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 September 28, 1997
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 28, 1997: 136,166,230
QUANTUM CORPORATION
10-Q REPORT
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION 25
SIGNATURE 27
2
QUANTUM CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(unaudited)
Three Months Ended Six Months Ended
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
------------- ------------- ------------- ------------
Sales $ 1,553,491 $ 1,124,144 $ 2,999,635 $ 2,277,646
Cost of sales 1,255,407 988,666 2,425,618 2,000,889
----------- ----------- ----------- ------------
Gross profit 298,084 135,478 574,017 276,757
Operating expenses:
Research and development 74,493 69,549 148,522 136,214
Sales and marketing 41,971 29,812 83,704 66,007
General and administrative 24,268 16,988 51,739 38,475
----------- ----------- ----------- ------------
140,732 116,349 283,965 240,696
Income from operations 157,352 19,129 290,052 36,061
Other (income) expense:
Interest expense 8,293 12,973 14,328 24,006
Interest income and other income and
expense, net 8,818 (24) 5,060 682
----------- ----------- ----------- ------------
17,111 12,949 19,388 24,688
Income before income taxes 140,241 6,180 270,664 11,373
Income tax provision 36,463 1,607 70,372 2,957
----------- ----------- ----------- ------------
Net income $ 103,778 $ 4,573 $ 200,292 $ 8,416
=========== =========== =========== ============
Net income per share:
Primary $ 0.71 $ 0.04 $ 1.40 $ 0.07
Fully diluted $ 0.62 $ 0.04 $ 1.23 $ 0.07
Weighted average common and common equivalent shares:
Primary 145,791 117,264 143,337 116,478
Fully diluted 172,501 117,264 167,506 116,478
See accompanying notes to condensed consolidated financial statements.
3
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 28, March 31,
1997 1997
------------- ----------
(unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 637,744 $ 345,125
Accounts receivable, net of allowance for
doubtful accounts of $ 10,194 and $ 10,610 1,029,829 887,477
Inventories 386,525 252,802
Deferred taxes 122,899 122,899
Other current assets 42,713 80,116
---------- ----------
Total current assets 2,219,710 1,688,419
Property and equipment, net of accumulated
depreciation of $ 188,231 and $ 226,691 258,859 407,206
Purchased intangibles, net 15,017 42,131
Other assets 158,112 20,507
---------- ----------
$2,651,698 $2,158,263
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 626,938 $ 502,069
Accrued warranty expense 84,446 94,989
Accrued compensation 65,870 63,093
Income taxes payable 44,476 31,153
Current portion of long-term debt 893 44,229
Other accrued liabilities 82,782 80,045
---------- ----------
Total current liabilities 905,405 815,578
Deferred taxes 33,709 33,587
Convertible subordinated debt 528,850 241,350
Long-term debt 40,463 177,668
Redeemable preferred stock 3,888 3,888
Shareholders' equity:
Common stock 512,700 459,800
Retained earnings 626,683 426,392
---------- ----------
Total shareholders' equity 1,139,383 886,192
---------- ----------
$2,651,698 $2,158,263
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
September 28, September 29,
1997 1996
------------- -------------
Cash flows from operating activities:
Net income $ 200,292 $ 8,416
Items not requiring the current use of cash:
Depreciation 39,553 46,134
Amortization 5,986 13,764
Compensation related to stock plans 1,733 851
Changes in assets and liabilities:
Accounts receivable (142,352) (40,550)
Inventories (133,723) 100,679
Accounts payable 124,869 (135,858)
Income taxes payable 13,323 (2,989)
Accrued warranty expense (10,543) (17,564)
Other assets and liabilities 42,122 (110,788)
--------- ---------
Net cash provided by (used in) operating activities 141,260 (137,905)
--------- ---------
Cash flows from investing activities:
Investment in property and equipment (78,804) (114,126)
Proceeds from disposition of property and equipment 23,785 11,134
Purchase of equity securities (15,000) --
Purchase of intangible assets (10,000) --
Proceeds from sale of interest in recording heads operations 94,000 --
--------- ---------
Net cash provided by (used in) investing activities 13,981 (102,992)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities -- 300,091
Proceeds from issuance of convertible subordinated note 287,500 --
Proceeds from mortgage loan -- 42,105
Principal payments on credit facilities (180,541) (137,815)
Proceeds from issuance of common stock 30,419 20,358
--------- ---------
Net cash provided by (used in) financing activities 137,378 224,739
--------- ---------
Net increase (decrease) in cash and cash equivalents 292,619 (16,158)
Cash and cash equivalents at beginning of period 345,125 164,752
--------- ---------
Cash and cash equivalents at end of period $ 637,744 $ 148,594
========= =========
Supplemental disclosure of cash flow information:
Note received on disposition of property and equipment $ 18,000
Cash paid during the period for:
Interest $ 10,504 $ 24,899
Income Taxes $ 21,517 $ 6,003
See accompanying notes to condensed consolidated financial statements
5
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)
September 28, March 31,
1997 1997
------------- ---------
Materials and purchased parts $ 52,225 $ 39,898
Work in process 35,058 48,005
Finished goods 299,242 164,899
--------- ---------
$386,525 $252,802
========= =========
3. Net income per share
Net income per share amounts are computed by dividing net income 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 and six month periods ended September 28, 1997 and September 29, 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 and six
month periods ended September 28, 1997 assumes conversion of the Company's
outstanding convertible subordinated debentures as of the beginning of the
respective periods. Net income per share computed on a fully diluted basis for
the three and six month periods ended
6
September 29, 1996 did not assume conversion of the Company's outstanding
convertible debt because the effect would have been anti-dilutive.
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 December 28, 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,
respectively, as of March 31, 1997, 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 September 28, 1997, there
was no outstanding balance drawn on this line.
The Company extended until September 1998 an $85 million unsecured Letter of
Credit facility with certain banks to issue letters of credit to
Matsushita-Kotobuki Electronics and its affiliates.
In July 1997, the Company issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option of
the holder at any time prior to maturity, unless previously redeemed, into
shares of the Company's common stock at a conversion price of $46.325 per share.
The notes are redeemable at the Company's option on or after August 1, 1999 and
prior to August 1, 2001, under certain conditions related to the price of the
Company's common stock. Subsequent to August 1, 2001, the notes are redeemable
at the Company's option at any time. In the event of certain changes involving
all or substantially all of the Company's common stock, the notes would become
redeemable at the option of the holder. Redemption prices range from 107% of the
principal to 100% at maturity. The notes are unsecured obligations subordinated
in right of payment to all existing and future senior indebtedness of the
Company.
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,
7
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.
With respect to the federal action, defendants filed their motion to dismiss on
April 16, 1997. The Court granted defendants' motion to dismiss without
prejudice. On September 11, 1997, plaintiff filed an amended complaint.
Defendants filed a motion to dismiss the complaint on October 24, 1997.
Certain of the Company's current and former officers and directors were also
named as defendants in a derivative lawsuit, which was filed on November 8, 1996
in the Superior Court of Santa Clara County. The derivative complaint was based
on factual allegations substantially similar to those alleged in the class
action lawsuits. Defendants' demurrer to the derivative complaint was sustained
without prejudice on April 14, 1997. Plaintiffs did not file an amended
complaint. On August 7, 1997, the Court issued an order of dismissal and entered
final judgment dismissing the complaint.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis includes:
o Business overview.
o Strategic developments.
o A comparison of Quantum's results of operations in the three and six
months ended September 28, 1997 with the results in the corresponding
periods in fiscal 1997.
o A discussion of Quantum's operating liquidity and capital resources.
o 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
Founded in 1980, Quantum Corporation ("Quantum" or the "Company"), has developed
leadership positions in both fixed and removable storage products. As one of the
highest volume global suppliers of hard disk drives, and the leader in the
mid-range tape market, Quantum is widely recognized as the storage industry's
quality leader. The Company sells a broad range of storage products to original
equipment manufacturers (OEM) and distribution customers worldwide.
Operating in a single business segment, Quantum designs, develops, and markets
information storage products, including high-performance, high-quality hard disk
drives, half-inch cartridge tape drives, tape media, 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
9
also involved in the research development and 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.
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. The Company's current desktop product offerings include:
The Quantum Bigfoot family of 5.25-inch drives, with 1.2 to 6.4
gigabytes (GB) of storage. These drives give home PC users an
economical high-capacity desktop storage solution.
The Company has announced and begun volume production of the Quantum
Bigfoot TX series of 5.25-inch hard disk drives which will feature
capacities of 4GB, 6GB, 8GB and 12GB; and will feature MR heads, a PRML
read channel, hign internal data rates and an Ultra ATA interface. The
Bigfoot TX drive series is intended to meet the storage requirements of
entry-level commercial systems, as well as mainstream PCs.
The Quantum Fireball family of 3.5-inch drives, including the Fireball
TM series in capacities from 1.0GB to 3.8GB, the Fireball ST series in
capacities from 1.6GB to 6.4GB and the Fireball SE in capacities of
2.1GB to 8.4GB. The Fireball family of drives are targeted for use in
power and corporate business PCs, as well as entry-level workstations
and servers. The Quantum Fireball drive family are intended to meet the
storage requirements of powerful central processing units (CPUs), and
complex operating systems and applications. By combining MR head and
PRML read channel technologies, the Fireball drive family provides
leading areal density and innovative technology for capacity-demanding
desktop systems and servers.
The Quantum Pioneer SG drives are available in 1.0GB and 2.1GB
capacities, and are Quantum's first drives with proximity recording
head technology. The Pioneer SG drives fulfill the storage needs of
corporate and small office/home office computer users.
Specialty Storage Products. Quantum designs, develops, manufactures,
and markets half-inch cartridge tape drives based on DLT TM technology
and solid state disk drives. Quantum also designs, develops and markets
the DLT TM tape media. The DLT TM tape drives (30 GB to 70 GB) use
advanced linear recording technology and a highly accurate tape guide
system to perform data backup for mid-range and high-end computer
systems. Quantum has exclusive worldwide manufacturing rights for the
DLT TM technology and is the sole manufacturer of DLT TM tape drives.
The Company believes that DLT TM tape drives have become the primary
market standard in the mid-range segment of the storage tape market.
The Company's solid state disk drives have high
10
execution speeds required for applications such as imaging, multimedia,
video-on-demand, on-line transaction processing, material requirements
planning, and scientific modeling.
The Company's current DLT TM tape drives product offerings include:
Quantum DLT TM 2000XT, DLT TM 4000 and DLT TM 7000 tape drives. The
Quantum DLT TM 2000XT tape drive features a native storage capacity of
15GB and a sustained data transfer rate of 1.25MB per second. The
Quantum DLT TM 4000 features a formatted storage capacity of 20GB per
cartridge and a sustained data transfer rate of 1.5MB per second. The
Quantum DLT TM 7000 tape drive offers a combination of 35GB native
capacity and a sustained data transfer rate of 5MB per second.
The Quantum DLTstor(TM) autoloader and libraries. Each library consists
of an elevator mechanism that provides random or sequential cartridge
access between a tape drive and cartridge magazines. The libraries and
autoloaders are available as 5, 7 and 14 cartridge units.
The Company's current solid state disk drives product offerings
include:
The Quantum ESP3000, ESP3053R-V (volatile), ESP3080R-V (volatile) and
ESP5000 products which are 3.5-inch and 5.25-inch SCSI-2 Solid State
Disks that provide fast data access time which is up to 15 times faster
than magnetic disk drives. The solid state disk drives are available in
megabyte (MB) capacities of 134MB, 268MB, 475MB, 536MB, 804MB and
950MB.
Workstation and Systems Storage Products. Quantum designs, develops,
and markets technologically advanced hard disk drives for the demanding
storage needs of high-end desktop systems, workstations, network
servers, minicomputers, and storage subsystems. 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. The Company's current high-end
product offerings include:
The Quantum Viking (7,200 RPM) hard disk drive which is intended to
meet the requirements of desktop workstations and PC-based servers. The
Viking drives include capacities of 2.2GB and 4.5GB, MR heads, PRML
read channels, a high internal data rate of 83 to 139 megabits per
second, and a wide selection of Ultra SCSI-3 interfaces which provide
burst data transfer rates up to 40MB per second.
The Company has announced but has not begun shipment of the Quantum
Viking II (7,200 RPM) hard disk drive which will feature new Ultra-2
low voltage differential (LVD) SCSI-3 interface that doubles the burst
data transfer rates up to 80MB per second. The Viking II drives will
include capacities of 4.5GB and 9.1GB, and are intended to meet the
requirements of high-end desktop computers, workstations and PC-based
servers.
11
The Quantum Atlas II (7,200RPM) hard disk drive includes the capacity,
performance and reliability required by high-end systems such as video
and database servers, RAID subsystems, mid-range workstations and
mini-computers. Atlas II drives include capacities of 2.2GB, 4.5GB and
9.1GB, MR heads, Ultra SCSI-3 and fibre channel interfaces to meet the
requirements of the high-end marketplace.
The Company has announced but has not yet begun shipment of the Quantum
Atlas III (7,200 RPM) hard disk drive which will offer capacities up to
18.2GB for storage-intensive applications such as data warehousing. The
Atlas III will have broad interface availability with new Ultra-2 LVD
SCSI-3, Ultra single-ended SCSI-3 and Fibre Channel Arbitrated Loop
(FC-AL).
The Quantum Viking and Quantum Atlas II products are Quantum's first
high-end drives to be manufactured by MKE.
Quantum is also 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, is replacing 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, MKE-Quantum Components LLC (MKQC).
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. As discussed in the Strategic
Developments section, efforts include developing optical drives based on Near
Field Recording TM technology. The Company is also focusing its efforts on
applying its MR technology to new generations of disk drives.
Strategic Developments
Quantum and TeraStor - Strategic Cooperation. In September 1997, Quantum and
TeraStor entered into a strategic agreement involving Near Field Recording TM
(NFR) disk drives and technology. Under the terms of the agreement, Quantum
licensed TeraStor's initial removable disk drive products and related
technology. Quantum and TeraStor will cooperate in the development of certain
future products, including the development of a disk drive that is optimized for
use in robotic libraries. Each company will manufacture, market, and sell the
initial products resulting from this agreement. Quantum will also have the right
to develop, manufacture, and market a variety of future products based on
TeraStor's NFR technology. NFR technology is a combination of Solid Immersion
Lens (which is an optical element), flying head and first surface recording
technologies. To date, there are not yet NFR based products in production.
12
High-end Disk Drives - Operating Considerations. Quantum is in the process of
considering its alternatives to address the current operating losses associated
with the Company's high-end disk drive products. The actions being contemplated
revolve around transition planning for the Company's next generation of high-end
disk drive products in light of the changing competitive dynamics in the
high-end marketplace. Some actions being considered could, if selected, result
in non-recurring charges in the third fiscal 1998 quarter. Such potential
non-recurring charges that may result from future decisions and actions based on
market conditions in the third fiscal 1998 quarter could range up to an
estimated $35 million, after tax.
Results of Operations
Sales. Sales for the three and six months ended September 28, 1997, were $1.553
billion and $3.000 billion, respectively, compared to $1.124 billion and $2.278
billion, respectively, for the corresponding periods in fiscal 1997. The sales
increases reflect an increase in shipments of DLT TM tape drives, DLT TM tape
drive-related products and desk top disk drives, as well as an increase in the
average price. The increase in the average price reflected a change in the sales
mix to a higher proportion of tape drives which have a higher unit price than
hard disk drive products, as well as a desktop hard disk drive sales mix shift
to higher capacity drives which have a higher unit price than the lower capacity
hard disk drives sold in the prior year periods. Although the Company
experienced a decline in unit sales and price erosion in the high-end portion of
the Company's hard disk drive product line on a sequential quarterly basis,
reflecting intense competition, the sales for this portion of the Company's
business increased on a year-over-year basis. This increase reflects a larger
current customer base and the impact of the transition of the high-end disk
drive manufacturing to MKE during the three and six months ended September 29,
1996.
Sales of desktop hard drives for the three and six months ended September 28,
1997, represented 69% and 68% of total sales, respectively, and the Company
anticipates that desktop products will continue to constitute a majority of
sales in the future. Sales of DLT TM product continued to increase and
represented 22% and 20% of sales in the three and six months ended September 28,
1997, respectively, compared to 14% and 12%, respectively, in the corresponding
periods in fiscal 1997. The Company expects that sales of DLT TM product will
continue to increase as a percentage of the Company's total sales and operating
profits in the future. For the third quarter of fiscal 1998, the Company expects
sales to follow seasonal trends and be higher than the sales level achieved in
the second quarter of fiscal 1998.
Sales to the Company's top five customers for the three and six months ended
September 28, 1997, represented 39% and 41% of sales, respectively, compared to
39% and 40% of sales, respectively, for the corresponding periods in fiscal
1997. Sales to Compaq Computer, Inc. were 11% and 10% of sales in the three and
six months ended September 28, 1997, respectively, compared to 12% and 11% of
sales, respectively, in the corresponding periods of fiscal 1997. Sales to
Hewlett-Parkard were 10% and 11% of sales in the three and six months ended
September 28, 1997, respectively, and were less than 10% of sales for both of
the corresponding periods in fiscal 1997.
13
Gross Margin Rate. The gross margin rate increased 7.1 percentage points to
19.2% in the quarter ended September 28, 1997, from 12.1% in the quarter ended
September 29, 1996. The gross margin rate for the first six months of fiscal
1998 was 19.1%, compared to 12.2% in the corresponding period in fiscal 1997.
These margin rate increases reflected a higher proportion of tape drive and tape
drive related product sales in the three and six months ended September 28,
1997, compared to the corresponding periods in fiscal 1997. This improved the
margin rate as the tape products achieve a higher gross margin rate compared to
sales of the Company's hard disk drive products. The gross margin rate increase
also reflected an increase in storage capacity within the mix of desktop
products sold in the three and six months ended September 28, 1997, compared to
the corresponding periods in fiscal 1997. This improved the margin rate as the
higher capacity drives earned a higher gross margin rate than the lower capacity
drives. Although the Company experienced margin reduction stemming from sales
erosion in the high-end portion of the Company's hard disk drive product line on
a sequential quarterly basis, reflecting intense competition, the gross margin
rate for this portion of the Company's business increased on a year-over-year
basis. This increase reflected that the gross margin rate earned on high-end
disk drives had largely been eroded during the three and six months ended
September 29, 1996, while the Company transitioned high-end disk drive
manufacturing to MKE. The margin rate increases also reflect a minor impact as a
result of the application of the equity method of accounting to the Company's
involvement in the recording heads operations, effective May 16, 1997.
Research and Development Expenses. In the three and six months ended September
28, 1997, the Company's research and development expenses were $74 million, or
4.8% of sales, and $149 million, or 5.0% of sales, respectively; compared to $70
million, or 6.2% of sales, and $136 million, or 6.0% of sales, respectively, in
the corresponding periods of fiscal 1997. These decreases in research and
development expense as a percentage of sales reflect the timing of certain
pre-production activity which varies from quarter to quarter. 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. For the
third fiscal 1998 quarter, the Company expects increased expenditures associated
with pre-production activity for hard drive and tape drive products in
development. Reflecting management's continued focus on the development and
timely introduction of new information storage products and technologies,
research and development expenses for the third fiscal 1998 quarter are expected
to increase over the level achieved in the second fiscal 1998 quarter.
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended September 28, 1997, were $42 million, or 2.7% of sales, and $84
million, or 2.8% of sales, respectively; compared to $30 million, or 2.7% of
sales, and $66 million, or 2.9% of sales, respectively, in the corresponding
periods in fiscal 1997. The increases in sales and marketing expenses were
related to the costs of supporting the Company's higher volumes of sales.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended September 28, 1997, were $24 million, or 1.6% of
sales, and $52 million, or 1.7% of sales, respectively; compared to $17 million,
or 1.5% of sales, and $38 million, or 1.7% of sales,
14
respectively, in the corresponding periods in fiscal 1997. The increases in
general and administrative expenses reflected expansion of the Company's
infrastructure.
Interest and Other Income/Expense. Net interest income and other income and
expense in the three and six months ended September 28, 1997 was a net expense
of $17 million and $19 million, respectively, compared to $13 million and $25
million, respectively, in the corresponding periods in fiscal 1997. The change
in net expense reflects decreases in interest expense corresponding to a
decrease in the average amount of debt outstanding and an increase in interest
income corresponding to an increase in the average cash balances. Effective May
16, 1997, the Company's involvement in the recording heads operations is through
its investment in the MKE/Quantum joint venture and this investment is accounted
for under the equity method. Prior to May 16, 1997, the recording head
operations were fully consolidated by Quantum. Comparing the year-over-year
second fiscal quarter net expense, the increase reflects a full quarter's impact
of the Company's equity loss related to its investment in the MKE/Quantum joint
venture. This equity loss reflects the adverse impact on the MKE/Quantum joint
venture of sequential quarterly sales erosion in the high-end portion of the
Company's hard disk drive product line for which the joint venture is a
supplier.
Income Taxes. The effective tax rate for the three and six months ended
September 28, 1997, at 26% was flat compared to the rate in the corresponding
periods ended September 29, 1996.
Liquidity and Capital Resources
At September 28, 1997, the Company had $638 million in cash and cash
equivalents, compared to $345 million at March 31, 1997. For the six month
period ended September 28, 1997, cash was provided by operating and financing
activities. Operating activities included cash provided from net income and an
increase in accounts payable, which were partially offset by an increase in
inventory and accounts receivable. Financing activities included $288 million of
proceeds from the issuance of 7% convertible subordinated notes in the second
quarter of fiscal 1998. The financing proceeds were partially offset by the
repayment of the outstanding senior credit facility in the first fiscal 1998
quarter. Cash provided by investing activities, including a $94 million payment
from MKE as part of the formation of the recording heads joint venture company,
were largely offset by investments in property and equipment and other activity.
In the second fiscal 1998 quarter, the Company extended until September 1998 an
$85 million unsecured Letter of Credit facility with certain banks to issue
letters of credit to Matsushita-Kotobuki Electronics and its affiliates.
The Company has filed a registration statement which became effective on July
24, 1997, 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. Under the registration statement, in July 1997, the Company
issued $288 million of 7% convertible subordinated notes. The notes mature on
August 1, 2004, and are convertible at the option of the holder at any time
prior to maturity,
15
unless previously redeemed, into shares of the Company's common stock at a
conversion price of $46.325 per share. The notes are redeemable at the Company's
option on or after August 1, 1999 and prior to August 1, 2001, under certain
conditions related to the price of the Company's common stock. Subsequent to
August 1, 2001, the notes are redeemable at the Company's option at any time. In
the event of certain changes involving all or substantially all of the Company's
common stock, the notes would become redeemable at the option of the holder.
Redemption prices range from 107% of the principal to 100% at maturity. The
notes are unsecured obligations subordinated in right of payment to all existing
and future senior indebtedness of the Company.
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, respectively, as of March 31, 1997.
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 September 28, 1997, there
was no outstanding balance drawn on this line.
The Company expects to spend approximately $185 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. 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.
16
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.
o Intense competition - The information storage products industry in
general, and the disk drive market 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.
o Rapid technological change - Technology advancement in the
information storage industry is increasingly rapid.
o 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.
o 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.
o 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
market, in particular, 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.
17
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, Maxtor, IBM and Fujitsu.
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 information storage industry in general.
Specialty Storage Products. In the market for tape drives, the Company
competes with other companies that have tape drive product offerings and
alternative formats, including Hewlett Packard, Exabyte, Storage
Technology, and Sony. The Company targets a market segment that requires a
mission critical backup system and competes in this segment based on the
reliability, data integrity, performance, capacity and scalability 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 line in this market.
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.
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,
quality and reliability of its products are even more important to the
users in this market than to users in the desktop market. However, this
does not lessen the intensely competitive nature of the high-end of the
hard disk drive market. For example, in the second fiscal 1998 quarter,
intense competition resulted in approximately $20 million of after tax
operating losses associated with the Company's high-end disk drive
products. The Company does not anticipate that the high-end disk drive
products will return to profitability prior to shipping next generation
products and there can be no assurance as to the profitability of next
generation products. The Company's operating results in the high-capacity
market during the foreseeable future is dependent on the successful
development, timely introduction, market acceptance, and product
transition of key new products, as to which there can be no positive
assurance.
18
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 the 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. 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 been in volume
production of high-end products since the completion of the transition. 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.
As part of the Company's strategy to remain technologically competitive, the
Company has invested in technologies, such as in NFR through a strategic
alliance with and investment in TeraStor, and its investment in MR recording
heads through the joint venture, MKQC. There can be no assurance that the
technologies, companies and ventures in which the Company has invested will be
be profitable in the information storage industry. Adverse technological or
operating outcomes could result in impairment and write down of associated
investments which could have a material adverse impact on the Company.
19
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 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 and tape products, which together comprise a
majority of its overall sales, were concentrated with several key customers in
the six months ended September 28, 1997, and the fiscal year ended March 31,
1997. Sales to the Company's top five customers for the six months ended
September 28, 1997, represented 41% of sales, and 38% of sales for the fiscal
year ended March 31, 1997. In the six month period ended September 28, 1997,
revenue from the top five customers was derived from both the OEM and
Distribution sales channel, 30% and 11% respectively. Two OEMs, Hewlett Packard
and Compaq represented 11% and 10%, respectively, of total revenue. No single
distribution channal customer represented 10% or more of total revenue. Because
of the rapid and unpredictable changes in market conditions, 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 have tended to be more
stable and have become a significant component of sales for the Company.
Beginning in the second quarter of fiscal 1998, sales of DLT TM tape drives and
DLT TM tape drive-related products achieved gross margin and profitability
roughly comparable to that achieved from the sale of the Company's desktop hard
drive products. In this regard the company expects sales of DLT TM products,
which represented 20% of sales and a much higher percentage of operating profits
for the six months ended September 28, 1997, will continue to increase as a
percentage of the Company's total sales and operating profits in the future. On
a sequential quarterly basis in Fiscal 1998, the Company expects the rate of
sales growth to lessen significantly as compared to the rates achieved over the
past year. However, there can be no assurance that any growth expectations will
be achieved or that current market conditions will continue.
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.
20
The Company could experience decreases in demand for any of its products in the
future, which could have a material adverse effect on the Company. For the third
fiscal 1998 quarter, the Company expects to experience continued gross margin
pressure with respect to its 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
increasing demand in the quarter ending December 31 compared with the quarter
ending September 30. The Company expects this trend to continue with respect to
the quarter ended December 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 September 28, 1997 and which the Company expects to occur again in the
quarter ending December 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 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 Note 5 of the Notes to
Condensed Consolidated Financial Statements.
Dependence on MKE Relationship. Quantum is dependent on MKE for the manufacture
of its disk drive products. Approximately 80% of the Company's sales in the six
months ended September 28, 1997, and 81% of the sales in year ended March
31,1997, 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.
21
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 terminated sooner 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
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.
22
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, MKQC in the first quarter of fiscal 1998 to partner in
the research, development, and production of MR heads and technology. However,
MR technology is relatively complex and, to date, the Company and MKQC's
manufacturing yields for its MR heads have been lower than would be necessary
for cost effective production of MR recording heads. The Company does not expect
cost-effective production of MR recording heads 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
anticipated benefits of the joint venture will be realized on a timely basis or
at all. The Company currently obtains 80% to 85% of its MR heads from outside
sources.
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 September 28, 1997, the
Company's ability to meet customer demand for its tape drive products was
somewhat constrained by component availability and manufacturing capacity. 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
23
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 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.
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.
24
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements.
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
The 1997 Annual Meeting of Shareholders was held on July 22, 1997. The matters
voted on were management's candidates for the Board of Directors; an amendment
to Quantum's Employee Stock Purchase Plan for the purpose of increasing the
number of shares reserved for issuance thereunder by 5,800,000 shares; an
amendment to the 1993 Long-Term Incentive Plan for the purpose of adding stock
option grant limitations in order to comply with Section 162(m) of the Internal
Revenue Code of 1986, as amended; and the appointment of Ernst & Young LLP to
serve as Quantum's independent auditors for the fiscal year ending March 31,
1998.
The shareholders approved management's candidates for the Board of Directors.
The votes were as follows:
For Withheld Authority
--- ------------------
Stephen M. Berkley 109,975,924 2,545,514
David A. Brown 112,014,612 506,826
Michael A. Brown 112,022,134 499,304
Robert J. Casale 112,023,406 498,032
Edward M. Esber, Jr. 112,023,924 497,514
Steven C. Wheelwright 112,017,806 503,632
The shareholders approved and ratified the amendment to Quantum's Employee Stock
Purchase Plan for the purpose of increasing the number of shares reserved for
issuance thereunder by 5,800,000 shares. The number of votes For were
89,188,652; the number of votes Against were 20,363,118; the number of votes
Abstained were 529,664; and the number of Broker Non-Votes were 2,440,004.
The shareholders approved and ratified the amendment to the 1993 Long-Term
Incentive Plan for the purpose of adding stock option grant limitations in order
to comply with Section 162(m) of the
25
Internal Revenue Code of 1986, as amended. The number of votes For were
103,740,316; the number of votes Against were 5,859,942; the number of votes
Abstained were 481,176; and the number of Broker Non-Votes were 2,440,004.
The shareholders approved the appointment of Ernst & Young LLP to serve as
Quantum's independent auditors for the fiscal year ending March 31, 1998. The
number of votes For were 112,357,792; the number of votes Against were 63,942;
the number of votes Abstained were 99,704; and there were zero Broker Non-Votes.
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.
(1) Form 8-K dated July 28, 1997
(2) Form 8-K dated August 6, 1997
26
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: October 29, 1997 By: /s/ Richard L. Clemmer
---------------------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
27
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number
10.1 MASTER LEASE dated as of August 22, 1997 between LEASE PLAN NORTH
AMERICA, INC., as the Lessor and Quantum Corporation, as the
Lessee.
10.2 PARTICIPATION AGREEMENT dated as of August 22, 1997 among Quantum
Corporation, as Lessee, LEASE PLAN NORTH AMERICA, INC., as Lessor
and as a Participant, ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as a Participant, and ABN AMRO BANK N.V.,
SAN FRANCISCO INTERNATIONAL BRANCH, as Agent.
10.3 APPENDIX 1 to Participation Agreement, Master Lease and
Construction Deed of Trust each dated as of August 22, 1997
(Specialty Storage Product Group Facilities)
10.4 Second Extension and Modification of Credit Agreement, dated
September 18, 1997, among Quantum Corporation and the Banks and
THE SUMITOMO BANK, LIMITED, acting through its San Francisco
Branch, as agent for the Banks and as Issuer.
11.1 Statement of Computation of Net Income Per Share
27 Financial Data Schedule
28