Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
--------------------
Commission File Number 0-12390
QUANTUM CORPORATION
Incorporated Pursuant to the Laws of the State of Delaware
--------------------
IRS Employer Identification Number 94-2665054
500 McCarthy Blvd., Milpitas, California 95035
(408) 894-4000
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 20, 1998: 151,401,814
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 12
PART II - OTHER INFORMATION 31
SIGNATURE 32
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
June 28, June 29,
1998 1997
----------- -----------
Sales $ 1,103,023 $ 1,446,144
Cost of sales 936,650 1,170,210
----------- -----------
Gross profit 166,373 275,934
Operating expenses:
Research and development 84,298 74,029
Sales and marketing 38,337 41,732
General and administrative 17,402 27,473
----------- -----------
140,037 143,234
Income from operations 26,336 132,700
Other (income) expense:
Interest expense 6,502 6,035
Interest income and other, net (8,704) (7,701)
Equity in loss of investee 24,237 3,942
----------- -----------
22,035 2,276
Income before income taxes 4,301 130,424
Income tax provision 1,291 33,910
----------- -----------
Net income $ 3,010 $ 96,514
=========== ===========
Net income per share:
Basic $ 0.02 $ 0.74
Diluted $ 0.02 $ 0.61
Weighted average common shares:
Basic 158,716 130,910
Diluted 165,956 162,178
See accompanying notes to condensed consolidated financial statements.
3
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 28, March 31,
1998 1998
----------- -----------
(unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 496,371 $ 642,150
Marketable securities 58,528 71,573
Accounts receivable, net of allowance for
doubtful accounts of $11,854 and $12,928 662,971 737,928
Inventories 317,826 315,035
Deferred taxes 133,995 133,981
Other current assets 96,122 124,670
----------- -----------
Total current assets 1,765,813 2,025,337
Property and equipment, net of accumulated
depreciation of $236,967 and $220,482 287,445 285,159
Purchased intangibles, net 20,899 24,490
Other assets 78,859 103,425
----------- -----------
$ 2,153,016 $ 2,438,411
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 391,761 $ 446,243
Accrued warranty 68,116 74,017
Accrued compensation 50,715 60,344
Income taxes payable 26,995 39,777
Current portion of long-term debt 956 935
Other accrued liabilities 65,440 78,920
----------- -----------
Total current liabilities 603,983 700,236
Deferred taxes 38,075 38,668
Convertible subordinated debt 287,500 287,500
Long-term debt 39,738 39,985
Shareholders' equity:
Common stock 785,827 776,291
Retained earnings 597,736 595,731
Treasury stock (199,843) --
----------- -----------
Total shareholders' equity 1,183,720 1,372,022
----------- -----------
$ 2,153,016 $ 2,438,411
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
June 28, June 29,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 3,010 $ 96,514
Items not requiring the current use of cash:
Depreciation 20,837 21,094
Amortization 3,987 3,802
Deferred income taxes (607) 677
Compensation related to stock plans 2,053 669
Changes in assets and liabilities:
Accounts receivable 74,957 93
Inventories (2,791) (42,449)
Accounts payable (54,482) (29,715)
Income taxes payable (12,782) 15,938
Accrued warranty (5,901) 2,662
Other assets and liabilities 33,756 42,323
--------- ---------
Net cash provided by operating activities 62,037 111,608
--------- ---------
Cash flows from investing activities:
Investment in property and equipment (30,348) (33,282)
Proceeds from disposition of property and equipment 4,281 4,176
Proceeds from maturity of marketable securities 13,045 --
Proceeds from repayment of note receivable -- 18,000
Proceeds from sale of interest in recording heads operations -- 94,000
--------- ---------
Net cash provided by (used in) investing activities (13,022) 82,894
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock (199,843) --
Principal payments on credit facilities (226) (180,331)
Proceeds from issuance of common stock 5,275 6,677
--------- ---------
Net cash used in financing activities (194,794) (173,654)
--------- ---------
Net increase (decrease) in cash and cash equivalents (145,779) 20,848
Cash and cash equivalents at beginning of period 642,150 345,125
--------- ---------
Cash and cash equivalents at end of period $ 496,371 $ 365,973
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 948 $ 3,433
Income taxes, net of (refunds) $ (10,944) $ 637
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, 1998 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, 1998.
2. Inventories
Inventories consisted of the following:
(In thousands)
June 28, March 31,
1998 1998
-------- --------
Materials and purchased parts $ 61,934 $ 72,990
Work in process 25,355 44,303
Finished goods 230,537 197,742
-------- --------
$317,826 $315,035
======== ========
3. Net income per share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
replaced the previously reported primary and fully diluted net income (loss) per
share with basic and diluted net income (loss) per share. Unlike primary net
income (loss) per share, basic net income (loss) per share excludes any dilutive
effects of options and convertible securities. Diluted net income (loss) per
share is very similar to the previously reported fully diluted net income (loss)
per share. All net income (loss) per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
6
The following table sets forth the computation of basic and diluted net income
per share:
(In thousands except per share data) Three Months Ended
June 28, June 29,
1998 1997
-------- --------
Numerator:
Numerator for basic net income per share
- income available to common stockholders $ 3,010 $ 96,514
Effect of dilutive securities:
5% convertible subordinated notes -- 1,810
-------- --------
Numerator for diluted net income per
share - income available to common
stockholders $ 3,010 $ 98,324
======== ========
Denominator:
Denominator for basic net income per
share - weighted average shares 158,716 130,910
Effect of dilutive securities:
Outstanding options 7,240 9,462
Series B preferred stock -- 180
5% convertible subordinated notes -- 21,626
-------- --------
Denominator for diluted net income per
share - adjusted weighted average shares
and assumed conversions 165,956 162,178
======== ========
Basic net income per share $ 0.02 $ 0.74
======== ========
Diluted net income per share $ 0.02 $ 0.61
======== ========
The computation of diluted net income per share for the three months ended June
28, 1998, excluded the effect of the 7% convertible subordinated notes issued in
July 1997, which are convertible into 6,206,152 shares at a conversion price of
$46.325 per share, because the effect would have been antidilutive.
4. Debt & Capital
In May 1998, the Board of Directors authorized the Company to repurchase
approximately 14 million shares of its common stock through the open market from
time to time. The intent of the repurchase is to minimize the dilutive impact of
the shares issued to complete the pending ATL acquisition. At June 28, 1998, the
Company had repurchased 9.4 million shares of common stock for approximately
$200 million.
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
7
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 of the Northern District of
California. The plaintiff in both class actions purports to represent a class of
all persons who purchased the Company's common stock between February 26, 1996,
and June 13, 1996. The complaints allege that the defendants violated various
federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about the Company, and that
individual defendants sold shares of the Company's stock based on 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. The Court heard oral
argument on plaintiffs' motion for class certification on November 4, 1997. On
March 4, 1998, the Court entered an order denying Plaintiffs' motion without
prejudice. On October 30, 1997, the Court granted defendants' motion for
creation of an ethical wall. Plaintiffs' motion for reconsideration of the
Court's order was denied on December 15, 1997.
With respect to the federal action, defendants filed their motion to dismiss on
April 16, 1997. On August 14, 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 amended complaint on October
24, 1997. The hearing on Defendants' motion took place on February 3, 1998. On
April 16, 1998, the Court granted Defendants' motion to dismiss with prejudice.
On May 19, 1998, Plaintiff filed a notice of appeal of the District Court's
dismissal in the United States Court of Appeals for the Ninth Circuit.
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
8
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.
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied many of these patents before and, of the patents it has
studied, believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not yet had time to make a complete study of all
the patents asserted by Papst and there can be no assurance that the Company has
not infringed these or other patents owned by Papst. The final results of this
litigation, as with any litigation, are uncertain. In addition, the costs of
engaging in litigation with Papst will be substantial.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity of
the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
6. MKE/Quantum Joint Venture
On May 16, 1997, the Company sold a 51% majority interest in its recording heads
operations to MKE, thereby forming a recording heads joint venture with MKE,
named MKE-Quantum Components LLC ("MKQC"). MKQC is involved in the research,
development, and manufacture of MR recording heads used in the Company's disk
drive products manufactured by MKE.
MKE and the Company share pro rata in MKQC's results of operations, and would
share pro rata in any capital funding requirements. The Company and MKE plan to
continue to utilize the recording heads manufactured by MKQC in the Company's
disk drive products manufactured by MKE.
Subsequent to May 16, 1997, the Company accounted for its 49% interest in MKQC
using the equity method of accounting. The results of the Company's involvement
in recording heads through May 15, 1997, were consolidated.
The Company provided support services to MKQC. The support services were mainly
finance, human resources, legal, and computer support. MKQC will reimburse the
Company for the estimated cost of the services.
The following is summarized financial information for MKQC:
9
Three Months
Ended
(In thousands) June 28, 1998
-------------
Sales $ 16,398
Gross profit (loss) (30,871)
Loss from operations (47,795)
Net loss (49,463)
June 28, 1998
-------------
Current assets $ 34,795
Noncurrent assets 211,334
Current liabilities 88,836
Note payable to Quantum 50,823
Other noncurrent liabilities 55,750
7. Comprehensive Income
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards, ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, it has no impact on the Company's net income or
shareholders' equity. SFAS 130 requires foreign currency translation
adjustments, which prior to adoption were reported in shareholders' equity, to
be included in comprehensive income.
The components of comprehensive income, net of tax, are as follows:
(In thousands) Three Months Ended
June 28, June 29,
1998 1997
------- -------
Net income $ 3,010 $96,514
Change in cumulative translation
adjustment (704) 1,043
------- -------
Comprehensive income $ 2,306 $97,557
======= =======
8. Pending Acquisition
In May 1998, the Company announced an agreement to acquire ATL Products, Inc.
("ATL"), pending approval of ATL's shareholders and other customary closing
conditions. ATL designs, manufactures, markets and services automated tape
libraries for the networked computer market. ATL's products incorporate DLTtape
drives as well as ATL's proprietary IntelliGrip automation technology. The total
acquisition cost is estimated to be approximately $300 million. Under the
10
terms of the agreement, which was approved by the Boards of Directors of both
companies, each outstanding share of ATL's common stock will be converted into
$29 worth of Quantum common stock, with the conversion ratio based on the
average Quantum share price during the 45 trading days prior to the acquisition
closing. The average share price may be adjusted for certain impacts related to
common stock repurchases. The acquisition is expected to close by October 1998
and will be accounted for as a purchase. The Company expects to recognize a
charge for acquired in-process research and development upon closing of the
acquisition. ATL had revenue of $33 million and $98 million, and after-tax net
income of $2 million and $8 million for the three months ended June 30, 1998,
and fiscal year ended March 31, 1998, respectively.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis includes:
o Business overview.
o A comparison of Quantum's results of operations in the three months ended
June 28, 1998 with the results in the corresponding period in fiscal 1998.
o Year 2000 update.
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") is a
diversified mass storage company with leadership positions in both the fixed and
removable storage markets. In calendar year 1997, Quantum was the highest-volume
global supplier of hard disk drives for personal computers and the worldwide
revenue leader for all classes of tape drives.
Quantum designs, develops, and markets information storage products, including
high-performance, high-quality half-inch cartridge tape drives, tape media, tape
autoloaders and libraries, hard disk drives, 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. MKE manufactures all of Quantum's hard disk drives.
12
The Company's strategy is to offer a diversified storage product portfolio that
features leading-edge technology and high-quality manufacturing for a broad
range of storage applications. Inherent in this strategy is a focus on
anticipating and meeting customers' information storage needs and on the
research and development of storage technology.
Quantum's products meet the storage requirements of mid-range to high-end
computer systems, workstations, network servers, high-end to entry-level desktop
personal computers, and storage subsystems. The Company directly markets its
products to major original equipment manufacturers ("OEMs") and through a broad
range of distributors, resellers, and systems integrators worldwide.
The Company's information storage business currently includes two units, the
Specialty Storage Products Group and the Enterprise and Personal Storage
Products Group. The primary business activities of these two groups are
discussed below.
Specialty Storage Products. Quantum designs, develops, manufactures,
and markets half-inch cartridge tape drives, autoloaders and libraries
based on patented DLTtape(TM) technology, and solid state disk drives.
Quantum also designs, develops, and markets DLTtape media. In addition,
the DLTtape technology has been licensed to Fuji and Maxell for the
manufacturing of tape media. The DLTtape drives (20 gigabytes to 70
gigabytes capacity, compressed) use advanced linear recording
technology and a highly accurate tape guide system to perform
mission-critical data backup for mid-range and high-end computer
systems. Quantum has worldwide manufacturing rights for DLTtape drive
and media technology and is the sole manufacturer of DLTtape drives.
The Company believes that DLTtape drives are the de facto market
standard in the mid-range segment of the tape storage market. The
Company's solid state disk drives have high execution speeds required
for applications such as imaging, multimedia, video-on-demand, online
transaction processing, material requirements planning, and scientific
modeling.
The Company's current DLTtape drive and automation product offerings
include:
Quantum DLT(TM) 7000 tape drive. This is the most recent offering in
the Company's DLTtape drive family. The DLT 7000 provides a combination
of 35 gigabytes ("GB") native capacity (70 GB compressed) and a
sustained data transfer rate of 5 megabytes ("MB") per second (10 MB
per second compressed). The DLT 7000 tape drive features a SCSI-2
fast/wide interface with single-ended and differential options.
Quantum DLT 4000 tape drive. Features a native storage capacity of 20
GB per cartridge and a sustained data transfer rate of 1.5 MB per
second.
Quantum PowerStor(TM) L500 library. This multiple-drive tape-automation
product has 14-cartridge capacity and accommodates up to three DLTtape
drives. A fully configured PowerStor Library provides a maximum native
storage capacity of 490 GB and a sustained data transfer rate of 15 MB
per second.
13
Quantum PowerStor L200 autoloader. Accommodates a Quantum DLT 4000 or
DLT 7000 tape drive and delivers a maximum native storage capacity of
280 GB and a sustained data transfer rate of 5 MB per second.
Quantum DLT 4500, 4700 autoloaders. The Quantum DLT 4500 five-cartridge
autoloader provides native storage capacity of 100 GB. The Quantum DLT
4700 seven-cartridge autoloader provides native storage capacity of 140
GB. These autoloaders have a sustained data transfer rate of 1.5 MB per
second.
Quantum DLTtape(TM) III, XT, IV tape media and cleaning cartridges. The
DLTtape family of half-inch cartridge tapes are designed and formulated
specifically for Quantum DLTtape drives, autoloaders and libraries. The
capacity of the DLTtape media is up to 35 GB, or 70 GB in compressed
mode. By combining both solid and liquid lubricants in the tape binder
system, tape and head wear are reduced while repelling airborne
particles that could affect read/write head performance. In addition,
by using a uniform particle shape, a dense binding system, a smooth
coating surface, and a specially selected base film, Quantum's
half-inch cartridge tapes take advantage of shorter wavelength
recording schemes to ensure read compatibility with future generations
of DLT brand tape drives.
The Company's current solid state disk drives product offerings
include:
Quantum Rushmore(TM) NTE family of solid state disk drives includes the
ESP3000 and ESP5000 series. These drives are available in capacities
ranging from 134 MB to 950 MB and have a data access time that is up to
15 times faster than magnetic hard disk drives.
Quantum Rushmore Ultra family of solid state disk drives includes the
RU3000 and RU5000 series. These drives are available in capacities
ranging from 134 MB to 1.66 GB and have a data access time that is up
to 10 times faster than magnetic hard disk drives.
Enterprise and Personal Storage Products. Quantum designs, develops,
and markets technologically advanced desktop and high-end hard disk
drives. These drives are designed to meet the storage needs of
entry-level to high-end desktop personal computers ("PCs"), servers,
and workstations for use in both home and business environments; and
for the data-intensive storage needs of high-end desktop systems,
workstations, high-performance network servers, and storage subsystems.
The high-end disk drives are designed for data-intensive applications,
such as data warehousing, digital content creation, digital video, file
servers, financial services, Internet and intranet services, mechanical
CAD, multimedia, online transaction processing, RAID storage, software
development, and workgroup computing.
The Company's current desktop disk drive product offerings include:
Quantum Bigfoot(TM) TX. The latest drive in the Quantum Bigfoot family
of 5.25-inch drives. The Bigfoot TX features capacities of 4 GB, 6 GB,
8 GB and 12 GB, Ultra ATA interface, MR heads, a PRML read channel,
burst data transfer rates of up to 33 MB per
14
second, internal data rates up to 142 MB per second, average seek times
of 12 milliseconds ("ms"), and a rotational speed of 4,000 RPM.
Quantum Fireball(TM) EX. Announced in June 1998 and began mass
production in July. The 3.5-inch Fireball EX features Shock Protection
System(TM), a new technology that protects the mechanical platform
against the impact of mishandling during shipping or integration into a
PC; capacities of 3.2 GB, 5.1 GB, 6.4 GB, 10.2 GB and 12.7 GB; Ultra
ATA interface; MR heads; buffer-to-host data transfer rates of up to 33
MB per second; internal data rates up to 187 MB per second; average
seek times of 9.5 ms; and a rotational speed of 5,400 RPM.
Quantum Fireball EL. Began mass production of the 3.5-inch Fireball EL
in May 1998. Features Shock Protection System, capacities of 2.5 GB,
5.1 GB, 7.6 GB and 10.2 GB, Ultra ATA interface, MR heads,
buffer-to-host data transfer rates of up to 33 MB per second, internal
data rates up to 162 MB per second, average seek times of 9.5 ms, and a
rotational speed of 5,400 RPM.
Quantum Fireball SE. Features capacities of 2.1 GB, 3.2 GB, 4.3 GB, 6.4
GB and 8.4 GB, Ultra ATA interface, MR heads, buffer-to-host data
transfer rates of up to 33 MB per second, internal data rates up to 158
MB per second, average seek times of 9.5 ms, and a rotational speed of
5,400 RPM.
Quantum Fireball ST. Features capacities of 1.6 GB, 2.1 GB, 3.2 GB, 4.3
GB and 6.4 GB, Ultra ATA interface, MR heads, buffer-to-host data
transfer rates of up to 33 MB per second, internal data rates up to 132
MB per second, average seek times of 10 ms, and a rotational speed of
5,400 RPM.
The Company's current high-end disk drive product offerings include:
Quantum Viking(TM) II. The Viking II 3.5-inch hard disk drive is
available in capacities of 4.5 GB and 9.1 GB with high bandwidth Ultra2
SCSI Low Voltage Differential (LVD) or Ultra SCSI interface. The Viking
II also features MR heads, a burst data transfer rates of up to 80 MB
per second, internal data rates of up to 170 MB per second, an average
seek time of 7.5 ms, and a rotational speed of 7200 RPM.
Quantum Viking. Features capacities of 2.2 GB and 4.5 GB, MR heads,
PRML read channels, internal data rates up to 139 MB per second, a wide
selection of interfaces (Ultra SCSI-3 narrow, wide, or SCA-2), a burst
data transfer rates of up to 40 MB per second, internal data rates of
up to 139 MB per second, an average seek time of 8 ms, and a rotational
speed of 7200 RPM.
Quantum Atlas(TM) III. The Atlas III multimode 3.5-inch hard disk drive
is available in capacities of 9.1 GB and 18.2 GB. It supports both the
high-speed Ultra2 SCSI LVD interface and the Ultra SCSI interface. The
Atlas III features broad interface availability with new Ultra-2 LVD
SCSI-3, Ultra single-ended SCSI-3 and Fibre Channel Arbitrated Loop
(FC-AL). The drive's performance includes burst data transfer rates of
up to 80 MB
15
per second, internal data rates up to 180 MB per second, average seek
time of 7.8 ms, and a rotational speed of 7200 RPM.
Quantum Atlas II. Features capacities of 2.2 GB, 4.5 GB and 9.1 GB,
Ultra SCSI-3 interface, MR heads, burst data transfer rates of up to 40
MB per second, internal data rates up to 121 MB per second, average
seek time of 8 ms, and a rotational speed of 7200 RPM.
In May 1998, the Company announced an agreement to acquire ATL Products, Inc.
("ATL"), pending approval of ATL's shareholders and other customary closing
conditions. ATL designs, manufactures, markets and services automated tape
libraries for the networked computer market. ATL's products incorporate DLTtape
drives as well as ATL's proprietary IntelliGrip automation technology. The total
acquisition cost is estimated to be approximately $300 million. Under the terms
of the agreement, which was approved by the Boards of Directors of both
companies, each outstanding share of ATL's common stock will be converted into
$29 worth of Quantum common stock, with the conversion ratio based on the
average Quantum share price during the 45 trading days prior to the acquisition
closing. The average share price may be adjusted for certain impacts related to
common stock repurchases. The acquisition is expected to close by October 1998
and will be accounted for as a purchase.
The Company owns 49% of MKE-Quantum Components LLC ("MKQC"), a joint venture
with MKE, that researches, develops, and manufactures magnetoresistive recording
heads for computer disk drives. The recording heads are used in the Company's
disk drive products. MKQC does not currently market heads to other companies.
The Company is currently concentrating its product research and development
efforts on broadening its existing tape, tape automation, and disk drive product
lines through the introduction of new products. These development efforts span
the Company's business and focus on the development of new tape drives,
autoloaders and libraries, desktop and high-capacity hard disk drives, and other
storage solutions. A key initiative involves Super DLTtape technology, which
includes four new tape drive technologies that the Company plans to develop into
a major extension of its DLTtape architecture. The Company expects to deliver
its first tape storage product based on the Super DLTtape technology in
mid-calendar year 1999.
Results of Operations
Sales. Sales for the quarter ended June 28, 1998, were $1.103 billion,
compared to $1.446 billion for the quarter ended June 29, 1997. The decrease in
sales reflected a decline in shipments of desktop and high-end hard disk drives,
as well as a decline in the average unit prices of these products. These
declines reflected a continuation of adverse hard drive market conditions in the
quarter ended June 28, 1998, characterized by lower than expected demand,
oversupply and intensely competitive pricing. In addition, DLTtape drive and
media shipments declined from the first quarter of fiscal 1998, reflecting a
year-over-year shift toward general product availability from supply constraint
and customers in turn reducing their inventory levels. Although the average
DLTtape drive price was flat compared to the prior year's first fiscal quarter,
unit prices by capacity point declined with the decrease offset by a shift in
sales mix to the higher-capacity DLT
16
7000 tape drives, which carry a higher per-unit price than lower-capacity
products. The decrease in DLTtape media sales reflected lower average unit
prices and a shift toward customers purchasing media from licensed DLTtape media
manufacturers. As a result of the shift, DLTtape media royalty revenue increased
in the first quarter of fiscal 1999 compared to the prior year's first fiscal
quarter. The royalty revenue increase more than offset the decrease in DLTtape
media sales, reflecting a market-wide increase in DLTtape media sales.
Sales to the Company's top five customers were 44% and 51% of sales in the
quarters ended June 28, 1998 and June 29, 1997, respectively (these amounts
reflect a retroactive combination of the sales to Compaq Computer, Inc. and
Digital Equipment Corporation as a result of their merger in June 1998). Sales
to Compaq Computer, Inc. were 16% and 19% of sales in the quarters ended June
28, 1998 and June 29, 1997, respectively (including sales made to Digital
Equipment Corporation). Sales to Hewlett-Packard were 15% and 12% of sales in
the quarters ended June 28, 1998 and June 29, 1997.
The OEM and distribution channel sales were 63% and 35% of sales in the quarter
ended June 28, 1998, compared to 62% and 38% of sales in the quarter ended June
29, 1997.
Gross Margin Rate. The gross margin rate for the quarter ended June 28, 1998
decreased to 15.1% from 19.1% in the quarter ended June 29, 1997. The decrease
in the gross margin rate reflected the decline in prices and gross margins
earned on both desktop and high-end hard disk drives. These decreases reflected
market conditions characterized by oversupply and intensely competitive pricing,
particularly in the desktop market. These decreases were partially offset by an
increase in DLTtape media royalty revenue, and the higher proportion of overall
revenue coming from sales of DLTtape drives and media in the first quarter of
fiscal year 1999, compared to the first quarter of fiscal year 1998. DLTtape
products achieved a significantly higher gross margin rate than that achieved on
the Company's other products. Through at least the second quarter of fiscal year
1999, the Company expects to experience continued gross margin pressure with
respect to its desktop hard disk drive products.
Research and Development Expenses. In the quarter ended June 28, 1998, the
Company's research and development expenses were $84 million, or 7.6% of sales,
compared to $74 million, or 5.1% of sales, in the quarter ended June 29, 1997.
The increase in research and development expenses reflected higher expenses
related to pre-production activity on new hard disk drive products, as well as
research and development expenses related to new information storage products
and technologies, including the Super DLTtape drive and optical storage
technology. These expense increases and the reduced sales caused the increase in
research and development expense as a percentage of sales. The amount of
research and development expenses is expected to increase in the second quarter
of fiscal year 1999 as compared to the first quarter of fiscal year 1999.
Sales and Marketing Expenses. Sales and marketing expenses in the quarter ended
June 28, 1998, were $38 million, or 3.5% of sales, compared to $42 million, or
2.9% of sales, in the quarter ended June 29, 1997. The increase in sales and
marketing expenses as a percentage of sales reflected sales decreasing at a
faster rate than the decline in sales and marketing expenses. Nevertheless, the
decrease in sales and marketing expenses reflected the decrease in sales and the
impact of cost
17
control efforts. The amount of sales and marketing expenses is expected to
increase in the second quarter of fiscal year 1999 as compared to the first
quarter of fiscal year 1999.
General and Administrative Expenses. General and administrative expenses in the
quarter ended June 28, 1998, were $17 million, or 1.6% of sales, compared to $27
million, or 1.9% of sales, in the quarter ended June 29, 1997. The decrease in
general and administrative expenses reflected the impact of cost control
efforts, including reduced bonus expenses, as a result of the lower level of
earnings and sales.
Interest and Other Income/Expense. Net interest and other income and expense in
the quarter ended June 28, 1998 was net other income of $2 million, flat with
the quarter ended June 29, 1997.
Equity in Loss of Investee. The equity in loss of investee in the quarter ended
June 28, 1998 was $24 million, compared to $4 million in the quarter ended June
29, 1997. The equity in loss of investee reflects the Company's 49% equity share
in the operating losses of MKQC, a joint venture formed on May 16, 1997. Prior
to May 16, 1997, the recording heads operations of Quantum, which became the
operations of MKQC, were fully consolidated by Quantum. The increased equity in
loss of investee reflected MKQC's reduced unit prices and margins as a result of
market oversupply of recording heads, poor manufacturing yields, and that the
equity method was applied for only a part of the prior year's first fiscal
quarter. The adverse conditions related to MKQC's unit prices and yields have
resulted in year-over-year and sequentially declining operating results of MKQC.
Income Taxes. The effective tax rate for the quarter ended June 28, 1998 was
30%, compared to 26% for the quarter ended June 29, 1997. The increase in the
effective tax rate reflected the increased contribution of DLTtape product sales
to operating results, which are primarily taxed at standard U.S. corporate tax
rates.
ATL - Pending Acquisition. The Company expects to recognize a charge for
acquired in-process research and development upon closing of the acquisition of
ATL, currently expected to occur by October 1998. In addition to the research
and development charge, the acquisition is expected to have a slightly negative
impact on the Company's results of operations in fiscal year 1999, primarily
from the amortization of intangible assets and goodwill.
Year 2000
As the millennium approaches, the Company is preparing all of its computer
systems and operations to be in compliance with Year 2000 requirements. Computer
system issues involving the Year 2000 exist because some of the Company's
computer hardware and software systems use only two digits to represent a year.
These systems will experience problems with dates beyond 1999 if this issue is
not corrected. Such problems could include errors in information or significant
system failures.
The Company is developing and is in the process of implementing plans to deal
with identified Year 2000 information technology issues. Plans include the
implementation of significant
18
system upgrades in the first half of fiscal year 1999 that will address Year
2000 information technology issues. The upgrade effort involves both internal
and external resources, but is not expected to have a material incremental
effect on the Company's financial position or results of operations. In July
1998, certain significant information technology systems upgrades were
substantially completed. The incremental expenses incurred to be in compliance
with Year 2000 requirements during the first quarters of fiscal year 1999 or
1998 were not material. In addition, the Company is in the process of performing
a Company-wide Year 2000 risk assessment. The Company plans to address
significant risks that are identified. There can be no assurance that there will
not be a delay or increased costs associated with addressing Year 2000 issues.
An inability to implement the plan would have a disruptive and adverse effect on
the Company's results of operations.
The risk assessment includes addressing the Year 2000 readiness of its customers
and key suppliers, including MKE. Quantum's reliance on key suppliers, and
therefore, on the proper functioning of their information systems and software,
means that their failure to address Year 2000 issues could have a material
adverse impact on the Company's financial results. However, the Company does not
currently expect any significant disruption to its operations or operating
results as a result of Year 2000 issues.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's fiscal
year ending March 31, 2000. SFAS No. 133 provides a standard for the recognition
and measurement of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Implementation of SFAS No. 133 is not expected to have a significant impact on
the Company's financial position or results of operations.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $555 million at June 28,
1998, compared to $714 million at March 31, 1998. The decrease in cash primarily
reflected the $200 million purchase of treasury stock as discussed below.
Partially offsetting this use of cash, operating activities generated cash,
primarily from the collection of accounts receivable.
In May 1998, the Board of Directors authorized the Company to repurchase
approximately 14 million shares of its common stock through the open market from
time to time. The intent of the repurchase is to minimize the dilutive impact of
the shares issued to complete the pending ATL acquisition. At June 28, 1998, the
Company had repurchased 9.4 million shares of common stock for approximately
$200 million.
The Company filed a registration statement that 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
19
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.
In June 1997, the Company entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At the
option of the Company, borrowings under the revolving credit line bear interest
at either LIBOR plus a margin determined by a total funded debt ratio, or a base
rate, with option periods of one to six months. As of June 28, 1998, there was
no outstanding balance drawn on this line.
The Company has a one-year $85 million unsecured letter of credit facility,
which expires in September 1998 with certain banks to issue standby letters of
credit to MKE and its affiliates.
In September 1996, the Company entered into a $42 million mortgage financing
related to certain domestic facilities at an effective interest rate of
approximately 10.1%. The term of the mortgage is 10 years, with monthly payments
based on a 20-year amortization period, and a balloon payment at the end of the
10-year term.
The Company expects to spend approximately $180 million for capital equipment,
expansion of the Company's facilities, and leasehold improvements in fiscal year
1999. These capital expenditures will support the disk drive and tape drive
businesses, 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 capital resources, including the credit
facility and any cash generated from operations, will be sufficient to meet all
currently planned expenditures and sustain operations for the next 12 months.
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 factors described in the Trends and Uncertainties section that follows.
Trends and Uncertainties
By 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.
20
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 hard 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 systems 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 is in turn affected by computer system product
cycles and prevailing economic conditions.
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 is materially 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 and transition products sooner than
expected, which can materially adversely affect the Company. For example, in the
first quarter of fiscal year 1999 and the second half of fiscal year 1998,
excess inventory in the desktop hard disk drive market, aggressive pricing and
corresponding margin reduction adversely impacted the Company's operating
results during the periods. The Company experienced similar conditions in the
high-end of the hard disk drive market during most of fiscal year 1998 and in
the first quarter of fiscal year 1999, although with less of an adverse impact
in the first quarter. As a result of these conditions, the Company had
diminished profitability, at near breakeven, in the first quarter of fiscal year
1999 and fourth quarter of fiscal year 1998. Futhermore, losses in the third
quarter of fiscal year 1998 were largely attributable to a $103 million special
charge primarily for high-end hard disk drive inventory write-offs and firm
inventory purchase commitments. If competition and pricing further intensifies,
the Company's operating results could be further adversely affected.
21
Another competitive risk is that the Company's customers could commence the
manufacture of disk and tape drives for their own use or for sale to others. Any
such loss of customers could have a material adverse effect on the Company.
Quantum faces direct competition from a number of companies, including Exabyte,
Fujitsu, Hewlett-Packard, IBM, Maxtor, Seagate, Sony, and Western Digital. In
the event that the Company is unable to compete effectively with these
companies, any other company, or any collaboration of companies, the Company
would be materially adversely affected. The Company's information storage
product competition can be further broken down as follows:
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 Exabyte, Hewlett-Packard, Sony, and Storage
Technology. In addition, Hewlett-Packard, IBM, and Seagate formed a
consortium to develop two tape drive products, one of which targets
high-capacity data storage. The Company targets and has the market
leadership position in the storage product market that provides
mission-critical backup systems, archiving, and disaster recovery for
mid-range servers. The Company has achieved market leadership 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 and conditions for its tape drive
products, the market would become more competitive if other companies
individually or collaboratively broaden their product lines in this
market. As a result, the Company could experience increased price and
performance competition. If price or performance competition increases,
the Company could be required to lower prices, resulting in decreased
margins that could materially adversely affect the Company's operating
results.
Hard Disk Drive Products. In the market for desktop products, Quantum
competes primarily with Fujitsu, IBM, Maxtor, Samsung, Seagate, and
Western Digital. Quantum and its competitors have developed and continue
to develop 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, cost, product performance, quality, and reliability 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. This
competitiveness, which intensified in the second half of fiscal year 1998
and continued in the first quarter of fiscal year 1999, has resulted in a
significant downward trend in gross profit margins on desktop disk drive
products during these periods.
The Company faces competition in the high-end hard disk drive market
primarily from Fujitsu, Hitachi, IBM, and Seagate. Seagate and IBM have
the largest share of the market for high-end hard disk drives. Although
the same competitive factors identified above as being generally
applicable to the overall disk drive industry apply to high-end disk
drives, the Company believes that performance, quality, and reliability
are even more important to the users of high-end products 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, intense competition has lead to the trend of losses on the
Company's high-end hard disk drive products over the past four quarters,
although with decreased losses in the first
22
quarter of fiscal year 1999. The Company does not anticipate that the
high-end disk drive products will return to profitability without
sustained high-volume shipping of these products with less rapid price
erosion. However, there can be no assurance as to the profitability of
current or next generation products. The Company's gross margins on its
high-end products during the foreseeable future are dependent on the
successful development, timely introduction, market acceptance, and
product transition of new products, as to which there can be no positive
assurance.
Rapid Technological Change, New Product Development, and Qualification. In the
hard disk drive market, the combination of an environment of increasingly rapid
technological changes, short product life cycles, and intense competitive
pressures results in rapidly decreasing gross margins on specific products.
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 that meet
this demand and effectively compete with the products of competitors.
For example, magnetoresistive ("MR") recording heads represent an important
technology and component related to the performance and competitiveness of the
Company's products. In particular, MR recording heads have been important to
achieving competitive storage density for the Company's products. The
anticipated next generation of MR recording heads is referred to as Giant MR
("GMR") recording heads. The Company expects industry-wide time-to-market
competition in calendar year 1999 using GMR technology to have an impact on
technology leadership and competitiveness. In this regard, the recent alliance
between IBM and Western Digital that includes a purchasing agreement and
technology licensing involving GMR recording heads is expected to increase the
competition in GMR recording head time-to-market. The Company can make no
assurance regarding its ability to incorporate GMR recording heads into its
products and, if successful, the competitiveness of the Company's products. The
Company's future is also dependent on its ability to qualify new products with
customers, to successfully introduce these products to the market on a timely
basis, and to commence and achieve volume production that meets customer demand.
Because of these factors, the Company expects sales of new products to continue
to account for a significant portion of its future hard disk drive sales, and
that sales of older products will decline rapidly.
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. The
Company would be materially adversely affected if it were unable to achieve
customer qualifications for new products in a timely manner, or at all, or if
MKE were unable to continue to manufacture qualified products in volume with
consistent high quality.
In the mid-range tape drive market, the Company has experienced less rapid
technological change, as well as less technology and performance based
competition compared with the hard disk drive market. This has resulted in
favorable gross margins on sales of the Company's DLTtape brand products. Higher
margins on DLTtape products, as compared with the eroded gross margins on
23
hard disk drives, have resulted in tape drive and related media products
becoming the primary source of the Company's operating income in the first
quarter of fiscal year 1999 and the second half of fiscal year 1998. Given the
favorable tape drive market conditions that the Company has experienced,
competitors are aggressively trying to make technological advances and take
other steps in order to more successfully compete with the Company's DLTtape
products. Successful competitor product offerings that target the market in
which the Company's DLTtape products compete could have a material adverse
effect on the Company. In addition, in the event that the Company is not able to
maintain DLTtape technology competitiveness based on its performance, quality,
reliability and scalability, or otherwise not meet the requirements of the
market, it could lose market share and experience declining sales and gross
margins, which would have a material adverse effect on the Company.
In the information storage industry in general, 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 or achieve market
acceptance. These significant risks apply to all new products, including those
expected to be based on optical and Super DLTtape technologies. 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 and substantially lower prices than the
Company's products. Furthermore, 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, for technological
or other reasons, the Company is unable 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 optical technology through its
strategic alliance with and investment in TeraStor, and MR recording heads
through the MKQC joint venture. There can be no assurance that the technologies,
companies, and ventures in which the Company has invested will be profitable in
the information storage industry. Adverse technological or operating outcomes
could result in impairment and write-down of associated investments that could
have a material adverse effect on the Company.
Customer Concentration. In addition to the concentration of the information
storage industry and the Company's customer base, customers are generally 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. In
June 1998, two Quantum customers, Compaq Computer, Inc. and Digital Equipment
Corporation merged, thereby increasing the Company's customer concentration and
associated risk.
24
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 first quarter of fiscal year 1999 and in fiscal year 1998. Sales to the
Company's top five customers in the first quarter in fiscal year 1999 and fiscal
year 1998 represented 44% of sales (percentage of sales reflects a retroactive
combination of the sales to Compaq Computer, Inc. and Digital Equipment
Corporation as a result of their merger in June 1998). Because of the rapid and
unpredictable changes in market conditions, and the short product life cycles
for its customers' products, the Company is unable to predict whether 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. In addition, the loss of one or more key
customers could materially adversely affect the Company.
Fluctuation in Product Demand. Fluctuation in demand for the Company's products
results in fluctuations in operating results. Demand for the computer systems in
which the Company's storage products are used 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, either 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 will be at a slower rate than
the rate experienced in recent years.
Sales of DLTtape drives and media have tended to be more stable and were a
significant component of sales for the Company. In addition, 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 can be no assurance that this trend will continue. Beginning in the third
quarter of fiscal year 1998, sales of tape drives and media achieved gross
margins that significantly exceeded gross margins from the sale of the Company's
hard drive products. In this regard the Company expects sales of DLTtape
products, which represented 23% of sales and the only profitable major product
family in the first quarter of fiscal year 1999, and 21% of sales and a majority
of operating profits in fiscal year 1998, will continue to represent a major
portion of the Company's operating profits in the future. The Company expects
the rate of sales growth to lessen in fiscal year 1999 compared with the rate of
growth achieved in fiscal year 1998. However, there can be no assurance that any
growth expectations will be achieved or that current market conditions will
continue.
The Company's shipments tend to be highest in the third month of each quarter.
Failure by the Company to complete shipments in the final month of a quarter
resulting from a decline in customer demand, manufacturing problems, or other
factors would adversely affect the Company's operating results for that quarter.
Because the Company has no long-term purchase commitments from its customers,
future demand is difficult to predict. 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.
25
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 intellectual property matters, the pending
acquisition of ATL, inventory risk, dependence on MKE for the manufacture of the
hard disk drives that Quantum develops and markets, losses associated with MKQC,
dependence on suppliers, component shortages, future capital needs, warranty
costs, foreign exchange contracts, foreign manufacturing and sales, and price
volatility of Quantum's common stock. For information regarding litigation,
refer to Note 5 of the Notes to Condensed Consolidated Financial Statements.
Intellectual Property Matters. From time to time, the Company is approached by
companies and individuals alleging Quantum's infringement of and need for a
license under patented or proprietary technology that Quantum assertedly uses.
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied many of these patents before and, of the patents it has
studied, believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not yet had time to make a complete study of all
the patents asserted by Papst and there can be no assurance that the Company has
not infringed these or other patents owned by Papst. The final results of this
litigation, as with any litigation, are uncertain. In addition, the costs of
engaging in litigation with Papst will be substantial. If required, there can be
no assurance that licenses to any technology owned by Papst or any other third
party alleging infringement could be obtained or obtained on commercially
reasonable terms. Adverse resolution of the Papst litigation or any other
intellectual property litigation could subject the Company to substantial
liabilities and require it to refrain from manufacturing certain products which
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the costs of engaging in the
Papst litigation or other intellectual property litigation could be substantial,
regardless of the outcome.
Pending Acquisition of ATL. As discussed in the Business Overview section, in
May 1998, the Company announced an agreement to acquire ATL. The proposed
acquisition of ATL by the Company entails a number of risks, including
successfully managing the transition of ATL to a wholly owned subsidiary of
Quantum; retention of key customers, employees, and suppliers; and managing a
larger and more diverse business. There can be no assurance that the transaction
contemplated by the Company's agreement to acquire ATL will close completely or
that the Company will successfully manage the risks of this transaction.
26
Inventory Risk. As discussed in the Customer Concentration and Fluctuation in
Product Demand sections, the Company's customers generally are not obligated to
purchase any minimum volume of the Company's products and fluctuations in
end-user demand may result in the deferral or cancellation of orders for the
Company's products. These risk factors, when combined with the OEM trend toward
carrying minimal inventory levels related to just-in-time and build-to-order
type manufacturing processes, increase the risk that Quantum, as a supplier,
will manufacture and custom configure too much or too little inventory in
support of OEM manufacturing processes. Significant excess inventory conditions
could result in inventory write-downs and losses that could adversely impact the
Company's results of operations, whereas inventory shortages could adversely
impact the Company's relationship with its customers and the Company's results
of operations.
Dependence on MKE Relationship. Quantum is dependent on MKE for the manufacture
of all of its hard disk drive products. Approximately 77% and 79% of the
Company's sales in the first quarter of fiscal year 1999 and in fiscal year
1998, respectively, were derived from products manufactured by MKE. In addition,
the MKQC joint venture with MKE to develop and produce recording heads used in
disk drive production represents additional dependence on MKE. The Company's
relationship with MKE is therefore critical to the Company's business and
financial performance.
Quantum's master agreement with MKE, which covers the general terms of the
business relationship is effective through May 2007. The agreement may be
terminated sooner as a result of certain specified events including a
change-in-control of either Quantum or MKE. 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 to 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 disk drive 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
27
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. For example, a portion of
the $103 million special charge recorded in the third quarter of fiscal
year 1998 reflected losses on firm inventory commitments associated with
high-end disk drive production at MKE.
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 year
1999. 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.
MKQC - Joint Venture for MR Recording Heads Development and Manufacturing. Since
the fiscal year 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 year
1998 to partner in the research, development, and production of MR recording
heads and technology. However, MR technology is complex and, to date, the
Company and MKQC's MR recording head manufacturing yields have been lower than
was necessary for cost-effective production. 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 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's current target is to obtain 15% to 20% of the MR recording
heads used in its products from MKQC.
Dependence on Suppliers of Components and Sub-Assemblies; Component Shortages.
Both 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. 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.
28
Future Capital Needs. The information storage industry is capital, research, and
development intensive, and the Company will need to maintain adequate financial
resources for capital expenditures, working capital, 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 over the next
12 months. However, if the Company decides to increase its capital expenditures
further, or sooner than presently contemplated, or if results of operations do
not meet the Company's expectations, the Company could require additional debt
or equity financing. There can be no assurance that such additional funds will
be available to the Company or will be available on favorable terms. The Company
may also require additional capital for other purposes not presently
contemplated. If the Company is unable to obtain sufficient capital, it could be
required to curtail its capital equipment, research, and development
expenditures, which could adversely affect the Company.
Warranty. Quantum generally warrants its products against defects for a period
of three to five years. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped. Actual warranty costs
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 used
to estimate the warranty expense accrual.
Risks Associated with Foreign Manufacturing and Sales. Many of the Company's
products and product components are currently manufactured outside the United
States. In addition, close to half of the Company's revenue comes from sales
outside the United States, including sales to the overseas operations of
domestic companies. 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. In
addition, several Asian countries have recently experienced significant economic
downturns and significant declines in the value of their currencies relative to
the U.S. dollar. In the last four quarters, including the first quarter of
fiscal year 1999, the Company experienced a year-over-year reduction in sales to
certain Asian countries due, in part, to the effects of these factors. With most
of the Company's non-U.S. sales being denominated in U.S. dollars, the Company
is unable to predict what effect, if any, these factors will have on its ability
to maintain or increase its sales in these markets, general economic conditions,
and the Company's customers.
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.
29
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 information storage and computer market
may have a significant impact on the market price of the common stock. In
particular, when the Company reports operating results that are less than the
expectations of analysts, the market price of the common stock can be materially
adversely affected.
30
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 - 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
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUANTUM CORPORATION
(Registrant)
Date: August 11, 1998 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President,
Finance and Chief
Financial Officer
32
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Exhibit
3.1 Amended Certificate of Designation of Rights, Preferences, and
Privileges of Series A Junior Participating Preferred Stock of Quantum
Corporation
4.1(1) Preferred Shares Rights Agreement, dated July 28, 1998 between Quantum
Corporation and Harris Savings and Trust Bank, as Rights Agent
10.1 AGREEMENT AND PLAN OF REORGANIZATION, dated May 18, 1998, among Quantum
Corporation, Quick Acquisition Corporation, a wholly-owned subsidiary
of Quantum Corporation, and ATL Products, Inc.
10.2 FIRST AMENDMENT TO CREDIT AGREEMENT, dated June 26, 1998, among Quantum
Corporation, certain financial institutions (collectively, the
"Banks"), and CANADIAN IMPERIAL BANK OF COMMERCE, as administrative
agent for the Banks.
27.1 Financial Data Schedule
Footnotes to
Exhibits Footnote
(1) Incorporated by reference to the Form 8-A filed with the
Securities and Exchange Commission on August 4, 1998
33