the transaction, Quantum contributed certain recording
heads assets and operations, transferred employees of the Company's recording
heads operations and leased certain premises to the joint venture and retained
a 49% ownership interest in the joint venture; the joint venture assumed $51
million of debt payable to Quantum; and MKE paid Quantum $94 million and
contributed $110 million to the joint venture in exchange for a 51% controlling
ownership interest in the joint venture. The joint venture combines Quantum's
engineering and design expertise with MKE's manufacturing expertise.
RENEGOTIATED MKE MASTER AGREEMENT. In May 1997, Quantum completed the
renegotiation of its master agreement with MKE, which covers the general terms
of the business relationship. The agreement was extended for a period of 10
years, unless sooner terminated as result of certain specified events including
a change-in-control of either Quantum or MKE. MKE currently manufactures all of
the hard disk drives developed and marketed by Quantum. Quantum's relationship
with MKE, which dates from 1984, is built on Quantum's engineering and design
expertise and MKE's high-volume, high-quality manufacturing expertise.
RESULTS OF OPERATIONS
Sales. Sales in the quarter ended June 29, 1997, were $1,446 million compared to
$1,154 million in the quarter ended June 30, 1996. The increase reflected an
increase in shipments of tape drives, tape drive-related products and disk
drives, as well as an increase in the average drive price. The increase in the
average drive price reflected a change in sales mix to a higher proportion of
high capacity drives and tape drives, which generally have a higher unit price
than the desktop products and a shift in sales to higher capacity desktop
drives. The increase in sales also reflects the impact of the successful
completion of the transition of the manufacturing of high-end disk drives to MKE
during fiscal 1997 which depressed sales in the quarter ended June 30, 1996. As
part of the transition, older high-end disk drive products ceased production in
July 1996, and new high-end drives manufactured by MKE did not ramp until the
third and fourth quarters of fiscal 1997.
Sales of desktop hard drives represented 67% of total sales for the quarter
ended June 29, 1997, and the Company anticipates that desktop products will
continue to constitute a majority of sales in the future. However, the Company
also expects that sales of DLT product, which represented 18% of sales and a
much higher percentage operating profits for the quarter ended June 29, 1997,
will continue to increase as a percentage of the Company's total sales and
operating profits in the future. The summer months of the second fiscal quarter
for hard disk drives are expected to continue the historical pattern of soft
demand. However, an expected continuation of growth in the tape business is
anticipated to partially offset this pattern, and accordingly, sales are
expected to be relatively flat compared to the first fiscal 1998 quarter.
Sales to the Company's top five customers were 46% of sales in the quarter ended
June 29, 1997, compared with 42% of sales in the quarter ended June 30, 1996.
Sales to Hewlett-Packard were $174 million, or 12% of sales, in the quarter
ended June 29, 1997, and were less than 10% of sales
11
in the quarter ended June 30, 1996. Sales to Digital Equipment Corporation were
$162 million, or 11% of sales, in the quarter ended June 29, 1997, and were less
than 10% of sales in the quarter ended June 30, 1996. Sales to Compaq Computer,
Inc. were less than 10% in the quarter ended June 29, 1997, compared with $121
million, or 10% of sales, in the quarter ended June 30, 1996.
Gross Margin Rate. The gross margin rate increased 6.9 percentage points to
19.1% in the quarter ended June 29, 1997, from 12.2% in the quarter ended June
30, 1996. The increase reflected a higher proportion of tape drive and tape
drive related product sales in the quarter ended June 29, 1997, compared to the
quarter ended June 30, 1996, as these products achieved a higher gross margin
rate than sales of hard disk drive products of the Company. The gross margin
increase also reflected a stronger product mix and pricing in the desktop market
in the quarter ended June 29, 1997, compared to the quarter ended June 30, 1996.
In addition, the increase reflected the introduction and market acceptance of
the new high end products; high-end margins in the quarter ended June 30, 1996
had been largely eroded during the transition of high-end disk drive
manufacturing to MKE.
For the second fiscal 1998 quarter, the Company expects to experience continued
gross margin pressure with respect to both its desktop and high-end hard disk
drive products. However, an expected continuation of growth in the tape business
is anticipated to partially offset this impact, and accordingly, the gross
margin rate is expected to be relatively flat compared to the first fiscal 1998
quarter.
Research and Development Expenses. In the quarter ended June 29, 1997, the
Company's investment in research and development was $74 million, or 5.1% of
sales, compared to $67 million, or 5.8% of sales, in the quarter ended June 30,
1996. The decrease in research and development expense as a percentage of sales
reflects the timing of certain pre-production activity which varies from quarter
to quarter. For the second fiscal 1998 quarter, the Company expects increased
expenditures associated with pre-production activity for hard disk drive
products in development. The decrease also reflects the impact of applying the
equity method of accounting to the Company's involvement in the recording heads
operations, effective May 16, 1997. Reflecting management's continued focus on
the development and timely introduction of new information storage products and
technologies, as a percentage of sales, research and development expenses for
the remainder of fiscal 1998 are expected to increase over the level achieved in
the first fiscal 1998 quarter.
Sales and Marketing Expenses. Sales and marketing expenses in the quarter ended
June 29, 1997 were $42 million, or 2.9% of sales, compared with $36 million, or
3.1% of sales, in the quarter ended June 30, 1996. The increase in sales and
marketing expenses was related to the costs of supporting the Company's higher
volume of sales. As a percentage of sales, sales and marketing expenses for the
second fiscal 1998 quarter are expected to increase slightly compared with the
level achieved in the first fiscal 1998 quarter.
12
General and Administrative Expenses. General and administrative expenses in the
quarter ended June 29, 1997, were $27 million, or 1.9% of sales, compared to $21
million, or 1.9% of sales, in the quarter ended June 30, 1996. The increase in
general and administrative expenses reflected expansion of the Company's
infrastructure. As compared to the first fiscal 1998 quarter, general and
administrative expenses are expected to be relatively flat for the second
fiscal quarter.
Interest and Other Income/Expense. Net interest and other income and expense was
$2 million net expense in the quarter ended June 29, 1997, and $12 million net
expense in the quarter ended June 30, 1996. The decline in net expense reflects
a decrease in the average amount of debt outstanding during the quarter ended
June 29, 1997, compared to the quarter ended June 30, 1996, and an increase in
interest income reflecting higher average cash balances during the quarter ended
June 29, 1997.
Income Taxes. The effective tax rate in the quarter ended June 29, 1997, at 26%
was flat compared to the rate in the quarter ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 1997, the Company had $366 million in cash and cash equivalents,
compared to $345 million at March 31, 1997. For the three month period ended
June 29, 1997, cash was provided by operating activities, primarily from net
income, and from investing activities. Cash provided by investing activities
included a $94 million payment from MKE as part of the formation of the
recording heads joint venture company and the repayment of a note receivable,
partially offset by investment in property and equipment. Cash was used in
financing activities for the repayment of the previously outstanding senior
credit facility, which included a revolving credit line and term loan, and a
term loan secured by specified capital equipment.
The revolving credit line, term loan, and equipment loan, which were paid off
and terminated in the first fiscal 1998 quarter had carrying amounts of $110
million, $56 million, and $14 million, as of March 31, 1997, respectively.
In June 1997, the Company entered into an unsecured senior credit facility which
provides a $500 million revolving credit line and expires in June 2000. At the
option of the Company, borrowings under the revolving credit line, bear interest
at either LIBOR plus a margin determined by a total funded debt ratio, or a base
rate, with option periods of one to six months. As of June 29, 1997, there was
no outstanding balance drawn on this line.
The Company has filed a registration statement pursuant to which the Company may
issue debt or equity securities, in one or more series or issuances, limited to
$450 million aggregate public offering price or its equivalent in one or more
foreign currencies, currency units or composite currencies as may be designated
by the Company. Debt securities which may be offered under the registration may
be either senior or subordinated, and the specific terms would be set pursuant
to a specific offering. The number of shares of Common stock, par value $0.01
per share, which may
13
be issued under the registration, as well as the initial public offering price
or method of determining the initial public offering price, would be set
pursuant to a specific offering. The registration statement became effective on
July 24, 1997.
The Company expects to spend approximately $200 million for capital equipment,
expansion of the Company's facilities, and leasehold improvements in fiscal
1998. These capital expenditures will support the tape business, research and
development, and general corporate operations. The Company believes that it will
be able to fund these capital requirements. Refer to the Future Capital Needs
section of the Trends and Uncertainties section for additional discussion of
capital.
The Company believes that its existing and available capital resources
including its unsecured senior credit facility and any cash generated from
operations will be sufficient to meet all currently planned expenditures and
sustain operations for the remainder of the fiscal year. However, this belief
assumes that operating results and cash flow from operations will meet the
Company's expectations, and actual results could vary due to certain of the
factors described in the Trends and Uncertainties section that follows.
TRENDS AND UNCERTAINTIES
Operating in the information storage industry, Quantum is affected by numerous
trends and uncertainties, some of which are specific to the industry while
others relate more specifically to Quantum. These are discussed below.
TRENDS AND UNCERTAINTIES - INFORMATION STORAGE INDUSTRY
Key trends and uncertainties inherent in the information storage industry and
how these trends and uncertainties specifically impact the Company are
summarized below.
- Intense competition - The information storage products industry in
general, and the disk drive industry in particular, is characterized
by intense competition that results in rapid price erosion; short
product life cycles; and continuous introduction of new, more
cost-effective products offering increased levels of capacity and
performance.
- Rapid technological change - Technology advancement in the
information storage industry is increasingly rapid.
- Customer concentration - High-purchase-volume customers for
information storage products are concentrated within a small number
of computer system manufacturers, distribution channels, and system
integrators.
- Fluctuating product demand - The demand for hard disk drive products
depends on the demand for the computer systems in which hard disk
drives are used, which in turn is affected by computer system
product cycles and by prevailing economic conditions.
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- Intellectual property conflicts - The hard disk drive industry has
been characterized by significant litigation relating to patent and
other intellectual property rights.
Intensely Competitive Industry. To compete within the information storage
industry, Quantum frequently introduces new products and transitions to newer
versions of existing products. Product introductions and transitions are
significant to the operating results of Quantum, and if they are not successful,
the Company would be materially and adversely affected. The hard disk drive
industry also tends to experience periods of excess product inventory and
intense price competition. If price competition intensifies, the Company may be
forced to lower prices more than expected, which could materially adversely
affect the Company. In addition, the Company's customers could commence the
manufacture of disk and tape drives for their own use or for sale to others. Any
such loss of customers could have a material adverse effect on the Company.
Quantum faces direct competition from a number of companies, including Seagate,
Western Digital, IBM, Maxtor, Exabyte and Sony. In the event that the Company is
unable to compete effectively with these or any other company, the Company would
be materially adversely affected. The Company's information storage product
competition can be further broken down as follows:
Desktop Storage Products. In the market for desktop products, Quantum
competes primarily with Seagate, Western Digital, and Maxtor. Quantum and
its competitors have developed and are developing a number of products
targeted at particular segments of this market, such as business users and
home PC buyers, and factors such as time to market can have a significant
effect on the success of any particular product. The desktop market is
characterized by more competitiveness and shorter product life cycles than
the hard disk drive market in general.
Workstation and System Storage Products. The Company faces competition in
the high-capacity disk drive market primarily from Seagate, IBM and
Fujitsu. Seagate has the largest share of the market for high-capacity
disk drives. Although the same competitive factors identified above as
being generally applicable to the overall disk drive industry apply to
high-capacity disk drives, the Company believes that the performance and
quality of its products are more important to the users in this market
than to users in the desktop market. The Company's success in the
high-capacity market during the foreseeable future is dependent on the
successful development, timely introduction, and market acceptance of key
new products, as to which there can be no assurance.
Specialty Storage Products. In the market for tape drives, the Company
competes with other companies that have tape drive product offerings and
alternative formats. The Company targets a market segment that requires
a mission critical backup system and competes in this segment based on the
reliability and durability of its tape drives. Although the Company has
experienced excellent market acceptance of its tape drive products, the
market may become more competitive as other companies broaden their
product lines in this market. As a result, the Company could experience
increased price competition. If price competition occurs,
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the Company may be forced to lower prices, in which case the Company could
be materially adversely affected.
Rapid Technological Change, New Product Development, and Qualification. The
combination of an environment of rapid technological changes, short product life
cycles and competitive pressures results in gross margins on specific products
decreasing rapidly. Accordingly, any delay in introduction of more advanced and
more cost-effective products can result in significantly lower sales and gross
margins. The Company's future is therefore dependent on its ability to
anticipate what customers will demand and to develop the new products to meet
this demand. The Company must also qualify new products with its customers,
successfully introduce these products to the market on a timely basis, and
commence volume production to meet customer demands. For example, during the
first quarter of fiscal 1998 the Company expects to introduce a new desktop
product that will account for a significant portion of the Company's sales.
There can be no assurance that the Company will successfully qualify this new
desktop product with its customers on a timely basis or that such product will
be produced in sufficient quantities to meet customer demand. Due to these
factors, the Company expects that sales of new products will continue to account
for a significant portion of its future sales and that sales of older products
will decline accordingly.
The Company is frequently in the process of qualifying new products with its
customers. The customer qualification process for disk drive products,
particularly high-capacity products, can be lengthy, complex, and difficult. In
addition, the Company transitioned the manufacturing of its high capacity
products to MKE during the first half of fiscal 1997, and MKE has only recently
begun volume production of such high-capacity products. In the event that the
Company is unable to obtain additional customer qualifications for new products
in a timely manner, or at all, or in the event that MKE is unable to continue to
manufacture such products in volume and with consistent high quality, the
Company would be materially adversely affected.
There can be no assurance that the Company will be successful in the development
and marketing of any new products and components in response to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products and components; or that the
Company's new products and components will adequately meet the requirements of
the marketplace and achieve market acceptance. In addition, technological
advances in magnetic, optical or other technologies, or the development of new
technologies, could result in the introduction of competitive products with
superior performance to and substantially lower prices than the Company's
products. Further, the Company's new products and components are subject to
significant technological risks. If the Company experiences delays in the
commencement of commercial shipments of new products or components, the Company
could experience delays or loss of product sales. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, the Company would be materially adversely affected.
Customer Concentration. In addition to the information storage industry and the
Company's customer base being concentrated, the customers generally are not
obligated to purchase any
16
minimum volume of the Company's products, and the Company's relationships with
its customers are generally terminable at will by its customers.
Sales of the Company's desktop products, which comprise a majority of its
overall sales, were concentrated with several key customers in the quarter ended
June 29, 1997, and the fiscal year ended March 31, 1997. Sales to the top five
customers of the Company represented 46% of total sales for the first quarter of
fiscal 1998, and 38% of sales for the fiscal year ended March 31, 1997. In the
three month period ended June 29, 1997, revenue from the top five customers was
derived from both the OEM and Distribution sales channel, 31% and 15%
respectively. On the OEM side both HP and Digital represented over 10% of total
revenue. On the Distribution side Electronic Resources represented just under
10% of total revenue. In addition the Company is unable to predict whether or
not there will be any significant change in demand for any of its customers'
products in the future. In the event that any such changes result in decreased
demand for the Company's products, whether by loss of or delays in orders, the
Company could be materially adversely affected.
Fluctuation in Product Demand. Fluctuation in demand for the Company's products
generally results in fluctuations in the Company's operating results. Demand for
computer systems-especially in the PC market segment, where the Company derives
a significant amount of its disk drive sales-has historically been subject to
significant fluctuations. Such fluctuations in end-user demand have in the past,
and may in the future, result in the deferral or cancellation of orders for the
Company's products, each of which could have a material adverse effect on the
Company. During the past several years, there has been significant growth in the
demand for PCs, a portion of which represented sales of PCs for use in the home.
However, many analysts predict that future growth may be at a moderately slower
rate than the rate experienced in recent years.
Sales of tape drives and tape drive-related products, which have been a less
significant component of sales for the Company than sales of disk drive products
but which have recently had a significant impact on margins and profitability,
have tended to be more stable. In this regard the Company expects sales of DLT
products, which represented 18% of sales and a much higher percentage of
operating profits for the quarter ended June 29, 1997, will continue to increase
as a percentage of the Company's total sales and operating profits in the
future.
The Company has experienced longer product cycles for its tape drives and tape
drive-related products, compared with the short product cycles of disk drive
products. However, there is no assurance that this trend will continue.
The Company could experience decreases in demand for its products in the future,
which could have a material adverse effect on the Company. For the second
fiscal 1998 quarter, the Company expects to experience continued gross margin
pressure with respect to both its desktop and high-end hard disk drive products.
The hard disk drive industry has also been subject, from time to time, to
seasonal fluctuations in demand. The Company has typically experienced
relatively flat demand in the quarter ending September 30 compared with the
quarter ending June 30. The Company expects this trend to continue with respect
to the quarter ended September 28, 1997. In addition, the Company's shipments
tend to be highest in the third month of each quarter, which occurred in the
quarter ended June 29, 1997 and which the Company expects to occur again in the
quarter ending September 28, 1997. As a result, and because the Company has no
long-term purchase commitments from its customers, future demand is difficult to
predict. The failure by the Company to complete shipments in the final month of
a quarter due to a decline in customer
17
demand, manufacturing problems or other factors would adversely affect the
Company's operating results for that quarter.
Intellectual Property Matters. From time to time, the Company is approached by
companies and individuals alleging Quantum's need for a license under patented
technology that Quantum assertedly uses. If required, there can be no assurance
that licenses to any such technology could be obtained or obtained on
commercially reasonable terms. Adverse resolution of any intellectual property
litigation could subject the Company to substantial liabilities and require it
to refrain from manufacturing certain products. In addition, the costs of
engaging in such litigation may be substantial, regardless of the outcome.
TRENDS AND UNCERTAINTIES MORE SPECIFIC TO QUANTUM
Certain trends and uncertainties relate more specifically to Quantum and are not
necessarily indicative of the information storage industry as a whole. These
trends and uncertainties include dependence on MKE for the manufacture of the
disk drives that Quantum develops and markets, costs associated with the MR
recording head development and manufacture, the recording heads joint venture
with MKE, dependence on suppliers, component shortages, future capital needs,
warranty costs, foreign manufacturing, and price volatility of Quantum common
stock. For information regarding litigation refer to "Legal Proceedings" below.
Dependence on MKE Relationship. Quantum is dependent on MKE for the manufacture
of its disk drive products. Approximately 82% of the Company's quarter ended
June 29, 1997 sales, and 81% of the year ended March 31,1997 sales, were derived
from products manufactured by MKE. In addition, the formation of the joint
venture with MKE to produce recording heads used in disk drive production in
combination with the transition of the manufacturing of the Company's
high-capacity products to MKE in fiscal 1997 has resulted in an increased
dependence on MKE. The Company's relationship with MKE is therefore critical to
the Company's business and financial performance.
In May 1997, Quantum completed renegotiation of its master agreement with MKE,
which covers the general terms of the business relationship. The agreement was
extended for a period of 10 years, unless sooner terminated as a result of
certain specified events including a change-in-control of either Quantum or
MKE. MKE currently manufactures all of the hard disk drives developed and
marketed by Quantum. Quantum's relationship with MKE, which dates from 1984, is
built on Quantum's engineering and design expertise and MKE's high-volume,
high-quality manufacturing expertise.
The Company's dependence on MKE entails, among others, the following principal
risks:
Quality and Delivery. The Company relies on MKE's ability to bring new
products rapidly to volume production at low cost, to meet the Company's
stringent quality requirements, and to respond quickly to changing product
delivery schedules from the Company. This requires, among other things,
close and continuous collaboration between the Company and MKE in all
phases of design, engineering, and production. The Company's business and
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financial results would be adversely affected if products manufactured by
MKE fail to satisfy the Company's quality requirements or if MKE is unable
to meet the Company's delivery commitments. In the event MKE is unable to
satisfy Quantum's production requirements, the Company would not have an
alternative manufacturing source to meet the demand without substantial
delay and disruption of the Company's operations. As a result, the Company
would be materially adversely affected.
Volume and Pricing. MKE's production schedule is based on the Company's
forecasts of its product purchase requirements, and the Company has
limited contractual rights to modify short-term purchase orders issued to
MKE. Further, the demand in the desktop business is inherently volatile,
and there is no assurance that the Company's forecasts are accurate. In
addition, the Company periodically negotiates pricing arrangements with
MKE. The failure of the Company to accurately forecast its requirements or
successfully adjust MKE's production schedule, which could lead to
inventory shortages or surpluses, or the failure to reach pricing
agreements reasonable to the Company would have a material adverse effect
on the Company.
Manufacturing Capacity and Capital Commitment. The Company believes that
MKE's current and committed manufacturing capacity should be adequate to
meet the Company's requirements at least through the end of fiscal 1998.
The Company's future growth will require, however, that MKE continue to
devote substantial financial resources to property, plant and equipment
and working capital to support manufacture of the Company's products, as
to which there can be no assurance. In the event that MKE is unable or
unwilling to meet the Company's manufacturing requirements, there can be
no assurance that the Company would be able to obtain an alternate source
of supply. Any such failure to obtain an alternative source would have a
material adverse effect on the Company.
MR Recording Heads Development and Manufacturing. Since the fiscal 1995
acquisition of MR recording heads technology as part of the acquisition of
certain businesses of the Storage Business Unit of Digital Equipment
Corporation, Quantum has made significant efforts to advance the development of
its MR recording heads capability. To further this effort, MKE and Quantum
formed a joint venture in the first quarter of fiscal 1998 to partner in the
research, development, and production of MR heads and technology. Quantum
believes that through MKE's manufacturing expertise, the potential of the MR
heads operations will be realized to the benefit of both MKE and Quantum.
However, cost-effective production of MR recording heads is not expected to be
realized in the near term. Until that time, the Company will incur losses based
on its pro rata ownership interest in the new joint venture. However, there can
be no assurance that the benefits of the joint venture will be realized on a
timely basis or at all.
Although the Company currently obtains the majority of its MR heads from outside
sources, the Company believes that by manufacturing MR heads it has developed
in-depth knowledge of MR head technology. The Company believes that MR head
technology, which enables higher capacity per disk than conventional thin-film
inductive heads, will replace inductive heads as the leading recording head
technology. This knowledge is leveraged in the research, development, and
production of disk drive products that utilize MR head technology. In addition,
the Company believes that having a captive supply of MR heads lowers the risk of
MR head supply
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shortages that may occur in the future as a result of increased requirements for
disk drive products that utilize MR recording heads. However, MR technology is
relatively complex and, to date, the Company's manufacturing yields for its MR
heads have been lower than would be necessary for cost effective production of
MR recording heads.
There is an additional uncertainty associated with maintaining or increasing the
supply of MR recording heads used in the manufacture of disk drives. There are
limited alternative sources of supply for MR recording heads. In the event that
current sources of MR recording heads, which include the joint venture's MR
heads operations, do not meet disk drive production requirements, there can be
no assurance that the Company will be able to locate and obtain adequate
supplies from alternative sources. A shortage of MR recording heads would
materially adversely affect the Company.
Dependence on Suppliers of Components and Sub-Assemblies; Component Shortages.
Each of the Company and its manufacturing partner, MKE, are dependent on
qualified suppliers for components and sub-assemblies, including recording
heads, media, and integrated circuits, which are essential to the manufacture of
the Company's disk drive and tape drive products. In connection with certain
products, the Company and MKE qualify only a single source for certain
components and sub-assemblies, which can magnify the risk of shortages.
Component shortages have constrained the Company's sales growth in the past, and
the Company believes that the industry will periodically experience component
shortages. For example, during the quarter ended June 29, 1997, the Company's
ability to meet customer demand for its tape drive products was somewhat
constrained by component availability. If component shortages occur, or if the
Company experiences quality problems with component suppliers, shipments of
products could be significantly delayed or costs significantly increased, which
would have a material adverse effect on the Company.
Future Capital Needs. The information storage industry is capital and research
and development intensive and the Company will need to maintain adequate
financial resources for capital expenditures, working capital, and research and
development, in order to remain competitive in the information storage business.
The Company believes that it will be able to fund these capital requirements at
least through fiscal 1998. However, if the Company decides to increase its
capital expenditures further, or sooner than presently contemplated, or if
results of operations do not meet the Company's expectations, the Company could
require additional debt or equity financing. There can be no assurance that such
additional funds will be available to the Company or will be available on
favorable terms. The Company may also require additional capital for other
purposes not presently contemplated. If the Company is unable to obtain
sufficient capital, it could be required to curtail its capital equipment and
research and development expenditures, which could adversely affect the Company.
Warranty. Quantum generally warrants its products against defects for a period
of one to five years. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped. The actual warranty
expenditures could have a material unfavorable impact on the Company if the
actual rate of unit failure or the cost to repair a unit is greater than what
the Company has used in estimating the warranty expense accrual.
Risks Associated with Foreign Manufacturing. Many of the Company's products are
currently manufactured outside the United States. As a result, the Company is
subject to certain risks associated with contracting with foreign manufacturers,
including obtaining requisite United
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States and foreign governmental permits and approvals, currency exchange
fluctuations, currency restrictions, political instability, labor problems,
trade restrictions, and changes in tariff and freight rates.
Foreign Exchange Contracts. The Company manages the impact of foreign currency
exchange rate changes on certain foreign currency receivables and payables using
foreign currency forward exchange contracts. With this approach the Company
expects to minimize the impact of changing foreign exchange rates on the
Company's net income. However, there can be no assurance that all foreign
currency exposures will be adequately managed, and the Company could incur
material charges as a result of changing foreign exchange rates. Refer to Note 2
of the Notes to Consolidated Financial Statements for additional information
regarding foreign currency forward exchange contracts.
Volatility of Stock Price. The market price of the Company's common stock has
been, and may continue to be, extremely volatile. Factors such as new product
announcements by the Company or its competitors; quarterly fluctuations in the
operating results of the Company, its competitors, and other technology
companies; and general conditions in the computer market may have a significant
impact on the market price of the common stock. In particular, if the Company
were to report operating results that did not meet the expectations of the
analysts, the market price of the common stock could be materially adversely
affected.
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