SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-12390
QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2665054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
(incorporation or organization)
500 MCCARTHY BLVD., MILPITAS, CALIFORNIA 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 894-4000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
6 3/8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
PREFERRED STOCK
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 1, 1996: $949,425,659 based upon the closing price reported
for such date on the NASDAQ National Market System. For purposes of this
disclosure, shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers and directors of
the Registrant have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive. The number of shares outstanding of the Registrant's Common Stock as
of May 1, 1996, was 54,293,006.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1996 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part III
of this Form 10-K Report.
PART I
ITEM 1.
BUSINESS
Quantum Corporation (the "Company" or "Quantum") was incorporated as a
California corporation in February 1980, and reincorporated as a Delaware
corporation in April 1987.
Quantum designs, develops and markets information storage products, including
high-performance, high quality hard disk drives, recording heads and tape
drives. The Company combines its engineering and design expertise with the high
volume hard disk drive manufacturing capabilities of its exclusive manufacturing
partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") of Japan, to
produce high quality hard disk drives to meet the storage requirements of
workstations, servers, disk arrays, entry-level to high-end desktop PCs and
minicomputers. In addition, the Company designs and manufactures its linear tape
drive products as well as the recording heads which are used in the Company's
disk drive products. The Company's customers include leading OEMs such as Acer,
Apple, Compaq, Dell, Digital, Hewlett-Packard, IBM, NEC, Silicon Graphics and
Sun Microsystems.
The Company's strategy is to offer a diversified product portfolio which
features leading edge technology and high quality manufacturing for a broad
range of market applications. The Company's storage business is currently
structured into the following four main operating divisions:
DESKTOP AND PORTABLE STORAGE GROUP (DPSG). The Desktop and Portable
Storage Group designs, develops and markets hard disk drives designed
to meet the storage needs of desktop and portable systems. The
Company's DPSG products are designed for entry-level to high-end
desktop PCs for use in both home and business environments.
WORKSTATION AND SYSTEMS STORAGE GROUP (WSSG). The Workstation and
Systems Storage Group designs, develops and markets the Company's most
technologically advanced hard disk drives for the demanding storage
needs of servers, workstations, storage subsystems, high-end desktop
systems and minicomputers. The Company's WSSG products are designed for
storage-intensive applications such as graphics, disk arrays, desktop
publishing systems, multimedia computing systems and networked data
bases and file servers.
SPECIALTY STORAGE PRODUCTS GROUP (SSPG). The Specialty Storage Products
Group designs, develops, manufactures and markets linear tape drives
and solid state disk drives. The tape drives use advanced linear
recording technology and a highly accurate tape guide system to perform
data backup for mid-range and high-end computer systems. The solid
state disk drives have the high execution speeds required for
applications such as imaging, multimedia, video-on-demand, on-line
transaction processing, material requirements planning and scientific
modeling.
RECORDING HEADS GROUP (RHG). The Recording Heads Group designs,
develops, and manufacturers both thin film inductive and
magnetoresistive ("MR") recording heads used in the Company's products.
The Company believes that MR technology, which provides higher capacity
per disk than conventional thin film heads, will replace thin film
heads as the leading recording head technology. The Company does not
currently market thin film or MR heads to other companies.
Quantum operates in an industry characterized by rapid technological change. The
Company is currently concentrating its product development efforts on broadening
its existing disk and tape drive product lines through the introduction of new
products, including new high-capacity hard disk drive products to be
manufactured by MKE for WSSG, as well as new products targeted specifically for
the increasing storage needs of the consumer market served by DPSG. The Company
is also focusing its efforts on applying its MR technology to new generations of
disk drives.
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On October 3, 1994, Quantum acquired the Hard Disk Drive, Heads and Tape Drives
Businesses of the Storage Business Unit of Digital Equipment Corporation (the
"Acquired Businesses") in a transaction (the "Acquisition") accounted for as a
purchase. The purchase of the Acquired Businesses was finalized in the second
quarter of fiscal 1996, resulting in a $5.7 million reduction to the original
contracted purchase price of $355.2 million. Included in the purchase were
Digital's interest in Digital Equipment Storage Products (Malaysia) Sdn Bhd. and
its 81% interest in Rocky Mountain Magnetics, Inc. ("RMMI"). Subsequently,
RMMI's name was changed to Quantum Peripherals Colorado, Inc. ("QPC"). The
Acquired Businesses were involved in the design, manufacture and marketing of
computer disk drive, tape drive, tape media, solid state memory device and
magnetic recording head products and optical storage devices and related
technology other than CD-ROM.
On November 8, 1995, the Company announced a plan to reorganize its WSSG
high-capacity business. This plan included resizing the infrastructure of the
business, focusing development and manufacturing efforts on a more
cost-effective product set and reducing the overall expense structure.
On January 30, 1996, the Company announced the transition of manufacturing of
its WSSG high-capacity products to MKE, the Company's long-time manufacturing
partner for desktop hard disk drives.
EXECUTIVE OFFICERS
The executive officers of the Company, and certain information about them as of
March 31, 1996, are as follows:
Name Age Position with the company
Stephen M. Berkley 52 Chairman of the Board
Michael A. Brown 37 President and Chief Executive Officer
Kenneth Lee 58 President, Workstation Systems Storage Group
and Chief Technical Officer
W.C. Robinette, Jr. 53 President and General Manager, Recording Heads Group
Young K. Sohn 40 President and General Manager, Desktop
and Portable Storage Group
Mark Jackson 45 Executive Vice President, Hard Disk Drive Operations
William F. Roach 52 Executive Vice President, Worldwide Sales
Joseph T. Rodgers* 53 Executive Vice President, Finance, Chief Financial Officer
and Secretary
Deborah E. Barber 56 Vice President, Human Resources
Gina M. Bornino* 35 Vice President and General Manager, Specialty Storage
Products Group
Kenneth R. Pelowski* 36 Vice President, Strategic Planning and Business
Development
* These officers have submitted their resignations since March 31, 1996.
Mr. Berkley joined the Company in 1981 as Vice President of Marketing. In 1983,
he became the founding President and CEO of Quantum subsidiary Plus Development
Corp., where he helped pioneer the development of Hardcard, the first hard disk
expansion board for personal computers. In 1987, he returned to Quantum, serving
as Chairman and CEO until 1992. He served as Chairman of Quantum's board until
1993 and became Board Chairman again in 1995. Prior to Quantum, Mr. Berkley was
with Qume Corp. from 1977 to 1981 where he served initially as Vice President of
Business Development and then General Manager of the Memory Products Division.
Mr. Brown joined the Company's marketing organization in August 1984. He was
named Vice President, Marketing, in June 1990 and became Executive Vice
President in February 1992. In 1993 he was named President of DPSG and in
September 1995 he was appointed President and Chief Executive Officer. Prior to
June 1990, Mr. Brown held positions in product and marketing management. Prior
to joining the Company, he served in the
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marketing organization at Hewlett-Packard Company and provided management
consulting services at Braxton Associates.
Mr. Lee joined the Company in 1989 as Director of Advanced Recording
Technologies and was promoted to Vice President, Engineering, in 1990. In 1993,
he was promoted to Executive Vice President, Technology and Engineering, and
Chief Technology Officer. In 1994, he also assumed responsibility for the
Recording Heads Group. In October 1995, Mr. Lee was named President of WSSG in
addition to his role as Chief Technical Officer. Prior to joining the Company,
he served for five years as Vice President, Product Development, for Domain
Technology, and previously spent 15 years at the IBM Research Laboratory in San
Jose, California, working on advanced magnetic storage devices.
Mr. Robinette joined the Company in August 1995 as President and General Manager
of RHG. In October 1995 he was named an Executive Vice President of the Company.
Prior to joining the Company, from 1992 to 1995, Mr. Robinette was Co-Founder,
Chairman and Chief Operating Officer of MicroModule Systems, Inc. (MMS), a
leader in the merchant multichip subsystems business. Previously, he was with
Digital Equipment Corporation (DEC) where he was group manager of worldwide
semiconductor manufacturing and technology, and group manager of UNIX/VAX-based
systems and software manufacturing operations.
Mr. Sohn joined the Company in 1992 as President and Managing Director of
Quantum Asia-Pacific. In 1994 he was named Vice President of Marketing for DPSG
and in February 1996 was promoted to President and General Manager of DPSG.
Prior to joining the Company in 1992, Mr. Sohn spent nine years at Intel
Corporation where, most recently, he managed that company's AT chip set
business.
Mr. Jackson joined the Company in 1985, serving in a variety of positions in the
logistics and operations organizations. In 1993 he was named Vice President of
Worldwide Logistics. Mr. Jackson served as President of DPSG from October 1995
to February 1996, when he was named Executive Vice President of Hard Disk Drive
Operations, responsible for production planning, logistics, quality and
reliability, customer service and materials support for both DPSG and WSSG.
Mr. Roach joined the Company in September 1989 as Vice President, Sales, and was
promoted to Executive Vice President, Worldwide Sales, in August 1993. Prior to
joining the Company, he spent 12 years in sales at Intel Corporation, last
serving as Worldwide Director, Distribution Sales and Marketing.
Mr. Rodgers joined the Company in December 1980 as its Vice President, Finance.
He was elected Secretary in May 1981 and Treasurer in September 1981 and
promoted to Executive Vice President, Finance in April 1986. From July 1979 to
December 1980, he served as Vice President, Finance, of Braegen Corporation, a
manufacturer of computer equipment. He also has more than nine years experience
with Price Waterhouse, last serving as an audit manager.
Ms. Barber joined the Company in October 1992 as Vice President, Human
Resources, Corporate Services, and Business Excellence. Prior to joining the
Company, she served five years at Cray Research as Vice President, Human
Resources. From June 1978 to January 1988, Ms Barber was employed by Honeywell,
Inc., last serving as Director of Human Resources for the military Avionics
Division.
Ms. Bornino joined the Company in August 1993 as Vice President, Corporate
Development and Planning. In October 1994, Ms. Bornino assumed responsibility
for the Specialty Storage Products Group as Vice President and General Manager.
Prior to joining the Company, she served as Director of Strategic Planning for
Silicon Graphics, Inc., from July 1992 to August 1993. From November 1989 to
July 1992, Ms. Bornino was employed by MIPS Computer Systems, Inc., last serving
as Director of Engineering. Prior to joining MIPS, she was a general management
consultant with the consulting firm of Arthur D. Little, Inc., from June 1988 to
November 1989.
Mr. Pelowski joined Quantum in April 1995 as Vice President, Strategic Planning
and Business Development. From 1990 to 1995, Mr. Pelowski was Senior Director of
Business Development at Sun Microsystems, responsible
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for planning, equity investments, corporate deals and mergers and acquisitions.
Prior to Sun Microsystems, he was a marketing manager with Intel Corporation
from 1987 to 1989.
PRODUCTS
DESKTOP AND PORTABLE STORAGE GROUP:
QUANTUM TRAILBLAZER(TM), QUANTUM FIREBALL, QUANTUM SIROCCO(TM) AND
QUANTUM FIREBALL TM SERIES 3.5-INCH DESKTOP PRODUCTS:
Quantum's desktop 3.5-inch hard drives consist of the Quantum
Trailblazer, Quantum Fireball, Quantum Sirocco and Quantum Fireball TM
Series products. These products are designed to meet the needs of
desktop systems.
Quantum Trailblazer 850. Mass production of the Trailblazer 850 began
in April 1995. The Quantum Trailblazer provides an industry-leading
storage solution for entry-level and mid-range desktop computer
systems. The drive features an innovative mechanical platform that
results in improved acoustics and lower cost, and a low part-count that
increases reliability and lowers power consumption.
Quantum Fireball 640/1280. Mass production of these products began in
October 1995. Quantum Fireball hard drives feature leading areal
density and innovative technology for capacity-hungry desktop systems
and servers. These products incorporate technologies such as advanced
read channel, enhanced interfaces to increase data transfer rates and
firmware that minimizes command overhead. As of June 1996, Quantum had
shipped over 10 million Fireball drives.
Quantum Sirocco 1700/2550. Mass production of these products began in
March 1996. Quantum Sirocco hard drives are one of the industry's first
desktop storage devices to combine magnetoresistive (MR) heads and a
Partial Response Maximum Likelihood (PRML) read channel, two advanced
technologies that are driving areal density and performance
improvements. Both drives are suited for multimedia, video and
information downloading applications.
Quantum Fireball 2.1/3.2 TM Series. Introduced in February 1996,
Quantum Fireball TM Series drives are the industry's first hard disk
drives to offer 1 gigabyte (GB) per platter storage capacity. Fireball
TM Series drives are the latest additions to the award-winning Fireball
family and also combine MR and PRML technologies to provide the storage
capacities and performance required by commercial personal computer
systems.
QUANTUM BIGFOOT(TM) 5.25-INCH DESKTOP PRODUCTS:
Quantum Bigfoot 1.2/2.5. Mass production of Quantum Bigfoot hard drives
began in March 1996. These products combine value with high-capacity
for consumer-oriented personal computer systems. Quantum 5.25-inch hard
drives fit into most modular PCs without any customization to system
enclosures.
WORKSTATION AND SYSTEMS STORAGE GROUP:
QUANTUM ATLAS(TM), QUANTUM ATLAS(TM) II AND QUANTUM VIKING(TM)
3.5-INCH HIGH-CAPACITY PRODUCTS:
Quantum's high-capacity 3.5-inch hard drives include the Quantum Atlas,
Quantum Atlas II and Quantum Viking products. These disk drives are
Quantum's most technologically advanced products and meet the demanding
needs of high-end desktop systems, workstations, RAID subsystems,
servers and minicomputers.
5
Quantum Atlas 2150/4300. Mass production of the Quantum Atlas products
began in December 1994. The Company has announced plans to phase out
this product line in connection with the transition to MKE of the
manufacturing for the Company's high-capacity products. This product
line will be replaced by the Atlas II high-capacity products.
Quantum Atlas II 4.5/9.1. Announced in April 1995, Quantum Atlas II
hard drives, to be manufactured by MKE, are intended to provide the
capacity, performance and fault-tolerance required by high-end systems
such as video and database servers, RAID subsystems, mid-range
workstations and mini-computers. Atlas II drives feature 7,200
rotations-per-minute (RPM) spin speed and leading-edge technologies
such as MR heads, Ultra SCSI-3 and fiber channel interfaces to meet the
needs of the high-end marketplace.
Quantum Viking 2.1/4.3. Announced in February 1996, Quantum Viking hard
drives combine workstation-class performance with PC-class prices,
meeting the needs of one of the fastest-growing segments of the
high-end marketplace: workstations and PC-based servers. The drives
feature capacities of 2.1 and 4.3 GBs with MR heads and PRML read
channels and a high internal data rate of 74 to 120 megabits per
second. A wide selection of Ultra SCSI-3 interfaces provide burst data
transfer rates as fast as 40 MB per second.
SPECIALTY STORAGE PRODUCTS GROUP:
QUANTUM DLT(TM) 0.5-INCH CARTRIDGE TAPE DRIVES:
Quantum DLT 2000XT. Mass production of the Quantum DLT 2000XT began in
September 1995. This device is a 0.5-inch cartridge streaming tape
drive designed to perform data back-up for mid-range and high-end
computer systems. With advanced linear recording technology, a highly
accurate tape guide system, and an adaptive control mechanism, the
drive is suited for mid-range systems, network servers, and high-end
workstations and systems. Using data compression techniques, the DLT
2000XT features a formatted capacity of 30 GBs per cartridge and a
sustained data transfer rate of 2.5 megabytes (MB)/second.
Quantum DLT 4000. Mass production of the Quantum DLT 4000 began in
February 1995. This 0.5-inch cartridge streaming tape drive is designed
for heavy duty cycle computer applications in the mid-range to high-end
of the tape drive market. Assuming data compression, the DLT 4000
features a combination of 40 GBs per cartridge and a sustained data
transfer rate of 3 MB/second.
Quantum DLT 7000. Introduced in January 1996, the Quantum DLT 7000
provides data storage and retrieval for demanding data back-up,
archive, and on-line storage applications. Assuming data compression,
this tape drive achieves a transfer rate of over 10 MBs per second and
a formatted capacity of 70 GBs, this tape drive provides significant
performance and capacity advantages over other drives in its class.
QUANTUM DLT(TM) AUTOLOADERS:
Quantum DLT 2500XT/2700XT/4500/4700. Quantum DLT Autoloaders are five-
and seven-cartridge subsystems designed for high-capacity data backup
applications in the computer systems market. Ranging in capacity from
150 to 280 GBs, each autoloader consists of an elevator mechanism that
provides random or sequential cartridge access between a tape drive and
cartridge magazines. All are appropriate table-top solutions or can be
configured into standard 19-inch equipment racks.
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QUANTUM DLTstor(TM) TAPE LIBRARY:
Announced in January 1996, the Quantum DLTstor tape library is designed
for use with Quantum's family of DLT 7000, 4000 and 2000XT tape drives.
Equipped with two seven-cartridge magazines and up to three drives, the
DLTstor product family is available in native capacities of 490, 280
and 210 GBs.
QUANTUM ESP5000 SERIES, ESP3000 SERIES AND ESP3000/ESP5000 TABLE TOP
SERIES SOLID STATE DISKS:
Quantum's solid state disks (SSDs) significantly improve the execution
speed of applications such as imaging, multimedia, video-on-demand,
on-line transaction processing, material requirements planning and
scientific modeling. In product development environments, the products
can substantially shorten time-to-market. Quantum's SSDs are used like
magnetic disks, however, they achieve near instantaneous access times
by eliminating the latency associated with disk rotation and head seek.
SSD drives include a unique and fully integrated data retention system
with continuous back-up to ensure that data is safely stored in the
event of a power interruption. The Company currently offers the Quantum
ESP5000 Series 5.25-inch form factor SSDs and the Quantum ESP3000
Series 3.5-inch form factor SSDs. Quantum's SSD drives did not
represent a significant amount of the Company's revenues in the fiscal
years ended March 31, 1996 and 1995.
PRODUCT DEVELOPMENT
Quantum operates in an industry characterized by rapid technological changes and
short product life cycles. For these and other reasons, including competitive
pressures, gross margins on specific products can decrease rapidly and any delay
in introduction of more advanced and more cost effective products can result in
significantly lower sales and gross margins. The Company's future is therefore
dependent on its ability to develop new products, to qualify these products with
its customers, to successfully introduce these products to the market on a
timely basis and to commence volume production to meet customer demands. In this
regard, the Company expects that sales of new products will account for a
significant portion of fiscal 1997 sales and that sales of older products will
decline. However, the foregoing is a forward-looking statement and actual
results could vary. See "Trends and Uncertainties - New Product Development" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company expects sales from its current high-capacity products,
presently manufactured by the Company in Milpitas, California and Penang,
Malaysia, to decline substantially in the first half of fiscal 1997, as the
Company transitions its customers to new high-capacity products to be
manufactured by MKE. The Company's new high-capacity products, currently under
development, are not expected to achieve volume production and contribute to
sales prior to the latter half of fiscal 1997. The Company's inability to
successfully manage this transition could have a material adverse effect on the
Company. In addition, the Company designs and manufactures other information
storage related technologies, including magnetic recording head products and
tape media. Any failure of the Company to successfully develop and manufacture
new products and manage the transition of customers to these products would
adversely affect the Company's results of operations.
For the three fiscal years ended March 31, 1996, 1995 and 1994, the Company's
research and development expenses were $239.1 million, $169.3 million, and $89.8
million, respectively. The increase in research and development expenses for the
year ended March 31, 1996, is due to the impact of a full year of expenses for
the Acquired Businesses and reflects spending for both the vertically integrated
heads business and the additional high-capacity disk drive products. The
information storage industry, particularly the hard disk drive business, is
subject to rapid technological advances, and the future success of the Company
is dependent upon continued development and timely introduction of new products
and technologies. As a result, the Company expects to continue to make
significant expenditures for research and development. See "Trends and
Uncertainties," in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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MANUFACTURING
The Company believes that its manufacturing strategy is a key to its success.
For production of its desktop hard disk drives, Quantum has relied exclusively
on MKE and the Company recently announced the transition to MKE of the
high-capacity product manufacturing. MKE is a substantial manufacturer of hard
disk drives and other electronic components and is a majority-owned subsidiary
(57.3%) of Matsushita Electric Industries Company, Ltd., of Japan. MKE produces
hard disk drives for Quantum in Japan, Singapore and Ireland. MKE's
state-of-the-art manufacturing process is highly automated, employing integrated
computer networks and advanced control systems. During fiscal 1996,
approximately 75% of the Company's sales were derived from products manufactured
by MKE, a decline from 80% of fiscal 1995 sales. The decline in MKE products as
a percentage of sales is a result of the increase in consolidated sales due to
the products related to the Acquired Businesses and Quantum's manufacturing of
those products for a full year. Since the Company's acquisition of Digital's
high-capacity disk drive operations in late 1994 (the "Digital Acquisition"),
the Company has experienced significant difficulties integrating these
operations into its high-capacity business. With the transition of high-capacity
product manufacturing to MKE, the Company announced its plans to close its
high-capacity disk drive manufacturing plants in Milpitas, California and
Penang, Malaysia by September 1996. As a result, the Company's dependency on MKE
will increase. Prior to this transition, the Company had also closed its
high-capacity disk drive manufacturing operations in Colorado Springs, Colorado.
Quantum continues to perform manufacturing for its head operations in Batam,
Indonesia, Louisville, Colorado, and Shrewsbury, Massachusetts. Manufacturing
for the Company's tape products is performed in Colorado Springs, Colorado.
The Company and its manufacturing partner, MKE, are dependent on suppliers for
components and sub-assemblies, including recording heads, media and integrated
circuits, which are essential to the manufacture of the Company's products. In
connection with certain products, the Company qualifies only a single source for
certain components and subassemblies, which can magnify the risk of shortages.
Component shortages have, in the past, constrained the Company's revenue growth.
If such shortages occur, or if the Company experiences quality problems with
component suppliers, shipment of products could be significantly delayed or
costs significantly increased, which would have a material adverse effect on the
Company's results of operations. The Company believes that the industry will
periodically experience component shortages, and there can be no assurance that
these issues will not adversely affect the Company's operating results.
The Company's relationship with MKE, which has been continuous since 1984, is
currently governed by a master agreement that, unless extended, will expire in
December 1997. The current agreement between the Company and MKE gives MKE the
exclusive worldwide right to manufacture, and the Company the exclusive
worldwide right to design and market, hard disk drives. The Company provides MKE
with forecasts of its requirements and places purchase orders approximately
three months prior to delivery. The Company has only a limited right to modify
these purchase orders. The Company's transactions with MKE are denominated in
U.S. dollars with prices for product purchases negotiated periodically,
generally on a semiannual basis. Thus, fluctuations in the exchange rate have no
material short term impact on Quantum's results of operations. However, such
fluctuations may impact future negotiated prices. The failure of the parties to
extend their relationship, or the extension of the relationship on terms
unfavorable to the Company, would have a material adverse effect on the Company.
The Company's current product manufacturing relies on both thin film head
technology and magnetoresistive ("MR") recording head technology. The Company
believes that MR head technology will replace thin film heads as the leading
recording head technology. As a result, the Company is currently engaged in a
substantial effort to advance the development of its MR recording heads. There
can be no assurance as to the timing of the transition from thin film heads to
MR recording heads, or the Company's success in its development efforts. See
"Trends and Uncertainties", in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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SALES AND MARKETING
The Company markets its products directly to desktop personal computer, notebook
and workstation manufacturers and to distributors, resellers and systems
integrators through its worldwide sales force. Sales to major customers, as a
percentage of consolidated sales, for the fiscal years ended 1996, 1995 and 1994
were as follows:
1996 1995 1994
---- ---- ----
Compaq Computer, Inc. 12% 16% 10%
Apple Computer, Inc. 11% 12% 22%
As is typical in the information storage industry, the Company's customer base
is concentrated with a small number of systems manufacturers. The Company's
sales to its customers are generally governed by written agreements. In general,
these agreements do not obligate a customer to purchase any minimum volume of
the Company's products. Any significant decrease in sales to these customers, or
the loss of one or all of these customers, could have a material adverse effect
on the Company's results of operations.
Quantum maintains a European regional headquarters in Neuchatel, Switzerland, an
Asia-Pacific regional headquarters in Singapore, a Japanese headquarters in
Tokyo and sales offices throughout the world. International sales, which include
sales to foreign subsidiaries of United States companies, accounted for 52% of
sales in fiscal 1995 and 53% in both fiscal 1995 and 1994. See also Note 13 in
the Notes to Consolidated Financial Statements.
WARRANTY AND SERVICE
Quantum generally warrants its products against defects in design, materials and
workmanship for one to five years. A provision for estimated future warranty
costs is recorded when products are shipped. The Company believes its accrual
for warranty liability is adequate. However, actual warranty expenditures could
have a material unfavorable impact on the Company if the rate of unit failure or
the cost to repair a unit is greater than what the Company has assumed in its
estimate. The Company maintains in-house service facilities for refurbishment or
repair of its products in Milpitas, California, Dundalk, Ireland and Penang,
Malaysia.
BACKLOG
The Company's six-month order backlog at June 13, 1996, was approximately $870
million compared to approximately $820 million at May 8, 1995. Backlog increased
slightly year-to-year, but reflects a slowdown in demand from the fourth quarter
of fiscal 1996. As noted in "Management's Discussion and Analysis of Financial
Condition and Resuts of Operations," under "Trends and Uncertainties," on June
12, 1996, the Company announced that weaker than expected industry demand for
drives for the PC market is expected to have an adverse impact on revenue and
earnings for the first quarter of fiscal 1997.
Backlog includes only firm orders for which the customers have released a
specific purchase order and specified a delivery schedule. Lead time for the
release of purchase orders depends upon the scheduling practices of the
individual customer, and the rate of new order bookings varies from month to
month. For this reason, and the possibility of customer changes in delivery
schedules or cancellations of orders, Quantum's backlog as of any particular
date may not be representative of actual sales for any succeeding period. In
addition, it has been the Company's practice to permit customers to increase or
decrease (including canceling) orders for products with relatively short notice
to the Company. The Company believes that this practice enables customers to
improve the management of their inventory, minimizes the Company's exposure to
disputed accounts receivable and improves the Company's relationships with
customers.
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COMPETITION
The information storage products industry in general, and the disk drive
industry in particular, is characterized by intense competition which results in
rapid price erosion, short product life cycles, and continuous introduction of
new products offering increased levels of capacity and performance. Quantum
faces direct competition from a number of companies, including Seagate, Western
Digital, IBM and Maxtor and Exabyte. In February 1996, Seagate merged with
Conner, a former competitor, creating a company that is the world's largest disk
drive manufacturer. There can be no assurance that the Company can compete
effectively with these or any other companies, and the Company is unable to
predict the effect, if any, that the Seagate/Conner merger may have on the
Company's business. In the event that the Company is unable to compete
effectively with these or any other companies, the Company's business, financial
condition or results of operations would be materially adversely affected.
In the market for desktop products, Quantum competes primarily with Seagate,
Western Digital and Maxtor. Quantum and its competitors have developed and are
developing a number of products targeted at particular segments of this market,
such as home PC buyers, and factors such as time to market can have a
significant effect on the success of any particular product. The desktop market
is characterized by more competitors and shorter product life cycles than the
hard disk drive market in general.
The Company faces competition in the high-capacity disk drive market primarily
from Seagate and IBM. Seagate has the largest share of the market for
high-capacity disk drives. Although the same competitive factors generally
applicable to the overall disk drive industry apply to high-capacity disk
drives, the company believes that the performance and quality of its products
are more important in this segment than in the desktop market. In connection
with the Company's recently announced transition of its manufacturing activities
to MKE, the Company has been able to focus its product development efforts more
closely on certain key products. The Company's success in the high-capacity
market during the foreseeable future is dependent on the successful development,
timely introduction and market acceptance of these key products, as to which
there can be no assurance.
The Company also competes with companies offering products based on alternative
data storage and retrieval technologies. In the market for tape drives, the
Company competes with a large number of companies, including Exabyte. During
fiscal 1996, the Company experienced increasing market acceptance of its tape
drive products. However, a number of competitors have announced or already
introduced tape drive product offerings and the market could become
significantly more competitive during fiscal 1997. As a result, the Company
could experience increased price competition. If price competition occurs, the
Company may be forced to lower prices, in which case the Company would be
materially adversely affected. Quantum currently does not market thin film or MR
heads to outside companies. Technological advances in magnetic, optical or other
technologies, or the development of new technologies, could result in the
introduction of competitive products with superior performance to and
substantially lower prices than the Company's products, which could adversely
affect the Company's results of operations.
Finally, the Company's customers could commence the manufacture of disk and tape
drives for their own use or for sale to others. Any such loss of customers could
have a material adverse effect on the Company.
10
PATENTS AND LICENSES
Quantum has been granted and/or owns by assignment 398 United States patents,
including patents originally issued to its former subsidiary Plus Development
Corporation, and patents originally issued to Digital Equipment Corporation. As
a general rule, these patents have 17-year terms from the date of issuance.
Quantum also has certain foreign patents and applications relative to certain of
the products and technologies. Although Quantum believes that its patents and
applications have significant value, the rapidly changing technology of the
computer industry makes Quantum's future success dependent primarily upon the
technical competence and creative skills of its personnel rather than on patent
protection. See also "Legal Proceedings."
Several companies and individuals have approached Quantum concerning the need
for a license under patented technology that Quantum has assertedly used, or is
assertedly using, in the manufacture and sale of one or more of Quantum's
products. Quantum conducts ongoing investigations into these assertions and
presently believes that any licenses ultimately determined to be required could
be obtained on commercially reasonable terms. However, there is no assurance
that such licenses are presently obtainable, or if later determined to be
required, could be obtained. See also "Legal Proceedings."
Quantum has signed several cross-licensing agreements with IBM, Seagate
Technology and Hewlett Packard. These agreements enable Quantum to use certain
patents owned by these companies, and it enables these companies to use certain
patents owned by Quantum.
EMPLOYEES
At March 31, 1996, the Company had 7,036 regular employees. However, in
connection with the transfer of the high-capacity product manufacturing to MKE
and the closure of manufacturing operations in Milpitas, California and
Malaysia, the Company has given termination notices to approximately 1,800
regular employees.
In the advanced electronics industry, competition for highly skilled employees
is intense. Quantum believes that a great part of its future success will depend
on its continued ability to attract and retain qualified employees. None of the
Company's employees are represented by a trade union, and the Company has
experienced no work stoppage. Quantum believes that its employee relations are
favorable.
ITEM 2.
PROPERTIES
The Company has its Corporate headquarters and some high-capacity product
manufacturing operations in a 37-acre leased campus complex in Milpitas,
California, which includes five buildings. The Company owns a repair facility in
Malaysia and a repair and distribution facility in Ireland. As part of the
Acquisition, the Company acquired two buildings and the associated 72-acre
parcel of land in Shrewsbury, Massachusetts, as well as a manufacturing plant in
Malaysia. The Shrewsbury facilities are currently utilized for research and
development activities, as well as the production of recording heads. In
conjunction with the announced plan to transfer its high-capacity disk drive
manufacturing to MKE, the Company is shutting down the high-capacity
manufacturing operations in California and Malaysia. A buyer is being sought for
the manufacturing building in Malaysia; however, the Company cannot predict when
a sale might be completed. The Company has committed to purchase a building in
Louisville, Colorado, which will be used for recording heads research and
development and manufacturing. Additionally, the Company leases office and
warehouse space and repair and manufacturing facilities throughout the world,
typically on a short-term basis. The Company believes that its configuration and
warehouse facilities are adequate to support customer requirements during fiscal
1997. The aggregate lease payments for all facilities in fiscal year 1996 were
approximately $30 million.
ITEM 3.
11
LEGAL PROCEEDINGS
On February 26, 1993, Quantum commenced a declaratory judgment lawsuit against
Rodime PLC of Glasgow, Scotland, in the U.S. District Court for the District of
Minnesota. Rodime counterclaimed by asserting that certain Quantum 3.5-inch hard
disk drive products infringed its U.S. Patent No. 4,638,383 and sought royalty
payments under that patent. The United States District Court entered a summary
judgment in Quantum's favor, ruling that claims of the Rodime patent were
invalid because of impermissible broadening in reexamination proceedings. This
summary judgement was affirmed on September 22, 1995, by the U.S. Court of
Appeals for the Federal Circuit. On April 29, 1996, the United States Supreme
Court declined to review this decision. This ruling, now final, is fully
dispositive of Quantum's dispute with Rodime.
The Company is also subject to other legal proceedings and claims which 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.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quantum Corporation's common stock has been traded in the over-the-counter
market under the Nasdaq symbol QNTM since the Company's initial public offering
on December 10, 1982.
The prices per share reflected in the table represent the range of high and low
closing prices in the Nasdaq National Market System for the quarter indicated.
Fiscal 1996 High Low
- ----------- ---- ---
Fourth quarter ended March 31, 1996 19 7/8 16 5/8
Third quarter ended December 31, 1995 20 7/8 16 1/8
Second quarter ended October 1, 1995 27 9/16 20 7/8
First quarter ended July 2, 1995 26 5/16 15
Fiscal 1995 High Low
- ----------- ---- ---
Fourth quarter ended March 31, 1995 15 13/16 13 7/8
Third quarter ended January 1, 1995 16 3/4 13 7/8
Second quarter ended October 2, 1994 17 5/8 12 13/16
First quarter ended July 3, 1994 18 3/16 11 3/4
Historically, the Company has not paid cash dividends on its common stock and
the Company's debt agreement currently prohibits the Company from paying
dividends while the debt is outstanding.
As of May 1, 1996, there were approximately 2,445 shareholders of record of the
Company.
12
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands except per
share amounts, and ratios)
Year ended March 31 (iv)
----------------------------------------------------------------------------------
1996(i) 1995(iii) 1994 1993 1992
----------------------------------------------------------------------------------
Sales $ 4,422,726 $ 3,367,984 $ 2,131,054 $ 1,697,240 $ 1,127,733
Research and development $ 239,116 $ 169,282 $ 89,837 $ 63,019 $ 59,255
Net income (loss) $ (90,456) $ 81,591 $ 2,674 $ 93,811 $ 46,845
Net income (loss) per
share:
Primary $ (1.74) $ 1.72 $ .06 $ 2.05 $ 1.05
Fully diluted $ (1.74) $ 1.52 $ .06 $ 1.77 $ 1.04
Property, plant and
equipment, net $ 364,111 $ 280,099 $ 85,874 $ 74,698 $ 65,831
Total assets $ 1,975,355 $ 1,481,028 $ 997,438 $ 926,633 $ 550,864
Total long-term
debt $ 598,158 $ 327,500 $ 212,500 $ 212,500 $ -
Return on average
shareholders' equity (17.2)% 17.7% .7% 26.6% 17.1%
Ratio of earnings to
fixed charges (ii) 6.0 1.2 9.6 8.1
(i) The results of operations for fiscal 1996 include the effect of a $209
million charge related to the transition of manufacturing for the
Company's high-capacity products to MKE. See Note 8 in Notes to
Consolidated Financial Statements.
(ii) Earnings (as defined) for fiscal 1996 were insufficient to cover fixed
charges by $141.3 million.
(iii) On October 3, 1994, Quantum acquired portions of Digital Equipment's
business. The acquisition is not reflected in the financial statements
prior to fiscal 1995, and thus the results for fiscal 1995 and fiscal
1996 are not comparable to the results prior to fiscal 1995. See Note 14
in Notes to Consolidated Financial Statements.
(iv) No cash dividends were paid for the years presented.
13
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include the expected benefits of transitioning the manufacturing of the
Company's high-capacity hard disk drive products to MKE, as well as management's
expectations regarding financial results for fiscal 1997. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the factors set forth below in "Trends and Uncertainties" and
elsewhere in this report.
RESULTS OF OPERATIONS
On November 8, 1995, the Company announced a plan to resize the infrastructure
associated with its high-capacity products. Subsequently, the Company recorded a
pre-tax charge of $38 million, $36 million of which impacted cost of goods sold.
This charge included canceling a certain development program, accelerating
end-of-life plans for lower gross margin products and severance costs.
On January 30, 1996, the Company announced its intention to transition the
manufacturing of its WSSG high-capacity products to Matsushita-Kotobuki
Electronics Industries, Ltd. ("MKE") of Japan. The Company subsequently recorded
a charge of $209 million, pre-tax, associated with the closure of the Company's
two high-capacity manufacturing facilities in Penang, Malaysia and Milpitas,
California. The charge included incremental inventory write-downs and excess
purchase commitment accruals resulting directly from the decision to stop
manufacturing certain products, capital asset write-downs associated with the
closure of the production facilities, and severance for approximately 1,800
regular and 450 temporary employees.
Sales. Quantum's results of operations for fiscal 1996 reflect a significant
increase in sales over the prior fiscal year. Sales for the year ended March 31,
1996, grew 31%, to $4.4 billion, compared to sales of $3.4 billion recorded in
fiscal 1995. An increase in unit sales and a change in sales mix to newer,
larger-capacity products were partially offset by a decline in average unit
prices on existing products. The increase in sales was also partially
attributable to a full year of sales of the products acquired in the October 3,
1994, purchase of the Disks, Heads and Tapes Businesses of the Storage Business
Unit of Digital Equipment Corporation (the "Acquired Businesses"). Unit
shipments for fiscal 1996 increased 24% compared to fiscal 1995, reflecting a
higher sales level of desktop and portable storage products and the increased
product line offerings due to the Acquired Businesses.
Quantum's results of operations for fiscal 1995 reflected a significant increase
in sales over the prior fiscal year. Sales for the year ended March 31, 1995,
grew 58%, to $3.4 billion, compared to sales of $2.1 billion recorded in fiscal
1994. This increase is attributable to the newly acquired products as well as
increased unit shipments of existing Quantum products, offset by a decline in
average unit sales prices. On a pro forma basis, Quantum's sales for fiscal 1995
and 1994 would have been $3.8 billion and $3.0 billion, respectively, had the
acquisition of the Acquired Businesses occurred at the beginning of fiscal 1994.
Sales to the top five customers represented 44% of sales for fiscal 1996,
compared to 46% and 47% for fiscal 1995 and 1994, respectively. Sales to Compaq
Computer, Inc. were $522 million, or 12% of sales, in fiscal 1996, compared to
$536 million, or 16% of sales, in fiscal 1995 and $220 million, or 10% of sales,
in fiscal 1994. Sales to Apple Computer, Inc. were $473 million, or 11% of
sales, in fiscal 1996, compared to $404 million, or 12% of sales, in fiscal 1995
and $458 million, or 22% of sales, in fiscal 1994.
Sales to the distribution channel were 29% of consolidated sales or $1.3 billion
for fiscal 1996, compared to 25%, or $856 million for fiscal 1995 and 20% or
$428 million for fiscal 1994. Sales increased in the distribution channel during
fiscal 1996 as the Company widened the customer base.
Gross Margin. The gross margin decreased to 12% for fiscal 1996, compared to 17%
and 11% for fiscal 1995 and 1994. The decrease in gross margin in fiscal 1996 is
attributable to product qualification issues which were partially responsible
for higher costs and lower-than-expected unit volumes in the high-capacity
product line. In
14
addition, the $38 million resizing charge recorded in the third quarter of
fiscal 1996 impacted gross margin by $36 million. Without this resizing charge,
gross margin for fiscal 1996 would have been 13%. During fiscal 1995, transition
to newer and more cost efficient products, along with stabilizing industry
conditions, contributed to an increase in gross margin as compared to fiscal
1994. In the future, gross margin may be affected by pricing and other
competitive conditions, as well as the Company's ability to phase out the older,
lower gross margin product lines and transition to higher margin products
incorporating advances in technology. See "Trends and Uncertainties" below for a
discussion of certain other factors that may affect the Company's gross margin.
Research and Development Expenses. During fiscal 1996, the Company invested $239
million, or 5.4% of sales, in research and development, compared to $169
million, or 5.0% of sales, in fiscal 1995 and $90 million, or 4.2% of sales, in
fiscal 1994. The increase in fiscal 1996 is due to the impact of a full year of
expenses for the Acquired Businesses along with higher expenses related to
preproduction activity for a larger number of new products. The increase from
fiscal 1994 to fiscal 1995 is due primarily to the Acquired Businesses and
reflects spending for both the vertically integrated heads business and the
additional high-capacity disk drive products. The information storage industry,
particularly the hard disk drive business, is subject to rapid technological
advances, and the future success of the Company is dependent upon continued
development and timely introduction of new products and technologies. As a
result, the Company expects to continue to make significant expenditures for
research and development. See "Trends and Uncertainties" below.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal 1996 were
$142 million, or 3.2% of sales, compared to $108 million, or 3.2% of sales, in
fiscal 1995 and $74 million, or 3.5% of sales, in fiscal 1994. The increase in
absolute dollar expenditures in fiscal 1996 is principally due to the costs
associated with supporting the Company's higher volume of sales. The increase in
absolute dollar expenditures during fiscal 1995 is related to the Digital
acquisition and the costs associated with supporting the higher sales volume and
the expanded Company infrastructure. Sales and marketing expenses as a
percentage of sales declined in fiscal 1995 due to the increase in sales.
General and Administrative Expenses. General and administrative expenses in
fiscal 1996 were $65 million, or 1.5% of sales, compared to $52 million, or 1.5%
of sales, in fiscal 1995, and $42 million, or 2.0% of sales, in fiscal 1994. The
absolute dollar increase in general and administrative expenses between fiscal
1995 and fiscal 1996 is related to the expansion of the Company's
infrastructure. The absolute dollar increase between fiscal 1994 and 1995
reflects the infrastructure required to support the Acquired Businesses. The
percentage decline in fiscal 1995 is due to the increase in sales.
Other Operating Charges. During fiscal 1996 the Company included in results of
operations a charge of $209 million related to the transition of manufacturing
for the high-capacity products to MKE. The charge was comprised of: reduction in
work force of approximately $10 million; write-down of capital assets of
approximately $45 million; incremental inventory write-downs and excess purchase
commitment accruals of approximately $144 million; and other charges of
approximately $10 million. These amounts reflect the provision for closing the
manufacturing facilities in Penang, Malaysia, and Milpitas, California.
As a result of the acquisition of the Acquired Businesses in fiscal 1995, the
Company incurred a charge of $73 million, which included $68 million of
purchased in-process research and development and $5 million in related merger
costs. Merger costs were comprised of incremental integration costs incurred
through the end of the quarter in which the acquisition was consummated.
Included in the Company's fiscal 1994 results of operations were restructuring
and other charges of $22.8 million, which were comprised of: the write-off of
goodwill and certain inventory associated with its former subsidiary, Plus
Development, of $7.7 million; the Company's reduction in work force of $1.5
million; accelerated product transitions of $8.0 million; the consolidation of
sales offices and other facilities of $5.1 million; and other charges of $0.5
million. Included in the charges for the consolidation of other facilities was
the consolidation of repair facilities from three facilities worldwide into a
single location in Malaysia. The Company had substantially completed the
restructuring as of March 31, 1994.
15
Other (Income) Expense. Net interest and other income and expense for fiscal
1996 was $28.0 million net expense compared to $15.8 million net expense and
$6.7 million net expense for fiscal 1995 and 1994, respectively. The increase in
net expense in fiscal 1996 can be attributed to interest expense on higher
levels of debt to finance operations. In fiscal 1995, the increase in net
expense was due to higher interest expense resulting from the acquisition
financing and lower cash balances due to cash used for the acquisition.
Income Taxes. The effective tax rate for fiscal 1996 was 36%, compared to 44%
and 27% for the fiscal years 1995 and 1994, respectively. The decrease in the
effective tax rate for fiscal 1996, as compared to fiscal 1995, was attributable
primarily to the realization of deferred tax assets previously reserved and
lower overall state taxes, offset by a reduction in the benefit of foreign
earnings taxed at less than the U.S. rate. The increase in the effective tax
rate for fiscal 1995, as compared to fiscal 1994, is attributable primarily to
the impact of the purchased research and development write-off as there is
minimal tax benefit associated with the acquired technology utilized offshore.
For financial reporting purposes, the Company has provided a valuation allowance
for certain deferred tax assets that are expected to reverse over a 15 year
period. The Company has concluded that taxable income generated over the next 3
years, combined with the reversal of existing taxable temporary differences,
will be sufficient to realize the benefits of the recorded deferred tax assets.
Net Income. The Company recorded a net loss for fiscal 1996 of $90.5 million
compared to net income of $81.6 million and $2.7 million for fiscal 1995 and
1994, respectively. The change from net income in fiscal 1995 to a loss in
fiscal 1996 is primarily a result of the $209 million charge related to the
transition of high-capacity product manufacturing to MKE as well as the $38
million resizing charge for the high-capacity business infrastructure in fiscal
1996. The increase in net income from fiscal 1994 to fiscal 1995 is primarily
due to higher unit shipments and revenue offset by acquisition related
expenditures in fiscal 1995.
During the period covered by the accompanying financial statements, the Company
has used derivative financial instruments to manage foreign currency exposure on
a limited basis only (See Note 2 in Notes to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had $165 million in cash and cash equivalents,
compared to $188 million at March 31, 1995. Cash was used in operating and
investing activities, primarily as a result of increases in accounts receivable
and inventories and investing in property and equipment, partially offset by an
increase in accounts payable. Cash was provided by financing activities,
primarily as a result of borrowing under the senior credit facility and
equipment loan facility described below as well as the issuance of convertible
subordinated notes.
In October 1994, the Company entered into a three year $350 million senior
credit facility structured as a $225 million revolving credit line and a $125
million term loan. As subsequently amended, the revolving credit line has been
increased to $325 million and has been extended one year to expire in September
1998. The revolving credit is governed by a borrowing base of eligible accounts
receivable and inventory, and the term loan was to amortize in five equal
semiannual installments that commenced in October 1995. In February 1996, the
remaining outstanding balance on the term loan was paid in full with proceeds of
the issuance of the convertible subordinated notes discussed below. The
revolving borrowings, at the option of the Company bear interest at either LIBOR
plus a margin or a base rate with option periods of one to six months. The
facility is secured by all the Company's domestic assets and 66% of the
Company's ownership of certain of its subsidiaries. As of March 31, 1996, total
borrowings under the senior credit facility were $210 million with a weighted
average interest rate of approximately 7.5%.
The Company was not in compliance with three of its financial covenants in
connection with its senior credit facility as of March 31, 1996; however, the
Company has received a waiver of this non-compliance for the period ended March
31, 1996. In addition, the financial covenant requirements for future periods
have been amended.
16
The Company also has a one-year $85 million unsecured Letter of Credit facility
with certain banks to issue standby letters of credit to MKE and its affiliates,
which expires in September 1996. As of March 31, 1996, there was no outstanding
balance under this letter of credit facility.
In March 1996, the Company entered into an $18 million term loan facility to
finance certain capital equipment. The facility amortizes over three years at a
fixed interest rate of 7.63% and payments are made on a quarterly basis. The
facility is secured by specified capital equipment.
In February 1996, the Company issued approximately $241 million of 5%
convertible subordinated notes (the "Notes") in a privately placed offering. The
Notes are due March 1, 2003, and are subordinated to all existing and future
senior indebtedness of the Company. Each Note is convertible at the option of
the holder into the Company's common stock at a conversion price of $22.32 per
share. The Notes are redeemable at the Company's option on or after March 3,
1998, and prior to March 3, 2000, under certain conditions related to the price
of the Company's common stock. Subsequent to March 3, 2000, the Notes are
redeemable at the Company's option at any time. Redemption prices range from
103.571% of the principal to 100% at maturity.
The Company's Convertible Subordinated Debentures due 2002 became redeemable at
the Company's option on or after April 2, 1995, at prices ranging from 104.5% of
the principal to 100% at maturity. Each debenture is convertible, at the option
of the holder, into the Company's common stock at a conversion price of
approximately $18.15 per share. During 1996, $79,567,000, or approximately 37%,
of the outstanding debentures were converted into the Company's common stock.
This conversion resulted in the issuance of 4,383,477 shares.
At this time, the Company expects to spend approximately $180 million for
leasehold improvements, capital equipment and expansion of the Company's
facilities during fiscal 1997. These capital expenditures will be to support the
recording heads and tapes businesses as well as to support general corporate
operations. In addition, the Company has committed to purchase, for $15 million,
a building currently under construction in Colorado and is seeking alternative
financing for that transaction.
The Company announced its intention to transition the manufacturing of its
high-capacity products to MKE and subsequently recorded a charge of $209
million, pre-tax, associated with the closure of the Company's two manufacturing
facilities in Penang, Malaysia and Milpitas, California (see Note 8 in Notes to
Consolidated Financial Statements). The Company anticipates that the cash
portion of this charge will be approximately $97 million, to be paid over the
first two quarters of fiscal 1997. There were no significant cash expenditures
related to this restructuring during fiscal 1996.
In conjunction with the purchase of the Acquired Businesses in October 1994, the
Company recorded an accrual for exit costs related to exiting facilities and
operations acquired from Digital (see Note 14 in Notes to Consolidated Financial
Statements). During fiscal 1996, cash outlays related to the exit activities
were $15.6 million. The Company anticipates that cash outlays for the exit
activities will be approximately $12 million during fiscal 1997.
The Company believes that its existing capital resources, including its credit
facilities and any cash generated from operations, will be sufficient to meet
all currently planned expenditures and sustain operations for the next fiscal
year. However, this forward-looking statement assumes that operating results and
cash flow from operations will meet the Company's expectations, and actual
results could vary due to the factors described below. The Company continues to
work to identify additional sources of cash and there can be no assurance that
if required, the Company will be able to obtain such financing on acceptable
terms, or at all.
TRENDS AND UNCERTAINTIES
On January 30, 1996, the Company announced its intention to transition the
manufacturing of its high-capacity products to MKE, and, as a result, the
Company subsequently recorded a related charge of $209 million, pre-tax. Actual
results, however, with regard to the restructuring charge could vary in the
event demand for the Company's current high-capacity products declines faster
than expected, resulting in additional excess inventory, or in the
17
event the Company experiences unanticipated problems or incurs greater than
expected costs in connection with the closure of its high-capacity manufacturing
operations.
On June 12, 1996, the Company announced that due to weaker industry demand for
drives for the personal computer market than had been expected and the resulting
pressure on pricing, the Company's sales and earnings for the first quarter of
fiscal 1997 will be less than the results for the fourth quarter of fiscal 1996
before taking into account the restructuring. Based on the weakened industry
demand picture and the preliminary results for the first two months of the
quarter, the Company expects revenue for the first quarter of fiscal 1997 to be
less than $1.2 billion and earnings per share fully diluted to be in the range
of $.05 to $.15. With this uncertainty about the level of demand, the Company
has decided to reduce its drive build plan by approximately 1 million units for
each of the first and second quarters of fiscal 1997. Contributing factors to
the weakened demand picture are lackluster demand in the consumer market for
home PCs in the U.S., delays in commercial purchases pending new operating
systems and new systems architectures, and weakness in Europe driven by
Germany's economic slowdown.
The foregoing estimates regarding the Company's results for the first quarter of
fiscal 1997, which are preliminary, constitute forward-looking information, and
actual results for the quarter will be impacted by the Company's operating
results during the balance of the quarter, which could vary due to the factors
described below. In addition, future revenue and earnings growth would be
impacted if the weakness in demand for desktop drives continues or intensifies,
or if the Company experiences increased price competition as a result.
Fluctuation in Results of Operations. The Company's results of operations are
subject to fluctuations from period to period. In this regard, the demand for
the Company's hard disk drive products depends on the demand for the computer
systems manufactured by its customers, which is affected by computer system
product cycles and by prevailing economic conditions. Growth in demand for
computer systems, especially in the personal computer ("PC") market segment,
where the Company derives a significant amount of its disk drive sales, has
historically been subject to significant fluctuations. Such fluctuations in end
user demand have in the past and may, in the future, result in the deferral or
cancellation of orders for the Company's products, each of which would have a
material adverse effect on the Company. During the past several years, there has
been significant growth in the demand for PCs, a portion of which represented
sales of PCs for use in the home. However, many analysts predict that future
growth may be at a slower rate than the rate experienced in recent years.
As noted above, the Company recently announced that weaker than expected
industry demand for drives for the PC market is expected to have an adverse
impact on revenue and earnings for the first quarter of fiscal 1997, and the
Company has decided to reduce its drive build plan for the first two quarters of
fiscal 1997. The Company could experience additional decreases in demand for its
products in the near future, and any such additional slowdowns in demand would
have a material adverse effect on the Company. The hard disk drive industry has
also been subject, from time to time, to seasonal fluctuations in demand. The
Company has typically experienced relatively flat demand in the quarter ending
September 30 as compared to the quarter ending June 30 and increasing demand
throughout the quarters ending December 31 and March 31. The Company's shipments
tend to be highest in the third month of each quarter and failure by the Company
to complete shipments in the final month could adversely affect the Company's
operating results for the quarter.
Transition of High-Capacity Manufacturing Operations to MKE; Introduction of New
High-Capacity Products. Since the Company's acquisition of Digital's
high-capacity disk drive operations in late 1993, the Company has experienced
significant difficulties integrating these operations into its high-capacity
business. These difficulties have included problems involving both the
development and the manufacturing of its high-capacity products and have
resulted in, among other things, significant delays in meeting the qualification
standards imposed by certain major customers of the Company's high-capacity disk
drive products. As part of its strategy to address these problems, in January
1996, the Company decided to transition its high-capacity disk drive product
manufacturing to MKE. As a result, in the Company's fiscal quarter ended March
31, 1996, the Company incurred a charge of $209 million associated with the
closure of the Company's two high-capacity disk drive manufacturing facilities
in Milpitas, California and Penang, Malaysia. Future results could also be
adversely impacted by this transition in the event demand for the Company's
current high-capacity products declines faster than expected, resulting in
18
additional excess inventory, or in the event the Company experiences
unanticipated problems or incurs greater than expected costs in connection with
the closure of its high-capacity manufacturing operations.
The Company's transition of its high-capacity manufacturing operations to MKE
entails several risks, and there can be no assurance that the Company's efforts
in this regard will be successful. This transition will require close and
continuous collaboration between the Company and MKE in all phases of design,
engineering and production of its high-capacity products. Although the Company
has had a continuous manufacturing relationship with MKE since 1984, the
Company's high-capacity products are more complex to manufacture than its
desktop products. MKE has not previously manufactured any significant amount of
the Company's high-capacity products and there can be no assurance that the
Company's previous difficulties with its high-capacity products will be resolved
or that new problems will not arise as a result of the transition of this
manufacturing to MKE. Any failure of the Company to successfully manage this
transition would have a material adverse effect on the Company.
In addition, the Company's high-capacity manufacturing transition could be
adversely affected by the necessity to phase out the Company's current
high-capacity products, which are manufactured by the Company, and to
simultaneously introduce, during the second half of calendar 1996, two new
high-capacity products to be manufactured by MKE. These new products are still
in the development and evaluation stage. The Company's product development
efforts entail a number of risks, and there can be no assurance that the Company
will be successful in these efforts.
Dependence on MKE Relationship. The Company is dependent upon MKE for the
manufacture of its disk drive products. During fiscal 1996 and 1995,
approximately 75% and 80%, respectively, of the Company's sales were derived
from products manufactured by MKE. In January 1996, the Company announced that
it will transition the manufacturing of its high-capacity hard disk drive
products to MKE. The Company and MKE have agreed that, following this
transition, MKE will have the exclusive right to manufacture all of the
Company's hard disk drive products.
The Company's relationship with MKE is critical to the Company's business and
financial performance. The Company's dependence on MKE entails, among others,
the following principal risks:
Quality and Delivery. The Company relies on MKE's ability to bring new
products rapidly to volume production at low cost, to meet the
Company's stringent quality requirements and to respond quickly to
changing product delivery schedules from the Company. This requires,
among other things, close and continuous collaboration between the
Company and MKE in all phases of design, engineering, and production.
In this respect, the Company's high-capacity product development teams
have had limited or no prior experience working with MKE. 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 high volume manufacturing source
to meet such demand without substantial delay and disruption of the
Company's operations. As a result, the Company would be materially
adversely affected.
Extension of Relationship. The Company's relationship with MKE, which
has been continuous since 1984, is currently governed by a master
agreement, that, unless extended, will expire in December 1997. The
failure of the parties to extend their relationship on terms favorable
to the Company would have a material adverse effect on the Company.
Volume and Pricing. MKE's production schedule is based on the Company's
forecasts of its product purchase requirements and the Company has only
limited rights to modify short-term purchase orders issued to MKE. In
addition, the Company renegotiates pricing arrangements with MKE on a
periodic basis. The failure of the Company to accurately forecast its
requirements, which could lead to inventory shortages or surpluses, or
the failure to reach agreements reasonable to the Company with regard
to pricing would have a material adverse effect on the Company.
19
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
calendar 1996. 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 in a timely manner or at all.
Any such failure to obtain an alternative source would have a material
adverse effect on the Company.
Dependence on Suppliers of Components and Sub-Assemblies; Component Shortages.
The Company and its manufacturing partner, MKE, are dependent upon suppliers for
components and sub-assemblies, including recording heads, media and integrated
circuits, which are essential to the manufacture of the Company's products. In
connection with certain products, the Company and MKE qualify only a single
source for certain components and sub-assemblies, which can magnify the risk of
shortages. Component shortages have in the past constrained the Company's sales
growth. If such shortages occur, or if the Company experiences quality problems
with component suppliers, shipments of products could be significantly delayed
or costs significantly increased, which would have a material adverse effect on
the Company's results of operations. The Company believes that the industry will
periodically experience component shortages, and there can be no assurance that
these issues will not adversely affect the Company's operating results.
New Product Development. Quantum operates in an industry characterized by
increasingly rapid technological changes and short product life cycles. For
these and other reasons, including competitive pressures, gross margins on
specific products can decrease rapidly and any delay in introduction of more
advanced and more cost-effective products can result in significantly lower
sales and gross margins. The Company's future is therefore dependent on its
ability to develop new products, to qualify these new products with its
customers, to successfully introduce these products to the market on a timely
basis and to commence volume production to meet customer demands. In this
regard, the Company expects that sales of new products, particularly a limited
number of products from DPSG, will account for a significant portion of fiscal
1997 sales and that sales of older products will decline. However, there can be
no assurance that such products will achieve or sustain market acceptance. The
Company expects sales from its current high-capacity products to decline
substantially in the first half of fiscal 1997, as the Company transitions
customers to new high-capacity products to be manufactured by MKE. The Company's
new high-capacity products, currently under development, are not expected to
achieve volume production and contribute to sales until at least the latter half
of fiscal 1997. The Company's inability to successfully manage this transition
could have a material adverse effect on the Company.
The Company is also currently engaged in a substantial effort to advance the
development of its MR recording heads. The Company believes that MR head
technology, which enables higher capacity per disk than conventional thin film
inductive heads, will replace thin film inductive heads as the leading recording
head technology. Although MR recording heads comprised a relatively small
portion of the recording head market demand for the entire industry in 1995, the
Company expects demand to increase significantly by 1998. The Company believes
that by establishing its own supply of MR heads it can lower the risk of supply
shortages of MR heads that may occur in the future and can create cost
advantages for its overall business. However, MR technology is relatively
complex, and as is typical of new head technology, manufacturing yields are
expected to begin at relatively low levels and then possibly increase throughout
the product life of the recording head. While the Company has increased
production yields in its MR recording heads manufacturing in the past, several
of the Company's important new disk drive products which are scheduled to
commence volume production during fiscal 1997 are dependent on new MR recording
heads currently under development, and increases in the current levels of
production yields for these new MR recording heads will be required for the
Company to meet its manufacturing objectives for these new disk drive products.
In the event that yields do not improve, there are limited alternative sources
of supply for MR recording heads, and there can be no assurance that the Company
will be able to locate and obtain adequate supply from such alternative sources.
In such event, the Company will be materially adversely affected.
20
There can be no assurance that the Company will be successful in the development
and marketing of these and other new products and components that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and components, or that the
Company's new products and components will adequately meet the requirements of
the marketplace and achieve market acceptance. In addition, technological
advances in magnetic, optical or other technologies, or the development of new
technologies, could result in the introduction of competitive products with
superior performance to and substantially lower prices than the Company's
products. Further, the Company's new products and components are subject to
significant technical risks. If the Company experiences delays in the
commencement of commercial shipments of new products or components, the Company
could experience delays or loss of product sales. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, the Company would be materially adversely affected.
Customer Concentration. As is typical in the information storage industry, the
Company's customer base is concentrated with a small number of systems
manufacturers. The Company's sales to its customers are generally governed by
written agreements. In general, these agreements do not obligate a customer to
purchase any minimum volume of the Company's products, and these agreements are
generally terminable at will by the customer.
Sales of the Company's desktop products, which comprise a significant majority
of its overall sales, were concentrated in several key customers during the
fiscal year ended March 31, 1996. Sales to the top five customers of the Company
represented 44% of total sales, of which 11% represented sales to Apple and 12%
represented sales to Compaq. Apple recently announced a significant layoff of
personnel and restructuring of its business. As a result, it could become
increasingly difficult for the Company to accurately forecast the demand for its
products by Apple. In addition, the Company is unable to predict whether or not
there will be any significant change in demand for Apple's or any of its other
customers' products in the future. In the event that any such changes result in
decreased demand for the Company's products, whether by loss or delays in
orders, the Company would be materially adversely affected.
Intensively Competitive Industry. The information storage products industry in
general, and the disk drive industry in particular, is characterized by intense
competition which results in rapid price erosion, short product life cycles, and
continuous introduction of new, more cost-effective products offering increased
levels of capacity and performance. In this regard, the Company intends to
introduce important new products during the latter half of fiscal 1997, and
there can be no assurance that it will be successful in this regard. If this
does not occur, the Company would be materially and adversely affected. The hard
disk drive industry also tends to experience periods of excess product inventory
and intense price competition. If price competition intensifies, the Company may
be forced to lower prices further than expected, which could adversely affect
its sales and gross margin.
Quantum faces direct competition from a number of companies, including Seagate,
Western Digital, IBM, Maxtor and Exabyte. In February 1996, Seagate merged with
Conner creating a company that is the world's largest disk drive manufacturer.
There can be no assurance that the Company can compete effectively with these or
any other companies and, in particular, the Company is unable to predict the
effect, if any, that the Seagate/Conner merger may have on the Company's
business. In the event that the Company is unable to compete effectively with
these or any other companies, the Company would be materially adversely
affected.
DPSG. In the market for desktop products, Quantum competes primarily
with Seagate, Western Digital, and Maxtor. Quantum and its competitors
have developed and are developing a number of products targeted at
particular segments of this market, such as home PC buyers, and factors
such as time to market can have a significant effect on the success of
any particular product. The desktop market is characterized by more
competitors and shorter product life cycles than the hard disk drive
market in general.
WSSG. The Company faces competition in the high-capacity disk drive
market primarily from Seagate and IBM. Seagate has the largest share of
the market for high-capacity disk drives. Although the same competitive
factors generally applicable to the overall disk drive industry apply
to high-capacity disk
21
drives, the Company believes that the performance and quality of its
products are more important to the users in this market than to users
in the desktop market. In connection with the Company's recently
announced transition of its manufacturing activities to MKE, the
Company has been able to focus its product development efforts more
closely on certain key products. The Company's success in the
high-capacity market during the foreseeable future is dependent on the
successful development, timely introduction and market acceptance of
these key products, as to which there can be no assurance.
SSPG. In the market for tape drives, the Company competes with a large
number of companies, including Exabyte. During 1996, the Company
experienced increasing market acceptance of its tape drive products.
However, a number of competitors have announced or already introduced
tape drive product offerings and the market could become significantly
more competitive during the remainder of calendar 1996. As a result,
the Company could experience increased price competition. If price
competition occurs, the Company may be forced to lower prices, in which
case the Company would be materially adversely affected.
Finally, the Company's customers could commence the manufacture of disk and tape
drives for their own use or for sale to others. Any such loss of customers could
have a material adverse effect on the Company.
Risks Associated with Foreign Manufacturing. Many of the Company's products are
currently manufactured outside the United States. As a result, the Company is
subject to certain risks associated with contracting with foreign manufacturers,
including obtaining requisite United States and foreign governmental permits and
approvals, currency exchange fluctuations, currency restrictions, political
instability, labor problems, trade restrictions and changes in tariff and
freight rates.
Intellectual Property Matters. The hard disk drive industry has been
characterized by significant litigation relating to patent and other
intellectual property rights. From time to time, the Company is approached by
companies and individuals alleging Quantum's need for a license under patented
technology that Quantum assertedly uses. There can be no assurance that licenses
to any such technology, if required, could be obtained on commercially
reasonable terms or at all. Adverse resolution of any intellectual property
litigation could subject the Company to substantial liabilities and require it
to refrain from manufacturing certain products. In addition, the costs of
engaging in such litigation may be substantial, regardless of the outcome.
Future Capital Needs. The information storage business is capital-intensive and
competitive. Although the Company is in the process of transitioning the
manufacturing of all of its hard disk drive products to MKE, the Company
believes that in order to remain competitive in the information storage
business, it will need significant additional financial resources over the next
several years for capital expenditures, working capital and research and
development. The Company believes that it will be able to fund these capital
requirements at least through fiscal 1997. However, in the event that the
Company decides to increase its capital expenditures further or sooner than
presently contemplated, or if results of operations do not meet the Company's
expectations, the Company will require additional debt or equity financing.
There can be no assurance that such additional funds will be available to the
Company or, if available, will be available on favorable terms. In addition, the
Company may require additional capital for other purposes not presently
contemplated by the Company. If the Company is unable to obtain sufficient
capital, it could be required to curtail its capital equipment and research and
development expenditures, which could adversely affect the Company.
Volatility of Stock Price. The market price of the Company's Common Stock has
been, and may continue to be, extremely volatile. Factors such as new product
announcements by the Company or its competitors, quarterly fluctuations in the
operating results of the Company, its competitors and other technology companies
and general conditions in the computer market may have a significant impact on
the market price of the Common Stock. In particular, if the Company were to
report operating results that did not meet the expectations of research
analysts, the market price of the Common Stock could be materially adversely
affected. In addition, the stock market has recently experienced substantial
price and volume fluctuations, which have particularly affected the market
prices of the stock of many high technology companies.
22
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 24
Consolidated Statements of Operations for each of the 25
three years in the period ended March 31, 1996
Consolidated Balance Sheets at March 31, 1996 and 1995 26
Consolidated Statements of Cash Flows for each of the 27
three years in the period ended March 31, 1996
Consolidated Statements of Shareholders' Equity for 28
each of the three years in the period ended
March 31, 1996
Notes to Consolidated Financial Statements 29
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 50
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
QUANTUM CORPORATION
We have audited the accompanying consolidated balance sheets of Quantum
Corporation as of March 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quantum
Corporation at March 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Palo Alto, California Ernst & Young LLP
May 3, 1996
24
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data) Year ended March 31,
-------------------------------------------------------
1996 1995 1994
-------------------------------------------------------
Sales $4,422,726 $3,367,984 $2,131,054
Cost of sales 3,880,309 2,804,271 1,892,211
---------- ---------- ----------
542,417 563,713 238,843
Operating expenses:
Research and development 239,116 169,282 89,837
Sales and marketing 142,413 108,290 74,015
General and administrative 65,145 52,134 41,910
Restructuring and other charges 209,122 - 22,753
Purchased research and development
and in merger costs - 72,945 -
---------- ---------- ----------
655,796 402,651 228,515
---------- ---------- ----------
Income (loss) from operations (113,379) 161,062 10,328
Interest and other income 7,945 7,258 8,217
Interest expense (35,904) (23,015) (14,882)
---------- ---------- ----------
Income (loss) before income taxes (141,338) 145,305 3,663
Income tax provision (benefit) (50,882) 63,714 989
---------- ---------- ----------
Net income (loss) $ (90,456) $ 81,591 $ 2,674
=========== ============ =============
Net income (loss) per share:
Primary $ (1.74) $ 1.72 $ .06
=========== ============ =============
Fully diluted $ (1.74) $ 1.52 $ .06
=========== ============ =============
Common and common equivalent shares:
Primary 51,841 47,319 44,967
=========== ============ =============
Fully diluted 51,841 59,038 44,967
=========== ============ =============
See accompanying notes to consolidated financial statements.
25
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) March 31,
--------------------------------------------
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 164,752 $ 187,753
Accounts receivable, net of allowance for doubtful
accounts of $10,497 in 1996 and $11,963 in 1995 711,107 497,887
Inventories 459,538 324,650
Deferred taxes 109,625 44,054
Other current assets 81,472 35,580
---------- ----------
Total current assets 1,526,494 1,089,924
Property, plant and equipment, less accumulated
depreciation 364,111 280,099
Purchased intangibles, net 66,313 95,818
Other assets 18,437 15,187
---------- ----------
$1,975,355 $1,481,028
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 498,829 $ 355,117
Accrued warranty expense 62,289 57,001
Accrued compensation 45,439 54,917
Income taxes payable 40,994 17,566
Accrued restructuring and exit costs 115,537 32,213
Current portion of long-term debt 4,125 50,000
Other accrued liabilities 53,929 77,227
---------- ----------
Total current liabilities 821,142 644,041
Deferred taxes 11,232 -
Convertible subordinated debt 374,283 212,500
Long-term debt 223,875 115,000
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Preferred stock, $.01 par value; authorized:
4,000,000 shares; issued: none in 1996 and 1995 - -
Common stock, $.01 par value; authorized:
150,000,000 shares; issued and outstanding:
54,195,672 in 1996 and 46,164,295 in 1995 541 461
Capital in excess of par value 266,405 140,693
Retained earnings 277,877 368,333
---------- ----------
Total shareholders' equity 544,823 509,487
---------- ----------
$1,975,355 $1,481,028
========== ==========
See accompanying notes to consolidated financial statements.
26
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended March 31,
------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (90,456) $ 81,591 $ 2,674
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Restructuring and other charges 208,571 67,184 6,338
Gain on sale of equity investment (3,844) - -
Depreciation and amortization 97,108 53,312 29,340
Deferred taxes (54,339) - -
Compensation related to stock option plans 1,414 - -
Changes in assets and liabilities:
Accounts receivable (216,499) (173,511) (57,382)
Inventories (188,444) 16,085 29,079
Accounts payable 144,547 87,928 51,744
Income taxes payable (26,430) 17,566 (19,026)
Accrued warranty expense 5,463 1,384 13,207
Other assets and liabilities (41,198) 9,517 15,316
--------- --------- ---------
Net cash provided by (used in) operating activities (164,107) 161,056 71,290
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities - (105,474) (134,581)
Proceeds from sales and maturities of
marketable securities - 217,982 192,407
Investment in property and equipment, net (211,602) (128,170) (38,372)
Proceeds from sale of equity investment 5,875 - -
Proceeds from sale of distribution subsidiary 5,276 - -
Purchase of Digital Equipment's Data
Storage Business - (285,171) -
--------- --------- ---------
Net cash provided by (used in) investing activities (200,451) (300,833) 19,454
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities 393,000 220,500 -
Principal payments on short-term note - (70,000) -
Principal payments on long-term credit facilities (330,000) (55,500) -
Repurchase of common stock - - (17,479)
Proceeds from issuance of common stock 37,207 14,999 22,428
Proceeds from issuance of convertible
subordinated notes 241,350 - -
--------- --------- ---------
Net cash provided by financing activities 341,557 109,999 4,949
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (23,001) (29,778) 95,693
Cash and cash equivalents at beginning of year 187,753 217,531 121,838
--------- --------- ---------
Cash and cash equivalents at end of year $ 164,752 $ 187,753 $ 217,531
========= ========= =========
Supplemental disclosure of cash flow information:
Conversion of debentures $ 79,567 - -
========= ========= =========
Issuance of note for acquisition of
Digital Equipment's Data Storage Business - $ 70,000 -
========= ========= =========
Cash paid during the year for:
Interest $ 32,768 $ 21,113 $ 13,707
========= ========= =========
Income taxes $ 29,789 $ 47,310 $ 18,100
========= ========= =========
See accompanying notes to consolidated financial statements.
27
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Capital
--------------------------- in excess Retained
(In thousands) Shares Amount of Par Value Earnings Total
----------------------------------------------------------------------------
Balances at March 31, 1993 43,322 $433 $ 99,616 $298,189 $398,238
Shares repurchased in the open
market (1,500) (15) (3,494) (13,970) (17,479)
Shares repurchased from
employees (11) - (63) (151) (214)
Shares issued under employee
stock purchase plan 735 7 6,251 - 6,258
Shares issued under employee
stock option plans 2,058 21 15,581 - 15,602
Tax benefits related to stock
option plans and other - - 6,193 - 6,193
Net income for year ended
March 31, 1994 - - - 2,674 2,674
----------------------------------------------------------------------------
Balances at March 31, 1994 44,604 446 124,084 286,742 411,272
Shares issued under employee
stock purchase plan 869 9 8,275 - 8,284
Shares issued under employee
stock option plans, net 691 6 6,709 - 6,715
Tax benefits related to stock
option plans - - 1,625 - 1,625
Net income for year ended
March 31, 1995 - - - 81,591 81,591
----------------------------------------------------------------------------
Balances at March 31, 1995 46,164 461 140,693 368,333 509,487
Conversion of subordinated debentures 4,384 44 77,776 - 77,820
Shares issued under employee
stock purchase plan 1,338 13 15,965 - 15,978
Shares issued under employee
stock option plans, net 2,310 23 22,011 - 22,034
Compensation expense - - 1,414 - 1,414
Tax benefits related to stock
option plans - - 8,546 - 8,546
Net loss for year ended
March 31, 1996 - - - (90,456) (90,456)
----------------------------------------------------------------------------
Balances at March 31, 1996 54,196 $541 $266,405 $277,877 $544,823
============================================================================
See accompanying notes to consolidated financial statements.
28
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the reader
in understanding and evaluating the consolidated financial statements. These
policies are in conformity with generally accepted accounting principles.
Nature of business: Quantum Corporation (the "Company") designs, manufactures
and markets information storage products, including high-performance,
high-quality hard disk drives, as well as solid state disks and tape drives. The
Company also manufactures recording heads for use in its products. Quantum's
products meet the storage requirements of workstations, servers, disk arrays,
high-end to entry-level desktop personal computers and minicomputers. The
Company markets its products directly to major OEMs, and through a broad range
of distributors, resellers and systems integrators worldwide.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue recognition: Revenue from sales of products is recognized upon shipment
to customers with provision made for estimated returns.
Foreign currency transactions and translation: A significant percentage of the
Company's sales are made to customers in non-U.S. locations, and a majority of
the Company's products are manufactured by Matsushita-Kotobuki Electronics
Industries, Ltd. ("MKE") of Japan. However, the majority of the Company's
transactions are denominated in U.S. dollars. Accordingly, the application of
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Transactions," to the Company's historical financial statements has not resulted
in transaction or translation gains or losses which are material to the
Company's consolidated financial statements for any year presented. The effect
of foreign currency exchange rate fluctuations on cash flows was also not
material for any year presented.
Net income (loss) per share: Net income (loss) per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding. Net income per share computed on a fully diluted basis for fiscal
1995 assumes conversion of the Company's outstanding 6 3/8% convertible
subordinated debentures having a principal value of $212.5 million. For fiscal
1996 and 1994, the net income (loss) per share is the same for both primary and
fully diluted, as the convertible subordinated debt is anti-dilutive.
Cash equivalents and marketable securities: The Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are carried at fair value,
with material unrealized gains and losses reported in shareholder's equity. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income along with interest earned. Realized gains or losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
reported as investment income or investment expense. The cost of securities sold
is based on the specific identification method.
Concentration of credit risk: The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral from its
customers. The Company maintains reserves for potential credit losses and such
losses have historically been within management's expectations.
The Company invests its excess cash in deposits with major banks and in money
market and short-term debt securities of companies with strong credit ratings
from a variety of industries. These securities generally mature
29
within 365 days and, therefore, bear minimal risk. The Company has not
experienced any material losses on its investments. The Company, by Corporate
policy, limits the amount of credit exposure to any one issuer and to any one
type of investment.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment are stated at cost,
with plant and equipment depreciated using the straight-line method over the
estimated useful lives of the assets, which range from three to twenty-five
years. Amortization of leasehold improvements is computed over the useful life
of the improvements or the terms of their respective leases, whichever is
shorter. Land is not depreciated.
Long-lived assets: Effective April 1, 1995, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The cumulative effect of adopting SFAS 121 as of April 1, 1995,
and the impact on results of operations for the year ended March 31, 1996, were
immaterial.
Purchased intangibles: Intangible assets were acquired primarily as a result of
the Digital acquisition on October 3, 1994. Intangible assets include completed
technology, work force in place, a supply agreement and customer lists related
to the Digital acquisition. The assets are being amortized over their estimated
useful lives, which range from three to ten years. The accumulated amortization
at March 31, 1996, and March 31, 1995, was $39.8 million and $13.4 million,
respectively. Intangible assets are reviewed for impairment whenever events or
circumstances indicate an impairment might exist, or at least annually.
Warranty expense: The Company generally warrants its products against defect for
a period of one to five years. A provision for estimated future costs relating
to warranty expense is recorded when products are shipped.
Advertising expense: The Company accrues for cooperative advertising as the
related revenue is earned, and other advertising expense is recorded as
incurred. Advertising expense for the years ended March 31, 1996, 1995 and 1994,
was $25.1 million, $19.8 million and $9.3 million, respectively.
Stock-based compensation: SFAS No. 123, "Accounting for Stock-based
Compensation," was issued in October 1995. SFAS 123 allows the Company to
account for its stock-based employee compensation plans using either a fair
value based method or the intrinsic value based method currently followed by the
Company. Under the current method, SFAS 123 requires certain additional
disclosures regarding the impact which the fair value based method would have on
the results of the Company's operations. The Company expects to adopt SFAS 123
in fiscal 1997 through disclosure only and, therefore, the adoption is not
expected to have any material impact on the Company's results of operations.
Risks and uncertainties: The Company's business entails a number of risks. As is
typical in the disk drive industry, the Company's customer base is concentrated
with a small number of systems manufacturers and the Company is not able to
predict whether there will be any significant change in the demand for its
customers' products. Sales of a limited number of desktop and portable storage
products represent a significant majority of the Company's sales, and due to
rapid technological change in the industry, the Company's future depends on its
ability to develop and successfully introduce new products. Quantum utilizes a
third party, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), to
manufacture a substantial majority of the products it sells. The Company relies
on MKE's ability to bring new products rapidly to volume production and to meet
stringent quality standards. If MKE were unable to satisfy Quantum's production
requirements, the Company would not have an alternative source to meet the
demand for its products without substantial delay and disruption to its
operations. In addition, the actual results with regard to warranty expenditures
could have a material unfavorable impact on the Company if the actual rate of
unit failure or the cost to repair a unit is greater than what the Company has
used in estimating the warranty expense accrual.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
30
NOTE 2: FINANCIAL INSTRUMENTS
AVAILABLE-FOR-SALE SECURITIES
Cost (In thousands)
March 31,
-----------------------
1996 1995
-----------------------
Corporate commercial paper and bank notes $48,766 $ 31,270
Certificates of deposit - 85,000
U.S. Treasury securities and obligations of U.S. government agencies 2,499 9,995
Other 175 149
------- --------
$51,440 $126,414
=======- ========
The gross unrealized gains and gross unrealized losses at March 31, 1996, and
March 31, 1995, were immaterial to the Company and, therefore, no amounts were
recorded to shareholders' equity. There were no sales of available-for-sale
securities during fiscal 1996. Proceeds from sales of available-for-sale
securities during fiscal 1995 were $6.2 million and gross realized gains and
losses were immaterial. At March 31, 1996, the average available-for-sale
portfolio duration was approximately 15 days and the securities had maturities
of 90 days or less.
DERIVATIVE FINANCIAL INSTRUMENTS
During the period covered by the financial statements, the Company has not used
any derivative instrument for trading purposes.
The Company invests its excess cash in various interest bearing instruments and
also has various borrowings which bear interest. During the period covered by
the financial statements, the Company has not used derivative instruments to
manage interest rate fluctuations.
Although the majority of the Company's transactions are denominated in U.S.
dollars, its global operations have resulted in some foreign currency exchange
rate fluctuation exposure. The Company utilizes foreign currency forward
exchange contracts to minimize the effects of exchange rate fluctuations arising
from certain intercompany receivable/payable transactions. The gains and losses
from market rate changes on these contracts, which are intended to offset the
gains and losses on the underlying recorded receivables/payables, are recorded
currently in the statement of operations. During the period covered by the
financial statements, the Company has not utilized derivative instruments to
manage either foreign currency firm commitments or foreign currency anticipated
transactions.
At March 31, 1996, the Company held foreign currency forward contracts with
maturities between April 5, 1996, and May 31, 1996, to sell 3.7 billion yen for
$36.2 million. The fair value of the yen underlying these instruments at March
31, 1996, totaled $34.5 million. At March 31, 1995, the Company held foreign
currency forward contracts to sell 2.5 billion yen for $26.2 million. The fair
value of the yen underlying these instruments at March 31, 1995, totaled $28.9
million.
31
CARRYING AMOUNT AND FAIR VALUES OF FINANCIAL INSTRUMENTS
March 31,
------------------------------------------------
(In millions) 1996 1995
------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ --------
Cash and cash equivalents $164.8 $164.8 $187.8 $187.8
Foreign currency contracts gain (loss) $ 1.7 $ 1.7 $ (2.7) $ (2.7)
Borrowings:
Convertible subordinated debt $374.3 $387.7 $212.5 $207.2
Revolving credit line $210.0 $210.0 $ 40.0 $ 40.0
Term loan -- -- $125.0 $125.0
Equipment loan $ 18.0 $ 18.0 -- --
The fair values for cash equivalents and marketable securities represent the
quoted market prices at the balance sheet dates. The fair values for foreign
currency forward contracts represent the difference between the contracted
forward rate and the quoted fair value of the underlying yen at the balance
sheet dates. Fair values for the convertible subordinated debt are based on the
quoted market price at the balance sheet dates. Fair values for the revolving
credit agreement and term loan approximate their carrying amounts since interest
rates on these borrowings are adjusted periodically to reflect market interest
rates. The equipment loan was entered into shortly before March 31, 1996, at a
market interest rate.
NOTE 3: INVENTORIES
Inventories consisted of:
March 31,
---------------------------
(In thousands) 1996 1995
---------------------------
Materials and purchased parts $ 119,984 $ 116,732
Work in process 98,591 42,091
Finished goods 240,963 165,827
--------- ---------
$ 459,538 $ 324,650
========= =========
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
(In thousands) March 31,
-----------------------------
1996 1995
-----------------------------
Machinery and equipment $ 309,717 $ 241,926
Furniture and fixtures 55,505 43,347
Buildings and leasehold improvements 152,749 107,433
Land 7,474 7,224
--------- ---------
525,445 399,930
Less accumulated depreciation and amortization (161,334) (119,831)
--------- ---------
$ 364,111 $ 280,099
========= =========
32
NOTE 5: CREDIT AGREEMENTS
The Company has a one-year $85 million unsecured Letter of Credit facility with
certain banks to issue standby letters of credit to MKE and its affiliates,
which expires in September 1996. As of March 31, 1996, there was no outstanding
balance under this letter of credit facility.
NOTE 6: LONG-TERM DEBT
In October 1994, the Company entered into a three year $350 million senior
credit facility structured as a $225 million revolving credit line and a $125
million term loan. As subsequently amended, the revolving credit line has been
increased to $325 million and has been extended one year to expire in September
1998. The revolving credit is governed by a borrowing base of eligible accounts
receivable and inventory, and the term loan was to amortize in five equal
semiannual installments that commenced in October 1995. In February 1996, the
remaining outstanding balance on the term loan was paid in full with proceeds of
the issuance of the convertible subordinated notes discussed below. The
revolving borrowings, at the option of the Company, bear interest at either
LIBOR plus a margin or a base rate with option periods of one to six months. The
facility is secured by all the Company's domestic assets and 66% of the
Company's ownership of certain of its subsidiaries.
As of March 31, 1996, total borrowings under the revolving credit line were $210
million with a weighted average interest rate of approximately 7.5%. The maximum
amount outstanding during the year under the senior credit facility was $405
million and the average amount outstanding for the year was approximately $275
million. The total weighted average interest rates on the bank debt for the
years ended March 31, 1996 and 1995, were 8.3% and 8.0%, respectively. Financial
covenants related to the senior credit facility include but are not limited to
the following ratios: fixed charge coverage ratio, debt service coverage ratio
and quick ratio. The Company's debt agreement currently prohibits the Company
from paying dividends while the debt is outstanding. The Company was not in
compliance with three of the financial covenants in connection with its senior
credit facility as of March 31, 1996; however, the company has received a waiver
of this non-compliance for the period ended March 31, 1996. In addition, the
financial covenant requirements for future periods have been amended.
In March 1996, the Company entered into an $18 million term loan facility to
finance certain capital equipment. The facility amortizes over three years at a
fixed interest rate of 7.63% and payments are made on a quarterly basis. The
facility is secured by specified capital equipment.
In February 1996, the Company issued approximately $241 million of 5%
convertible subordinated notes (the "Notes") in a privately placed offering. The
Notes are due March 1, 2003, and are subordinated to all existing and future
senior indebtedness of the Company. Each Note is convertible at the option of
the holder into the Company's common stock at a conversion price of $22.32 per
share. The Notes are redeemable at the Company's option on or after March 3,
1998, and prior to March 3, 2000, under certain conditions related to the price
of the Company's common stock. Subsequent to March 3, 2000, the Notes are
redeemable at the Company's option at any time. Redemption prices range from
103.571% of the principal to 100% at maturity.
In April 1992, the Company issued $212.5 million of 6 3/8% convertible
subordinated debentures. Each debenture is convertible, at the option of the
holder, into the Company's common stock at a conversion price of $18.15 per
share. The debentures became redeemable at the Company's option on April 2,
1995, at prices ranging from 104.5% of the principal to 100% at maturity. The
debentures are due April 1, 2002, and are subordinated to all existing and
future senior indebtedness of the Company. During fiscal 1996, $79,567,000, or
approximately 37%, of the outstanding debentures were converted into the
Company's common stock. This conversion resulted in the issuance of 4,383,477
shares.
Payments required on long-term debt outstanding at March 31, 1996, are: $4.1
million in fiscal 1997, $5.9 million in fiscal 1998, $216.3 million in fiscal
1999 and $1.7 million in fiscal 2000.
33
NOTE 7: SHAREHOLDERS' EQUITY
1993 Long-Term Incentive Plan: The Company has a Long-Term Incentive Plan (the
"Plan") which provides for the issuance of stock options, stock appreciation
rights, stock purchase rights and long-term performance awards. The Plan has
available and reserved for issuance 4.8 million shares and allows for an annual
increase in the number of shares available for issuance, subject to a
limitation. Available for grant as of March 31, 1996, were 488,000 shares.
During fiscal 1996, the Company recorded compensation expense of $889,000
related to 298,000 shares of restricted stock granted pursuant to stock purchase
rights under the Plan. No grants of restricted stock were made under the Plan
prior to fiscal 1996. During fiscal 1996, additional compensation expense of
$370,000 was recorded in relation to accelerated stock options under the Plan.
A summary of transactions relating to the 1993 Long-Term Incentive Plan follows:
(In thousands) Year ended March 31,
--------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------
Options Price Options Price
------- ----- ------- -----
Outstanding beginning of
period 3,086 $ 9.875 - 15.50 1,012 $ 9.875 - 15.50
Granted 2,444 $ .01 - 22.875 2,294 $ 12.875 - 14.25
Canceled (475) $ 9.875 - 22.875 (158) $ 9.875 - 15.50
Exercised (722) $ .01 - 15.625 (62) $ 9.875 - 12.875
----- ------------------- ----- -----------------
Outstanding end of period 4,333 $ .01 - 22.875 3,086 $ 9.875 - 15.50
===== =====
Exercisable end of period 1,270 764
===== =====
Stock Option Plans: The Company has Stock Option Plans (the "Plans") under which
an aggregate of 4.1 million shares of common stock have been reserved for future
issuance. Options under the Plans are granted at prices determined by the Board
of Directors, but at not less than the fair market value, and expire ten years
from the date of grant; accordingly no compensation accounting has been required
at the original date of grant. Compensation expense of $155,000 was recorded in
fiscal 1996 on accelerated stock options under the Plans. Options generally vest
ratably over one to four years. At March 31, 1996, options with respect to
81,000 shares were available for grant.
A summary of transactions relating to the Plans' outstanding stock options
follows:
(In thousands) Year ended March 31,
-------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------
Options Price Options Price
------- ----- ------- -----
Outstanding beginning of
period 4,966 $ .82 - 16.00 5,914 $ .82 - 16.00
Granted 820 $16.875 - 24.50 38 $ 15.6875
Canceled (151) $ 8.50 - 17.50 (353) $ 8.50 - 12.50
Exercised (1,595) $ .82 - 16.00 (633) $ 2.00 - 13.75
----- ----------------- ----- -----------------
Outstanding end of period 4,040 $ 2.00 - 24.50 4,966 $ .82 - 16.00
===== =====
Exercisable end of period 2,837 2,934
===== =====
Stock Purchase Plan: The Company has an employee stock purchase plan (the
"Purchase Plan") under which 8.5 million shares of common stock have been
reserved for issuance. The Purchase Plan is qualified under Section 423 of the
Internal Revenue Code. The plan allows for the purchase of stock at 85% of the
fair market value at the date of grant or the exercise date, whichever is less.
During fiscal 1996, 1995 and 1994, 1,338,000, 869,000 and 735,000 shares,
respectively, were issued under this plan.
34
Shareholder Rights Plan: The Company has a shareholder rights plan (the "Rights
Plan") which provides existing shareholders with the right to purchase 1/100
preferred share for each common share held in the event of certain changes in
the Company's ownership. The Rights Plan may serve as a deterrent to takeover
tactics which are not in the best interests of shareholders.
NOTE 8: RESTRUCTURING AND OTHER EXPENSES
On January 30, 1996, the Company committed to transition manufacturing of its
high-capacity products to MKE. The Company's intention is to cease its
manufacturing of these products and complete the shut-down of the related
facilities by September 1996. The Company plans to continue manufacturing
certain of the high-capacity products until that time in order to utilize
components either on-hand or under firm committed orders. When the planned
production is completed, related manufacturing work forces will be reduced. The
Company intends to sell or dispose of certain facilities and equipment carried
at a fair value of approximately $30 million, net of estimated cost to dispose,
which are associated with the high-capacity manufacturing facilities located in
Penang, Malaysia and Milpitas, California. A buyer is being sought for the
manufacturing building in Malaysia; however, the Company cannot predict when a
sale might be completed. The fair value of the building was estimated based on a
market study.
In connection with the plan, the Company recorded a restructuring charge of $209
million, pre-tax, in the fourth quarter of fiscal 1996. Among other things, the
charge provides for costs associated with: employee termination benefits for
approximately 2,250 employees associated with the high-capacity product
manufacturing process; the difference between the carrying value and estimated
current fair value on disposal of high-capacity manufacturing property and
equipment; and incremental impairments in the carrying value of certain
high-capacity product inventories and losses on supplier commitments arising
directly from the decision to stop manufacturing, as follows:
(In millions)
Employee termination benefits $ 10
Write-down of capital assets to fair value 45
Write-down of inventories to net realizable value and
losses on supplier commitments 144
Other exit costs 10
----
$209
====
The restructuring accrual at March 31, 1996, is comprised of approximately $83
million related to product transition costs, such as excess purchase commitments
and costs to complete existing inventory in excess of recoverable value,
approximately $10 million related to employee termination benefits, and
approximately $10 million in other estimated exit costs. There were no
significant cash expenditures associated with the exit plan in fiscal 1996. It
is expected that approximately $97 million of cash expenditures related to the
restructuring will occur during the first half of fiscal 1997.
The actual results with regard to this restructuring charge could vary in the
event that demand for the current high-capacity products declines faster than
expected, resulting in additional excess inventory, or if greater than expected
costs are incurred in closing the Company's high-capacity manufacturing
operations. In addition, the transition of the high-capacity manufacturing
operations to MKE entails several risks. The high-capacity products are more
complex to manufacture than the desktop products and MKE has not previously
manufactured any significant amount of the high-capacity products. This
transition also requires the successful introduction of new products during
fiscal 1997 which are currently still in development.
35
During fiscal 1994, the Company recorded $22.8 million in restructuring and
other charges to operations. The charge was comprised of the following
components:
(In millions)
Write-off of Plus Development goodwill and certain
Plus Development inventory $ 7.7
Reduction in force 1.5
Accelerated product transitions 8.0
Consolidation of sales offices and other facilities 5.1
Other 0.5
-----
$22.8
=====
At March 31, 1994, all of the activities contemplated in the $22.8 million of
restructuring and other charges had been completed and no material amount of the
accrual remained.
NOTE 9: SAVINGS AND INVESTMENT PLAN
Substantially all of the regular domestic employees are eligible to make
contributions to the Company's 401(k) savings and investment plan. The Company
matches a percentage of the employee's contributions and may also make
additional discretionary contributions to the plan. Prior to October 1, 1994,
all of the Company's matching contributions were discretionary. Company
contributions were $4.0 million in fiscal 1996, $1.1 million in fiscal 1995, and
$.3 million in fiscal 1994.
NOTE 10: INCOME TAXES
The income tax provision computed under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," consists of the following:
(In thousands) Year ended March 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
Federal: Current $(31,160) $31,896 $(10,396)
Deferred (44,686) (751) 4,805
-------- ------- --------
(75,846) 31,145 (5,591)
-------- ------- --------
State: Current 9,691 19,386 3,965
Deferred (9,691) (5,571) (3,219)
-------- ------- --------
- 13,815 746
-------- ------- --------
Foreign: Current 24,926 23,528 1,244
Deferred 38 (4,774) 4,590
-------- ------- --------
24,964 18,754 5,834
-------- ------- --------
Income tax provision $(50,882) $ 63,714 $ 989
======== ======== =========
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of stock options and employee stock purchase plan shares reduce
taxes currently payable as shown above by $8.5 million, $1.6 million and $5.4
million in fiscal 1996, 1995 and 1994, respectively. Such benefits are credited
to capital in excess of par value when realized.
The Company's income tax provision differs from the amount computed by applying
the Federal statutory rates of 35% to income before income taxes as follows:
36
(In thousands) Year ended March 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Tax at federal statutory rate $(49,468) $50,857 $ 1,282
State income tax, net of federal benefit - 8,980 485
Amortization and write-off of goodwill - 68 2,386
Foreign earnings taxed at less than U.S. rates (3,545) (9,447) (3,007)
Federal valuation allowance (4,855) 13,286 -
Other 6,986 (30) (157)
-------- ------- --------
$(50,882) $63,714 $ 989
======== ======= ========
Effective tax rate 36% 44% 27%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities are as follows:
(In thousands) Year ended March 31,
--------------------------
1996 1995
--------------------------
Deferred tax assets
Inventory valuation methods $ 56,728 $ 30,009
Accrued warranty expense 8,768 10,514
Allowance for doubtful accounts 3,610 4,163
Distribution reserves 6,283 5,439
Restructuring reserve 35,776 --
Other accruals and reserves not currently deductible for tax purposes 11,470 5,868
Depreciation methods 21,819 5,750
Amortization methods 20,597 18,415
Federal and state valuation allowance (15,224) (16,347)
--------- ---------
149,827 63,811
Deferred tax liabilities
Tax on unremitted foreign earnings net of foreign tax credits and
foreign deferred taxes (36,619) (12,836)
Other (14,815) (6,921)
--------- ---------
(51,434) (19,757)
--------- ---------
Net deferred tax asset $ 98,393 $ 44,054
========= =========
For financial reporting purposes, the Company has provided a valuation allowance
for certain deferred tax assets that are expected to reverse over a 15 year
period. The Company believes that the valuation allowance is needed to reduce
the deferred tax asset to an amount that is more likely than not to be realized.
The valuation allowance increased (decreased) by $(1.1) million and $16.3
million for the years ended March 31, 1996 and 1995, respectively.
Pretax income from foreign operations was $124.3 million, $113.6 million and
$49.2 million for the years ended March 31, 1996, 1995 and 1994, respectively.
U.S. taxes have not been provided for unremitted foreign earnings of $156.9
million. The residual U.S. tax liability if such amounts were remitted would be
approximately $39 million.
37
NOTE 11: LITIGATION
On February 26, 1993, Quantum commenced a declaratory judgment lawsuit against
Rodime PLC of Glasgow, Scotland, in the U.S. District Court for the District of
Minnesota. Rodime counterclaimed by asserting that certain Quantum 3.5-inch hard
disk drive products infringed its U.S. Patent No. 4,638,383 and sought royalty
payments under that patent. The United States District Court entered a summary
judgment in Quantum's favor, ruling that claims of the Rodime patent were
invalid because of impermissible broadening in reexamination proceedings. This
summary judgement was affirmed on September 22, 1995, by the U.S. Court of
Appeals for the Federal Circuit. On April 29, 1996, the United States Supreme
Court declined to review this decision. This ruling, now final, is fully
dispositive of Quantum's dispute with Rodime.
The Company is also subject to other legal proceedings and claims which 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.
NOTE 12: COMMITMENTS
The Company leases its present facilities under non-cancelable operating lease
agreements for periods of up to fifteen years. Some of the leases have renewal
options ranging from one to ten years and contain provisions for maintenance,
taxes or insurance.
Rent expense was $29.7 million, $18.8 million and $12.1 million for the years
ended March 31, 1996, 1995 and 1994, respectively.
Future minimum lease payments under operating leases are as follows:
(In thousands)
Year ended March 31,
1997 $ 19,914
1998 17,994
1999 17,085
2000 14,540
2001 12,627
Thereafter 64,256
--------
Total future minimum lease payments $146,416
========
The amounts above include $11.4 million for payments due on a lease in
Louisville, Colorado which were provided for in the Digital exit accrual (see
Note 14). In addition, the Company has committed to purchase for $15 million a
building currently under construction in Louisville. The Company expects to
occupy the building in August 1996.
NOTE 13: BUSINESS SEGMENT AND FOREIGN OPERATIONS
The Company is engaged in a single business segment consisting of the design,
manufacture and marketing of information storage products, including
high-performance, high-quality 3.5-inch hard disk drives; economical,
high-capacity 5.25-inch hard disk drives; high-capacity, high-performance
DLT(TM) tape drive products; and solid state disk drives. The Company also
manufactures recording heads for use in its products.
A significant percentage of the Company's sales are made to customers in
non-U.S. locations and a majority of the Company's products are manufactured by
MKE in Japan, Singapore and Ireland. Quantum also operates a repair facility in
Malaysia, a repair and distribution center in Ireland, and manufacturing plants
in Malaysia and Indonesia.
38
As a result, the Company is subject to risks associated with foreign operations,
such as obtaining governmental permits and approvals, currency exchange
fluctuations, currency restrictions, political instability, labor problems,
trade restrictions and changes in tariff and freight rates.
During fiscal 1994, the Company began operations in its European headquarters.
Prior to fiscal 1994, export sales from domestic operations accounted for a
significant portion of the Company's sales. Export sales for fiscal 1996 and
1995 were less than 10% of consolidated sales. Following is a table that
summarizes U.S. export sales to certain geographic areas for the year ended
March 31, 1994:
(In thousands)
Europe $140,000
Asia-Pacific 59,000
Other 21,000
--------
$220,000
========
Information on operations by geographic area is presented in the tables below.
Transfers between geographic areas are accounted for at amounts which are
generally above cost and are eliminated in the consolidated financial
statements. Identifiable assets are those assets that can be directly associated
with a particular geographic location. Operating income (loss) by geographic
area does not include an allocation of general corporate expenses.
FISCAL 1996
Geographic Area
-------------------------------------
Rest of
(In millions) U.S. Europe World Corp. Eliminations Total
-------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $ 2,141 $ 2,121 $ 161 - - $ 4,423
Transfers between geographic
locations 461 66 - - $ (527) -
------- ------- ------- ------- ------- ------
Total net sales $ 2,602 $ 2,187 $ 161 - $ (527) $ 4,423
Operating income (loss) $ (167) $ 337 $ (117) $ (166) - $ (113)
Identifiable assets $ 1,163 $ 578 $ 189 $ 45 - $ 1,975
FISCAL 1995
Geographic Area
-------------------------------------
Rest of
(In millions) U.S. Europe World Corp. Eliminations Total
-------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,596 $1,663 $ 109 - - $3,368
Transfers between geographic
locations 312 75 - - $ (387) -
------ ------ ------ ------ -------- ------
Total net sales $1,908 $1,738 $ 109 - $ (387) $3,368
Operating income (loss) $ 56 $ 294 $ (3) $ (186) - $ 161
Identifiable assets $ 917 $ 429 $ 100 $ 35 - $1,481
39
FISCAL 1994
Geographic Area
-------------------------------------
Rest of
(In millions) U.S. Europe World Corp. Eliminations Total
-------------------------------------------------------------------------------------
Revenue from unaffiliated
customers $1,218 $ 837 $ 76 - - $2,131
Transfers between geographic
locations 261 77 - - $(338) -
------ ------ ----- ----- ------ ------
Total net sales $1,479 $ 914 $ 76 - $(338) $2,131
Operating income (loss) $ 4 $ 120 $ (4) $(110) - $ 10
Identifiable assets $ 666 $ 252 $ 53 $ 26 - $ 997
One major customer accounted for 12%, 16%, and 10% of consolidated sales in
1996, 1995 and 1994, respectively. In addition, another customer accounted for
11%, 12% and 22% of consolidated sales in 1996, 1995 and 1994, respectively.
NOTE 14: ACQUISITION OF BUSINESSES FROM DIGITAL EQUIPMENT CORPORATION
On October 3, 1994, Quantum Corporation ("Quantum" or "the Company") acquired
the Hard Disk Drive, Heads and Tape Drives Businesses of the Storage Business
Unit of Digital Equipment Corporation ("the Acquired Businesses"), in a
transaction accounted for as a purchase. The operating results of the Acquired
Businesses have been included in the consolidated statement of operations from
the date of acquisition.
The purchase price was finalized during the second quarter of fiscal 1996,
resulting in a $5.7 million reduction to the original contracted purchase price
of $355.2 million. The original price included direct costs of $4.7 million
incurred for investment banker and professional fees and other direct
incremental transaction costs. The purchase price reduction is reflected as a
$4.6 million reduction in inventories and a $1.1 million reduction in property
and equipment.
Recap of finalized purchase price allocation (in millions)
Inventories $142.1
Property and equipment 103.2
Intangible assets 106.1
Accrual for exit costs (34.9)
Other assets/liabilities, net (34.2)
Purchased research and development 67.2
------
$349.5
======
Intangible assets include $79.5 million of completed technology and an aggregate
of $26.6 million for work force in place, a supply agreement and customer lists.
Completed technology and work force in place were assigned four year lives,
while the customer base was assigned a ten year life. The supply agreement was
assigned a life equal to the terms of the contractual agreement. Intangible
asset amortization totaled $26.5 million and $13.4 million in fiscal 1996 and
1995, respectively.
The accrual for exit costs included only those direct costs related to exiting
facilities and operations in Colorado acquired from Digital and did not include
any costs related to modifications of the previous Quantum business. The
components of the exit activities were as follows:
40
(In millions)
Non-cancelable lease commitments after closure
and costs to "make new" as required by the lease $11.4
Reduction in force 7.7
Retention bonuses 4.5
Write-off of capital assets resulting from closures 9.3
Other 2.0
-----
$34.9
=====
Except for approximately $12 million to exit the QPC lease arrangement assumed
in the Acquisition and termination benefits related to a small remaining work
force, the activities contemplated in the $34.9 million accrual for exit costs
have been completed at March 31, 1996, without a material change in the
estimated cost of such activities. During fiscal 1996, cash outlays related to
exit activity were $15.6 million. The future cash outlays related to the exit
accrual are estimated to be approximately $12 million and are expected to be
incurred in calendar 1996.
The $67.2 million allocated to purchased research and development was expensed
in fiscal 1995 as required under generally accepted accounting principles.
The unaudited pro forma combined condensed results of operations of the Company
for the twelve months ended March 31, 1995, and March 31, 1994, had the
Acquisition occurred at the beginning of the period and which eliminate the
non-recurring charges, are as follows:
(In thousands except per share data) Twelve Months Ended
---------------------------------------
March 31, 1995 March 31, 1994
Pro Forma Pro Forma
---------------------------------------
Net sales $ 3,790,769 $ 2,956,307
Net income (loss) $ 75,877 $ (40,696)
Net income (loss) per share:
Primary $ 1.60 $ (0.94)
Fully diluted $ 1.29 $ (0.94)
The unaudited pro forma results for the twelve months ended March 31, 1995, and
March 31, 1994, exclude the effects of the charge for purchased research and
development and other in merger costs of $73 million, as such amounts are
non-recurring. The pro forma results for the twelve months ended March 31, 1995,
and March 31, 1994, reflect intangible asset amortization, depreciation of
acquired fixed assets, amortization of loan fees and interest expense on the new
debt related to the Acquisition.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred had the transaction been completed at the beginning of the period
indicated, nor is it necessarily indicative of future operating results.
41
NOTE 15: UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
Fiscal 1996
-----------------------------------------------------------------------
(In thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter(i)
-----------------------------------------------------------------------
Sales $ 941,316 $ 1,033,048 $ 1,215,872 $ 1,232,491
Gross margin $ 124,489 $ 142,426 $ 113,955 $ 161,548
Net income (loss) $ 12,942 $ 22,025 $ (2,481) $ (122,942)
Net income (loss) per share
Primary $ 0.25 $ 0.39 $ (0.05) $ (2.28)
Fully diluted $ 0.24 $ 0.37 $ (0.05) $ (2.28)
Fiscal 1995(ii)
-------------------------------------------------------------------
(In thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------------------
Sales $ 725,304 $ 726,169 $ 932,702 $ 983,809
Gross margin $ 146,077 $ 132,730 $ 135,255 $ 149,651
Net income (loss) $ 58,241 $ 48,603 $ (48,310) $ 23,057
Net income (loss) per share
Primary $ 1.24 $ 1.03 $ (1.06) $ .48
Fully diluted $ 1.03 $ .85 $ (1.06) $ .42
(i) The results of operations for the fourth quarter of fiscal 1996 include
the effect of a $209 million charge related to the transition of
manufacturing for the Company's high-capacity products to MKE. See Note
8.
(ii) On October 3, 1994, Quantum acquired portions of Digital Equipment's
business. The acquisition is not reflected in the financial statements
prior to the third quarter of fiscal 1995, and thus the results for the
first and second quarters of fiscal 1995 are not comparable to the
later results. See Note 14.
42
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to Part I,
Item 1 of this document and to the Company's Proxy Statement.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and 13 of
this Form 10-K Annual Report, the Company's definitive Proxy Statement for its
1996 Annual Meeting of Shareholders is not deemed "filed" as part of this Form
10-K Annual Report.
43
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES - See Index
to Consolidated Financial Statements at Item 8 on page 23 of this
report.
2. EXHIBITS
Exhibit
Number
-------
2.1(a) (1) Stock and Asset Purchase Agreement by and among Quantum
Corporation, Quantum Peripherals (Europe) S.A. and Digital
Equipment Corporation, dated as of July 18, 1994
2.1(b) (1) Amendment No. 1 dated as of October 3, 1994, to the Stock and
Asset Purchase Agreement by and among Quantum Corporation,
Quantum Peripherals (Europe) S.A. and Digital Equipment
Corporation, dated as of July 18, 1994
2.1(c) (1) Supplemental agreement to the Stock and Asset Purchase
Agreement by and among Quantum Corporation, Quantum
Peripherals (Europe) S.A. and Digital Equipment Corporation,
dated as of July 18, 1994
2.2 (1) RMMI Stock Purchase Agreement, dated as of July 18, 1994,
among Quantum Corporation, Digital Equipment Corporation and
Rocky Mountain Magnetics, Inc
3.1(a) (2) Certificate of Incorporation of Registrant
3.1(b) (3) Certificate of Amendment of Certificate of Incorporation of
Registrant
3.2 (3) By-laws of Registrant, as amended
4.1 (4) Indenture between Registrant and LaSalle National Bank,
Trustee, covering $212.5 million of 6 3/8% Convertible
Subordinated Debentures due 2002 (including form of Debenture)
4.2 (5) Shareholder Rights Plan
10.7 (2) Registrant's 1984 Incentive Stock Option Plan and Agreement
10.8 (6) Registrant's 1986 Stock Option Plan and Agreement, as amended
10.9 (7) Registrant's Employee Stock Purchase Plan and form of
Subscription Agreement, as amended
44
10.10 (8) Form of Indemnification Agreement between Registrant and
Certain Officers and Directors
10.11 (9) Agreement between Registrant and MKE
10.12 (10) (11) Purchase Agreement between Registrant and MKE
10.13 (12) Lease (dated October 13, 1989) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.14 (13) Lease (dated September 17, 1990) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.15 (3) Lease (dated April 10, 1992) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.17 (14) Form of Statement of Employment Terms executed by Stephen M.
Berkley, David A. Brown and William J. Miller, directors of
Registrant, and Joseph T. Rodgers, William F. Roach and
Michael A. Brown, executive officers of Registrant
10.18 (9) Lease (dated November 13, 1992) and First Amendment to Lease
(dated November 17, 1992) between Registrant and Milpitas
Realty Delaware, Inc.
10.20 (15) Third Amendment to the Purchase Agreement between Registrant
and MKE dated December 31, 1992
10.21 (16) 1993 Long-Term Incentive Plan
10.23 (17) Second Amendment (dated April 15, 1993) to Lease (dated
November 13, 1992) between Registrant and Milpitas Realty
Delaware, Inc.
10.24 (17) Lease (dated April 14, 1993) between Registrant and Milpitas
Realty Delaware, Inc.
10.25 (1) Patent Assignment and License Agreement, dated as of October
3, 1994, by and between Digital Equipment Corporation and
Quantum Corporation
10.27 (10)(18) Supply Agreement between Digital Equipment Corporation (Buyer)
and Quantum Corporation (Seller) for Storage Devices, as dated
as of October 3, 1994
10.28 (18) Credit Agreement among Quantum Corporation and The Banks named
herein and ABN AMRO BANK N.V., San Francisco International
Branch, BARCLAYS BANK PLC and CIBC INC. as Managing Agents for
the Banks, and CANADIAN IMPERIAL BANK OF COMMERCE as
Administrative Agent and Collateral Agent for the Banks dated
as of October 3, 1994
10.29 (19) First Amendment dated February 15, 1995, to Credit Agreement
(dated October 3, 1994), among Quantum Corporation and The
Banks named herein and ABN AMRO BANK N.V., San Francisco
International
45
Branch, BARCLAYS BANK PLC and CIBC INC. as Managing Agents for
the Banks, and CANADIAN IMPERIAL BANK OF COMMERCE as
Administrative Agent and Collateral Agent for the Banks
10.30 (20) Second Amendment dated June 26, 1995 to Credit Agreement
(dated October 3, 1994), among Quantum Corporation and The
Banks named herein and ABN AMRO BANK N.V., San Francisco
International Branch, BARCLAYS BANK PLC and CIBC INC. as
Managing Agents for the Banks, and CANADIAN IMPERIAL BANK OF
COMMERCE as Administrative Agent and Collateral Agent for the
Banks
10.31(21) Third Amendment, dated September 29, 1995, to Credit Agreement
(dated October 3, 1994) among Quantum Corporation and The
Banks named herein and ABN AMRO BANK N.V., San Francisco
International Branch, BARCLAYS BANK PLC and CIBC INC. as
Managing Agents for the Banks, and CANADIAN IMPERIAL BANK OF
COMMERCE as Administrative Agent and Collateral Agent for the
Banks.
10.32 (21) Credit Agreement dated September 22, 1995, among Quantum
Corporation and the Banks named therein and THE SUMITOMO BANK,
LIMITED, acting through its San Francisco branch, as Agent for
the Banks and as Issuer
10.33 (21) Lease Agreement, dated August 31, 1995, between CRAY COMPUTER
CORPORATION, as Landlord, and QUANTUM CORPORATION, as Tenant
10.34 (22) Lease Agreement, dated August 22, 1995, between QD INVESTORS,
as Landlord, and QUANTUM CORPORATION, as Tenant
10.35 Fourth Amendment, dated January 29, 1996, to Credit Agreement
(dated October 3, 1994) among Quantum Corporation and The
Banks named herein and ABN AMRO BANK N.V., San Francisco
International Branch, BARCLAYS BANK PLC and CIBC INC. as
Managing Agents for the Banks, and CANADIAN IMPERIAL BANK OF
COMMERCE as Administrative Agent and Collateral Agent for the
Banks
10.36 Indenture dated as of February 15, 1996, between Quantum
Corporation and LaSalle National Bank, as trustee, covering 5%
Convertible Subordinated Notes due 2003.
10.37 Fifth Amendment, dated May 29, 1996, to Credit Agreement
(dated October 3, 1994) among Quantum Corporation and The
Banks named herein and ABN AMRO BANK N.V., San Francisco
International Branch, BARCLAYS BANK PLC and CIBC INC. as
Managing Agents for the Banks, and CANADIAN IMPERIAL BANK OF
COMMERCE as Administrative Agent and Collateral Agent for the
Banks
10.38 Consulting and Release Agreement dated as of November 1, 1995,
between William J. Miller and Quantum Corporation
11 Statement of Computation of Earnings Per Share
46
12 Statement of Computation of Ratios of Earnings to Fixed
Charges
21 Subsidiaries of Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney. See page 49.
27 Financial Data Schedule
- ------------------------------
(1) Incorporated by reference from Form 8-K filed with the
Securities and Exchange Commission on October 17, 1994.
(2) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1987.
(3) Incorporated by reference from exhibits filed with
Registrant's Annual Report on Form 10-K for fiscal year ended
March 31, 1992.
(4) Incorporated by reference from Registration Statement No.
33-46387 on Form S-3.
(5) Incorporated by reference from Form 8-A filed with the
Securities and Exchange Commission on August 5, 1988.
(6) Incorporated by reference from exhibits filed with
Registrant's Form S-8, No. 33-52190 filed with the Securities
and Exchange Commission on September 21, 1992.
(7) Incorporated by reference from exhibits filed with
Registrant's Form S-8, No. 33-52192 filed with the Securities
and Exchange Commission on September 21, 1992.
(8) Incorporated by reference to the Registrant's Definitive
Special Meeting Proxy Statement filed with the Securities and
Exchange Commission on March 24, 1987.
(9) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
27, 1989, filed with the Securities and Exchange Commission on
February 10, 1993.
(10) Confidential Treatment Requested. Granted by the Securities
and Exchange Commission.
(11) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1988.
(12) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
31, 1989, filed with the Securities and Exchange Commission on
February 14, 1990.
(13) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
30, 1990, filed with the Securities and Exchange Commission on
February 13, 1991.
(14) Incorporated by reference to the Registrant's Amendment No. 1
to Form 10-Q for the quarter ended June 30, 1991.
47
(15) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1993.
(16) Incorporated by reference from Registration Statement No.
33-72222 on Form S-8 filed with the Securities and Exchange
Commission on November 30, 1993.
(17) Incorporated by reference from exhibits filed with
Registrant's Annual Report on Form 10-K for fiscal year ended
March 31, 1994.
(18) Incorporated by reference from Form 8-K/A-1 filed with the
Securities and Exchange Commission on January 31, 1995.
(19) Incorporated by reference from exhibits filed with
Registrant's Annual Report on Form 10-K for fiscal year ended
March 31, 1995.
(20) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended July 2,
1995, filed with the Securities and Exchange Commission on
August 17, 1995.
(21) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended October
1, 1995, filed with the Securities and Exchange Commission on
November 20, 1995.
(22) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
31, 1995, filed with the Securities and Exchange Commission on
February 5, 1996.
(b) Reports on Form 8-K
(1) Form 8-K dated February 5, 1996, filed on February 8, 1996.
(2) Form 8-K dated February 15, 1996, filed on March 22, 1996.
(3) Form 8-K dated May 7, 1996, filed on May 8, 1996.
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedules
See Item 14(a) above.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANTUM CORPORATION
Dated: June 21, 1996 \s\ JOSEPH T. RODGERS
-----------------------
Joseph T. Rodgers
Executive Vice President, Finance
Chief Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints G. Edward McClammy and Andrew Kryder, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on June 21,
1996.
Signature Title
- ------------------------------------------------------------
\s\ MICHAEL A. BROWN President, Chief Executive Officer and
- ------------------------------------- Director (Principal Executive Officer)
(Michael A. Brown)
\s\ JOSEPH T. RODGERS Executive Vice President, Finance, Chief
- ------------------------------------- Financial Officer and Secretary (Principal
(Joseph T. Rodgers) Financial and Accounting Officer)
\s\ STEPHEN M. BERKLEY Chairman of the Board
- -------------------------------------
(Stephen M. Berkley)
\s\ DAVID A. BROWN Director
- -------------------------------------
(David A. Brown)
\s\ ROBERT J. CASALE Director
- -------------------------------------
(Robert J. Casale)
\s\ EDWARD M. ESBER, JR. Director
- -------------------------------------
(Edward M. Esber, Jr.)
\s\ STEVEN C. WHEELWRIGHT Director
- -------------------------------------
(Steven C. Wheelwright)
49
QUANTUM CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at (reductions) Balance at
Classification beginning of charged to end of
(In thousands) period expense Deductions(i) period
------------------------------------------------------------------------------
Allowance for doubtful
accounts year ended:
March 31, 1996 $ 11,962 $ (813) $ (652) $ 10,497
March 31, 1995 $ 9,391 $ 4,142 $ (1,571) $ 11,962
March 31, 1994 $ 8,118 $ 6,296 $ (5,023) $ 9,391
Accrued restructuring and exit costs
year ended: (ii)
March 31, 1996 $ 32,213 $ 116,187 $ (32,863) $ 115,537
March 31, 1995 $ 34,937 - $ (2,724) $ 32,213
(i) For the allowance for doubtful accounts, deductions represent
write-offs, and for the accrued restructuring and exit costs,
deductions represent usage of the accrual.
(ii) Established October 3, 1994, when recording the Digital acquisition.
Additions in fiscal 1996 were related to the restructuring charge
resulting from the transition of the high-capacity product
manufacturing to MKE.
50