SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 26, 1999
-------------------------------
QUANTUM CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 0-12390 94-2665054
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 McCarthy Boulevard, Milpitas, CA 95035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 894-4000
-----------------------------
Not Applicable
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(Former name or former address, if changed since last report.)
ITEM 5. OTHER
This current report is being filed to update the consolidated financial
statements ("MKQC Financials") for MKE-Quantum Components LLC and Subsidiaries
("MKQC") included in Quantum Corporation's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998. This update is required to permit KPMG Peat
Marwick LLP to reissue its opinion for the MKQC Financials. On October 28, 1998,
Quantum and MKE entered into an agreement to dissolve MKQC. Footnote 13 to the
MKQC Financials included with this report has been added to reflect this
event.
-2-
QUANTUM CORPORATION
SEPARATE FINANCIAL STATEMENTS OF FIFTY-PERCENT-OR-LESS-OWNED PERSONS ACCOUNTED
FOR BY THE EQUITY METHOD:
MKE-QUANTUM COMPONENTS LLC
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1998
(With Independent Auditors' Report Thereon)
1
Independent Auditors' Report
The Board of Directors and Members
MKE-Quantum Components LLC:
We have audited the accompanying consolidated balance sheet of MKE-Quantum
Components LLC and subsidiaries as of March 31, 1998 and the related
consolidated statements of operations, members' equity, and cash flows for the
period from May 16, 1997 (Inception) through March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MKE-Quantum
Components LLC and subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the period from May 16, 1997 (Inception)
through March 31, 1998 in conformity with generally accepted accounting
principles.
Boston, Massachusetts KPMG Peat Marwick LLP
April 14, 1998, except for notes 6(b) and 12
which are as of June 5, 1998
2
MKE-QUANTUM COMPONENTS LLC
Consolidated Balance Sheet
March 31, 1998
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 4,335
Investment securities 10,657
Accounts receivable 19,102
Inventories (note 2) 10,996
Prepaid expenses 2,716
Other current assets 1,714
--------
Total current assets 49,520
--------
Property, plant and equipment, net (note 3) 197,898
Intangible assets, net (note 1) 12,969
Other assets 2,363
--------
$262,750
========
Liabilities and Members' Equity
Current liabilities:
Note payable to bank (note 6) $ 27,000
Current portion of obligation under capital lease (note 11) 353
Accounts payable 19,471
Accrued expenses (note 4) 24,521
Due to members 23,362
--------
Total current liabilities 94,707
========
Note payable to member (notes 6 and 12) 50,823
Obligation under capital lease, less current portion (note 11) 14,964
--------
Total liabilities 160,494
--------
Commitments (notes 6 and 11)
Members' equity:
Class A units 57,436
Class B units 44,820
--------
Total members' equity 102,256
--------
$262,750
========
See accompanying notes to consolidated financial statements.
3
MKE-QUANTUM COMPONENTS LLC
Statement of Operations
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
Net sales $ 165,775
Cost of sales 209,452
---------
Gross margin (loss) (43,677)
---------
Operating expenses:
Research and development 42,215
General and administrative 35,763
Restructuring 10,038
---------
88,016
Loss from operations (131,693)
Interest and other income, net 2,342
Interest expense (4,434)
---------
Loss before income taxes (133,785)
Income taxes 1,031
---------
Net loss $(134,816)
=========
See accompanying notes to consolidated financial statements.
4
MKE-QUANTUM COMPONENTS LLC
Statement of Members' Equity
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
Class A Class B
Units Units Total
--------- --------- ---------
Initial capital contribution at May 16, 1997 $ 125,732 120,801 246,533
Distribution to member -- (10,363) (10,363)
Unrealized gain on investment securities 460 442 902
Net loss (68,756) (66,060) (134,816)
--------- --------- ---------
Members' equity at March 31, 1998 $ 57,436 44,820 102,256
========= ========= =========
See accompanying notes to consolidated financial statements.
5
MKE-QUANTUM COMPONENTS LLC
Statement of Cash Flows
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
Cash flows from operating activities:
Net loss $(134,816)
Adjustments to reconcile net loss to net cash used in operating activities:
Restructuring 1,295
Depreciation and amortization 48,426
Loss on the disposal of property, plant and equipment 7,550
Effect of foreign currency exchange on property, plant and equipment 1,924
Changes in assets and liabilities:
Accounts receivable (18,875)
Inventories 12,166
Prepaid expenses (1,003)
Other assets (3,403)
Accounts payable 3,999
Accrued expenses and other liabilities 14,888
Due to members 45,757
---------
Net cash used in operating activities (22,092)
---------
Cash flows from investing activities:
Purchases of investment securities (9,754)
Investment in property, plant and equipment (96,681)
Proceeds from disposition of property, plant and equipment 3,462
---------
Net cash used in investing activities (102,973)
---------
Cash flows from financing activities:
Borrowings on note payable to bank 27,000
Distribution to member (10,363)
Principal payments under capital lease obligations (283)
---------
Net cash provided by financing activities 16,354
---------
Decrease in cash and cash equivalents (108,711)
Cash and cash equivalents at beginning of period 113,046
---------
Cash and cash equivalents at end of period $ 4,335
=========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,434
=========
(Continued)
6
MKE-QUANTUM COMPONENTS LLC
Statement of Cash Flows, Continued
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
Supplemental disclosure of noncash financing and investing activities:
Increase in capital lease obligations $ 15,600
========
Assets and liabilities contributed at May 16, 1997:
Assets:
Cash $113,046
Accounts receivable 227
Due from member 22,395
Inventories 23,162
Prepaid expenses 1,713
Property, plant and equipment 130,971
Intangible assets 28,977
Other assets 674
--------
$321,165
========
Liabilities:
Accounts payable $ 15,472
Accrued expenses and other liabilities 6,724
Note payable to member 50,823
Other liabilities 1,613
--------
$ 74,632
========
See accompanying notes to consolidated financial statements.
7
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements
March 31, 1998
(1) Nature of Business and Summary of Significant Accounting Policies
(a) Nature of Business
MKE-Quantum Components LLC ("MKQC" or "the Company") commenced
operations on May 16, 1997, and was formed as a joint venture between
Matsushita-Kotubuki Electronics, Inc. ("MKE"), a Japanese corporation,
through its wholly-owned subsidiary, Matsushita-Kotubuki Peripherals
Corporation ("MKPC"), a Delaware corporation, and Quantum Corporation
("Quantum"). MKQC manufactures magnetic recording heads for computer
disk drives at its facilities in Shrewsbury, Massachusetts, and Batam,
Indonesia, and performs research and development activities at its
Louisville, Colorado facilities. Substantially all of its products are
sold to MKE and its affiliated entities.
Quantum contributed to MKQC its Recording Heads Group operations in
exchange for 4,900,000 Class B member units and 2,350,000 Class A units
and MKPC contributed $110.0 million in exchange for 2,750,000 Class A
units. In addition, Quantum received $94.0 million from the sale of
2,350,000 Class A units to MKPC. Quantum contributed assets of $211.1
million and liabilities of $74.6 million, which were recorded at their
historical cost. Contributed assets and liabilities consisted of the
following (in thousands):
Assets:
Cash $ 3,046
Accounts receivable 22,622
Inventory 23,162
Property, plant and equipment 130,971
Intangible assets 28,977
Other assets 2,387
--------
211,165
========
Liabilities:
Accounts payable 15,472
Accrued expenses and other liabilities 6,724
Note payable to Quantum 50,823
Other liabilities 1,613
--------
$ 74,632
========
The Company is operated under a Restated Operating Agreement (the
"Agreement") whereby management and control of the Company is vested in
the members acting by consent, which is defined as a supermajority. The
Agreement provides that earnings and profits be allocated to each
member based on their respective ownership interest and that liability
for losses, debt and obligations are limited to each members' original
capital contribution.
8
2
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(1) Continued
(b) Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. These estimates are based on information available as of the
date of the financial statements. Actual results may differ from these
estimates.
(c) Cash Equivalents
The Company considers all highly liquid debt instruments with original
or remaining maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
(e) Investment Securities
Investment securities consist of 500,000 shares of Quantum common
stock, which is being held for use in the Company's Time Accelerated
Restricted Stock Award Plan (note 8). Investment securities are
classified as available-for-sale and have a cost basis of $9.8 million,
determined based on specific identification, and a fair value of $10.7
million at March 31, 1998.
Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and are reported as a separate component of
members' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific
identification basis.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are initially stated at the present
value of the future minimum lease payments. Depreciation on property,
plant and equipment is calculated using the straight-line method over
the estimated useful lives of the assets. Property, plant and equipment
held under capital leases and leasehold improvements are amortized
using the straight line method over the shorter of the lease term or
estimated useful life of the asset.
9
3
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(1) Continued
(g) Intangible Assets
Intangible assets, which include acquired completed technology and work
force in place, are being amortized over their remaining estimated
useful lives, generally one to three years. Accumulated amortization at
March 31, 1998 totaled $59.3 million.
(h) Income Taxes
The Company, a Limited Liability Company ("LLC"), is treated as a
partnership for US and state income tax purposes and therefore is not
subject to US or state income taxes. The Company shall distribute to
the members amounts sufficient to pay the tax liability generated by
their ownership interests. The provision for income taxes in the
financial statements relates solely to the Company's wholly-owned
foreign subsidiaries. The current provision for income taxes
attributable to the foreign subsidiaries is $1,031,000.
(i) Revenue Recognition
Revenue from sales of products is recognized upon shipment to
customers, with provision made for estimated returns.
(j) Foreign Currency Translation and Transactions
Assets, liabilities, and operations of foreign subsidiaries are
recorded based on the functional currency of the entity. For the
Company's foreign operations, the functional currency is the U.S.
Dollar. Accordingly, the application of Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
to the Company's historical financial statements has resulted in
transaction gains or losses that are immaterial to the Company's
consolidated financial statements. The effect of foreign currency
exchange rate fluctuations on cash flows was also immaterial for the
period presented. Assets and liabilities denominated in other than the
functional currency are remeasured each month with the remeasurement
gain or loss recorded in other income.
(k) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No.
123 establishes financial accounting and reporting standards for
stock-based compensation plans. The Company elected to continue
accounting for stock-based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations, as SFAS No. 123
permits, and to follow the pro forma net loss and stock-based
compensation plan disclosure requirements set forth in SFAS No 123.
10
4
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(1) Continued
(l) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Company has reviewed the
recoverability of its long-lived assets at March 31, 1998 and
determined that no impairment is present as of March 31, 1998.
(m) Year 2000
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The
Company has developed a plan to deal with the Year 2000 problem and has
begun converting its computer systems to be Year 2000 compliant. The
plan provides for conversion efforts to be completed by the end of
calendar 1999. The Company expenses all costs associated with these
systems changes as costs are incurred. Costs related to these systems
changes are not considered to be material.
(n) Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components (revenue, expense, gains and
losses) in a full set of general purpose financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement, and display the
accumulated balance of other comprehensive income separately from
members' equity in the statement of members' equity. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. SFAS 130
requires comparative financial statements for earlier years to be
restated and is not expected to have a material impact to the Company's
statement of operations or financial position.
11
5
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(2) Inventories
Inventories consisted of the following at March 31, 1998 (in thousands):
Raw materials $ 5,263
Work in process 4,541
Finished goods 1,192
-------
$10,996
=======
(3) Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at March 31, 1998
(in thousands):
Depreciable
Life
----
Machinery and equipment 3-5 years $ 111,025
Furniture and fixtures 5 years 1,620
Buildings and leasehold improvements 10-25 years 37,846
Construction in progress -- 54,076
Land -- 2,340
-----------
206,907
Less accumulated depreciation and amortization (9,009)
-----------
$ 197,898
===========
Included in property, plant and equipment is $15.6 million of assets under
a capital lease (see note 11) and $69.7 million of net assets held outside
the United States, primarily in Batam, Indonesia.
(4) Accrued Expenses
Accrued expenses consist of the following at March 31, 1998 (in thousands):
Accrued compensation $10,617
Restructuring 5,173
Other 8,731
-------
$24,521
=======
12
6
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets, other assets, note payable to bank, accounts payable,
and accrued expenses approximate their fair values because of the
short-term nature of these instruments. The carrying amount of note payable
to member approximates its fair value because the note bears interest at a
variable interest rate, changes to which are derived from market rate
changes.
(6) Notes Payable
(a) Note Payable to Member
At March 31, 1998, the Company has a note payable in the amount of
$50.8 million due to Quantum. The note is payable in quarterly
installments of principal and interest, with interest payments
commencing September 30, 1997 and principal payments commencing April
30, 1998, subject to Available Cash, as defined (maximum of 33 1/3% of
net operating cash flow less any interest payment on the subordinated
note). The note bears interest at the Applicable Federal Rate plus 1.5%
(6.8% at March 31, 1998). Any unpaid amounts under this note are due in
their entirety on May 15, 2022. The note is subordinated to any senior
indebtedness, including note payable to bank, and is subject to certain
operating covenants. All interest was paid through March 31, 1998.
(b) Note Payable to Bank
In March 1998 as part of the Company's financing agreement (see note
12), the Company entered into a bridge note financing facility with a
bank for up to $50.0 million which was subsequently increased to $65.0
million on March 26, 1998. Interest on outstanding borrowings accrues
at either the London Inter-Bank Offering Rate ("LIBOR"), Reserve
Adjusted LIBOR, Federal Funds Rate or the bank's prime rate. The
interest rate at March 31, 1998 was 7.05%. Borrowings under the bridge
note financing facility are secured by substantially all assets of the
Company. At March 31, 1998, there was $27.0 million of outstanding
borrowings under this note. The bridge note was due to expire on April
30, 1998, however the expiration date was subsequently extended to May
29, 1998 and was repaid in full upon the closing of the Company's
financing agreement (see note 12).
13
7
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(7) Restructuring
During the period from May 16, 1997 (Inception) through March 31, 1998,
the Company recorded a restructuring charge of $10.0 million associated
with the transition of its manufacturing operations in Colorado to a
research and development operation. As part of the transition, production
at the Colorado facility was moved to Massachusetts. The restructuring
charge provided for $5.2 million associated with employee termination
benefits for more than 400 employees who were associated with the
manufacturing process, non-cash charges of $1.5 million associated with
the disposal of manufacturing property and equipment, $0.4 million
related to a writedown in the carrying value of certain intangible and
other assets, and $2.8 million related to the remaining lease term of
certain Colorado facilities. At March 31, 1998, $5.2 million of accrued
restructuring costs are included in accrued expenses.
(8) Stock Compensation Plans
(a) Restricted Stock Award Plan
During the period from May 16, 1997 (Inception) to March 31, 1998, the
Company adopted a Time Accelerated Restricted Stock Award Plan (the
"Plan") pursuant to which the Company's Board of Directors may grant up
to 500,000 shares of Quantum common stock to officers and key
employees. All stock awards vest over 4 years from the date of grant
and may accelerate to a two-year vesting schedule if the Company meets
certain performance criteria. The performance criteria are based on
obtaining predetermined yield, operating income and net income goals.
At March 31, 1998, there were 92,700 shares available for grant under
the Plan. Total compensation expense recognized for the period from May
16, 1997, (Inception) to March 31, 1998 amounted to $2.0 million.
(b) Quantum Stock Incentive Plans
As affiliates, certain of the Company's employees are eligible to
participate in Quantum's stock incentive plans, which include stock
options and restricted stock. All stock incentive awards outstanding at
May 16, 1997, which have been issued while the respective employees
were employed by Quantum, were effectively assumed by the Company.
During the period from May 16, 1997 (Inception) to March 31, 1998,
25,000 stock incentive awards were granted to the Company's employees.
The Company has no specific rights to have stock incentive awards
granted under the Quantum plans to its employees in the future.
Restricted stock previously granted generally vests over two to three
years. Stock options were granted with exercise prices determined by
Quantum's Board of Directors, but not less than the grant date fair
market value of Quantum's common stock. Stock options currently expire
no later than ten years from the grant date and generally vest ratably
over one to four years.
14
8
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(8) Continued
(c) Stock Option Summary Information
A summary of activity related to Company employees' involvement in
Quantum's stock incentive plans follows:
Period from May 16, 1997 (Inception)
to March 31, 1998
------------------------------
Options Weighted-Average
(in thousands) Exercise Price
-------------- --------------
Outstanding at May 16, 1997 780 $ 7.29
Granted 25 21.00
Canceled (28) 7.54
Exercised (229) 6.47
---- ------
Outstanding at March 31, 1998 548 $ 8.24
==== ======
Exercisable at March 31, 1998 303 $ 7.70
==== ======
The range of exercise prices for options held by Company employees and
outstanding at March 31, 1998 was $6.44 to $21.00. The following tables
summarize information about options held by Company employees that were
outstanding at March 31, 1998:
Outstanding Options
--------------------------------------------------------------
Options Outstanding Weighted-Average
at March 31, 1998 Weighted-Average Remaining
Range of Exercise Prices (in thousands) Exercise Price Contractual Life
------------------------ -------------- -------------- ----------------
$6.44 - $ 7.13 84 $ 7.06 6.77
$7.22 253 7.22 8.25
$7.81 - $21.00 211 9.94 7.63
--- -------- ----
548 $ 8.24 7.78
=== ======== ====
Exercisable Options
-------------------------------------
Shares
Exercisable
at March 31, 1998 Weighted-Average
Range of Exercise Prices (in thousands) Exercise Price
------------------------ -------------- --------------
$6.44 - $ 7.13 66 $ 7.05
$7.22 114 7.22
$7.81 - $21.00 123 8.49
--- --------
303 $ 7.70
=== ========
15
9
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(8) Continued
Expiration dates range from May 16, 2004 to January 26, 2008 for
Company employee options outstanding at March 31, 1998. Prices for
options exercised by Company employees during the period from May 16,
1997 (Inception) to March 31, 1998 ranged from $0.01 to $11.44.
Proceeds received from exercises are paid directly to Quantum.
(d) Pro Forma Information
Certain pro forma information is required by SFAS No. 123. This
information is required to be determined as if the Company had
accounted for stock incentives granted to its employees subsequent to
March 31, 1995, under the fair value method.
The fair value of options granted to the Company's employees by Quantum
subsequent to March 31, 1995, reported below, were estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
Stock Options Stock Purchase Plan
--------------------------- ---------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1998 Fiscal 1997
----------- ----------- ----------- -----------
Option life (in years) 2.94 2.78 0.98 1.40
Risk-free interest rate 6.30% 6.25% 5.90% 6.14%
Stock price volatility .56 .53 .53 .52
Dividend yield -- -- -- --
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of
the fair value of the options.
The following is a summary of weighted-average grant date fair values:
Weighted Average Grant Date Fair Value
--------------------------------------
Fiscal 1998 Fiscal 1997
----------- -----------
Options granted under stock
incentive plans $ 8.78 $ 2.93
Restricted stock granted
under stock incentive plan -- 14.86
16
10
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(8) Continued
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense ratably over the options'
vesting period. Had the Company determined stock compensation expense in
accordance with SFAS 123, the pro forma net loss would have been $(135.8)
million for the period from May 16, 1997 (Inception) to March 31, 1998.
(9) Savings and Investment Plan
Substantially all of the Company's domestic employees are eligible to make
contributions to the Company's 401(k) savings and investment plan. The
Company matches a percentage of the employees' contributions and may also
make additional discretionary contributions to the plan. Company
contributions were $0.9 million during the period from May 16, 1997
(Inception) to March 31, 1998.
(10) Related Party Transactions
During the period from May 16, 1997 (Inception) to March 31, 1998, the
Company had revenues of $152 million from the sale of product to MKE and
its affiliates. At March 31, 1998, there was a net receivable balance of
$15.9 million due from MKE and its affiliates. The Company purchased $4.1
million in fixed assets and $0.4 million in services from MKE and its
affiliates during the period from May 16, 1997 (Inception) to March 31,
1998. A balance of $3.8 million was due to MKE and its affiliates at March
31, 1998 related to these purchases.
During the period from May 16, 1997 (Inception) to March 31, 1998, the
Company had the following transactions with Quantum (in millions):
Product sales $ 12.5
Sales of equipment 3.5
Purchases of property, plant and equipment 17.0
Purchase of support services 16.0
Reimbursement for accounts payable disbursements 14.4
Rent of Shrewsbury, Massachusetts facilities 4.7
Interest on note 3.1
Amounts paid for employee health insurance coverage 2.5
Interest on capital lease (see note 11) 1.2
Amounts reimbursed for employee payroll 17.3
17
11
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(10) Continued
The support services provided by Quantum to the Company were mainly
comprised of finance, human resources, and computer support services.
Quantum charges the Company for these services on a basis which reflects
the costs directly attributable to the Company. Management believes these
methods are reasonable based upon the Company's use of such services. At
March 31, 1998, the Company owed $19.5 million to Quantum, representing
$14.1 million in capital improvements at the Shrewsbury facility and $5.4
million for services. See also notes 6 and 11.
(11) Leases
The Company is obligated under a capital lease with Quantum for its
research and development facility in Louisville, Colorado. At March 31,
1998, the gross amount of building, land and related accumulated
amortization recorded under the capital lease was as follows (in
thousands):
Building $ 13,260
Land 2,340
--------
15,600
Less accumulated amortization (576)
--------
$ 15,024
========
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has a non-cancelable operating lease with Quantum
Corporation for its manufacturing and office space in Shrewsbury,
Massachusetts. The lease expires in May 2002 and contains renewal options
for three five-year periods, and requires the Company to pay all executory
costs such as maintenance and insurance. In addition, the Company leases
manufacturing space for its Batam, Indonesia operations. Rental expense
amounted to $6.4 million for the period from May 16, 1997 (Inception)
through March 31, 1998.
Future minimum lease payments under operating leases (with initial or
remaining lease terms in excess of one year) as of March 31, 1998 are (in
thousands):
1999 $ 8,625
2000 9,655
2001 7,460
2002 7,460
2003 1,912
-------
Total future minimum
lease payments $35,112
=======
18
12
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(11) Continued
Future minimum capital lease payments as of March 31, 1998 are (in
thousands):
1999 $ 2,074
2000 2,074
2001 2,074
2002 2,074
2003 2,074
Thereafter 18,210
---------
Total minimum lease payments 28,580
Less: executory costs (such as taxes,
maintenance and insurance, included
in minimum lease payments) 2,752
---------
Net minimum lease payments 25,828
Less: interest 10,511
Less: current portion of obligation under capital lease 353
---------
Obligation under capital lease, less current portion $ 14,964
=========
(12) Subsequent Events
(a) Financing Agreement
On May 26, 1998, the Company entered into a financing agreement with a
bank to permit the Company to borrow up to $80.0 million. The agreement
provides for a $30.0 million revolving credit facility and a $50.0
million long term credit facility to be used for equipment purchases.
Certain assets located in the United States collateralize the credit
facility. The Company's ownership interest in its foreign subsidiaries
is also pledged. Under the terms of the agreement, the Company is
required to meet certain financial ratios and other financial
covenants. The borrowings under the revolving credit facility and long
term facility bear a variable interest rate based on the bank's
available funds, as defined. The revolving credit facility has a term
of one year. The long-term credit facility is available for borrowing
until January 28, 1999. The principal amount of the long-term facility
will be repaid in sixteen quarterly installments beginning on June 30,
1999, with a maturity date of March 31, 2003. The note payable to
Quantum for $50.8 million (see note 6) is subordinated to this credit
facility.
On June 5, 1998, the Company executed a $40.0 million lease agreement
with a bank. Under the terms of this agreement, the $40.0 million will
be used by the Company to obtain manufacturing equipment through
leasing arrangements with the bank. The Company will make semi-annual
rental payments for the equipment.
19
13
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(12) Continued
(b) Restructuring
On June 4, 1998, the Company recorded a restructuring charge of
approximately $1.7 million associated with a strategic plan designed to
improve manufacturing technology and efficiency. The restructuring
charge primarily provided for costs associated with employee
termination benefits for more than 150 employees located primarily in
Shrewsbury, Massachusetts.
(13) Events (Unaudited) Subsequent to the Date of the Report of the Independent
Auditor.
On October 28, 1998, MKE and Quantum announced an agreement to dissolve the
Company. In accordance with the plan of dissolution, substantially all domestic
operations were discontinued on or about December 27, 1998 and the Indonesian
manufacturing subsidiary was distributed to MKE. Domestic assets are in
liquidation and the Company recorded all assets and liabilities at their
estimated net realizable value, resulting in a $136.4 million charge to
operations in December 1998 based on management estimates. As of December 27,
1998, the Company was in violation of covenants related to its financing
relationship with a bank under which approximately $30 million and $30 million
were outstanding under long-term and revolving debt agreements, respectively.
Subsequent to December 27, 1998, the Company repaid the outstanding balace of
long-term debt and $10 million of the outstanding balance of the revolving debt
agreement. The Company was also in default of its bank lease financing
arrangement as of December 27, 1998. The Company recorded the related assets
under operating leases at their estimated net realizable values and recorded a
liability of $33.5 million to reflect the expected settlement of the lease
arrangement, which was repaid on January 4, 1999.
MKE and Quantum have announced their intentions to fund the Company pro rata to
their interests for repayment of MKQC's obligations, consisting primarily of
bank debt, lease obligations, accounts payable, severance, continuation and
other liabilities through June 1999 when the liquidation of MKQC is expected to
be completed.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 26, 1999 QUANTUM CORPORATION
/s/ Richard L. Clemmer
-------------------------------------
Richard L. Clemmer
Executive Vice President, Finance and
Chief Financial Officer and Secretary
ITEM 7. EXHIBITS.
Exhibit
Number Description
- ------- -----------
99.1 Independent Accountants' Consent