UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
____________________
Commission File Number 0-12390
QUANTUM CORPORATION
Incorporated Pursuant to the Laws of the State of Delaware
____________________
IRS Employer Identification Number 94-2665054
500 McCarthy Blvd., Milpitas, California 95035
(408) 894-4000
____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
-----
As of the close of business on January 31, 2001, Quantum Corporation had
151,177,142 shares of DLT & Storage Systems group common stock outstanding and
79,066,790 shares of Hard Disk Drive group common stock outstanding.
QUANTUM CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Quantum Corporation - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Quantitative and Qualitative Disclosures About Market Risk 23
Quantum Corporation DLT & Storage Systems Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Income 24
Condensed Combined Balance Sheets 25
Condensed Combined Statements of Cash Flows 26
Notes to Condensed Combined Financial Statements 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations 32
Quantitative and Qualitative Disclosures About Market Risk 44
Quantum Corporation Hard Disk Drive Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 45
Condensed Combined Balance Sheets 46
Condensed Combined Statements of Cash Flows 47
Notes to Condensed Combined Financial Statements 48
Management's Discussion and Analysis of Financial Condition
and Results of Operations 53
Quantitative and Qualitative Disclosure About Market Risk 64
PART II - OTHER INFORMATION 65
SIGNATURE 66
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenue $1,077,548 $1,253,555 $3,483,612 $3,461,914
Cost of revenue - on net sales 810,170 985,132 2,710,706 2,821,167
Cost of revenue - special charge (benefit) - - (15,825) 57,068
---------- ---------- ---------- ----------
Gross profit 267,378 268,423 788,731 583,679
Operating expenses:
Research and development 97,890 86,334 283,780 269,220
Sales and marketing 65,407 56,050 193,107 164,730
General and administrative 32,630 35,553 102,673 95,267
Purchased in-process research
and development - - - 37,000
Special charge (benefit) - - (90) 2,338
Merger costs 6,359 - 6,359 -
---------- ---------- ---------- ----------
202,286 177,937 585,829 568,555
Income from operations 65,092 90,486 202,902 15,124
Other income (expense):
Interest income and other, net 11,358 9,952 36,572 29,509
Interest expense (7,040) (7,074) (20,728) (21,500)
---------- ---------- ---------- ----------
4,318 2,878 15,844 8,009
Income before income taxes 69,410 93,364 218,746 23,133
Income tax provision 25,175 37,468 78,477 21,609
---------- ---------- ---------- ----------
Net income $ 44,235 $ 55,896 $ 140,269 $ 1,524
========== ========== ========== ==========
Quantum common stock (1):
Net loss $ (17,193)
Net loss per share: ==========
Basic
Diluted $ (0.10)
$ (0.10)
Weighted average common shares:
Basic 165,788
Diluted 165,788
DLT & Storage Systems group (1):
Net income $ 47,519 $ 50,790 $ 135,754 $ 63,287
========== ========== ========== ==========
Net income per share:
Basic $ 0.32 $ 0.31 $ 0.92 $ 0.58
Diluted $ 0.30 $ 0.30 $ 0.87 $ 0.56
Weighted average common shares:
Basic 146,372 163,072 148,307 109,483
Diluted 156,229 168,082 155,886 113,721
3
Hard Disk Drive group (1):
Net income (loss) $ (3,284) $ 5,150 $ 4,515 $ (44,500)
=========== =========== =========== ===========
Net income (loss) per share:
Basic $ (0.04) $ 0.06 $ 0.06 $ (0.81)
Diluted $ (0.04) $ 0.06 $ 0.05 $ (0.81)
Weighted average common shares:
Basic 76,281 82,915 78,354 55,266
Diluted 76,281 86,004 84,553 55,266
(1) As discussed in Note 2 of the Notes to Condensed Consolidated Financial
Statements, a recapitalization occurred on August 3, 1999. As a result,
earnings per share for Quantum Corporation common stock reflect earnings
through the recapitalization date, while earnings for DLT & Storage Systems
group common stock and Hard Disk Drive group common stock reflect results
subsequent to that date.
See accompanying notes to condensed consolidated financial statements.
4
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
2000 2000
----------- ----------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 802,243 $ 918,262
Marketable securities 5,763 32,080
Accounts receivable, net of allowance for
doubtful accounts of $19,634 and $23,110 576,390 609,225
Inventories 266,689 223,825
Deferred taxes 143,544 133,382
Other current assets 105,512 96,780
---------- ----------
Total current assets 1,900,141 2,013,554
Property and equipment, net of accumulated
depreciation of $340,031 and $299,671 232,947 236,685
Intangible assets, net 234,252 250,203
Other assets 62,070 33,510
---------- ----------
$2,429,410 $2,533,952
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 371,110 $ 470,210
Accrued warranty 101,762 99,560
Accrued compensation 89,560 90,452
Accrued special charges 17,354 44,284
Income taxes payable 66,803 43,363
Current portion of long-term debt 1,202 1,033
Other accrued liabilities 152,400 105,345
---------- ----------
Total current liabilities 800,191 854,247
Deferred taxes 74,137 55,336
Long-term debt 36,926 37,838
Convertible subordinated debt 287,500 287,500
Stockholders' equity:
Common stocks 739,773 737,020
Retained earnings 586,816 545,050
Accumulated other comprehensive income (loss) (1,379) 16,961
Treasury stock, at cost (94,554) -
---------- ----------
Total stockholders' equity 1,230,656 1,299,031
---------- ----------
$2,429,410 $2,533,952
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
December 31, December 26,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 140,269 $ 1,524
Adjustments to reconcile net income to net cash
provided by operations:
Special charge (5,844) 33,779
Purchased in-process research and development - 37,000
Depreciation 66,688 73,651
Amortization 23,359 23,268
Deferred income taxes (1,222) 391
Compensation related to stock plans 14,281 2,356
Changes in assets and liabilities:
Accounts receivable 32,736 10,367
Inventories (42,390) 77,909
Accounts payable (99,100) (22,215)
Income taxes payable 22,519 (3,014)
Accrued warranty 2,202 23,604
Other assets and liabilities (7,227) 6,786
--------- ---------
Net cash provided by operating activities 146,271 265,406
--------- ---------
Cash flows from investing activities:
Investment in equity securities (28,353) -
Purchases of marketable securities - (37,890)
Maturities of marketable securities 2,032 55,831
Acquisition of intangible assets - (2,500)
Investment in property and equipment (60,641) (66,155)
--------- ---------
Net cash used in investing activities (86,962) (50,714)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities - 10,000
Principal payments on long-term credit facilities (743) (28,759)
Purchases of treasury stock (240,848) (265,877)
Proceeds from factoring 100,000
Payments on factoring (70,000)
Proceeds from issuance of common stock, net 36,263 31,751
--------- ---------
Net cash used in financing activities (175,328) (252,885)
--------- ---------
Decrease in cash and cash equivalents (116,019) (38,193)
Cash and cash equivalents at beginning of period 918,262 772,368
--------- ---------
Cash and cash equivalents at end of period $ 802,243 $ 734,175
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 14,332 $ 14,535
Income taxes, net of (refunds) $ 14,054 $ 27,145
Tangible and intangible assets acquired for shares of DSS
and HDD common stock, net of cash acquired and liabilities
assumed - $ 104,698
See accompanying notes to condensed consolidated financial statements.
6
QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Quantum Corporation ("Quantum" or the "Company") and its
majority owned subsidiaries. All material intercompany balances and transactions
have been eliminated. The interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the results for the periods
shown. The results of operations for such periods are not necessarily indicative
of the results expected for the full fiscal year. The condensed consolidated
balance sheet as of March 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements should be read in
conjunction with the audited financial statements of Quantum Corporation for the
fiscal year ended March 31, 2000 included in its Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
2. Recapitalization
On July 23, 1999, the Company's stockholders approved a tracking stock proposal.
As a result, Quantum's Certificate of Incorporation was amended and restated,
effective as of the close of business on August 3, 1999, designating two new
classes of Quantum Corporation common stock, DLT & Storage Systems group ("DSS")
common stock, $.01 par value per share and Hard Disk Drive group ("HDD") common
stock, $.01 par value per share. On August 3, 1999, each authorized share of
Quantum common stock, $.01 par value per share, was exchanged for one share of
DSS stock and one-half share of HDD stock. These two securities are intended to
track separately the performance of the DLT & Storage Systems group and the Hard
Disk Drive group.
3. Securitized Assets
HDD has an asset securitization program with Capital Factors Inc., under which
the Company borrows against eligible accounts receivable, on a with recourse
basis. At December 31, 2000, $37.5 million of accounts receivable were
securitized under this program. Given the recourse nature of this arrangement,
the securitized accounts receivable are included within the accounts receivable
balance, with a loan of $30 million being included in other liabilities.
4. Inventories
Inventories consisted of the following:
(In thousands)
December 31, March 31,
2000 2000
------------ --------
Materials and purchased parts $ 71,298 $ 49,206
Work in process 26,964 42,323
Finished goods 168,427 132,296
-------- --------
$266,689 $223,825
======== ========
7
5. Net Income (Loss) Per Share
DSS stock and HDD stock were created as a result of the recapitalization on
August 3, 1999. Subsequent to this date, net income (loss) per share was
computed individually for DSS and HDD. Prior to that date net income (loss) per
share was calculated on a consolidated basis.
The following tables set forth the computation of basic and diluted net income
(loss) per share:
(In thousands, except per share
data) Three Months Ended Three Months Ended
December 31, 2000 December 26, 1999
--------------------- ----------------------
DSSG HDDG DSSG HDDG
--------- -------- --------- --------
Numerator:
Numerator for basic and
diluted net income (loss) per
share - income (loss)
available to common
stockholders $47,519 $(3,284) $ 50,790 $ 5,150
======= ======= ======== =======
Denominator:
Denominator for basic net
income (loss) per share -
weighted average shares 146,372 76,281 163,072 82,915
Effect of dilutive securities:
Outstanding options 9,857 - 5,010 3,089
------- ------- -------- -------
Denominator for diluted net
income (loss) per share -
adjusted weighted average
shares 156,229 76,281 168,082 86,004
======= ======= ======== =======
Basic net income (loss) per
share $ 0.32 $ (0.04) $ 0.31 $ 0.06
======= ======= ======== =======
Diluted net income (loss) per
share $ 0.30 $ (0.04) $ 0.30 $ 0.06
======= ======= ======== =======
8
(In thousands, except per share
data) Nine Months Ended Period from Period from
December 31, 2000 August 4, 1999 to April 1,
December 26, 1999 1999 to
August 3,
1999
--------------------- ------------------------- ----------------
DSSG HDDG DSSG HDDG Quantum
Corporation
--------- -------- ---------- --------- ----------------
Numerator:
Numerator for basic and
diluted net income (loss) per
share - income (loss)
available to common
stockholders $135,754 $4,515 $ 63,287 $ (44,500) $ (17,193)
======== ====== ======== ========= =========
Denominator:
Denominator for basic net
income (loss) per share -
weighted average shares 148,307 78,354 109,483 55,266 165,788
Effect of dilutive securities:
Outstanding options 7,579 6,199 4,238 - -
-------- ------ -------- --------- ---------
Denominator for diluted net
income (loss) per share -
adjusted weighted average
shares 155,886 84,553 113,721 55,266 165,788
======== ====== ======== ========= =========
Basic net income (loss) per
share $ 0.92 $ 0.06 $ 0.58 $ (0.81) $ (0.10)
======== ====== ======== ========= =========
Diluted net income (loss) per
share $ 0.87 $ 0.05 $ 0.56 $ (0.81) $ (0.10)
======== ====== ======== ========= =========
The computation of diluted net income (loss) per share for DSS, HDD and Quantum
for all periods presented, excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 6,206,152
shares of DSS common stock, or 21.587 shares per $1,000 note, and 3,103,076
shares of HDD common stock, or 10.793 shares per $1,000 note, because the effect
would have been antidilutive.
Options to purchase 17,432,245 shares of HDD common stock were outstanding at
December 31, 2000. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
HDD for the three and nine month periods ended December 31, 2000, because the
effect would have been antidilutive.
Options to purchase 26,411,958 shares of Quantum common stock were outstanding
at August 3, 1999. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
Quantum for the period April 1, 1999 through August 3, 1999, because the effect
would have been antidilutive.
Options to purchase 13,411,973 shares of DSS common stock were outstanding for
the three and nine months ended December 31, 2000, but were not included in the
computation of diluted net
9
income per share because the options' exercise price was greater than the
average market price of the common stock and, therefore, the effect would have
been antidilutive.
Options to purchase 4,718,007 shares of HDD common stock were outstanding for
the nine months ended December 31, 2000, but were not included in the
computation of diluted net income per share because the options' exercise price
was greater than the average market price of the common stock and, therefore,
the effect would have been antidilutive.
6. Common Stock Repurchase
During fiscal year 2000, the Board of Directors authorized the Company to
repurchase up to $700 million of the Company's common stock in open market or
private transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSS or HDD common stock. An
additional $100 million was authorized for repurchase of HDD common stock.
Since the beginning of the authorization through December 31, 2000, the Company
has repurchased a total of 3.9 million shares of Quantum common stock, 29.2
million shares of DSS common stock and 13.5 million shares of HDD common stock
for a combined total of $566 million. For the three months ended December 31,
2000, there were no repurchases of common stock.
7. Credit Line
In April 2000, the Company entered into two unsecured senior credit facilities,
each providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At the Company's option, borrowings under the
revolving credit lines bear interest at either the London interbank offered rate
or a base rate, plus a margin determined by a leverage ratio with option periods
of one to six months. At December 31, 2000, there were no outstanding balances
drawn on these lines.
8. Litigation
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 26 U.S. patents, which it asserts that the Company has infringed.
In October 1999 the case was transferred to a federal district court in New
Orleans, Louisiana, where it has been joined with suits involving Maxtor
Corporation and Minebea Company, Ltd. for the purposes of coordinated discovery
under multi-district litigation rules. IBM has recently been sued by Papst and
has been added to the multi-district proceedings. The final results of this
litigation, as with any litigation, are uncertain. In addition, the costs of
engaging in litigation with Papst will be substantial.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. For example, in fiscal year 2000,
Discovision Associates brought patents they hold to the Company's attention.
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.
10
9. Special Charges
DLT & Storage Systems Group
During the fourth quarter of fiscal year 2000, DSS recorded a special charge of
$40.1 million. The charge was primarily focused on DSS's DLTtape Division and
reflected DSS's strategy to align its DLTtape drive operations with market
conditions. These conditions include slower growth in the mid-range server
market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTape Division and an acceleration of DSS's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed assets
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
The facilities costs noted above include lease payments for vacant space in a
facility in Colorado Springs, Colorado, the write-off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang, Malaysia, as this space
is converted to DSS manufacturing. DSS expects the Colorado facility to be
vacated by the end of fiscal year 2001.
The write-off of investments reflects DSS's decision to end its research on
certain optical based storage solutions. As a result, DSS has written-off an
equity investment and technology licenses related to optical technology.
DSS currently expects a workforce reduction of approximately 900 employees. The
reduction in force primarily affects employees at DSS's manufacturing operations
in Colorado Springs, Colorado, as well as administrative employees within the
DLTtape Division. As of December 31, 2000, 294 employees have been terminated.
DSS anticipates that the remaining employees will be terminated by the end of
the fourth quarter of fiscal year 2001.
As of December 31, 2000, DSS had incurred cash expenditures of $5 million
associated with employee severance and benefits, facilities and other costs.
DSS expects to incur additional cash expenditures associated with the plan of
approximately $6 million, which will be funded out of operations.
In the third quarter of fiscal year 2001, DSS reversed $7 million as a special
charge benefit on the income statement. This reversal is primarily due to a
revised estimate of the vacancy period related to a facility in Colorado
Springs, Colorado.
11
The following tables summarize the activity related to the fourth quarter fiscal
year 2000 special charge at December 31, 2000:
(In thousands) Severance
And Facilities Fixed Other
Benefits Costs Investments Assets Costs Total
-------- ----- ----------- ------ ----- ------
Special charge provision $ 7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments (956) -- -- -- (1,102) (2,058)
Non-cash charges -- -- (13,908) (3,163) -- (17,071)
------- ------- -------- ------- ------- --------
Balance at Mar. 31, 2000 $ 6,690 $13,500 $ -- $ -- $ 764 $ 20,954
Cash payments (2,737) (105) -- -- (68) (2,910)
Non-cash charges -- (5,219) -- -- -- (5,219)
Special charge benefit -- (7,000) -- -- -- ( 7,000)
------- ------- -------- ------- ------- --------
Balance at Dec. 31, 2000 $ 3,953 $ 1,176 $ -- $ -- $ 696 $ 5,825
======= ======= ======== ======= ======= ========
DSS recorded a special charge of $7 million in the third quarter of fiscal Year
2001. This is a result of DSS's decision to establish a close proximity between
its design and manufacturing operations in order to accelerate time-to-market
for future products within its DLTtape drive product family. This will impact
engineering, marketing and administrative employees in Shrewsbury,
Massachusetts, as these positions will be transitioned to Boulder, Colorado. The
special charge is related to severance and benefits associated with terminated
employees affected by this plan.
DSS currently expects a workforce reduction of approximately 200 employees. As
of December 31, 2000, 43 employees have been terminated, representing $0.4
million in cash expenditures. DSS anticipates that the remaining employees will
be terminated by the end of the fourth quarter of fiscal year 2001. DSS expects
to incur additional cash expenditures associated with the plan of approximately
$6.6 million, which will be funded out of operations.
The following table summarizes activity related to the third quarter fiscal year
2001 special charge through December 31, 2000:
(In thousands) Severance
And
Benefits
Special charge provision $7,000
Cash payments (358)
------
Balance at Dec. 31, 2000 $6,642
======
Hard Disk Drive Group
During the second quarter of fiscal year 2000, HDD recorded a special charge of
$59.4 million. The charge reflected HDD's strategy to modify the hard disk
drive business to more closely align product development and the business'
operating model with the requirements of the rapidly growing low-cost PC market.
The special charge was associated primarily with streamlining HDD's logistics
model in order to create a faster and more flexible fulfillment system, changes
in customer service strategy and consolidation of certain product development
programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes in customer service strategy, $7.8
12
million in severance and benefits for terminated employees, and approximately
$12 million in other costs associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. The affected facilities were vacated by the end of
the third quarter of fiscal year 2001.
Subsequent to the end of the second quarter fiscal year 2000, HDD revised its
estimate of costs required to implement the restructuring plan. HDD estimated
that severance and benefits, inventory and other costs, which included the
disposition of additional capital assets, would be more than previously
estimated as a result of the planned changes in the customer service strategy.
HDD also estimated that costs associated with vacating leased facilities would
be less than previously estimated as a result of disposing of a major facility
earlier than previously expected. Accordingly, HDD reallocated amounts between
these categories during the second half of fiscal year 2000.
In the second quarter of fiscal year 2001, HDD reversed $15.9 million as a
special charge benefit on the statement of operations. This reversal was
primarily due to negotiated lease cancellations and reduced severance and
benefits due to the attrition and redeployment of certain employees.
In connection with the charge, HDD currently expects a workforce reduction of
approximately 513 employees, down from the original expectation of 600
employees. In addition, approximately 100 open and budgeted positions have been
eliminated. The reduction in force primarily affects employees at HDD's drive
configuration centers and warehouses in Milpitas, California and Dundalk,
Ireland and employees within the desktop drive business. As of December 31,
2000, 513 employees have been terminated. The reserve balance remaining,
primarily represents outstanding costs for outplacement services.
As of December 31, 2000, HDD had incurred $10 million in cash expenditures
associated with employee severance and benefits, facilities and other costs.
HDD expects to incur additional cash expenditures associated with the plan of
approximately $5 million.
The following table summarizes activity related to the special charge at
December 31, 2000.
(In thousands) Severance
And Facilities Other
Benefits Costs Inventory Costs Total
-------- ----- --------- ----- -----
Special charge provision $ 7,833 $26,359 $ 13,214 $12,000 $ 59,406
Cash Payments (3,906) (1,394) - (1,663) (6,963)
Non-cash charges - (5,646) (15,588) (8,800) (30,034)
Adjustments 1,166 (7,852) 2,374 4,312 -
------- ------- -------- ------- --------
Balance at March 31, 2000 $ 5,093 $11,467 $ - $ 5,849 22,409
Cash Payments (2,459) (561) - (281) (3,301)
Non-cash charges - (1,650) - 3,344 1,694
Special charge benefit (2,284) (7,787) - (5,844) (15,915)
------- ------- -------- ------- --------
Balance at December 31, 2000 $ 350 $ 1,469 $ - $ 3,068 $ 4,887
======= ======= ======== ======= ========
13
10. Comprehensive Income
Accumulated other comprehensive income on the condensed consolidated balance
sheets consists of unrealized gains (losses) on available for sale investments
and foreign currency translation adjustments. Total comprehensive income , net
of tax, for the three and nine months ended December 31, 2000 and December 26,
1999, is presented in the following table:
(In thousands) Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
-------------- --------------- -------------- ---------------
Net income $ 44,235 $ 55,896 $ 140,269 $ 1,524
Other comprehensive income -
Unrealized gain (loss) on
investments, net (7,290) 17,568 (15,230) 17,568
Foreign currency translation
adjustments (908) (176) (3,110) 597
--------- -------- --------- --------
Comprehensive income $ 36,037 $ 73,288 $ 121,929 $ 19,689
========= ======== ========= ========
11. Business Segment Information
Quantum Corporation's reportable segments are its two business groups, the Hard
Disk Drive group and the DLT & Storage Systems group. HDD consists of desktop
and high-end hard disk drives. DSS consists of DLTtape(TM) drives and media,
Enterprise Solutions' autoloaders, libraries and solid state storage systems,
and Snap's network attached storage solutions. The Company markets its products
to computer manufacturers and through a broad range of distributors, resellers
and systems integrators.
The Company evaluates segment performance based on net profit or loss not
including non-recurring gains or losses. Segment assets include those items
that can be specifically identified with or reasonably allocated to a particular
segment. Results for the Company's reportable segments for the three and nine
months ended December 31, 2000 and December 26, 1999 are presented in the
following table:
(In millions)
Three Months Ended
--------------------------------------------------------------------------------
December 31, 2000 December 26, 1999
------------------------------------------ ------------------------------------
HDD DSS Total HDD DSS Total
--- --- ----- --- --- -----
Revenue from external customers $709 $369 $1,078 $888 $366 $1,254
Intersegment revenues - 1 - 1
Segment operating profit (loss) (9) 74 65 5 86 91
14
(In millions)
Nine Months Ended
---------------------------------------------------------------------------------
December 31, 2000 December 26, 1999
----------------- ------------------
HDD DSS Total HDD DSS Total
--- --- ----- --- --- -----
Revenue from external customers $2,386 $1,098 $3,484 $2,409 $1,053 $3,462
Intersegment revenues 10 - 10 1 - 1
Segment operating profit (loss) (7) 210 203 (215) 230 15
(In millions) Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
---- ---- ---- ---
Income reconciliation:
Total unit operating income $ 65 $ 91 $ 203 $ 15
Unallocated amounts:
Interest and other income 4 2 16 8
-------- -------- -------- --------
Income before income taxes $ 69 $ 93 $ 219 $ 23
======== ======== ======== ========
12. Pending Events
On October 3, 2000, the Company entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDD in an all-stock transaction. The merger
agreement provides that HDD's stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDD common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected to be completed in early calendar 2001. The transaction is expected to
be tax-free to Quantum and its stockholders. This transaction is subject to the
approval of the stockholders of both companies and other customary conditions.
If the combination is completed,
a. Quantum's DLT & Storage Systems Group will operate as a legally separate,
stand-alone company that will be known as Quantum Corporation;
b. DSS stockholders will continue to hold on a one-for-one basis, shares of
the then-independent company comprising all of the operations and assets of
the Quantum DLT & Storage Systems Group;
c. Outstanding Quantum HDD stock options, whether vested or unvested, and
Quantum HDD restricted stock subject to repurchase, held by individuals
other than employees transferred to the combined Maxtor-HDD company and
former service providers, will be converted into Quantum DSS options and
Quantum DSS restricted stock. All unvested Quantum DSS stock options held
by employees who are either transferred to the combined Maxtor-HDD company
or who are terminated in connection with the merger will be converted into
shares of Quantum DSS restricted stock;
d. Quantum intends to sever approximately 600 employees.
These expectations are forward-looking statements and actual results may differ.
15
On October 24, 2000, the Company announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000, Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following an IPO, Quantum expects to own at least
80% of Snap Appliances' outstanding common stock. Quantum intends to distribute
these shares to DSS stockholders subject to receiving a favorable IRS ruling and
Board of Directors approval. After the IPO, the remaining DSS business will be
comprised of two business groups, Enterprise Solutions and DLTtape.
13. Subsequent Event
On February 7, 2001, Quantum announced that it signed a definitive agreement to
acquire M4 Data (Holdings) Ltd., a privately held data storage company based in
the United Kingdom. The acquisition enables Quantum to leverage M4 Data's
complementary products and technologies to enhance the range of storage
solutions offered to enterprise customers. M4 Data provides high performance
tape automation products for the data storage market
Under the terms of the agreement, Quantum will acquire all the outstanding stock
of M4 Data for approximately $56 million in consideration, including $13.4
million in cash, with the balance split between debt and equity. The purchase
agreement also includes additional contingent consideration based on the
achievement of future performance goals. The acquisition is expected to close
by March 31, 2001, pending various tax and regulatory approvals and other
customary closing conditions. The acquisition will be accounted for as a
purchase, and Quantum expects that a portion of the purchase price will be
assigned to in-process research and development, which will be expensed upon
completion of the acquisition.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Quantum Corporation
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually are
phrased in the future tense or contain the words "estimate," "anticipate,"
"expect," or similar expressions. All forward-looking statements are inherently
uncertain as they are based on various expectations and assumptions concerning
future events and they are subject to numerous known and unknown risks and
uncertainties. These uncertainties could cause actual results to differ
materially from those expected for the reasons set forth under Trends and
Uncertainties relating to the DLT & Storage Systems group and Trends and
Uncertainties relating to the Hard Disk Drive group. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof.
Business Description
Quantum operates its business through two separate business groups: the DLT &
Storage Systems group ("DSS") and the Hard Disk Drive group ("HDD") as described
in their respective sections of this report.
On October 3, 2000, the Company entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDD in an all-stock transaction. The merger
agreement provides that HDD's stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDD common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected to be completed in early calendar 2001. The transaction is expected to
be tax-free to Quantum stockholders. This transaction is subject to the
approval of the stockholders of both companies and other customary conditions.
On October 24, 2000 the Company announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000 Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following the IPO, Quantum expects to own at
least 80% of Snap Appliances' outstanding common stock. Quantum intends to
distribute these shares to Quantum DSS stockholders subject to receiving a
favorable IRS ruling and Board of Directors approval. After the IPO, the
remaining DSS business will be comprised of two business groups, Enterprise
Solutions and DLTtape.
Results of Operations
Revenue. Revenue in the three and nine months ended December 31, 2000 was
$1.078 billion and $3.484 billion, respectively, compared to $1.254 billion and
$3.462 billion, respectively, for the corresponding periods in fiscal year 2000.
The decrease in revenue in the three months ended December 31, 2000 reflected
decreased revenue from sales of desktop hard disk drives, partially offset by
increased revenue from sales of storage systems and DLTtape media royalties,
both reaching record highs in the three and nine month periods.
17
The decreased revenue in the three month period reflected decreased shipments
of desktop hard disk drives in conjunction with lower average unit prices.
Units were lower than expected in the three months ended December 31, 2000 due
to specific component shortage. The increase in high-end hard disk drive
revenue was the result of higher sales volume due to the improved penetration
of HSD's current generation Atlas V and Atlas 10K II products in the market.
The increase in storage systems revenue reflected an increase in shipments of
tape libraries and enterprise solutions products, and shipments of network
attached storage systems following the acquisition of Meridian Data, Inc. in
September 1999. The increase in DLTtape media royalties reflected an increase
in sales of DLTtape media cartridges at licensed media manufacturers for which
DSS earns a royalty fee. The overall increase in sales of DLTtape media
cartridges reflected sales of cartridges for use in both new DLTtape drives and
to meet the ongoing new media needs of the installed base of DLTtape drives.
The nine month period also reflected increased revenue from sales of DLTtape
drives as a result of increased shipments, partially offset by a decline in the
average unit price.
Sales to our top five customers in the three and nine months ended December 31,
2000 represented 45% and 46% of revenue, respectively, compared to 48% and 47%
of revenue, respectively, for the corresponding periods in fiscal year 2000.
Sales to Compaq were 15% and 14% of revenue in the three and nine months ended
December 31, 2000, respectively, compared to 13% and 12% of revenue,
respectively, for the corresponding periods in fiscal year 2000, including sales
to Digital Equipment. Sales to Dell Computer Corporation were less than 10% and
10% of revenue in the three and nine months ended December 31, 2000,
respectively, compared to less than 10% of revenue in the corresponding periods
in fiscal year 2000. Sales to Hewlett-Packard Company were less than 10% of
revenue in the three and nine months ended December 31, 2000, respectively,
compared to 11% and 12% of revenue, respectively, in the corresponding periods
in fiscal year 2000.
Sales to computer equipment manufacturers and distribution channel customers
were 56% and 35% of revenue, respectively, in the three months ended December
31, 2000, compared to 65% and 29%, respectively, in the three months ended
December 26, 1999. For the nine months ended December 31, 1999, computer
equipment manufacturer and distribution channel sales were 61% and 31% of
revenue, respectively, compared to 61% and 33% of revenue, respectively, for the
corresponding period in fiscal year 2000. The remaining revenue in the three
and nine months ended December 31, 2000 represented media royalty revenue, sales
to value added resellers and direct sales, and in the three and nine months
ended December 26, 1999, represented media royalty revenue and sales to value
added resellers.
Gross Margin Rate. The gross margin rate in the three months ended December 31,
2000 increased to 24.8% from 21.4% in the three months ended December 26, 1999.
The gross margin rate for the first nine months of fiscal year 2000 was 22.6%,
compared to 16.9% in the corresponding period in fiscal year 2000.
The gross margin rate in the nine month period of fiscal year 2001 reflected the
impact of a $15.8 million special charge benefit. The benefit was primarily due
to negotiated lease cancellations and reduced severance and benefits due to the
redeployment of employees. The gross margin excluding the impact of the benefit
was 22.2% in the nine month period ended December 31, 2000. The gross margin
rate in the nine month period of fiscal year 2000 reflected the impact of a
$57.1
18
million special charge as discussed below. The gross margin rate excluding the
impact of the charge was 18.5% in the nine month period ended December 26, 1999.
Excluding the impact of the special benefit and charge, the increase in the
gross margin rate in the three and nine month periods reflected increased
revenue from storage systems and DLTtape media royalties, which have
significantly higher margins than our hard disk drive products. The increase
also reflected higher margins earned on high-end hard disk drives. This was
partially offset by the decline in gross margins earned on desktop hard disk
drives in the nine month period, and the decline in gross margins earned on
DLTtape drives in the three and nine month periods, reflecting lower average
unit prices on both. The increase in the gross margin rate in the three month
period also reflected higher margins earned on desktop hard disk drives
reflecting the transition to new lower cost, higher margin products, cost
reductions associated with the special charge and the strong desktop PC market.
Research and Development Expenses. Research and development expenses in the
three and nine months ended December 31, 2000, were $98 million, or 9.1% of
revenue, and $284 million, or 8.1% of revenue, respectively, compared to $86
million, or 6.9% of revenue, and $269 million, or 7.8% of revenue, respectively,
for the corresponding periods of fiscal year 2000. The increase in research and
development expenses reflect the inclusion of Snap Appliances' expenses, which
were only partially included in the prior year periods as the acquisition
occurred on September 10, 1999. Other increases to R&D spending were pre-
production builds of the next generation drive, Consumer Electronics' expansion
and the development of the microdrive.
Sales and Marketing Expenses. Sales and marketing expenses in the three and
nine months ended December 31, 2000, were $65 million, or 6.1% of revenue, and
$193 million, or 5.5% of revenue, respectively, compared to $56 million, or 4.5%
of revenue, and $165 million, or 4.8% of revenue, respectively, for the
corresponding periods of fiscal year 2000. The increase in sales and marketing
expenses reflected the inclusion of Snap Appliances expenses, which were only
partially included in the prior year periods as the acquisition occurred on
September 10, 1999. In addition to the acquisition of Snap, sales and marketing
expenses increased while building market awareness for the Snap products,
category awareness for NAS applications and infrastructure expansion of ATL.
This was partially offset by a decrease in advertising expenses within the hard
disk drive business.
General and Administrative Expenses. General and administrative expenses in the
three and nine months ended December 31, 2000, were $33 million, or 3.0% of
revenue, and $103 million, or 2.9% of revenue, respectively, compared to $36
million, or 2.8% of revenue, and $95 million, or 2.8% of revenue, respectively,
for the corresponding periods of fiscal year 2000. The decrease in general and
administrative expenses for the three month period year over year reflects the
impact of a provision for bad debt due to the bankruptcy of a distributor in the
third quarter of fiscal year 2000. Overall, the increase in general and
administrative expenses for the nine month period year on year reflect the
inclusion of Snap Appliances expenses, which were only partially included in the
prior year periods as the acquisition occurred on September 10, 1999, increased
expenses associated with DLTtape libraries and the expansion of ATL's
infrastructure.
Purchased In-process Research and Development Expense. DSS expensed purchased
in-process research and development of $37 million, as a result of the Meridian
(Snap) acquisition in the second quarter ended September 10, 1999.
19
Merger Expenses. During the third quarter of fiscal year 2001, HDD recorded
expenses of $6.4 million associated with the Maxtor-Quantum proposed merger.
The merger costs were primarily associated with legal, accounting and
underwriter fees.
Special Charge - HDD. During the second quarter of fiscal year 2000, HDD
recorded a special charge of $59.4 million. The charge reflected HDD's strategy
to modify the hard disk drive business to more closely align product development
and our operating model with the requirements of the rapidly growing low-cost PC
market. The special charge was associated primarily with streamlining HDD's
logistics model in order to create a faster and more flexible fulfillment
system, changes in customer service strategy and consolidation of certain
product development programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes in customer service strategy, $7.8 million in severance and benefits
for terminated employees and approximately $12 million in other costs associated
with the plan.
HDD is proceeding according to plan and expects to realize more than $100
million in cost savings per year, beginning this fiscal year. The majority of
the savings are expected in cost of revenue as a result of a more efficient
distribution system and reduced customer service costs, with the remaining
savings in research and development, as a result of the consolidation of product
development programs. As compared to fiscal year 2000, HDD expects operating
expenses to be relatively flat in fiscal year 2001, with increased investments
in disk drive and other storage products, primarily reflected in research and
development, offsetting the operating cost savings resulting from the special
charge. These expectations are forward-looking statements and actual results
may differ.
In the second quarter of fiscal year 2001, HDD reversed $15.9 million as a
special charge benefit on the statement of operations. This reversal was
primarily due to negotiated lease cancellations and reduced severance and
benefits due to attrition and redeployment of certain employees. In addition,
fixed assets that were intended to be written-off are now being utilized
elsewhere in the organization as a result of technology and product roadmap
plan.
Special Charge - DSS. During the fourth quarter of fiscal year 2000, DSS
recorded a special charge of $40.1 million. The charge was primarily focused on
DSS's DLTtape Division reflected DSS's strategy to align its DLTtape drive
operations with market conditions. These conditions include slower growth in
the mid-range server market and increasing centralization of server backup
through automation solutions, both of which have resulted in relatively flat
DLTtape drive shipments. The special charge included a reduction of overhead
expenses throughout the DLTtape Division and an acceleration of DSS's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed asset
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
20
In the third quarter of fiscal year 2001, DSS reversed $7 million as a special
charge benefit on the statement of operations. This reversal was primarily due
to a revised estimate of the vacancy period related to a facility in Colorado
Springs, Colorado.
DSS recorded a special charge of $7 million in the third quarter of fiscal year
2001. This is a result of DSS's decision to establish a close proximity between
the design and manufacturing operations in order to accelerate time-to-market
for future products within its DLTtape drive product family. This will impact
engineering, marketing and administrative employees in Shrewsbury,
Massachusetts, as these positions will be transitioned to Boulder, Colorado.
The special charge is related to severance and benefits associated with
terminated employees affected by this plan.
DSS is proceeding according to plan and expects to realize annual cost savings
from the plans of approximately $50 million, beginning upon full
implementation of the plans at the end of fiscal year 2001. Approximately $25
million of the savings are expected in cost of revenue as a result of reduced
manufacturing costs, with the remaining amount in operating expenses,
primarily research and development, as a result of ending research on certain
optical-based storage solutions and a reduction in headcount. As compared to
fiscal year 2000, DSS expects operating expenses to increase because of
increased investments in storage systems products and marketing in fiscal year
2001 and as a result of including the Snap Appliances' operations for a full
year following the acquisition of Meridian in September 1999. These
expectations are forward-looking statements and actual results may differ.
Interest and Other Income/Expense. Net interest and other income for the three
and nine months ended December 31, 2000 were $4.3 million and $15.8 million,
respectively, compared to $2.9 million and $8.0 million, respectively for the
corresponding periods of fiscal year 2000. The increase reflected increased
interest income as a result of a higher average cash balance and higher interest
rates.
Income Taxes. The Company's effective tax rate on income excluding
nondeductible merger costs for the three and nine months ended December 31,
2000, was 33% and 35%, respectively, as compared to an effective benefit rate of
40% and 36%, respectively, for the corresponding periods in the prior year. The
fiscal year 2001 effective tax rate reflects an increase in foreign earnings,
which are taxed at less than the U.S. rate.
Liquidity and Capital Resources.
Cash, cash equivalents and marketable securities were $808 million at December
31, 2000 compared to $950 million at March 31, 2000. The Company used cash in
the nine months ended December 31, 2000 to purchase $241 million of treasury
stock, as discussed below. Other uses of cash included $60 million for
investments in property and equipment. The Company generated approximately $146
million of cash from operations, primarily related to net income and non-cash
expenses, partially offset by changes in other assets and liabilities and a
decrease in accounts payable and an increase in inventories. Other sources of
cash were $36 million in proceeds from the issuance of common stock and $30
million in proceeds from accounts receivable factoring.
21
The accounts receivable factoring resulted from an asset securitization program
that HDD has with with Capital Factors Inc, under which the Company borrows
against eligible accounts receivable on a with recourse basis. At December 31,
2000, $37.5 million of accounts receivable were securitized under the program.
Because of the with recourse nature of the arrangement, the securitized accounts
receivable are included within the accounts receivable balance, with a loan of
$30 million being included in other liabilities.
During fiscal year 2000, the Board of Directors authorized the Company to
repurchase up to $700 million of the Company's common stock in open market or
private transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSS or HDD common stock. An
additional $100 million was authorized for repurchase of HDD common stock. Under
these authorizations, as of December 31, 2000, the Company had repurchased a
total of 3.9 million shares of Quantum common stock, 29.2 million shares of DSS
common stock and 13.5 million shares of HDD common stock for a combined total of
$566 million. During the first nine months of fiscal year 2001, the Company
repurchased 13.5 million shares of DSS common stock and 10 million shares of HDD
common stock for a combined total of $241 million.
In April 2000, the Company entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the Company's option, borrowings
under the revolving credit lines bear interest at either the London interbank
offered rate or a base rate, plus a margin determined by a leverage ratio with
option periods of one to six months. At December 31, 2000, there were no
outstanding balances drawn on these lines.
The Company expects to spend approximately $88 million in fiscal year 2001 for
capital equipment and leasehold improvements. These capital expenditures will
support the disk drive, tape drive and storage solutions businesses, research
and development, and general corporate operations.
The Company believes that its existing capital resources, including the credit
facilities and any cash generated from operations, will be sufficient to meet
all currently planned expenditures and sustain operations for the next 12
months. However, this belief assumes that operating results and cash flow from
operations will meet our expectations. These expectations are forward-looking
statements and actual results may be affected by the factors discussed in
"Trends and Uncertainties Relating to the DLT & Storage Systems Group and Hard
Disk Drive Group" in this report.
In the future, the Company may seek to raise cash through the issuance of debt
or equity securities. There can be no assurance that such financing would be
available on terms favorable to the Company, if at all.
Euro Impact
The Company believes that the adoption of a single currency, the Euro, by eleven
European countries has not and will not materially affect our business,
information systems or consolidated financial position, operating results or
cash flows.
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended March 31, 2000.
The Company is exposed to equity price risk on its investment in TiVo, Inc.
common stock. The Company does not attempt to reduce or eliminate its market
exposure on this security. The Company entered into a strategic alliance with
TiVo in fiscal year 1999 to supply hard disk drives utilizing Quantum's
QuickView technology for integration into TiVo's Personal Video Recorder. At
December 31, 2000, the fair market value of the Company's investment was
approximately $5 million. As TiVo is a relatively new company and has
introduced a new product in the consumer electronics market, the Company does
not believe it is possible to reasonably estimate any future price movement of
TiVo common stock.
In addition, Quantum's operating results are expected to be affected by charges
to be incurred in connection with the merger of HDD and Maxtor. See "Trends and
Uncertainties Relating to the DLT & Storage System Group" and "Trends and
Uncertainties Relating to the Hard Disk Drive Group" in this report.
23
Item 1. Financial Statements
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
-------- -------- ---------- ----------
Product revenue $ 309,294 $ 316,959 $ 934,404 $ 920,340
Royalty revenue 59,977 48,821 162,802 133,282
---------- ---------- ---------- ----------
Total revenue 369,271 365,780 1,097,206 1,053,622
Cost of revenue 205,861 201,692 616,123 567,678
---------- ---------- ---------- ----------
Gross profit 163,410 164,088 481,083 485,944
Operating expenses:
Research and development 31,412 31,322 99,142 89,527
Sales and marketing 39,027 30,821 114,840 82,810
General and administrative 19,316 16,376 56,727 46,013
Purchased in-process research
and development - - - 37,000
---------- ---------- ------------ ----------
89,755 78,519 270,709 255,350
Income from operations 73,655 85,569 210,374 230,594
Other income (expense):
Interest income and other, net 4,767 3,797 14,928 13,967
Interest expense (4,174) (4,716) (13,187) (14,372)
---------- ---------- ------------ ----------
593 (919) 1,741 (405)
Income before income taxes 74,248 84,650 212,115 230,189
Income tax provision 26,729 33,860 76,361 106,874
---------- ---------- ---------- ----------
Net income $ 47,519 $ 50,790 $ 135,754 $ 123,315
========== ========== ========== ==========
See accompanying notes to condensed combined financial statements.
24
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
December 31, March 31,
2000 2000
------------ ----------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 376,718 $ 336,720
Marketable securities 1,099 2,032
Accounts receivable, net of allowance for
doubtful accounts of $4,011 and $3,492 258,577 214,107
Inventories 107,044 101,478
Deferred taxes 54,668 54,669
Other current assets 62,269 38,424
---------- ----------
Total current assets 860,375 747,430
Property and equipment, net of accumulated
depreciation of $109,800 and $80,997 84,479 78,137
Intangible assets, net 234,252 248,288
Other assets 26,350 12,149
---------- ----------
$1,205,456 $1,086,004
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 115,215 $ 94,596
Accrued warranty 58,882 52,593
Accrued compensation 44,684 36,379
Income taxes payable 68,632 -
Accrued special charge 12,467 20,954
Current portion of long-term debt 801 689
Due to the Hard Disk Drive group - 30,100
Other accrued liabilities 42,376 27,749
---------- ----------
Total current liabilities 343,057 263,060
Deferred taxes 33,603 13,578
Long-term debt 24,617 25,225
Convertible subordinated debt 191,667 191,667
Group equity 612,512 592,474
---------- ----------
$1,205,456 $1,086,004
========== ==========
See accompanying notes to condensed combined financial statements.
25
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited
Nine Months Ended
December 31, December 26,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 135,754 $ 123,315
Adjustments to reconcile net income to net cash provided by
operations:
Purchased in-process research and development - 37,000
Depreciation 30,022 24,812
Amortization 20,803 20,334
Deferred income taxes 2 (107)
Compensation related to stock plans 9,819 1,593
Changes in assets and liabilities:
Accounts receivable (44,569) 28,346
Inventories (5,092) 23,380
Accounts payable 20,619 20,801
Income taxes payable 68,632 -
Accrued warranty 6,289 13,304
Other assets and liabilities (27,156) (20,797)
--------- ---------
Net cash provided by operating activities 215,123 271,981
--------- ---------
Cash flows from investing activities:
Investment in equity securities (14,343) -
Purchases of marketable securities - (4,523)
Maturities of marketable securities 2,032 7,764
Acquisition of intangible assets - (2,500)
Investment in property and equipment (37,191) (26,812)
--------- ---------
Net cash used in investing activities (49,502) (26,071)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities - 6,667
Principal payments on long-term credit facilities (496) (19,173)
Inter-group payment for common stock issued - (2,835)
Purchases of treasury stock (146,251) (246,187)
Proceeds from issuance of common stock, net 21,124 24,515
--------- ---------
Net cash used in financing activities (125,623) (237,013)
--------- ---------
Increase in cash and cash equivalents 39,998 8,897
Cash and cash equivalents at beginning of period 336,720 272,643
--------- ---------
Cash and cash equivalents at end of period $ 376,718 $ 281,540
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 9,470 $ 9,656
Income taxes, net of (refunds) $ 11,224 $ 7,367
Tangible and intangible assets acquired for shares of DSS and
HDD common stock, net of cash acquired and liabilities assumed
- $ 101,863
See accompanying notes to condensed combined financial statements.
26
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed combined financial statements of the DLT &
Storage Systems group ("DSS"), together with the unaudited condensed combined
financial statements of the Hard Disk Drive group ("HDD"), include all of the
accounts in the unaudited condensed consolidated financial statements of
Quantum. The separate group unaudited condensed combined financial statements
give effect to the accounting policies applicable with the implementation of the
tracking stock proposal. The separate DSS and HDD financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (i) the historical balance sheets, results of
operations, and cash flows of businesses that comprise each of the groups, with
all significant intragroup transactions and balances eliminated, (ii) in the
case of DSS's financial statements, corporate assets and liabilities of Quantum
and related transactions identified with DSS, including allocated portions of
Quantum's debt and selling, general and administrative costs, and (iii) in the
case of HDD's financial statements, corporate assets and liabilities of Quantum
and related transactions identified with HDD, including allocated portions of
Quantum's debt and selling, general and administrative costs. Intergroup
transactions and balances are not eliminated in the separate financial
statements of DSS or HDD.
The condensed combined financial statements of the DLT & Storage Systems Group
provide DSS stockholders with financial information about the DLT & Storage
Systems group operations. Holders of DSS stock and HDD stock are Quantum
stockholders and are subject to all of the risks of an investment in Quantum and
all of Quantum's businesses, assets and liabilities. Quantum retains ownership
and control of all of the assets and operations of each group. Financial
effects arising from one group that affect Quantum's consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
other group's stock. Any net losses of DSS or HDD, and dividends or
distributions on, or repurchases of HDD stock, at a price per share greater than
par value, will reduce the funds of Quantum legally available for payment of
dividends on DSS stock. As a result, DSS's condensed combined financial
statements should be read in conjunction with Quantum's condensed consolidated
financial statements and HDD's condensed combined financial statements. The
condensed combined balance sheet of DSS as of March 31, 2000 has been derived
from the audited financial statements of DSS included in Quantum's Annual Report
on Form 10-K filed with the Securities and Exchange Commission, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
These interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management, are necessary
for a fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
27
2. Inventories
Inventories consisted of the following:
(In thousands)
December 31, March 31,
2000 2000
----------- --------
Materials and purchased parts $ 64,917 $ 41,819
Work in process 25,611 37,024
Finished goods 16,516 22,635
-------- --------
$107,044 $101,478
======== ========
3. Common Stock Repurchase
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stock in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSS or HDD common stock. An
additional $100 million was authorized for repurchase of HDD common stock.
Since the beginning of the authorization through December 31, 2000, Quantum has
repurchased a total of 3.9 million shares of Quantum common stock, 29.2 million
shares of DSS common stock and 13.5 million shares of HDD common stock for a
combined total of $566 million. For the three months ended December 31, 2000,
there were no repurchases of common stock.
4. Credit Line
In April 2000, Quantum entered into two new unsecured senior credit facilities,
each providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At Quantum's option, borrowings under the
revolving credit lines bear interest at either the London interbank offered rate
or a base rate, plus a margin determined by a leverage ratio with option periods
of one to six months. At December 31, 2000, there were no outstanding balances
drawn on these lines.
5. Special Charge
During the fourth quarter of fiscal year 2000, DSS recorded a special charge of
$40.1 million. The charge was primarily focused on DSS's DLTtape Division and
reflected DSS's strategy to align its DLTtape drive operations with market
conditions. These conditions include slower growth in the mid-range server
market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTape Division and an acceleration of DSS's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed assets
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
28
The facilities costs noted above include lease payments for vacant space in a
facility in Colorado Springs, Colorado, the write-off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang, Malaysia, as this space
is converted to DSS manufacturing. DSS expects that the Colorado facility will
be vacated by the end of fiscal year 2001.
The write-off of investments reflects DSS's decision to end its research on
certain optical based storage solutions. As a result, DSS has written-off an
equity investment and technology licenses related to optical technology.
DSS currently expects a workforce reduction of approximately 900 employees. The
reduction in force primarily affects employees at DSS's manufacturing operations
in Colorado Springs, Colorado, as well as administrative employees within the
DLTtape Division. As of December 31, 2000, 294 employees have been terminated.
DSS anticipates that the remaining employees will be terminated by the end of
the fourth quarter of fiscal year 2001.
As of December 31, 2000, DSS had incurred cash expenditures of $5 million
associated with employee severance and benefits, facilities and other costs.
DSS expects to incur additional cash expenditures associated with the plan of
approximately $6 million, which will be funded out of operations.
In the third quarter of fiscal year 2001, DSS reversed $7 million as a special
charge benefit on the income statement. This reversal is primarily due to a
revised estimate of the vacancy period related to a facility in Colorado
Springs, Colorado.
The following tables summarize the activity related to the fourth quarter fiscal
year 2000 special charge through December 31, 2000:
(In thousands) Severance
And Facilities Fixed Other
Benefits Costs Investments Assets Costs Total
-------- ---------- ----------- ------ ----- -----
Special charge provision $ 7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments (956) -- -- -- (1,102) (2,058)
Non-cash charges -- -- (13,908) (3,163) -- (17,071)
------- ------- -------- ------- ------- --------
Balance at Mar. 31, 2000 $ 6,690 $13,500 $ -- $ -- $ 764 $ 20,954
Cash payments (2,737) (105) -- -- (68) (2,910)
Non-cash charges -- (5,219) -- -- -- (5,219)
Special charge benefit -- (7,000) -- -- -- ( 7,000)
------- ------- -------- ------- ------- --------
Balance at Dec. 31, 2000 $ 3,953 $ 1,176 $ -- $ -- $ 696 $ 5,825
======= ======= ======== ======= ======= ========
DSS recorded a special charge of $7 million in the third quarter of fiscal year
2001. This is a result of DSS's decision to establish a close proximity between
its design and manufacturing operations in order to accelerate time-to-market
for future products within its DLTtape drive product family. This will impact
engineering, marketing and administrative employees in Shrewsbury,
Massachusetts, as these positions will be transitioned to Boulder, Colorado. The
special charge is related to severance, benefits and costs associated with
terminated employees affected by this plan.
DSS currently expects a workforce reduction of approximately 200 employees. As
of December 31, 2000, 43 employees have been terminated, representing $0.4
million in cash expenditures. DSS anticipates that the remaining employees will
be terminated by the end of the fourth quarter of fiscal
29
year 2001. DSS expects to incur additional cash expenditures associated with the
plan of approximately $6.6 million, which will be funded out of operations.
The following table summarizes activity related to the third quarter fiscal year
2001 special charge at December 31, 2000:
(In thousands) Severance
And
Benefits
Special charge provision $7,000
Cash payments (358)
Non-cash charges --
Special charge benefit --
------
Balance at Dec. 31, 2000 $6,642
------
6. Comprehensive Income
Accumulated other comprehensive income included in group equity on the condensed
combined balance sheets of the DLT & Storage System group consists of foreign
currency translation adjustments. Total comprehensive income for the three
months and nine months ended December 31, 2000 and December 26, 1999 is
presented in the following table:
(In thousands) Three Months Ended Nine Months Ended
------------------------------- -------------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income $ 47,519 $50,790 $135,754 $123,315
Other comprehensive income - -- --
Foreign currency
translation adjustments (175) -- (408) --
-------- ------- -------- --------
Comprehensive income $ 47,344 $50,790 $135,346 $123,515
======== ======= ======== ========
7. Pending Events
On October 3, 2000, Quantum entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDD in an all-stock transaction. The merger
agreement provides that HDD's stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDD common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected to be completed in early 2001. The transaction is expected to be tax-
free to Quantum and its stockholders. This transaction is subject to the
approval of stockholders of both companies and other customary conditions.
If the combination is completed,
a. Quantum's DLT & Storage Systems Group will operate as a legally separate,
stand-alone company that will be known as Quantum Corporation;
30
b. DSS stockholders will continue to hold on a one-for-one basis, shares of the
then-independent company comprising all of the operations and assets of the
Quantum DLT & Storage System Group;
c. Outstanding Quantum HDD stock options, whether vested or unvested, and
Quantum HDD restricted stock subject to repurchase, held by individuals
other than employees transferred to the combined Maxtor-HDD company and
former service providers, will be converted into Quantum DSS options and
Quantum DSS restricted stock. All unvested Quantum DSS stock options held by
employees who are either transferred to the combined Maxtor-HDD company or
who are terminated in connection with the merger will be converted into
shares of Quantum DSS restricted stock;
d. Quantum intends to sever approximately 600 employees.
These expectations are forward-looking statements and actual results may differ.
On October 24, 2000, Quantum announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000, Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following the IPO, Quantum will own at least 80%
of Snap Appliances' outstanding common stock. Quantum intends to distribute
these shares to DSS stockholders subject to receiving a favorable IRS ruling and
Board of Directors approval. After the IPO, the remaining DSS business will be
comprised of two business groups, Enterprise Solutions and DLTtape.
8. Subsequent Event
On February 7, 2001, Quantum announced that it signed a definitive agreement to
acquire M4 Data (Holdings) Ltd., a privately held data storage company based in
the United Kingdom. The acquisition enables Quantum to leverage M4 Data's
complementary products and technologies to enhance the range of storage
solutions offered to enterprise customers. M4 Data provides high performance
tape automation products for the data storage market.
Under the terms of the agreement, Quantum will acquire all the outstanding stock
of M4 Data for approximately $56 million in consideration, including $13.4
million in cash, with the balance split between debt and equity. The purchase
agreement also includes additional contingent consideration based on the
achievement of future performance goals. The acquisition is expected to close
by March 31, 2001, pending various tax and regulatory approvals and other
customary closing conditions. The acquisition will be accounted for as a
purchase, and Quantum expects that a portion of the purchase price will be
assigned to in-process research and development, which will be expensed upon
completion of the acquisition.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - DLT & Storage Systems Group
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually are
phrased in the future tense or contain the words "estimate," "anticipate,"
"expect," or similar expressions. All forward-looking statements are inherently
uncertain as they are based on various expectations and assumptions concerning
future events and they are subject to numerous known and unknown risks and
uncertainties. These uncertainties could cause actual results to differ
materially from those expected for the reasons set forth under Trends and
Uncertainties relating to the DLT & Storage Systems group. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
Business Overview
The DLT & Storage Systems group ("DSS") designs, develops, manufactures,
licenses and markets DLTtape/TM/ drives, DLTtape media cartridges and storage
solutions. DSS's storage solutions consist of DLTtape libraries, network
attached storage solutions, solid state storage systems and service. Digital
Linear Tape, or DLTtape, is DSS's half-inch tape technology that is the industry
standard for mid-range UNIX and NT system backup and archive applications. DSS
recently introduced a new family of tape drive products based on Super DLTtape
technology, targeted to serve workgroup, mid-range and enterprise business
needs. Super DLTtape technology is an extension of the DLTtape technology
product set. Super DLTtape continues to build on generations of DLTtape success
while ensuring compatibility with previous DLTtape formats.
DSS's tape libraries are part of our Enterprise Solutions business and serve the
entire tape library data storage market from desktop computers to enterprise
class computers. DSS offers a broad line of automated tape libraries that are
used to manage, store and transfer data in enterprise networked computing
environments.
DSS is a leading provider of network attached storage, or NAS, solutions for
workgroups. DSS's NAS appliances offer a combination of interoperability,
reliability, ease of use and cost-effectiveness that we believe is better suited
to the storage needs of workgroups than other storage alternatives. Our Snap
Server appliances utilize our optimized hardware and proprietary operating
system, the Snap OS, to enable our customers to add additional storage capacity
to a network quickly, inexpensively and conveniently. The target end-users for
Snap Server appliances are workgroups within small to large organizations and
application service providers and Internet service providers.
DLTtape drives store data on DLTtape media cartridges. Historical use of
DLTtape drives has shown that drives use many media cartridges per year. DSS's
DLTtape media cartridges are manufactured and sold by licensed third party
manufacturers. DSS receives a royalty fee on DLTtape media cartridges sold by
its licensees which, while resulting in lower revenue than DLTtape media sold
directly by DSS, generates comparable income from operations. DSS prefers
32
to sell a substantial portion of DLTtape media cartridge through its license
model because this minimizes DSS's operational risks and expenses and provides
an efficient distribution channel. Currently, approximately 85% of media sales
occur through this license model.
On October 24, 2000, Quantum announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000 Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following the IPO, Quantum expects to own at least
80% of Snap Appliances' outstanding common stock. Quantum intends to distribute
these shares to DSS stockholders subject to receiving a favorable IRS ruling and
Board of Directors approval. After the IPO, the remaining DSS business will be
comprised of two business groups, Enterprise Solutions and DLTtape.
Products
The DLT & Storage Systems group's products include:
DLT:
----
. Super DLTtape(TM) drives. DSS recently introduced a new family of tape
drive products based on Super DLTtape technology, targeted to serve
workgroup, mid-range and enterprise business needs. The mid-range market
including workgroup and department servers, large corporate departments
and mid-size automated libraries will see a drive with a native capacity
of 110GB (220GB compressed) and a sustained transfer rate of 11MB per
second (22MB compressed). In response to high performance enterprise
needs, DSS also offers a Super DLTtape drive with a sustained transfer
rate of greater than 16MB per second (32MB compressed). Super DLTtape
drives are expected to begin volume shipment in the first half of
calendar year 2001.
. DLTtape drives. DSS currently offers three tape drive products--the
DLT8000, the DLT7000 and the DLT4000. The DLT8000 provides a combination
of 40GB of native capacity (80GB compressed) and a sustained data
transfer rate of 6MB per second (12MB compressed). The DLT7000 provides a
combination of 35GB of native capacity (70GB compressed) and a sustained
data transfer rate of 5MB per second (10MB compressed). The DLT4000
provides a combination of 20GB of native capacity (40GB compressed) and a
sustained data transfer rate of 1.5MB per second (3MB compressed).
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges is designed and formulated specifically for use with DLTtape
drives. The capacity of a DLTtape media cartridge is up to 40GB (80GB
compressed). DSS's half-inch tape cartridges take advantage of shorter
wavelength recording schemes to ensure read compatibility with future
generations of DLTtape drives. The tape itself features a special high-
grade metal particle formula that reduces tape and head wear. The result
is tape that delivers a proven one million passes with a negligible
impact on soft error rates and a 30-year archival life. DSS has qualified
the one supplier of Super DLTtape media and is currently qualifying
others; the tape will include enhanced features to support Super DLTtape
products.
33
Storage Solutions:
------------------
. Tape libraries. DSS offers a broad line of automated DLTtape libraries that
support a wide range of back-up and archival needs from workgroup servers
to enterprise-class servers. DSS's tape libraries range from its tape
autoloaders which accommodate a single DLTtape drive and up to 280GB of
storage capacity to the P6000 series library which features Prism Library
Architecture(TM) and can be configured in multiple units to scale up to
22.8 terabytes of storage capacity. In addition, DSS offers WebAdmin(TM),
the industry's first Internet browser-based tape library management system,
allowing system administrators to monitor widely distributed storage
systems at remote locations with point-and-click ease.
. Solid state storage systems. DSS offers two families of solid state storage
systems--the Rushmore(TM) Ultra series and the Rushmore eSystem
Accelerators. The Rushmore Ultra Solid State Disks are available in
capacities ranging from 268MB to 3.2GB and have data access times of less
than 50 microseconds, 100 to 200 times faster than magnetic hard disk
drives. The Rushmore eSystem Accelerator is a comprehensive set of
hardware, tools, services and consulting bundled into one package. With
capacities ranging from 536MB to 3.2GB, the Rushmore eSystem Accelerator
delivers data access times of less than 25 microseconds, more than 18,000
accesses to information per second for time-critical applications.
. Network attached storage solutions. DSS's Snap! Server(TM) family of
network attached storage appliances, include the Snap Server 1000, Snap
Server 2000, and Snap Server 4100, including storage capacities ranging
from 15GB to 240GB. Snap Servers connect directly to a network and can be
easily and seamlessly integrated with other network devices. To install a
Snap Server, a user simply connects the appliance to a network and a power
source and then turns on the appliance. The entire installation process can
take less than five minutes and does not require an information technology
professional. The Snap OS includes a file system that can simultaneously
function in a variety of operating environments, including Apple MacOS,
Linux, Microsoft Windows, Novell Netware and UNIX. The Snap hardware
includes motherboards with standard components, hard disk drives, memory
and processors. The Snap Server 1000 features 15GB or 30GB of storage
capacity, one disk drive, and a 3.5 pound desktop or portable form factor.
The Snap Server 2000 features 60GB of storage capacity, two disk drives,
desktop form factor, and RAID 0, 1. The Snap Server 4100 features 120GB or
240GB of storage capacity, four disk drives, 1U rack form factor, and RAID
0, 1 and 5.
Results of Operations
Revenue. Revenue in the three and nine months ended December 31, 2000 was $369
million and $1.097 billion, respectively, compared to $366 million and $1.054
billion, respectively, for the corresponding periods in fiscal year 2000. The
increase in revenue reflected increased sales of DLTtape libraries and Snap
servers, and increased DLTtape media royalties. Sales of tape libraries reached
a record high in the third quarter of fiscal year 2001. Sales of Snap Server
network attached storage appliances also reached a record high without
comparable sales in the prior year nine month period, as DSS's sales of Snap
servers resulted from the acquisition of Meridian in September 1999. The
increase in units of DLTtape media cartridges sold reflects sales of cartridges
for use in both new DLTtape drives and to meet the ongoing new media needs of
the installed base of DLTtape drives. The increase in DLTtape media royalties
reflected an increase in the sales of DLTtape
34
media cartridges by licensed media manufacturers for which DSS earns a royalty
fee. Revenue from sales of DLTtape drives declined, reflecting decreased
shipments and a decline in average unit prices due to competitive pricing.
The table below summarizes the components of DSS's revenue in the three and nine
months ended December 31, 2000 and December 26, 1999:
(in millions) Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
DLT drives $ 187 $ 215 $ 598 $ 654
DLT media 28 42 90 105
DLT royalty 60 49 163 133
Storage systems 116 82 326 231
Intra-group
elimination* (22) (22) (80) (69)
-------- --------- -------- ---------
Revenue $ 369 $ 366 $ 1,097 $ 1,054
======== ========= ======== =========
* Represents intra-group sales of DLTtape drives for incorporation into DSS's
tape libraries.
Sales to the top five customers in the three and nine months ended December 31,
2000 represented 42% and 44% of revenue, respectively, compared to 49% and 48%
of revenue, respectively, for the corresponding periods in fiscal year 2000.
Sales to Compaq were 19% and 18% of revenue in the three and nine months ended
December 31, 2000, respectively, compared to 22% and 21% of revenue,
respectively, in the corresponding periods in fiscal year 2000, including sales
to Digital Equipment. Sales to Hewlett Packard were 10% and 12% of revenue in
the three and nine months ended December 31, 2000, respectively, compared to
less than 10% and 13% of revenue, respectively, in the corresponding periods in
fiscal year 2000.
Sales to computer equipment manufacturers and distribution channel customers
were 59% and 15% of revenue, respectively, in the three months ended December
31, 2000, compared to 62% and 17% of revenue, respectively, in the three months
ended December 26, 1999. For the nine months ended December 31, 2000, computer
equipment manufacturer and distribution channel sales were 60% and 15% of
revenue, respectively, compared to 64% and 16% of revenue, respectively, in the
corresponding period of fiscal year 2000. The remaining revenue in the three
and nine months ended December 31, 2000 represented media royalty revenue, sales
to value-added resellers and direct sales, and in the three and nine months
ended December 26, 1999, represented media royalty revenue and sales to value-
added resellers.
Gross Margin Rate. The gross margin rate in the three months ended December 31,
2000, was 44.3%, compared to 44.9% in the three months ended December 26, 1999.
The gross margin rate for the first nine months of fiscal year 2001 was 43.8%
compared to 46.1% for the corresponding period of fiscal year 2000. The
decrease reflected lower DLTtape drive margins as a result of price declines,
partially offset by an increase in the proportion of overall revenue represented
by DLTtape media royalty revenue.
Research and Development Expenses. Research and development expenses in the
three and nine months ended December 31, 2000, were $31 million, or 8.5% of
revenue, and $99 million, or 9% of revenue, respectively, compared to $31
million, or 8.6% of revenue, and $90 million, or 8.5% of
35
revenue, respectively, in the corresponding periods of fiscal year 2000. The
increase in the nine month period reflected the inclusion of Snap Appliances'
expenses for the entire period. These expenses were not comparatively included
in the prior year nine month period as the Meridian acquisition occurred on
September 10, 1999.
Sales and Marketing Expenses. Sales and marketing expenses in the three and
nine months ended December 31, 2000, were $39 million, or 10.5% of revenue, and
$115 million, or 10.4% of revenue, respectively, compared to $31 million, or
8.4% of revenue, and $83 million, or 7.9% of revenue, respectively, in the
corresponding periods of fiscal year 2000. The increase in the three month
period was the result of additional marketing expense to build category
awareness for NAS applications and brand awareness for the Snap server product
line. The increase in the nine month period reflected the inclusion of Snap
Appliances' expenses for the entire period and an increase in sales and
marketing costs associated with the expansion of our Enterprise Solutions'
business. Snap Appliances' expenses were not comparatively included in the prior
year nine month period as the Meridian acquisition occurred on September 10,
1999.
General and Administrative Expenses. General and administrative expenses in the
three and nine months ended December 31, 2000, were $19 million, or 5.1% of
revenue, and $57 million, or 5.1% of revenue, respectively, compared to $16
million, or 4.5% of revenue, and $46 million, or 4.4% of revenue, respectively,
in the corresponding periods of fiscal year 2000. The increase in general and
administrative expenses in the three month period reflected increased Enterprise
Solutions and Snap expenses. The increase in the nine month period reflected
the inclusion of Snap Appliances' expenses for the entire period and increased
Enterprise Solutions expenses. Snap Appliances' expenses were not comparatively
included in the prior year nine month period as the Meridian acquisition
occurred on September 10, 1999.
Purchased In-process Research and Development Expense. DSS expensed purchased
in-process research and development of $37 million, as a result of the Meridian
acquisition in the second quarter ended September 26, 1999.
Special Charge. During the fourth quarter of fiscal year 2000, DSS recorded a
special charge of $40.1 million. The charge was primarily focused on DSS's
DLTtape Division and reflected DSS's strategy to align its DLTtape drive
operations with market conditions. These conditions include slower growth in
the mid-range server market and increasing centralization of server backup
through automation solutions, both of which have resulted in relatively flat
DLTtape drive shipments. The special charge included a reduction of overhead
expenses throughout the DLTtape Division and an acceleration of DSS's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed asset
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
36
expenses, primarily research and development, as a result of ending research on
certain optical-based storage solutions. As compared to fiscal year 2000, DSS
expects operating expenses to increase because of increased investments in
storage systems products and marketing in fiscal year 2001 and as a result of
including the Snap Appliances' operations for a full year following the
acquisition of Meridian in September 1999. These expectations are forward-
looking statements and actual results may differ.
In the third quarter of fiscal year 2001, DSS reversed $7 million as a special
charge benefit on the income statement. This reversal was primarily due to a
revised estimate of the vacancy period related to a facility in Colorado
Springs, Colorado.
DSS recorded a special charge of $7 million in the third quarter of fiscal
year 2001. This is a result of DSS's decision to establish a close proximity
between its design and manufacturing operations in order to accelerate time-to-
market for future products within its DLTtape drive product family. This will
impact engineering, marketing and administrative employees in Shrewsbury,
Massachusetts, as these positions will be transitioned to Boulder, Colorado.
The special charge is related to severance and benefits associated with
terminated employees affected by this plan.
DSS is proceeding according to plan and expects to realize annual cost savings
from the plans of approximately $50 million, beginning upon full
implementation of the plans at the end of fiscal year 2001. Approximately $25
million of the savings are expected in cost of revenue as a result of reduced
manufacturing costs, with the remaining amount in operating expenses,
primarily research and development, as a result of ending research on certain
optical-based storage solutions and a reduction in headcount. As compared to
fiscal year 2000, DSS expects operating expenses to increase because of
increased investments in storage systems products and marketing in fiscal year
2001 and as a result of including the Snap Appliances' operations for a full
year following the acquisition of Meridian in September 1999. These
expectations are forward-looking statements and actual results may differ.
Interest and Other Income/Expense. Net interest and other income/expense for the
three and nine months ended December 31, 2000 was $0.6 million income and $1.7
million income, respectively, compared to $0.9 million expense and $0.4 million
expense, respectively, for the corresponding periods of fiscal year 2000. The
turnabout of expense to income reflected increased interest income as a result
of higher average cash balances and higher interest rates.
Income Taxes. DSS's effective tax rate for the three and nine months ended
December 31, 2000 and December 26, 1999, was 36% and 40%, respectively. The
decrease in the fiscal year 2001 effective tax rate reflects an increase in
foreign earnings, which are taxed at less than the U.S. rate.
Liquidity and Capital Resources
DSS cash, cash equivalents and marketable securities were $378 million at
December 31, 2000 compared to $339 million at March 31, 2000. DSS used cash in
the nine months ended December 31, 2000 to purchase $146 million of treasury
stock, as discussed below. Other uses of cash included approximately $37
million for investments in property and equipment. DSS generated cash from
operations of $215 million, primarily reflecting net income, increases in income
taxes payable and accounts payable, partially offset by increases in other
assets and accounts receivable. Other sources of cash included $21 million from
the issuance of common stock.
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stock in open market or private
transactions. Of the total repurchase authorization, $600 million was authorized
for repurchase of either Quantum, DSS or HDD common stock. An additional $100
million was authorized for repurchase of HDD common stock.
37
Under these authorizations, as of December 31, 2000, Quantum had repurchased a
total of 3.9 million shares of Quantum common stock, 29.2 million shares of DSS
common stock and 13.5 million shares of HDD common stock for a combined total of
$566 million. During the first nine months of fiscal year 2001, Quantum
repurchased 13.5 million shares of DSS common stock and 10 million shares of HDD
common stock for a combined total of $241 million.
In April 2000, Quantum entered into two unsecured senior credit facilities, each
providing a $187.5 million revolving credit line and expiring in April 2001 and
April 2003, respectively. At Quantum's option, borrowings under the revolving
credit lines bear interest at either the London interbank offered rate or a base
rate, plus a margin determined by a leverage ratio with option periods of one to
six months. At December 31, 2000, there were no outstanding balances drawn on
these lines.
DSS expects to spend approximately $55 million in fiscal year 2001 for capital
equipment and leasehold improvements. These capital expenditures will support
the introduction and manufacturing of Super DLTtape products; manufacturing
DLTtape drives in its new location, Penang, Malaysia; and DSS's general
infrastructure.
DSS believes that its existing capital resources, including the credit
facilities and any cash generated from operations, will be sufficient to meet
all currently planned expenditures and sustain operations for the next 12
months. However, this belief assumes that operating results and cash flow from
operations will meet DSS's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt or
equity securities. There can be no assurance that such financing would be
available on terms favorable to Quantum, if at all.
Trends and Uncertainties Relating to the DLT & Storage Systems Group
Holders of DSS stock remain stockholders of Quantum Corporation, which, prior to
the completion of the merger of HDD and Maxtor, includes common stock of HDD,
and therefore, financial effects on HDD could adversely affect DSS.
Holders of DSS stock and HDD stock are stockholders of a single company. DSS
and HDD are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of its businesses, assets and liabilities. The issuance of DSS stock and HDD
stock and the allocation of assets and liabilities and stockholders' equity
between DSS and HDD did not result in a distribution or spin-off to stockholders
of any Quantum assets or liabilities and did not affect ownership of our assets
or responsibility for our liabilities or those of our subsidiaries. The assets
we attribute to one group could be subject to the liabilities of the other
group, whether such liabilities arise from lawsuits, contracts or indebtedness
that we attribute to the other group. If we are unable to satisfy one group's
liabilities out of the assets we attribute to it, we may be required to satisfy
those liabilities with assets we attribute to the other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
tracking stock relating to the other group. In addition, net losses of either
group and dividends and distributions on, or repurchases of, either class of
tracking stock or repurchases of preferred stock at a price per share greater
than par value will reduce the funds we
38
can pay on each class of tracking stock under Delaware law. For these reasons,
you should read our consolidated financial information with the financial
information we provide for each group.
The split-off of Quantum HDD may be determined not to be tax-free, which would
result in Quantum or its stockholders, or both, incurring a substantial tax
liability.
Maxtor and Quantum have agreed not to request a ruling from the Internal Revenue
Service (the "IRS"), or any state tax authority confirming that the structure of
the combination of Maxtor with Quantum HDD will not result in any federal income
tax or state income or franchise tax to Quantum, the newly formed subsidiary of
Quantum or the holders of Quantum HDD common stock. Instead, Maxtor and Quantum
have agreed to effect the split-off and the merger on the basis of an opinion
from Ernst & Young LLP, Quantum's tax advisors, and a tax opinion insurance
policy issued by a syndicate of major insurance companies covering up to $340
million of tax loss to Quantum caused by the split-off and merger.
If Quantum incurs non-insured tax as a result of the split-off, Quantum's
financial condition and operating results could be negatively
affected.
If the split-off was determined to be taxable to Quantum, Quantum would not be
able to recover the tax either from Maxtor or under the insurance policy under
the following circumstances:
. If the tax loss was not covered by the policy because it fell under one
of two exclusions described above, insurance proceeds would not be
available to cover the loss.
. If the tax loss was caused by Quantum's own acts or those of a third
party that made the split-off taxable (for instance, an acquisition of
control of Quantum during the two year period following the closing).
Maxtor would not be obligated to indemnify Quantum for the tax.
. If Maxtor was obligated to indemnify Quantum for the tax but was not able
to make the payment, Quantum would nevertheless be obligated, as the
taxpayers to make the payment.
In any of these circumstances, the tax payments due from Quantum could be
substantial. In order to pay the tax, Quantum would have to either deplete its
existing cash resources or borrow money to cover its tax obligation. Quantum's
payment of the tax prior to Maxtor's payment to it under Maxtor's
indemnification obligations, or in circumstances where those obligations do not
apply, could harm Quantum's business, financial condition and operating results.
Quantum may be harmed as a result of operating solely as a DLTtape and storage
solutions business.
Quantum's operations have consisted of the DLTtape and storage solutions
business and the hard disk drive business. Operating results of the Quantum DSS
business alone may be adversely affected by the loss of one or more of the
following benefits that Quantum HDD has contributed to Quantum:
. The ability to leverage the expertise of Quantum HDD in areas related to
Quantum HDD's core competency in hard disk drives;
. The opportunity to jointly develop various products, such as online storage
solutions
. The ability to more effectively enable and cost reduce data storage
solutions;
. Use of the goodwill and brand recognition associated with Quantum HDD;
. The benefit of Quantum as a whole having a larger market capitalization
related to the two tracking stocks;
. Diversification associated with a single company serving the DLTtape,
storage solutions and hard disk drive markets;
Maxtor's failure to perform under the indemnification agreement in connection
with Quantum's convertible debt would harm Quantum's business.
Maxtor has agreed to assume responsibility for payments on up to $95,833,000 of
Quantum's convertible debt. If Maxtor fails to indemnify Quantum under the
indemnification agreement for Maxtor's portion of the convertible debt, Quantum
could experience a material adverse effect on its business and financial
performance.
39
Risks related to the Quantum DSS business following the merger.
. Quantum's DSS business may experience difficulty attracting and retaining
quality employees, which may hurt its ability to operate its business
effectively.
The ability of Quantum DSS to maintain its competitive technological
position will depend, in large part, on its ability to attract and retain
highly qualified technical and managerial personnel. The combination of
Quantum DSS and Quantum HDD has resulted in faster growth and greater scale
for Quantum. After the split-off and merger, without the benefits of a
combined business, Quantum DSS may not experience the same success in
attracting quality employees. Competition for qualified personnel is
intense. There is a risk that some key employees will depart as a result
of the split-off and merger. In addition, the announcement of the proposed
split-off of Quantum HDD may impede Quantum DSS ability to attract new
employees. Lack of success in attracting qualified employees could lead to
lower than expected operating results and delays in the introduction of new
products and could have a negative effect on the ability of Quantum DSS to
support customers.
. The historical financial information of Quantum DSS may not be
representative of its future results as a separate company.
The historical financial information of Quantum DSS does not necessarily
reflect what its financial position, operating results, and cash flows
would have been had it been a separate, stand-alone entity during the
periods presented. In addition, the historical information is not
necessarily indicative of what its operating results, financial position
and cash flows will be in the future. Quantum DSS has not made adjustments
to reflect many significant changes that may occur in its cost structure,
funding and operations as a result of its separation from Quantum HDD,
including changes in its employee base, legal structure, costs associated
with reduced economics of scale, marketing expenses related to establishing
a new brand identify, and costs associated with being a public stand-alone
company.
. Quantum may incur additional special charges as a result of the merger.
Although Maxtor has agreed to hire or pay severance for up to 535 current
Quantum corporate division employees, the Quantum DSS business may
determine that the Quantum infrastructure, including employees and assets,
after the merger is not in alignment with the requirements of the Quantum
DSS business. Such a determination could result in significant charges
attributable to hiring or terminating Quantum employees or undertaking the
acquisition or divestiture of certain assets, which could adversely impact
the operating results of the Quantum DSS business.
If the contemplated combination of the HDD business with Maxtor is not
successfully completed, this could have a negative impact on Quantum's results
of operations.
Though Quantum has publicly announced that it currently intends to combine its
HDD business with Maxtor, the transaction remains subject to the approval of
Maxtor and Quantum stockholders, and other customary conditions. If the
transaction is not consummated, Quantum's results of operations could be
negatively impacted due to, among other things, market, customer and employee
perception of the terminated transaction.
The HDD merger could result in substantial compensation charges to Quantum.
Outstanding Quantum HDD stock options, whether vested or unvested, and Quantum
HDD restricted stock subject to repurchase, held by individuals other than
employees transferred to the combined Maxtor-HDD company and former service
providers, will be converted into Quantum DSS options and Quantum DSS restricted
stock. All unvested Quantum DSS stock options held by employees who are either
transferred to the combined Maxtor-HDD company or who are terminated in
connection with the merger will be converted into shares of Quantum DSS
restricted stock. This conversion, while intended to preserve the existing value
of the converted securities, will result in a compensation charge and dilution
to Quantum DSS. In addition, Quantum DSS restricted stock subject to repurchase
held by employees who are transferred to the combined Maxtor-HDD company will
remain restricted stock held by those employees. Based on current stock and
option values and an estimate of Quantum employees to be terminated or
transferred to the combined company, Quantum estimates that the transaction will
result in dilution to the remaining DSS business of approximately 6 to 7 million
shares and non-cash special compensation charges to be approximately $94 million
to $134 million, based on low and high HDD and DSS per share common stock
prices, respectively, since the beginning of October 2000, of $7.9375 and $12.75
for HDD common stock, and $11.3125 and $16.125 for DSS common stock.
Competition may increase in the tape drive market as a result of large
competitors introducing tape drive products based on new technology standards.
DSS competes with companies that develop, manufacture, market and sell tape
drive products. DSS's principal competitors include Exabyte Corporation,
Hewlett-Packard, Seagate Technology, Inc., Sony Corporation and Storage
Technology Corporation. These competitors are aggressively trying to develop
new tape drive technologies to compete more successfully with products based on
DLTtape technology. Hewlett-Packard, IBM Corporation and Seagate have formed a
consortium to develop new linear tape drive products. DSS expects products
based on this developing technology standard to target the high-capacity data
back-up market and to compete with DSS's products based on Super DLTtape
technology. Such competition could have a material adverse impact on DSS's
operating results.
40
DSS's operating results depend on new product introductions, which may not be
successful.
To compete effectively, DSS must improve existing products and introduce new
products, such as products based on Super DLTtape technology and network
attached storage appliances. DSS cannot assure you that:
. It will introduce any of these new products in the time frame DSS currently
forecasts;
. It will not experience technical or other difficulties that could prevent
or delay the introduction of these new products;
. Its new products will achieve market acceptance;
. Its new products will be successfully or timely qualified with DSS's
customers by meeting customer performance and quality specifications. A
successful and timely customer qualification must occur before customers
will place large product orders; or
. It will achieve high volume production of these new products in a timely
manner, if at all.
These risks are magnified because DSS expects that technological changes,
changes in customer requirements and increasing competition could result in
declining sales and gross margins on its existing products.
Reliance on a limited number of third-party suppliers could result in
significantly increased costs and delays in the event these suppliers experience
shortages or quality problems.
DSS depends on a limited number of suppliers for components and sub-assemblies,
including recording heads, media cartridges and integrated circuits, all of
which are essential to the manufacture of DLTtape drives and tape libraries.
DSS currently purchases the DLTtape media cartridges it sells primarily from
Fuji Photo Film Co., Ltd. and Hitachi Maxell, Ltd. DSS cannot provide assurance
that Fuji or Maxell will continue to supply an adequate number of high quality
media cartridges in the future. If component shortages occur, or if DSS
experiences quality problems with component suppliers, shipments of products
could be significantly delayed and/or costs significantly increased. In
addition, DSS qualifies only a single source for many components and sub-
assemblies, which magnifies the risk of future shortages.
DSS's main supplier of tape heads is located in China. Political instability,
trade restrictions, changes in tariff or freight rates or currency fluctuations
in China could result in increased costs, delays in shipment and could have an
adverse impact on DSS's operating results.
DSS's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance.
41
DSS's quarterly operating results have fluctuated significantly in the past and
could fluctuate significantly in the future. As a result, you should not use
DSS's past quarterly operating results to predict future performance. Quarterly
operating results could be adversely affected by:
. An inadequate supply of DLTtape media cartridges;
. Customers canceling, deferring or rescheduling significant orders as a
result of excess inventory levels or other factors;
. Declines in network server demand;
. Failure to complete shipments in the last month of a quarter during which a
substantial portion of DSS's products are typically shipped; or
. Increased competition.
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments.
DSS's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and DSS's relationships with its
customers are terminable at will. The loss of, or a significant change in
demand from, one or more key customers could materially adversely impact DSS's
operating results.
Unpredictable end-user demand, combined with the computer equipment manufacturer
trend toward carrying minimal inventory levels, increases the risk that DSS will
manufacture and custom configure too much or too little inventory for particular
customers. Significant excess inventory could result in inventory write-downs
and losses, while inventory shortages could adversely impact DSS's relationship
with its customers, either of which could adversely impact DSS's operating
results.
DSS does not control licensee pricing or licensee sales of DLTtape media
cartridges and as a result DSS's royalty revenue may decline.
DSS receives a royalty fee based on sales of DLTtape media cartridges by Fuji
and Maxell. Under DSS's license agreements with Fuji and Maxell, each of the
licensees determines the pricing and number of units of DLTtape media cartridges
sold by it. In addition, other companies may begin to sell DLTtape media
cartridges under license agreements. As a result, DSS's royalty revenue will
vary depending upon the level of sales and prices set by Fuji, Maxell and
potentially other licensees. In addition, lower licensee pricing could require
DSS to lower its prices on direct sales of DLTtape media cartridges, which would
adversely impact DSS's margins for this product.
Third party infringement claims could result in substantial liability and
significant costs.
From time to time, third parties allege DSS's infringement of and need for a
license under their patented or other proprietary technology. While management
currently believes the amount of
42
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. Adverse resolution
of any third party infringement claim could subject DSS to substantial
liabilities and require it to refrain from manufacturing and selling certain
products. In addition, the costs incurred in intellectual property litigation
can be substantial, regardless of the outcome.
Power outages which currently impact companies with facilities in California
may adversely affect Quantum's California facilities.
Quantum conducts operations in the state of California and relies on a
continuous power supply to conduct operations. California's current energy
crisis could disrupt Quantum's operations and increase expenses. In the event
of an acute power shortage, that is, when power reserves for the state of
California fall below 1.5%, California has on some occasions implemented, and
may in the future continue to implement, rolling blackouts throughout the state.
Although state lawmakers are working to minimize the impact, if blackouts
interrupt our power supply, Quantum may be temporarily unable to continue
operations at its facilities. Any such interruption in Quantum's ability to
continue operations at its facilities could delay the development of products
and manufacturing processes. Future interruptions could damage Quantum's
reputation and could result in lost revenue, either of which could harm
Quantum's business and results of operations. Furthermore, the deregulation of
the energy industry instituted in 1996 by the California government and
shortages in wholesale electricity supplies have caused power prices to
increase. If wholesale prices continue to increase, Quantum's operating
expenses will likely increase which will have a negative effect on Quantum's
operating results.
43
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in Quantum's Annual Report on Form
10-K for the year ended March 31, 2000.
In addition, Quantum's operating results are expected to be affected by charges
to be incurred in connection with the merger of HDD and Maxtor. See "Trends and
Uncertainties Relating to the DLT & Storage System Group."
44
Item 1. Financial Statements
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
-------- -------- ---------- ----------
Revenue $708,565 $889,024 $2,395,925 $2,409,729
Cost of revenue - on net sales 604,597 784,645 2,104,102 2,254,856
Cost of revenue - special charge (benefit) - - (15,825) 57,068
-------- -------- ---------- ----------
Gross profit 103,968 104,379 307,648 97,805
Operating expenses:
Research and development 66,478 55,012 184,638 179,693
Sales and marketing 26,380 25,229 78,267 81,920
General and administrative 13,314 19,177 45,946 49,254
Special charge (benefit) - - (90) 2,338
Merger costs 6,359 - 6,359 -
-------- -------- ---------- ----------
112,531 99,418 315,120 313,205
Income (loss) from operations (8,563) 4,961 (7,472) (215,400)
Other income (expense):
Interest income and other, net 6,591 6,154 21,644 15,541
Interest expense (2,866) (2,357) (7,541) (7,127)
-------- -------- ---------- ----------
3,725 3,797 14,103 8,414
Income (loss) before income taxes (4,838) 8,758 6,631 (206,986)
Income tax provision (benefit) (1,554) 3,608 2,116 (85,265)
-------- -------- ---------- ----------
Net income (loss) $ (3,284) $ 5,150 $ 4,515 $ (121,721)
======== ======== ========== ==========
See accompanying notes to condensed combined financial statements.
45
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
(unaudited)
December 31, March 31,
2000 2000
---------- ----------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 425,525 $ 581,542
Marketable securities 4,664 30,048
Accounts receivable, net of allowance for
doubtful accounts of $15,623 and $19,618 317,813 395,118
Inventories 159,645 122,347
Due from the DLT & Storage Systems group - 30,100
Deferred taxes 88,876 78,713
Other current assets 43,243 58,356
---------- ----------
Total current assets 1,039,766 1,296,224
Property and equipment, net of accumulated
depreciation of $230,231 and $218,674 148,468 158,548
Intangible assets, net - 1,915
Other assets 35,720 21,361
---------- ----------
$1,223,954 $1,478,048
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 255,895 $ 375,614
Accrued warranty 42,880 46,967
Accrued compensation 44,876 54,073
Income taxes payable (receivable) (1,829) 44,284
Accrued special charge 4,887 22,409
Current portion of long-term debt 401 344
Other accrued liabilities 110,024 77,596
---------- ----------
Total current liabilities 457,134 621,287
Deferred taxes 40,534 41,758
Long-term debt 12,309 12,613
Convertible subordinated debt 95,833 95,833
Group equity 618,144 706,557
---------- ----------
$1,223,954 $1,478,048
========== ==========
See accompanying notes to condensed combined financial statements.
46
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
December 31, December 26,
2000 1999
--------- ---------
Cash flows from operating activities:
Net loss $ 4,515 $(121,721)
Adjustments to reconcile net loss to net cash provided by
(used in) operations:
Special charge (5,844) 33,779
Depreciation 36,666 48,839
Amortization 2,556 2,934
Deferred income taxes (1,224) 498
Compensation related to stock plans 4,462 763
Changes in assets and liabilities:
Accounts receivable 77,305 (17,979)
Inventories (37,298) 54,459
Accounts payable (119,719) (43,016)
Income taxes payable (46,113) (3,014)
Accrued warranty (4,087) 10,300
Other assets and liabilities 19,929 27,583
--------- ---------
Net cash used in operating activities (68,852) (6,575)
--------- ---------
Cash flows from investing activities:
Investment in equity securities (14,010) -
Purchases of marketable securities - (33,367)
Maturities of marketable securities - 48,067
Investment in property and equipment (26,281) (39,343)
Proceeds from disposition of property and equipment 2,831 -
--------- ---------
Net cash used in investing activities (37,460) (24,643)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities - 3,333
Principal payments on long-term credit facilities (247) (9,586)
Inter-group proceeds for common stock issued - 2,835
Purchases of treasury stock (94,597) (19,690)
Proceeds from factoring 100,000 -
Payments on factoring (70,000) -
Proceeds from issuance of common stock, net 15,139 7,236
--------- ---------
Net cash used in financing activities (49,705) (15,872)
--------- ---------
Decrease in cash and cash equivalents (156,017) (47,090)
Cash and cash equivalents at beginning of period 581,542 499,725
--------- ---------
Cash and cash equivalents at end of period $ 425,525 $ 452,635
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,862 $ 4,879
Income taxes $ 2,830 $ 19,778
See accompanying notes to condensed combined financial statements.
47
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed combined financial statements of the Hard
Disk Drive group ("HDD"), together with the unaudited condensed combined
financial statements of the DLT & Storage Systems group ("DSS"), include all of
the accounts in the unaudited condensed consolidated financial statements of
Quantum. The separate group unaudited condensed combined financial statements
give effect to the accounting policies applicable with the implementation of the
tracking stock proposal. The separate HDD and DSS financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (i) the historical balance sheets, results of
operations, and cash flows of businesses that comprise each of the groups, with
all significant intragroup transactions and balances eliminated, (ii) in the
case of HDD's financial statements, corporate assets and liabilities of Quantum
and related transactions identified with HDD, including allocated portions of
Quantum's debt and selling, general and administrative costs, and (iii) in the
case of DSS's financial statements, corporate assets and liabilities of Quantum
and related transactions identified with DSS, including allocated portions of
Quantum's debt and selling, general and administrative costs. Intergroup
transactions and balances are not eliminated in the separate financial
statements of HDD or DSS.
The condensed combined financial statements of the Hard Disk Drive group provide
HDD stockholders with financial information about the Hard Disk Drive group
operations. Holders of HDD stock and DSS stock are Quantum stockholders and are
subject to all of the risks of an investment in Quantum and all of Quantum's
businesses, assets and liabilities. Quantum retains ownership and control of
all of the assets and operations of each group. Financial effects arising from
one group that affect Quantum's consolidated results of operations or financial
condition could, if significant, affect the results of operations or financial
condition of the other group and the market price of the other group's stock.
Any net losses of HDD or DSS, and dividends or distributions on, or repurchases
of DSS stock, at a price per share greater than par value, will reduce the funds
of Quantum legally available for payment of dividends on HDD stock. As a
result, HDD's condensed combined financial statements should be read in
conjunction with Quantum's condensed consolidated financial statements and DSS's
condensed combined financial statements. The condensed combined balance sheet
as of March 31, 2000 has been derived from the audited financial statements of
HDD included in Quantum's Annual Report on Form 10-K filed with the Securities
and Exchange Commission, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
These interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
48
2. Securitized Assets
HDD has an asset securitization program with Capital Factors Inc., under which
Quantum borrows against eligible accounts receivable, on a with recourse basis.
At December 31, 2000, $37.5 million of accounts receivable were securitized
under this program. Given the recourse nature of this arrangement, the
securitized accounts receivable are included within the accounts receivable
balance, with a loan of $30 million being included in other liabilities.
3. Inventories
Inventories consisted of the following:
(In thousands)
December 31, March 31,
2000 2000
-------- --------
Materials and purchased parts $ 6,381 $ 7,387
Work in process 1,353 5,299
Finished goods 151,911 109,661
-------- --------
$159,645 $122,347
======== ========
4. Common Stock Repurchase
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stock in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSS or HDD common stock. An
additional $100 million was authorized for repurchase of HDD common stock.
Since the beginning of the authorization through December 31, 2000, Quantum has
repurchased a total of 3.9 million shares of Quantum common stock, 29.2 million
shares of DSS common stock and 13.5 million shares of HDD common stock for a
combined total of $566 million. For the three months ended December 31, 2000,
there were no repurchases of common stock.
5. Credit Line
In April 2000, Quantum entered into two unsecured senior credit facilities, each
providing a $187.5 million revolving credit line and expiring in April 2001 and
April 2003, respectively. At Quantum's option, borrowings under the revolving
credit lines bear interest at either the London interbank offered rate or a base
rate, plus a margin determined by a leverage ratio with option periods of one to
six months. At December 31, 2000, there were no outstanding balances drawn on
these lines.
6. Litigation
On August 7, 1998, Quantum was named as one of several defendants in a patent
infringement lawsuit filed in the U.S. District Court for the Northern District
of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH, owns at
least 26 U.S. patents, which it asserts that Quantum has infringed. In October,
1999 the case was transferred to a federal district court in New Orleans,
Louisiana, where it has been joined with suits involving Maxtor Corporation and
Minebea
49
Company, Ltd. for the purposes of coordinated discovery under multi-district
litigation rules. IBM has recently been sued by Papst and has been added to the
multi-district proceedings. The final results of this litigation, as with any
litigation, are uncertain. In addition, the costs of engaging in litigation with
Papst will be substantial.
7. Special Charge
During the second quarter of fiscal year 2000, HDD recorded a special charge of
$59.4 million. The charge reflected HDD's strategy to modify the hard disk
drive business to more closely align product development and the business'
operating model with the requirements of the rapidly growing low-cost PC market.
The special charge was associated primarily with streamlining HDD's logistics
model in order to create a faster and more flexible fulfillment system, changes
in customer service strategy and consolidation of certain product development
programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes in customer service strategy, $7.8 million in severance and benefits
for terminated employees, and approximately $12 million in other costs
associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. The affected facilities were vacated by the end of the
third quarter of fiscal year 2001.
Subsequent to the end of the second quarter fiscal year 2000, HDD revised its
estimate of costs required to implement the restructuring plan. HDD estimated
that severance and benefits, inventory and other costs, which included the
disposition of additional capital assets, would be more than previously
estimated as a result of the planned changes in the customer service strategy.
HDD also estimated that costs associated with vacating leased facilities would
be less than previously estimated as a result of disposing of a major facility
earlier than previously expected. Accordingly, HDD reallocated amounts between
these categories during the second half of fiscal year 2000.
In the second quarter of fiscal year 2001, HDD reversed $15.9 million as a
special charge benefit in the statement of operations. This reversal was
primarily due to negotiated lease cancellations and reduced severance and
benefits due to the redeployment of certain employees.
In connection with the charge, HDD currently expects a workforce reduction of
approximately 513 employees, down from the original expectation of 600
employees. In addition, approximately 100 open and budgeted positions have been
eliminated. The reduction in force primarily affects employees at HDD's drive
configuration centers and warehouses in Milpitas, California and Dundalk,
Ireland and employees within the desktop drive business. As of December 31,
2000, 513 employees have been terminated. The reserve balance remaining,
primarily represents outstanding costs for outplacement services.
As of December 31, 2000, HDD had incurred $10 million in cash expenditures
associated with employee severance and benefits, facilities and other costs.
HDD expects to incur additional cash expenditures associated with the plan of
approximately $5 million.
50
The following table summarizes activity related to the special charge through
December 31, 2000.
(In thousands) Severance
And Facilities Other
Benefits Costs Inventory Costs Total
-------- ----- --------- ----- -----
Special charge provision $ 7,833 $26,359 $ 13,214 $12,000 $ 59,406
Cash Payments (3,906) (1,394) - (1,663) (6,963)
Non-cash charges - (5,646) (15,588) (8,800) (30,034)
Adjustments 1,166 (7,852) 2,374 4,312 -
------- ------- -------- ------- --------
Balance at March 31, 2000 $ 5,093 $11,467 $ - $ 5,849 22,409
Cash Payments (2,459) (561) - (281) (3,301)
Non-cash charges - (1,650) - 3,344 1,694
Special charge benefit (2,284) (7,787) - (5,844) (15,915)
------- ------- -------- ------- --------
Balance at December 31, 2000 $ 350 $ 1,469 $ - $ 3,068 $ 4,887
======= ======= ======== ======= ========
8. Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) included in group equity on the
condensed combined balance sheets of the Hard Disk Drive group consists of
unrealized gains (losses) on available for sale investments and foreign currency
translation adjustments. Total comprehensive income (loss) for the three and
nine months ended December 31, 2000 and December 26, 1999, is presented in the
following table:
(In thousands) Three Months Ended Nine Months Ended
----------------------------- -----------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income (loss) $ (3,284) $ 5,150 $ 4,515 $(121,721)
Other comprehensive income -
Unrealized gain (loss) on
investments, net (7,290) 17,568 (15,230) 17,568
Foreign currency translation
adjustments (733) (176) (2,702) 597
-------- -------- -------- ---------
Comprehensive income (loss) $(11,307) $ 22,542 $(13,417) $(103,556)
======== ======== ======== =========
9. Business Segment Information
The Hard Disk Drive group currently has two primary product lines, desktop hard
Risk drives and high-end hard disk drives. HDD has two separate business units
that support these two product lines.
The desktop business unit designs, develops and markets desktop hard disk drives
designed to meet the storage requirements of entry-level to high-end desktop
personal computers in home and business environments. The high-end business unit
designs, develops and markets high-end hard disk drives designed to meet the
storage requirements of network servers, workstations and storage
51
subsystems. In the future, the two HDD business units may become a single
business unit as their markets begin to converge and be reported on a combined
basis.
Results for HDD's business units for the three months and nine months ended
December 31, 2000 and December 26, 1999 are presented in the following table:
(In thousands) Three Months Ended Nine Months Ended
----------------------------- -----------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Business unit:
Desktop
Revenue $518 $754 $1,848 $2,052
Unit operating income (loss) (27) 13 (51) (182)
High-end
Revenue 191 135 548 357
Unit operating income (loss) 18 (8) 44 (33)
(In thousands) Three Months Ended Nine Months Ended
----------------------------- -----------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Income (loss) reconciliation:
Total unit operating income (loss) $ (9) $ 5 $ (7) $ (215)
Unallocated amounts:
Interest and other income 4 4 14 8
------ ------ ------ -------
Income (loss) before income taxes $ (5) $ 9 $ 7 $ (207)
====== ====== ====== =======
10. Pending Event
On October 3, 2000 Quantum entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDD in an all-stock transaction. The merger
agreement provides that HDD stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDD common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected be completed in early calendar 2001. The transaction is expected to be
tax-free to Quantum stockholders. This transaction is subject to the approval
of the stockholders of both companies and other customary conditions. These
expectations are forward-looking statements and actual results may differ.
52
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Hard Disk Drive Group
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually are
phrased in the future tense or contain the words "estimate," "anticipate,"
"expect," or similar expressions. All forward-looking statements are inherently
uncertain as they are based on various expectations and assumptions concerning
future events and they are subject to numerous known and unknown risks and
uncertainties. These uncertainties could cause actual results to differ
materially from those expected for the reasons set forth under Trends and
Uncertainties relating to the Hard Disk Drive group. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof.
Business Overview
The Hard Disk Drive group ("HDD") designs, develops and markets a diversified
product portfolio of hard disk drives featuring leading-edge technology. HDD's
hard disk drives are designed for the desktop market which requires economy and
reliability and the high-end market, which requires faster and higher capacity
disk drives--as well as the emerging market for hard disk drives specially
designed for consumer electronics devices such as personal video recorders,
personal audio recorders, cable and set-top boxes, Internet appliances and
digital video editing. HDD has been a leading volume supplier of hard disk
drives for the desktop market for each of the past seven years.
HDD designs desktop hard disk drives to meet the storage requirements of entry-
level to high-performance desktop PCs in home and business environments. HDD
also designs high-end hard disk drives to store data on large computing systems
such as network servers. These high-end hard disk drives are generally used for:
. dedicated sites that store large volumes of data;
. network servers such as those used for Internet and intranet services,
online transaction processing and enterprise wide applications;
. high-speed computers used for specialized engineering design software;
and
. computer systems incorporating a large number of shared hard disk drives.
HDD also pioneered hard disk drive applications for the developing consumer
electronics market. These hard disk drive applications utilize Quantum
QuickView--HDD's hard disk drive technology designed especially for consumer
electronics. Quantum QuickView technology makes it possible to simultaneously
record and play back audio and video content and to instantly and inexpensively
access large amounts of audio and video content--capabilities that are not as
well suited to competing technologies such as video tape and optical media.
On October 3, 2000, Quantum entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDD in an all-stock transaction. The merger
agreement provides that HDD
53
stockholders will receive 1.52 shares of Maxtor common stock for every share of
HDD common stock they own. The transaction, which was unanimously approved by
the Boards of Directors of both companies, is expected to be completed in early
calendar 2001. The transaction is expected to be tax-free to Quantum
stockholders. This transaction is subject to the approval of the stockholders of
both companies and other customary conditions.
Products
Desktop products. HDD offers two families of desktop hard disk drives--the
Quantum Fireball/TM/ and Quantum Fireball Plus. The Quantum Fireball family
offers 3.5-inch hard disk drives for consumer and commercial PCs, as well as
entry-level workstations and network servers. Fireball Plus offers superior
performance for power users. HDD offers the Shock Protection System/TM/, Shock
Protection System II and Data Protection System/TM/ with its desktop products.
These features substantially reduce failure rates and provide increased
reliability and performance. Shock Protection System II provides enhanced
protection against both operating and non-operating shock. Along with providing
enhanced protection against shock during handling and integration, Shock
Protection System II guards against kicks and jolts while the PC is running to
reduce field failures. HDD has also incorporated feature enhancements of the
Quiet Drive Technology into recently introduced Quantum desktop drives. This
technology has been pioneered through a combination of proprietary design
innovations and unique drive features that enable Quantum to develop drives that
emit dramatically reduced levels of noise. It was first introduced over a year
ago in Quantum QuickView drives targeted for the noise-sensitive consumer
electronics market and has continued to be refined with technology and feature
enhancements.
High-end products. HDD also offers a broad line of high-end 3.5-inch hard disk
drives--the Quantum Atlas and Quantum Atlas 10K families. The Quantum Atlas
families offer high-capacity hard disk drives for high performance storage-
intensive applications such as enterprise servers and storage subsystems. HDD
also offers the Shock Protection System, Shock Protection System II, Data
Protection System and Quiet Drive Technology with its high-end products, and has
incorporated the Shock Protection System III into its recently introduced Atlas
10K III. Shock Protection System III is a further enhancement to Shock
Protection I & II, guarding against one of the leading causes of hard disk drive
failure - mistreatment during handling and integration.
The table below sets forth key performance characteristics for HDD's current
products:
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
- -------- ---- ---- ----- --------
Fireball lct 10 10.3 5.1 to 30.0 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II, Data Protection System and Quiet Drive
Technology
Fireball lct 15 15.0 7.5 to 30.0 4,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II, Data Protection System and Quiet Drive
Technology
Fireball lct 20 20.4 10.0 to 40.0 4,500 Desktop PCs--Value, with Ultra ATA/100 interface, Shock
Protection System II, Data Protection System and Quiet Drive
Technology
54
Fireball Plus LM 10.3 10.2 to 30.0 7,200 Desktop PCs--Performance, with Ultra ATA/66 interface,
Shock Protection System and Data Protection System
Fireball Plus AS 20.0 10.2 to 60.0 7,200 Desktop PCs--Performance, with Ultra ATA/100 interface,
Shock Protection System II, Data Protection System and Quiet
Drive Technology
Atlas V 9.1 9.1 to 36.7 7,200 Servers, Workstations and Storage Subsystems, with Ultra
160 SCSI interface, Shock Protection System II and
Data Protection System
Atlas 10K II 7.3 9.2 to 73.4 10,000 Enterprise Servers, Workstations and Storage Subsystems,
with Ultra 160 SCSI interface, Shock Protection System II,
Data Protection System and Quiet Drive Technology
Results of Operations
Revenue. Revenue in the three and nine months ended December 31, 2000 was $709
million and $2.396 billion, respectively, compared to $889 million and $2.410
billion, respectively, for the corresponding periods in fiscal year 2000. The
decrease in revenue for the three and nine month periods primarily reflected
lower revenue from sales of desktop hard disk drives.
. Desktop hard disk drive revenue in the three and nine months ended December
31, 2000 was $518 million and $1.848 billion, respectively, compared to $754
million and $2.052 billion, respectively, for the corresponding periods in
fiscal year 2000. The decreased revenue in the three and nine month periods
reflected decreased shipments of desktop hard disk drives in conjunction with
lower average unit prices. During the three months ended December 31, 2000,
revenue and units shipped were lower than expected due to specific component
shortage.
. High-end hard disk drive revenue for the three and nine months ended December
31, 2000 was $191 million and $548 million, respectively, compared to $135
million and $357 million million, respectively, for the corresponding periods
in fiscal year 2000. The increase in revenue was the result of higher sales
volume due to the improved penetration of the current generation Atlas V and
Atlas 10K II products in the market.
Sales to the top five customers represented 49% revenue in the three and nine
months ended December 31, 2000, compared to 51% and 50% of revenue,
respectively, for the corresponding periods in fiscal year 2000. These amounts
reflected a retroactive combination of sales to Ingram Micro and Electronic
Resources as a result of the completion of their merger in July 1999. Sales to
Compaq were 13% and 12% of revenue in the three and nine months ended December
31, 2000, respectively, compared to less than 10% of revenue in the
corresponding periods of fiscal year 2000. Sales to Hewlett-Packard were less
than 10% of revenue in the three and nine months ended December 31, 2000
compared to 12% of revenue for the corresponding periods in fiscal year 2000.
Sales to Dell Computer were 11% of revenue in the three months ended December
31, 2000 and 12% of revenue in the corresponding period in fiscal year 2000.
Sales to Dell Computer were 13% and less than 10% of revenue in the nine months
ended December 31, 2000 and the corresponding period in fiscal year 2000,
respectively. Sales to Ingram Micro were 10% and less than 10% of revenue in
the three and nine months ended December 31, 2000, respectively, and were 12%
and 13% of revenue, respectively, for the corresponding periods in fiscal year
2000, including sales to Electronic Resources.
55
Sales to computer equipment manufacturers and distribution channel customers
were 55% and 45% of revenue, respectively, in the three months ended December
31, 2000, compared to 66% and 34% of revenue, respectively, in the three months
ended December 26, 1999. For the nine months ended December 31, 2000, computer
equipment manufacturers and distribution channel sales were 62% and 38% of
revenue, respectively, compared to 60% and 40%, respectively, for the
corresponding period of fiscal year 2000.
Gross Margin Rate. The gross margin rate in the three months ended December 31,
2000 increased to 14.7% from 11.7% in the three months ended December 26, 1999.
The gross margin rate for the first nine months of fiscal year 2001 was 12.8%,
compared to 4.1% in the corresponding period in fiscal year 2000. The gross
margin rate in the nine month period of fiscal year 2001 reflected the impact of
a $15.8 million special charge benefit. The benefit was primarily due to
negotiated lease cancellations and reduced severance and benefits due to the
redeployment of employees. The gross margin excluding the impact of the benefit
was 12.2% in the nine month period ended December 31, 2000. The gross margin
rate in the nine month period of fiscal year 2000 reflected the impact of a
$57.1 million special charge related to HDD's strategy to modify the hard disk
drive business to more closely align product development and the business's
operating model with the requirements of the rapidly growing low-cost PC market.
The gross margin rate excluding the impact of the charge was 6.4% in the nine
month period ended December 26, 1999.
. The desktop gross margin rate for the three and nine months ended December 31,
2000 was 10.2% and 8.9%, respectively, compared to 10.5% and 1.5%,
respectively, for the corresponding periods in fiscal year 2000. Excluding
the desktop portion of the special charge benefit of $15.5 million in fiscal
year 2001, the gross margin rate was 8.0% in the nine month period ended
December 31, 2000. Excluding the desktop portion of the special charge of
$51.4 million in fiscal year 2000, the gross margin rate was 4.0% for the nine
month period ended December 26, 1999. Excluding the impact of the benefit and
charge, the increase in gross margin rate reflected the transition to new
lower cost, higher margin products in an environment characterized by
continued competitive pricing pressures.
. The high-end gross margin rate for the three and nine months ended December
31, 2000 was 26.9% and 26.2%, respectively, compared to 18.8% and 18.6%,
respectively, for the corresponding periods in fiscal year 2000. Excluding the
high-end portion of the special charge benefit of $0.3 million in fiscal year
2001, the gross margin rate was 26.1% in the nine month period ended December
31, 2000. Excluding the high-end portion of the special charge of $5.7
million, the gross margin rate was 20.2% in the nine month period ended
December 26, 1999. Excluding the impact of the benefit and charge, the
increase in the gross margin rate reflected higher sales volumes, the
transition to new high performance products and the mix shift towards higher
capacity, higher margin products.
Research and Development Expenses. Research and development expenses in the
three and nine months ended December 31, 2000, were $66 million, or 9.4% of
revenue, and $185 million, or 7.7% of revenue, respectively, compared to $55
million, or 6.2% of revenue, and $180 million, or 7.5% of revenue, respectively,
in the corresponding periods of fiscal year 2000. The increase in research and
development expenses for the three and nine month periods is primarily the
result of the next
56
generation drive pre-production builds, increased spending to support Consumer
Electronics' strategic intent expansion and the development of the microdrive.
Sales and Marketing Expenses. Sales and marketing expenses in the three and
nine months ended December 31, 2000, were $26 million, or 3.7% of revenue, and
$78 million, or 3.3% of revenue, respectively, compared to $25 million, or 2.8%
of revenue, and $82 million, or 3.4% of revenue, respectively, in the
corresponding periods of fiscal year 2000. The increase in sales and marketing
expenses for the three month period in fiscal year 2001 primarily reflects an
increase in advertising expenses, while the nine month period reflects an
overall decrease in advertising costs.
General and Administrative Expenses. General and administrative expenses in
the three and nine months ended December 31, 2000, were $13 million, or 1.9% of
revenue, and $46 million, or 1.9% of revenue, respectively, compared to $19
million, or 2.2% of revenue, and $49 million, or 2% of revenue, respectively, in
the corresponding periods of fiscal year 2000. The decrease in general and
administrative expenses for the three and nine month periods reflects the impact
of a provision for bad debt due to the bankruptcy of a distributor in the third
quarter of fiscal year 2000.
Merger Expenses. During the third quarter of fiscal year 2001, HDD recorded
expenses of $6.4 million associated with the Maxtor-Quantum proposed merger.
The merger costs were primarily associated with employee retention, legal,
accounting and underwriter fees.
Special Charge. During the second quarter of fiscal year 2000, HDD recorded a
special charge of $59.4 million. The charge reflected HDD's strategy to modify
the hard disk drive business to more closely align product development and the
business' operating model with the requirements of the rapidly growing low-cost
PC market. The special charge was associated primarily with streamlining HDD's
logistics model in order to create a faster and more flexible fulfillment
system, changes in customer service strategy and consolidation of certain
product development programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes in customer service strategy, $7.8 million in severance and benefits
for terminated employees, and approximately $12 million in other costs
associated with the plan.
HDD is proceeding according to plan and expects to realize more than $100
million in cost savings per year, beginning in fiscal year 2001. The majority
of the savings are expected in cost of revenue as a result of a more efficient
distribution system and reduced customer service costs, with the remaining
savings in research and development, as a result of the consolidation of product
development programs. As compared to fiscal year 2000, HDD expects operating
expenses to be relatively flat in fiscal year 2001, with increased investments
in disk drive and other storage products, primarily reflected in research and
development, offsetting the operating cost savings resulting from the special
charge. These expectations are forward-looking statements and actual results
may differ.
In the second quarter of fiscal year 2001, HDD reversed $15.9 million as a
special charge benefit in the statement of operations. This reversal was
primarily due to negotiated lease cancellations and reduced severance and
benefits due to attrition and redeployment of certain employees. In addition,
fixed assets that were intended to be written-off are now being utilized
elsewhere in the organization as a result of technology and product roadmap
plans.
57
Interest and Other Income/Expense. Net interest and other income for the three
and nine months ended December 31, 2000 were $3.7 million and $14.1 million,
respectively, compared to net interest and other income of $3.8 million and $8.4
million, respectively, for the corresponding periods of fiscal year 2000. The
increase reflected increased interest income as a result of a higher average
cash balance and higher interest rates.
Income Taxes. HDD recorded a tax benefit of $1.6 million and a tax provision of
$2 million for the three and nine months ended December 31, 2000. These amounts
reflect an effective tax rate on income excluding nondeductible merger costs of
(102%) and 16% as compared to an effective rate of 41% for the corresponding
periods in the prior year.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $430 million at December
31, 2000, compared to $612 million at March 31, 2000. HDD used cash in the nine
months ended December 31, 2000, to purchase $95 million of treasury stock, as
discussed below. Other uses of cash included approximately $26 million for
investments in property and equipment and $14 million in equity securities.
Cash used in operating activities was $69 million, primarily reflecting net
income of $5 million and a decrease in accounts receivable, offset by decreases
in accounts payable, income taxes payable and an increase in inventories. Other
sources of cash were $115 million in proceeds from factoring and the issuance of
common stock, being partially offset by payments on factoring of $70 million.
HDD has an asset securitization program with Capital Factors, Inc., under which
we borrow against our eligible accounts receivable on a with recourse basis. At
December 31, 2000, $37.5 million of accounts receivable were securitized under
the program and included in our accounts receivable balance with a loan of $30
million being included in other liabilities.
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stock in open market or private
transactions. Of the total repurchase authorization, $600 million was authorized
for repurchase of either Quantum, DSS or HDD common stock. An additional $100
million was authorized for repurchase of HDD common stock. Under these
authorizations, as of December 31, 2000, Quantum had repurchased a total of 3.9
million shares of Quantum common stock, 29.2 million shares of DSS common stock
and 13.5 million shares of HDD common stock for a combined total of $566
million. During the first nine months of fiscal year 2001, Quantum repurchased
13.5 million shares of DSS common stock and 10 million shares of HDD common
stock for a combined total of $241 million.
In April 2000, Quantum entered into two unsecured senior credit facilities, each
providing a $187.5 million revolving credit line and expiring in April 2001 and
April 2003, respectively. At Quantum's option, borrowings under the revolving
credit lines bear interest at either the London interbank offered rate or a base
rate, plus a margin determined by a leverage ratio with option periods of one to
six months. At December 31, 2000, there were no outstanding balances drawn on
these lines.
HDD expects to spend approximately $33 million in fiscal year 2001 for capital
equipment and leasehold improvements. These capital expenditures will support
the development and introduction of new disk drive products.
58
HDD believes that its existing capital resources, including the credit
facilities and any cash generated from operations, will be sufficient to meet
all currently planned expenditures and sustain operations for the next 12
months. However, this belief assumes that operating results and cash flow from
operations will meet HDD's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt or
equity securities. There can be no assurance that such financing would be
available on terms favorable to Quantum, if at all.
Trends and Uncertainties Relating to the Hard Disk Drive Group
Holders of HDD stock remain stockholders of Quantum Corporation, which prior to
the completion of the merger of HDD and Maxtor, includes common stock of DSS,
and, therefore, financial effects on DSS could adversely affect HDD.
Holders of HDD stock and DSS stock are stockholders of a single company. HDD
and DSS are not separate legal entities. As a result, stockholders will continue
to be subject to all of the risks of an investment in Quantum and all of its
businesses, assets and liabilities. The issuance of the HDD stock and the DSS
stock and the allocation of assets and liabilities and stockholders' equity
between HDD and DSS did not result in a distribution or spin-off to stockholders
of any Quantum assets or liabilities and did not affect ownership of our assets
or responsibility for our liabilities or those of our subsidiaries. The assets
we attribute to one group could be subject to the liabilities of the other
group, whether such liabilities arise from lawsuits, contracts or indebtedness
that we attribute to the other group. If we are unable to satisfy one group's
liabilities out of the assets we attribute to it, we may be required to satisfy
those liabilities with assets we attribute to the other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
tracking stock relating to the other group. In addition, net losses of either
group and dividends and distributions on, or repurchases of, either class of
tracking stock at a price per share greater than par value will reduce the funds
we can pay on each class of tracking stock under Delaware law. For these
reasons, you should read our consolidated financial information with the
financial information we provide for each group.
If the contemplated combination of the HDD business with Maxtor is not
successfully completed, this could have a negative impact on Quantum's results
of operations. Though Quantum has publicly announced that it currently intends
to combine its HDD business with Maxtor, the transaction remains subject to the
approval of Maxtor and Quantum stockholders, and other customary conditions. If
the transaction is not consummated, Quantum's results of operations could be
negatively impacted due to, among other things, market, customer and employee
perception of the terminated transaction.
The split-off of Quantum HDD may be determined not to be tax-free, which would
result in Quantum, or its stockholders, or both, incurring a substantial tax
liability.
Maxtor and Quantum have agreed not to request a ruling from the Internal Revenue
Service (the "IRS"), or any state tax authority confirming that the structure of
the combination of Maxtor with
59
Quantum HDD will not result in any federal income tax or state income or
franchise tax to Quantum, the newly formed subsidiary of Quantum or the holders
of Quantum HDD common stock. Instead, Maxtor and Quantum have agreed to effect
the split-off and the merger on the basis of an opinion from Ernst & Young LLP,
Quantum's tax advisors, and a tax opinion insurance policy issued by a syndicate
of major insurance companies covering up to $340 million of tax loss to Quantum
caused by the split-off and merger.
Quantum may be harmed as a result of operating solely as a DLTtape and storage
solutions business.
Quantum's operations have consisted of the DLTtape and storage solutions
business and the hard disk drive business. Operating results of the Quantum DSS
business alone may be adversely affected by the loss of one or more of the
following benefits that Quantum HDD has contributed to Quantum:
. The ability to leverage the expertise of Quantum HDD in areas related to
Quantum HDD's core competency in hard disk drives;
. The opportunity to jointly develop various products, such as online storage
solutions
. The ability to more effectively enable and cost reduce data storage
solutions;
. Use of the goodwill and brand recognition associated with Quantum HDD;
. The benefit of Quantum as a whole having a larger market capitalization
related to the two tracking stocks;
. Diversification associated with a single company serving the DLTtape, storage
solutions and hard disk drive markets;
Maxtor's failure to perform under the indemnification agreement in connection
with Quantum's convertible debt would harm Quantum's business.
Maxtor has agreed to assume responsibility for payments on up to $95,833,000 of
Quantum's convertible debt. If Maxtor fails to indemnify Quantum under the
indemnification agreement for Maxtor's portion of the convertible debt, Quantum
could experience a material adverse effect on its business and financial
performance.
HDD's operating results depend on new product introductions, which may not be
successful
To compete effectively, HDD must frequently introduce new hard disk drives. HDD
cannot assure you that:
. it will successfully or timely develop or market any new hard disk drives
in response to technological changes or evolving industry standards;
. it will not experience technical or other difficulties that could delay or
prevent the successful development, introduction or marketing of new hard
disk drives;
. it will successfully qualify new hard disk drives, particularly high-end
disk drives, with HDD's customers by meeting customer performance and
quality specifications. A successful
60
and timely customer qualification must occur before customers will place
large product orders;Risks related to the Quantum DSS business following
the merger.
. it will quickly achieve high volume production of new hard disk drives; or
. its new products will achieve market acceptance.
These risks are magnified because HDD expects technological changes, short
product life cycles and intense competitive pressures to result in declining
sales and gross margins on its current generation products.
HDD's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
HDD's quarterly operating results have fluctuated significantly in the past and
may fluctuate significantly in the future. As a result, you should not use HDD's
past quarterly operating results to predict future performance. Quarterly
operating results could be adversely affected by:
. the ability of MKE, HDD's exclusive manufacturer, to quickly achieve high
volume production of HDD's hard disk drives;
. customers canceling, deferring or rescheduling significant orders;
. returns by customers of unsold hard disk drives for credit;
. decline in PC demand; or
. failure to complete shipments in the last month of a quarter during which
a substantial portion of HDD's products are typically shipped.
HDD's prices and margins are subject to declines due to unpredictable end-user
demand and oversupply of hard disk drives
End-user demand for the computer systems that contain HDD's hard disk drives has
historically been subject to rapid and unpredictable fluctuations. As a
result, the hard disk drive market tends to experience periods of excess
capacity, which typically lead to intense price competition. If intense price
competition occurs, HDD may be forced to lower prices sooner and more than
expected and transition to new products sooner than expected. For example, in
the second quarter of fiscal year 2001, as a result of oversupply in the desktop
hard disk drive market, aggressive pricing and corresponding margin reductions
materially adversely impacted HDD's operating results.
Growth of the lower priced PC markets is putting downward pressure on HDD's
desktop hard disk drive prices
The growth of the lower priced PC market has led to a shift toward lower priced
desktop hard disk drives. HDD expects the trend toward lower prices on hard
disk drives to continue. If HDD is
61
unable to lower the cost of its desktop hard disk drives accordingly, operating
results could be materially adversely affected.
Intense competition in the desktop and high-end hard disk drive market could
adversely impact HDD's operating results
In the desktop hard disk drive market, HDD's primary competitors are Fujitsu
Limited, IBM, Maxtor Corporation, Samsung Electronics Co., Ltd., Seagate
Technologies, Inc. and Western Digital Corporation. The desktop hard disk drive
market is characterized by more competitiveness than that seen in the computer
industry in general. HDD's operating results and competitive position could be
negatively impacted by the introduction of competitive products with higher
performance, higher reliability and/or lower cost than HDD's products. For
example, in the first half of fiscal year 2000, certain competitors reduced
prices for their products significantly. As a result, HDD's operating results
were materially adversely affected.
In the high-end hard disk drive market, HDD's primary competitors are Fujitsu,
Hitachi, IBM and Seagate. Currently, Seagate and IBM have the largest market
share for high-end hard disk drives.
A majority of sales come from a few customers that have no minimum or long-term
purchase commitments
HDD's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and HDD's customer relationships are
terminable at will. The loss of, or a significant change in demand from, one or
more key HDD customers could have a material adverse impact on HDD's operating
results.
Because HDD depends on MKE for the manufacture of all hard disk drives, adverse
material developments in this critical manufacturing relationship would
adversely affect HDD's operating results
HDD's relationship with MKE is critical to the Hard Disk Drive group's operating
results and overall business performance. HDD's dependence on MKE includes the
following principal risks:
. Quality and Delivery. HDD relies on MKE to quickly achieve volume
production of new hard disk drives at a competitive cost, to meet HDD's
stringent quality requirements and to respond quickly to changing product
delivery schedules. Failure of MKE to satisfy these requirements could
have a material adverse impact on HDD's operating results.
. Purchase Forecasts. MKE's production schedule is based on HDD's forecasts
of its purchase requirements, and HDD has limited rights to modify short-
term purchase orders. The failure of HDD to accurately forecast its
requirements or successfully adjust MKE's production schedule could lead
to inventory shortages or surpluses.
. Pricing. HDD negotiates pricing arrangements with MKE on a quarterly
basis. Any failure to reach competitive pricing arrangements would have a
material adverse impact on HDD's operating results.
62
. Capital Commitment. HDD's future growth will require that MKE continue to
devote substantial financial resources to property, plant and equipment to
support the manufacture of HDD's products.
. Manufacturing Capacity. If MKE is unable or unwilling to meet HDD's
manufacturing requirements, an alternative manufacturing source may not be
available in the near term.
MKE depends on a limited number of component and sub-assembly suppliers and
component shortages and quality problems or delays from these suppliers could
result in increased costs and reduced sales
MKE depends on a limited number of qualified suppliers for components and sub-
assemblies, including recording heads, media and integrated circuits, all of
which are essential to the manufacture of HDD's hard disk drives. MKE may
qualify only a single source for certain components and sub-assemblies, which
can magnify the risk of component shortages. Component shortages have
constrained HDD's sales growth in the past, and HDD believes that it will
periodically experience component shortages in the future. If MKE experiences
quality problems with its component suppliers, HDD's hard disk drive shipments
could be significantly delayed or costs could be significantly increased.
Unexpected warranty costs could have a material adverse impact on operating
results
HDD warrants its products against defects for a period of one to five years.
Actual warranty costs could have a material adverse impact on HDD's operating
results if the actual unit failure rate or unit repair costs are greater than
those for which HDD established a warranty accrual.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege HDD's infringement of and need for a
license under their patented or other proprietary technology. For example, in
August 1998 Quantum was named as one of several defendants in a patent
infringement lawsuit. The plaintiff, Papst Licensing GmbH, owns at least 26 U.S.
patents, which it asserts that HDD has infringed. In fiscal year 2000,
Discovision Associates brought some of its patents to HDD's attention. Adverse
resolution of the Papst or any other third party infringement claim could
subject HDD to substantial liabilities and require it to refrain from
manufacturing and selling certain products. HDD cannot assure you that licenses
to any technology owned by Papst or any other third party alleging infringement
could be obtained on commercially reasonable terms, or at all. In addition, the
costs of litigation could be substantial, regardless of the outcome.
HDD's foreign manufacturing costs could be adversely impacted by fluctuations in
currency exchange rates
MKE generally purchases manufacturing components at prices denominated in U.S.
dollars. However, significant increases in currency exchange rates against the
U.S. dollar could increase MKE's manufacturing costs and could result in higher
product prices and/or declining margins for HDD's products.
63
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in Quantum's Annual Report on Form
10-K for the year ended March 31, 2000.
HDD is exposed to equity price risk on its investment in TiVo, Inc. common
stock. HDD does not attempt to reduce or eliminate its market exposure on this
security. HDD entered into a strategic alliance with TiVo in fiscal year 1999
to supply hard disk drives utilizing Quantum's QuickView technology for
integration into TiVo's Personal Video Recorder. At December 31, 2000, the fair
market value of HDD's investment was approximately $5 million. As TiVo is a
relatively new company and has introduced a new product in the consumer
electronics market, HDD does not believe it is possible to reasonably estimate
any future price movement of TiVo common stock.
64
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
The information contained in Note 7 of the Notes to Condensed Consolidated
Financial Statements and Note 6 of the Notes to Condensed Combined Financial
Statements of the Hard Disk Drive group is incorporated into this Part II, Item
1 by reference.
Item 2. Changes in securities - Not Applicable
Item 3. Defaults upon senior securities - Not Applicable
Item 4. Submission of matters to a vote of security holders - Not Applicable
Item 5. Other information - Not Applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits. The exhibits listed on the accompanying index to exhibits
--------
immediately following the signature page are filed as
part of this report.
(b) Reports on Form 8-K.
-------------------
On December 8, 2000, Quantum filed a Form 8-K reporting that its Hard Disk Drive
Group's revenue and units for the fiscal third quarter will be lower than
expected.
On December 14, 2000, Quantum filed a Form 8-K/A reporting that on October 3,
2000, Quantum Corporation, ("Quantum"), Maxtor Corporation, ("Maxtor"), Insula
Corporation, ("Insula"), and Hawaii Acquisition Corporation, ("Merger Sub"),
entered into an Agreement and Plan of Merger and Reorganization, (the "Merger
Agreement"), pursuant to which Quantum has agreed to sell its Hard Disk Drive
Group, (the "HDD Business"), to Maxtor, (the "Disposition"). Under the terms of
the Disposition, Quantum will assign to Spinco and Spinco will assume the assets
and liabilities of the HDD Business. Immediately following the assignment and
assumption, Quantum will redeem all shares of HDD common stock from the holders
of such shares in exchange for shares of Spinco common stock (the "Redemption").
On or about December 6, 2000, the parties to the Merger Agreement elected to
amend and restate the Merger Agreement to provide for the transaction to be
effected by a merger of Spinco directly into Maxtor immediately following the
Redemption, (the "Merger"), with Maxtor continuing after the Merger as the
surviving corporation and to effect certain other changes (the "Amended and
Restated Merger Agreement"). As a result of the Merger, each share of Spinco
common stock (formerly HDD common stock prior to the Redemption) will be
converted into the right to receive 1.52 shares of Maxtor common stock.
65
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUANTUM CORPORATION
(Registrant)
Date: February 12, 2001 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
66
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.1 (1) Amended and Restated Agreement and Plan of Merger and
Reorganization dated as of October 3, 2000 by and among Quantum
Corporation, Maxtor Corporation, Insula Corporation and Hawaii
Corporation (excluding exhibits).
Footnotes
to Exhibits Footnote
(1) As filed with Maxtor's Registration Statement on Form S-4 filed
with the Securities and Exchange Commission on January 23, 2001.