Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12390
QUANTUM CORPORATION
Incorporated Pursuant to the Laws of the State of Delaware
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IRS Employer Identification Number 94-2665054
500 McCarthy Blvd., Milpitas, California 95035
(408) 894-4000
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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 January 26, 1997: 64,980,302
QUANTUM CORPORATION
10-Q REPORT
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Operations 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 17
SIGNATURE 19
2
QUANTUM CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(unaudited)
Three Months Ended Nine Months Ended
Dec. 29, Dec. 31, Dec. 29, Dec. 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Sales $ 1,477,951 $ 1,215,872 $ 3,755,598 $ 3,190,235
Cost of sales 1,262,494 1,101,917 3,263,384 2,809,365
----------- ----------- ----------- -----------
Gross profit 215,457 113,955 492,214 380,870
Operating expenses:
Research and development 73,267 63,681 209,481 173,939
Sales and marketing 38,732 37,211 104,739 105,716
General and administrative 21,331 17,730 59,805 45,365
----------- ----------- ----------- -----------
133,330 118,622 374,025 325,020
Income (loss) from operations 82,127 (4,667) 118,189 55,850
Other (income) expense:
Interest expense 13,855 10,302 37,861 26,050
Interest and other (income)/expense (2,587) (6,327) (1,903) (10,807)
----------- ----------- ----------- -----------
11,268 3,975 35,958 15,243
Income (loss) before income taxes 70,859 (8,642) 82,231 40,607
Income tax provision (benefit) 18,424 (6,161) 21,380 8,121
----------- ----------- ----------- -----------
Net income (loss) $ 52,435 $ (2,481) $ 60,851 $ 32,486
=========== =========== =========== ===========
Net income (loss) per share:
Primary $ 0.85 $ (0.05) $ 1.03 $ 0.60
Fully diluted $ 0.71 $ (0.05) $ 0.91 $ 0.59
Weighted average common and
common equivalent shares:
Primary 61,364 52,941 59,281 54,465
Fully diluted 78,196 52,941 76,368 62,862
See accompanying notes to consolidated financial statements.
3
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
December 29, March 31,
1996 1996
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Assets
Current assets:
Cash and cash equivalents $ 219,315 $ 164,752
Accounts receivable, net of allowance for
doubtful accounts of $12,486 and $10,497 803,131 711,107
Inventories 252,825 459,538
Deferred taxes 109,620 109,625
Other current assets 110,479 81,472
---------- ----------
Total current assets 1,495,370 1,526,494
Property and equipment, net of accumulated
depreciation of $203,409 and $161,334 403,460 364,111
Purchased intangibles, net 41,148 66,313
Other assets 32,087 18,437
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$1,972,065 $1,975,355
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 377,375 $ 498,829
Accrued warranty expense 70,717 62,289
Accrued compensation 48,364 45,439
Income taxes payable 51,412 40,994
Accrued restructuring and exit costs 9,688 115,537
Current portion of long-term debt 44,100 4,125
Other accrued liabilities 68,284 53,929
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Total current liabilities 669,940 821,142
Deferred taxes 11,232 11,232
Convertible subordinated debt 332,272 374,283
Long-term debt 273,150 223,875
Shareholders' equity:
Common stock 346,743 266,946
Retained earnings 338,728 277,877
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Total shareholders' equity 685,471 544,823
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$1,972,065 $1,975,355
========== ==========
See accompanying notes to consolidated financial statements.
4
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
December 29, December 31,
1996 1995
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Cash flows from operating activities:
Net income $ 60,851 $ 32,486
Gain on sale of equity investment - (3,844)
Items not requiring the current use of cash:
Depreciation and amortization 91,547 70,112
Compensation related to stock plans 1,767 -
Changes in assets and liabilities:
Accounts receivable (92,024) (209,400)
Inventories 206,714 (200,099)
Accounts payable (121,454) 164,451
Income taxes payable 7,495 (20,177)
Accrued warranty expense 8,428 5,692
Other assets and liabilities (93,307) (12,025)
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Net cash provided by (used in) operating activities 70,017 (172,804)
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Cash flows from investing activities:
Investment in property and equipment (148,331) (152,641)
Proceeds from disposition of property and equipment 14,645 -
Proceeds from sale of equity investment - 5,875
Proceeds from sale of distribution subsidiary - 5,276
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Net cash provided by (used in) investing activities (133,686) (141,490)
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Cash flows from financing activities:
Proceeds from long-term credit facilities 310,091 315,000
Proceeds of mortgage loan 42,105 -
Principal payments on long-term credit facilities (262,946) (75,000)
Proceeds from issuance of common stock, net 28,982 22,547
---------- ----------
Net cash provided by financing activities 118,232 262,547
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Net increase (decrease) in cash and cash equivalents 54,563 (51,747)
Cash and cash equivalents at beginning of period 164,752 187,753
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Cash and cash equivalents at end of period $ 219,315 $ 136,006
========== ==========
Supplemental disclosure of cash flow information:
Conversion of debentures $42,011 -
Note received on disposition of property and equipment $18,000 -
Cash paid during the period for:
Interest $35,592 $25,105
Taxes $13,839 $27,979
See accompanying notes to consolidated financial statements.
5
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. Certain
prior period amounts have been reclassified to conform to the current period's
presentation. The accompanying financial statements should be read in
conjunction with the audited financial statements of Quantum Corporation for the
fiscal year ended March 31, 1996.
2. Inventories
Inventories consisted of the following:
(In thousands)
December 29, March 31,
1996 1996
------------ ---------
Materials and purchased parts $ 42,806 $119,984
Work in process 31,146 98,591
Finished goods 178,873 240,963
--------- --------
$252,825 $459,538
========= ========
3. Net income per share
Net income (loss) 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 convertible subordinated debt.
4. Debt
The Company has a senior credit facility which includes a $325 million revolving
credit line and a $75 million term loan. As of December 29, 1996, the
outstanding balance on the revolving credit line was $185 million. The term loan
amortizes in eight quarterly payments beginning December 31, 1996.
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5. Litigation
See Part II, Item 1 of this Form 10-Q for a description of legal proceedings.
6. Subsequent Event
On December 20, 1996, the Company called for redemption on January 19, 1997, all
of the Company's outstanding 6 3/8% Convertible Subordinated Debentures due
April 1, 2002, at a redemption price of $1,057.38 per $1,000 principal amount of
Debenture. From December 20, 1996 through January 19, 1997, holders of
$1,831,000 and $90,882,000 principal amount of Debentures exercised their option
to convert Debentures held into 100,887 and 5,007,595 shares of the Company's
common stock at a conversion price of approximately $18.15 per share, on
December 20, 1996 through December 29, 1996, and December 30, 1996 through
January 19, 1997, respectively. The remaining $40,000 principal amount of
Debentures outstanding on January 19, 1997, was redeemed for $42,295, which
included redemption premium and accrued interest.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following discussion 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. These forward-looking statements
include the continued and increased benefits resulting from the transition of
the manufacturing of the Company's high-capacity hard disk drive products to
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), of Japan, as well as
management's expectations regarding financial results for fiscal 1997. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain of the risk factors set forth below in "Trends
and Uncertainties" and elsewhere in this report.
Sales. Sales for the quarter and nine months ended December 29, 1996, were
$1,478 million and $3,756 million, respectively, compared to $1,216 million and
$3,190 million for the corresponding periods in fiscal 1996. Unit shipments of
drives for the quarter ended December 29, 1996, increased 14% compared to the
corresponding period in fiscal 1996, with sales for the third quarter of fiscal
1997 increasing 22% over the corresponding period in fiscal 1996. For the nine
month period ended December 29, 1996, unit shipments of drives increased 13% and
sales increased 18% over the comparable period in fiscal 1996. The increase in
sales on a year-to-year basis was attributable to increased unit sales of drives
and DLT tape, and a change in sales mix to higher-capacity, higher-priced
products in the desktop market. The increase in sales was partially offset by a
decline in sales of high-capacity disk drive products reflecting product
transitions. High-capacity disk drive products manufactured by MKE began to be
shipped in volume in the third quarter of fiscal 1997. Sales of a limited number
of desktop information storage products represented a significant majority of
sales for the nine month period ended December 29, 1996. While the Company
expects sales of the high-end products and the DLT products to increase as a
percentage of total sales in the future, the Company anticipates that desktop
products will continue to constitute a majority of sales in the future.
Sales to the top five customers for the quarter and nine month period ended
December 29, 1996, represented 40% and 39% of sales, respectively, with sales to
two customers representing 10% or more of sales for each period. For the
corresponding periods in fiscal 1996, sales to the top five customers
represented 41% and 44% of sales, with sales to two customers representing 10%
or more of sales for each period. A 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.
Gross Margin. The gross margin for the quarter ended December 29, 1996,
increased to 14.6% from 9.4% for the corresponding period in fiscal 1996. The
Company's gross margin for the nine month period ended December 29, 1996 was
13.1%, compared to 11.9% for the corresponding period in fiscal 1996. The gross
margin increase from the previous fiscal year reflected a stronger product mix
and pricing in the desktop market in the third quarter of fiscal 1997, which was
offset by lower pricing and margins in the first and second quarters of fiscal
1997. The remaining increase reflects the impact of a $38 million charge
associated with the resizing of the infrastructure of WSSG in the third quarter
of fiscal 1996. In the future, gross margin may be
8
affected by pricing and other competitive conditions, as well as the Company's
ability to maintain profit margins during the phase out of older product lines
and the introduction and ramp of newer product lines that incorporate advances
in technology. See "Trends and Uncertainties," below for a discussion of certain
other factors that may affect the Company's gross margin.
Research and Development Expenses. Research and development expenses for the
quarter ended December 29, 1996, were $73 million, or 5.0% of sales, compared to
$64 million, or 5.2% of sales, for the corresponding period in fiscal 1996. For
the nine month period ended December 29, 1996, research and development expenses
were $209 million, or 5.6% of sales, compared to $174 million, or 5.5% of sales,
for the corresponding period in fiscal 1996. The absolute dollar increase in
research and development spending reflected higher expenses related to
preproduction activity for a number of new products for both the desktop and the
high-capacity markets. The information storage industry, particularly the hard
disk drive business, 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. As a result, the Company expects
to continue to make significant expenditures for research and development. See
"Trends and Uncertainties," below.
Sales and Marketing Expenses. Sales and marketing expenses for the quarter ended
December 29, 1996 were $39 million, or 2.6% of sales, compared to $37 million,
or 3.1% of sales for the corresponding period in fiscal 1996. Sales and
marketing expenses for the nine month period ended December 29, 1996 were $105
million, or 2.8% of sales, compared to $106 million, or 3.3% of sales, for the
corresponding period in fiscal 1996. The sales and marketing expenses decline as
a percentage of sales reflects a higher sales base.
General and Administrative Expenses. General and administrative expenses for the
quarter ended December 29, 1996, were $21 million, or 1.4% of sales, compared to
$18 million, or 1.5% of sales, for the corresponding period in fiscal 1996.
General and administrative expenses for the nine month period ended December 29,
1996, were $60 million, or 1.6% of sales, compared to $45 million, or 1.4% of
sales, for the corresponding period in fiscal 1996. The increase in absolute
dollars for the quarter reflected expansion of the Company's infrastructure. The
increase for the nine month period reflected expansion of the Company's
infrastructure and an increase in bad debt expense in the first quarter of
fiscal 1997.
Other (Income) Expense. Net interest and other income/expense was $11 million
net expense for the quarter ended December 29, 1996, and $4 million for the
corresponding period in fiscal 1996. Net interest and other income/expense for
the nine month period ended December 29, 1996 was $36 million, compared to $15
million for the corresponding period in fiscal 1996. The increase in net
interest expense was the result of an increase in the level of debt and lower
foreign currency exchange gains.
Income Taxes. The effective tax rate for the quarter ended December 29, 1996,
was 26% compared to a benefit rate of 71% for the corresponding period in fiscal
1996. The higher fiscal 1996 benefit rate was primarily attributable to the
re-evaluation of the fiscal 1996 year-to-date effective tax rate. The effective
tax rate for the nine month period ended December 29, 1996, was 26% as compared
to the effective tax rate of 20% for the corresponding period in fiscal 1996.
The higher effective
9
tax rate in fiscal 1997 was primarily attributable to a decreased percentage of
tax benefit related to foreign earnings taxed at less than the U.S. rate.
Liquidity and Capital Resources
At December 29, 1996, the Company had $219 million in cash and cash equivalents,
compared to $165 million at March 31, 1996. For the nine month period ended
December 29, 1996, cash used in operating and investing activities reflected
increases in accounts receivable, decreases in accounts payable and other
current liabilities, and investments in property and equipment. Sources of cash
included net borrowing under long-term credit and mortgage arrangements,
decreases in inventories, and the issuance of common stock.
The Company has a senior credit facility which includes a $75 million term loan,
and a $325 million revolving credit line with an $185 million outstanding
balance at December 29, 1996. The term loan amortizes in eight quarterly
payments beginning December 31, 1996.
The Company expects to spend approximately $30 million for capital equipment,
expansion of the Company's facilities, and leasehold improvements, for the
remainder of fiscal 1997. These capital expenditures will support the recording
heads and tapes businesses, as well as research and development and general
corporate operations.
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 for the remainder of the
fiscal year. However, this forward-looking statement 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 below in
"Trends and Uncertainties" under "Fluctuation in Results of Operations." The
Company continues to work to identify additional sources of cash and there can
be no assurance that, if required, the Company will be able to obtain such
financing or obtain it on acceptable terms.
Trends and Uncertainties
Fluctuation in Results of Operations. The Company's results of operations are
subject to fluctuations from period to period. In this regard, the demand for
the Company's hard disk drive products depends on the demand for the computer
systems manufactured by its customers, which is affected by computer system
product cycles and by prevailing economic conditions. Growth in demand for
computer systems, especially in the personal computer ("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
10
home. However, many analysts predict that future growth may be at a moderately
slower rate than the rate experienced in recent years.
In the first half of fiscal 1997, the Company experienced weak demand for its
mix of drive products for the PC market and this resulted in pricing pressure on
the Company's products and had an adverse impact on revenue and earnings for the
first six months of fiscal 1997. The Company lost some desktop business to
competitors with strong 1.6 gigabyte desktop programs at different price points.
In response to the declining demand, the Company reduced its drive build plan at
MKE through the second quarter of fiscal 1997. In the third quarter of fiscal
1997, the Company experienced increased demand for its mix of drive products.
However, there can be no assurance that this increase in demand will continue,
and the Company could experience decreases in demand for its products in the
future. Any such slowdowns in demand could have a material adverse effect on the
Company.
The hard disk drive industry has also been subject, from time to time, to
seasonal fluctuations in demand. Because shipments have tended to be highest in
the third month of each quarter, the Company is taking steps to improve the
linearity of shipments throughout the quarter. As a result of these steps, the
Company experienced improved linearity of shipments in the third quarter of
fiscal 1997. The fourth quarter of fiscal 1997 is expected to be less linear
than the third quarter of fiscal 1997. There can be no assurance that this
linearity trend will continue. Any failure by the Company to complete shipments
in the final month of the quarter could adversely affect the Company's operating
results for that quarter.
Sales of tape drives and cartridges, although a less significant component of
sales for the Company than sales of disk drive products, have tended to be more
stable than the sales of disk drive products. The Company has experienced longer
product cycles for its tape drives and cartridges in comparison to the product
cycles of disk drive products. These factors combined with sustained acceptance
for newer tape drives and cartridges have resulted in consistent growth during
the first three quarters of fiscal 1997 on a quarter-by-quarter basis and as
compared to the corresponding periods of fiscal 1996. However, there is no
assurance that this trend will continue and the Company could experience
decreases in demand for its products in the future. Any such slowdowns in demand
could have a material adverse effect on the Company.
Transition of High-Capacity Manufacturing Operations to MKE. Since the Company's
acquisition of Digital's high-capacity disk drive operations in late 1994, the
Company experienced significant difficulties in integrating these operations
into its high-capacity business. These difficulties included problems involving
both the development and manufacturing of its high-capacity products and
resulted in, among other things, significant delays in meeting the qualification
standards imposed by certain major customers of the Company's high-capacity disk
drive products. As part of its strategy to address these problems, the Company
decided to transition its high-capacity disk drive product manufacturing to MKE
in fiscal 1996. As a result, the Company incurred a charge of $209 million in
the fourth quarter of fiscal 1996, associated with the closure of the Company's
two high-capacity disk drive manufacturing facilities in Milpitas, California,
and Penang, Malaysia. These two facilities were closed during the quarter ended
September 29, 1996.
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Several risks are associated with the Company's transition of its high-capacity
manufacturing operations to MKE. Although the Company has had a continuous
manufacturing relationship with MKE since 1984, the Company's high-capacity
products are more complex to manufacture than its desktop products. Prior to the
transition, MKE had not previously manufactured any significant amount of the
Company's high-capacity products, and there can be no assurance that the
Company's previous difficulties with its high-capacity products will be resolved
or that new problems will not arise as a result of the transition of this
manufacturing to MKE. Any failure of the Company to successfully manage this
transition would have a material adverse effect on the Company.
Dependence on MKE Relationship. The Company is dependent upon MKE for the
manufacture of its disk drive products. During fiscal 1996 and the first three
quarters of fiscal 1997, approximately 75%, and 80%, respectively, of the
Company's sales were derived from products manufactured by MKE. The transition
of the manufacturing of the Company's high-capacity products to MKE 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.
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
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.
Extension of Relationship. The Company's relationship with MKE, which has
been continuous since 1984, is currently governed by a master agreement
that, unless extended, will expire in December 1997. The failure of the
parties to extend their relationship on terms favorable to the Company
would have a material adverse effect on the Company.
Volume and Pricing. MKE's production schedule is based on the Company's
forecasts of its product purchase requirements and the Company has only
limited 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 renegotiates pricing arrangements with
MKE. The failure of the Company to accurately forecast its requirements,
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.
12
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 1997.
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.
Dependence on Suppliers of Components and Sub-Assemblies; Component Shortages.
The Company and its manufacturing partner, MKE, are dependent upon qualified
suppliers for components and sub-assemblies, including recording heads, media
and integrated circuits, which are essential to the manufacture of the Company's
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. If such 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.
Rapid Technological Change; New Product Development and Qualification. Quantum
operates in an industry characterized by increasingly rapid technological
changes and short product life cycles. For these and other reasons, including
competitive pressures, gross margins on specific products can decrease rapidly.
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 the customers will demand
and to develop the new products to meet this demand. The Company must also
qualify these new products with its customers, successfully introduce these
products to the market on a timely basis and commence volume production to meet
customer demands. 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. However, there can be
no assurance that such new products will achieve or sustain market acceptance
and failure to achieve acceptance could have a material adverse effect on the
Company.
The Company is currently in the process of qualifying two of its new
high-capacity products. The customer qualification process for disk drive
products, particularly high-capacity products, can be lengthy and complex, and
the Company has in the past experienced difficulties in obtaining qualifications
of its high-capacity products from certain customers. 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 these new products in a timely manner, or
at all, or in the event MKE is unable to manufacture such products in volume,
the Company would be materially adversely affected.
13
There can be no assurance that the Company will be successful in the development
and marketing of these and other new products and components that seek to
respond 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 technical 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.
MR Recording Heads Development and Manufacturing. The Company is currently
engaged in a substantial effort to advance the development of its MR recording
heads capability. 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. 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. This knowledge is leveraged in the research,
development and production of 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 shortages that may occur in the future as a result of
increased requirements for disk drive products which 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 the Company's
manufacturing yields for its thin film inductive heads. In the event that yields
do not improve, the Company will continue to incur losses associated with its MR
heads manufacturing operations, and these losses would continue to negatively
affect the Company's operating results. In addition, since there are limited
alternative sources of supply for MR recording heads, and there can be no
assurance that the Company will be able to locate and obtain adequate supply
from such alternative sources, the Company would be materially adversely
affected in the event that its yields for MR heads do not improve.
Customer Concentration. As is typical in the information storage industry, the
Company's customer base is concentrated with a small number of computer systems
manufacturers. In general, the customers are not obligated to purchase any
minimum volume of the Company's products, and the Company's relationships with
its customers are generally terminable at will by the customers.
Sales of the Company's desktop products, which comprise a significant majority
of its overall sales, were concentrated with several key customers during the
nine months ended December 29, 1996, and fiscal 1996. Sales to the top five
customers of the Company represented 39% of total sales for the nine month
period ended December 29, 1996, and 44% of sales for corresponding
14
period of fiscal 1996. For the nine month period ended December 29, 1996, sales
to Compaq and Hewlett Packard were approximately 12% and 10% of total sales,
respectively. Apple's share of the Company's sales, which was 11% in fiscal
1996, has declined to approximately 7% for the nine month period ended December
29, 1996. 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 or delays in orders, the Company could
be materially adversely affected.
Intensely Competitive Industry. The information storage products industry in
general, and the disk drive industry in particular, is characterized by intense
competition which 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. In this regard, the Company has begun to
introduce new products in the third quarter of fiscal 1997 and intends to
introduce additional new products in the fourth quarter of fiscal 1997. If the
product transition is 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.
Quantum faces direct competition from a number of companies, including Seagate,
Western Digital, IBM, (which recently announced increased investment in its
storage business), Maxtor and Exabyte. In the event that the Company is unable
to compete effectively with these or any other companies, the Company would be
materially adversely affected.
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 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 competitors 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 and IBM.
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, which have tape drive product offerings,
including Exabyte. The Company targets a market segment which requires a
mission critical backup system, and the Company competes in this segment
based upon the reliability and durability of its tape drives. Although the
15
Company has experienced excellent market acceptance of its tape drive
products, the market could become significantly more competitive at any
time during the remainder of fiscal 1997 or beyond. As a result, the
Company could experience increased price competition. If price competition
occurs, the Company may be forced to lower prices, in which case the
Company could be materially adversely affected.
Finally, 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.
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 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.
Intellectual Property Matters. The hard disk drive industry has been
characterized by significant litigation relating to patent and other
intellectual property rights. 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.
Litigation. See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
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Future Capital Needs. The information storage business is capital-intensive and
competitive. Although the Company has recently transitioned the manufacturing of
all of its hard disk drive products to MKE, the Company believes that it will
need significant additional financial resources over the next several years 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
1997. 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 will 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. In addition,
the Company may 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.
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 research
analysts, the market price of the common stock could be materially adversely
affected.
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
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
17
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 October 23, 1996, the Company filed a
demurrer requesting dismissal of the state action, and on November 21, 1996, the
Company moved for a determination that the action not be permitted to proceed as
a class action. There has been no decision on either motion to date. In the
federal action, the defendants have not yet responded to the complaint.
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. The
defendants have not yet responded to the derivative complaint.
The Company believes that the pending actions are without merit and intends to
defend against them vigorously. Nevertheless, litigation is subject to inherent
uncertainties and thus there can be no assurance that these suits will be
resolved favorably to the Company or will not have a material adverse effect on
the Company.
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
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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: February 11, 1997 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
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QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number
11.1 Statement of Computation of Net Income Per Share
27 Financial Data Schedule
20