Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[
X
] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended Commission
File Number
July 3, 1994
0-12390
QUANTUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2665054
(State or other jurisdiction of (IRS Employer
Identification Number)
incorporation or organization)
500 McCarthy Blvd.
Milpitas, California
95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 894-4000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934, during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of July 29, 1994: 45,232,586.
QUANTUM CORPORATION
10-Q REPORT
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION 11
SIGNATURE 12
QUANTUM CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except share per share data)
(unaudited)
First Quarter
Three Months Ended
July 3,
July 4,
1994 1993
Sales
$725,304 $479,112
Cost of sales 579,227
420,618
Gross p
rofit146,077
58,494
Operating expenses:
Research and development 28,599
21,695
Sales and marketing 22,760
18,771
General and administrative 10,331
11,379
61,690
51,845
Income from operations 84,387
6,649
Other (income) expense:
Interest
expense 3,556
3,608
Interest and other income (2,371)
(1,994)
1,185
1,614
Income before income taxes 83,202
5,035
Income tax provision 24,961
1,662
Net income $58,241 $
3,373
Net income per share:
Primary $1.24 $0.08
Fully diluted $1.03 $
0.08
Weighted average common and
common equivalent shares:
Primary 46,854,979
44,756,490
Fully diluted 58,562,979
44,756,490
See accompanying notes to consolidated financial statements.
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
July 3,
March 31,
1994 1994
Assets
Current assets:
Cash and cash equivalents $ 251,252
$217,531
Short-term investments 119,797
112,508
Accounts receivable, net of allowance for
doubtful accounts of $10,371 and $9,391 379,284
324,376
Inventories 177,308
194,083
Deferred taxes 41,445
32,821
Other current assets 14,283
14,365
Total current assets 983,369
895,684
Property and equipment, net of accumulated
depreciation of $79,636 and $72,801 95,611
85,874
Other assets 15,973
15,880
$1,094,953
$997,438
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 269,472
$267,189
Accrued warranty expense 56,261
55,617
Accrued compensation 19,
593 15,315
Income taxes payable 20,833 -
Other accrued liabilities 44,929
35,545
Total current liabilities 411,088
373,666
Subordinated debentures 212,500
212,500
Shareholders' equity:
Common stock 126,382
124,530
Retained ea
rnings 344,983
286,742
Total shareholders' equity 471,365
411,272
$1,094,953
$997,438
See accompanying notes to consolidated financial statements.
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
July 3,
July 4,
1994 1993
Cash flows from operating activities:
Net income $ 58,241 $
3,373
Items not requiring the current use of cash:
Depreciation and amortization 7,265
7,225
Changes in assets and liabilities:
Accounts receivable (54,908)
17,613
Inventories 16,775
(29,127)
Accounts payable 2,282
(24,022)
Income taxes payable 21,196
(15,098)
Accrued warranty expense 644
4,352
Other assets and liabilities 4,829
10,215
Net cash provided by (used in) operating activities 56,324
(25,469)
Cash flows from investing activities:
Purchase of short-term investments (17,349)
(80,000)
Sales and maturities of short-term investments 10,060
138,136
Investment in property and equipment (16,803) (10,762)
Net cash provided by (used in) investing activities (24,092)
47,374
Cash flows from financing activities:
Repurchase of common stock -
(991)
Proceeds from issuance of common stock 1,489
1,754
Net cash provided by financing activities 1,489
763
Net increase in cash and cash equivalents 33,721
22,668
Cash and cash equivalents at beginning of period 217,531
121,838
Cash and cash equivalents at end of period $251,252
$144,506
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,831 $
6,837
Income taxes $ 4,247 $
8,806
See accompanying notes to consolidated financial statements.
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited consolidated financial statements
reflect all adjustments, consisting only of normal recurring
adjustments which, in the opinion of management, are necessary for
a fair presentation of the results for the periods shown. The results of
operations for such periods are
not necessarily indicative of the results expected for the full
fiscal year. The accompanying financial statements should be read
in conjunction with the audited financial statements of Quantum Corporation for
the fiscal year ended March 31, 1994.
2. Cash, Cash Equivalents and Short Term Investments
The Company has classified all cash and highly liquid
investments with original maturities of three months or less at the
date of acquisition as cash equivalents. All other liquid investments are
classified
as short-term investments. The Company invests primarily in short
term debt securities of companies with strong credit ratings from a
variety of industries. The Company has not experienced any material losses on
its investments. The Company, by
Corporate policy, limits the amount of credit exposure to any one
issuer and to any one type of investment.
3. Change in Method of Accounting for Certain Investments
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with the Statement, prior period
financial statements have not been restated to reflect the change
in accounting principle.
The cumulative effect as of April 1, 1994 of adopting Statement 115
was immaterial. The Company has classified its entire investment
portfolio as available-for-sale.
Available-for-sale securities are carried at fair value, with material unrealized
gains and losses reported in stockholder's equity.
The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization is included in interest income along with interest earned. Realized
gains or losses and declines in value judged to
be other-than-temporary on available-for-sale securities are
reported as investment income or investment expense. The cost of
securities sold is based on the specific identification method.
The following is a summary of available-for-sale securities at July
3, 1994:
Available-for-Sale Securities
(In thousands)
Cost
Corporate commercial paper and bank notes $199,558
Certificates of deposit 89,504
U.S. Treasury securities and obligations
of U.S. government agencies 9,687
Other 1,297
$300,046
Amounts included in short-term investments $119,797
Amounts included in cash and cash equivalents 180,249
$300,046
During the three months ended July 3, 1994 there were no sales of
securities available-for-sale. In addition, the gross unrealized gains
and gross unrealized losses were immaterial to the Company and
therefore, no amount was recorded to stockholder's equity for the
quarter ended July 3, 1994. As of July 3, 1994, the average portfolio duration
is approximately 30 days and no individual
security has a maturity which exceeds one year.
4. Inventories
Inventories consisted of the following:
(In thousands)
July 3, March
31,
1994 1994
Materials and purchased parts $ 1
4,205$ 27,841
Work in process 22,636
14,729
Finished goods 140,467
151,513
$177,308
$194,083
5.
Net income per share
Net income per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding.
Net income per share computed on a fully diluted basis assumes
conversion of the Company's outstanding 6 3/8% convertible
subordinated debentures having a principal value of $212,500,000.
For the three months ended July 4, 1993, the primary net income
per share is shown in the statement of income as both primary and
fully diluted, as the effect of the assumed conversion of the
subordinated debentures is anti-dilutive.
6. Subsequent events
On July 19, 1994, the Company signed an agreement to purchase
Digital Equipment Corporation's magnetic disk drive, tape drive, solid
state disk and thin-film heads businesses for $400 million. This
transaction includes Digital's 81% interest in Rocky Mountain
Magnetics, Inc. which is developing magneto-resistive head technology. The
closing date is expected on or about October 3.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Consolidated sales for the three months ended July 3, 1994
were $725 million, compared to $479 million for the corresponding
period in fiscal 1994. The increase in consolidated sales is
attributable to increased unit shipments which were partially
offset by a decline in average unit sales prices. Unit shipments
for the three months ended July 3, 1994 increased 58% compared to
the corresponding period in fiscal 1994 with sales for the first
quarter of fiscal 1995 increasing 51% over the first quarter of
fiscal 1994.
Sales to Compaq Computer, Inc. and Apple Computer, Inc. represented 16% and
14% of consolidated sales for the three months
ended July 3, 1994. For the first quarter of fiscal 1994, sales to
Compaq Computer, Inc. and Apple Computer, Inc. represented 14% and
29% of total consolidated sales. The Company has no long-term supply
arrangements with any customers. A significant
decrease in combined sales to the top customers, or the loss of
these customers, could have a material adverse effect on the
Company's results of operations.
Gross margin for the quarter ended July 3, 1994 increased to
20.1% from 12.2% for the first quarter of fiscal 1994. This
increase was due to the Company's successful transition of its
customers from the ProDrive ELS to the newer more cost effective
ProDrive LPS and the return to a more normal pricing environment
throughout the industry. However, the Company expects that price
declines will be moderately higher during the September quarter
primarily because of pricing pressures at certain capacity points.
Due to the cyclical nature of the disk drive industry and the
Company's dependence on new product introductions, there can be no
assurance that the Company will be able to sustain the current
gross margin levels.
Over the past ten years, Quantum has established a strong
business relatio
nship with Matsushita-Kotobuki Electronics
Industries, Ltd. (MKE) of Japan. This relationship has been built
on Quantum's engineering and design expertise and MKE's
high-volume, high-quality manufacturing
expertise. The Company's
master agreement with MK
E, which covers the general terms of the
business relationship, was renegotiated during fiscal 1993 and was
extended for a period of five years. In fiscal 1994 approximately
90% of Quantum's sales were derived from products manufactured by
MKE. In the ev
ent MKE is unable to supply such products or
increases its prices for manufacturing services, the Company's
results of operations would be adversely affected. The Company's
transactions with MKE are denominated in U.S. dollars with prices
for product purc
hases negotiated periodically, usually on an annual
basis. Thus, fluctuations in the exchange rate have no material
short-term impact on Quantum's results of operations. However, such
fluctuations may impact future negotiated prices.
Quantum operates in
an extremely competitive industry and its
rapid growth has been the result of the Company's ability to
identify customer needs and develop quality products to meet those
requirements. The Company expects that sales from new products
will account for a si
gnificant portion of sales for the latter half
of fiscal 1995 and will replace sales of some current products.
The Company's ability to produce new products economically and
manage the transition of customers to these new products is
essential for continu
ed success. The hard disk drive industry is
characterized by increasingly short product life cycles and is
dependent on the strength of unit demand in the personal computer
market.
As a result, the industry tends to experience periods of
excess product i
nventory and intense price competition. These and
other factors may affect the Company's results of operations, and
past financial performance should not be considered a reliable
indicator of future performance. Investors should not use
historical trends
to anticipate results or trends in future
periods.
Subsequent to July 3, 1994, the Company signed an agreement to
purchase Digital Equipment Corporation's magnetic disk drive, tape
drive, solid state disk and thin-film heads businesses for $400
million, with the closing date expected on or about October 3. If the
acquisition is consummated as planned, the Company's results will
reflect the operations of Digital's Storage Business unit
commencing the December quarter.
Although it is premature to estimate the impact on the financial results of
the Company at this time,
the Company anticipates that the acquisition will have a dilutive
effect on earnings for the December and March quarters in fiscal
1995.
Operating Expenses
Research and development expenses in the three months ended
July 3, 1994 were $29 million, or 3.9% of sales, compared to $22
million, or 4.5% of sales in the corresponding period in fiscal
1994. The percentage decrease is due to higher revenues in the
first quarter of fiscal 1995. Quantum intends to continue its
investment in research and development. The hard disk drive
industry is subject to rapid technological advances and the future
success of the Company is dependent upon continued successful and
timely introductions of new products and technologies.
Sales and marketing expenses in the three months ended July 3,
1994 were $23 million, or 3.1% of sales, compared to $19 million,
or 3.9% of sales in the corresponding period in fiscal 1994. The
increase in absolute dollars is due to costs associated with
supporting the higher sales volume and expanding the Company's
international infrastructure.
General and administrative expenses in the three months ended
July 3, 1994 were $10 million, or 1.4% of sales, compared to $11
million, or 2.4% of sales in the corresponding period in fiscal
1994. The decline in absolute dollars is due to the Company's
reorganization in Q2 1994 and subsequently having more streamlined
operations.
Net interest and other income/expense in the three months
ended July 3,
1994 were $1.2 million net expense, compared to $1.6 million net
expense in
the corresponding period in fiscal 1994. The decrease in net
expense in fiscal
1995 is due to increased interest income which resulted from higher
cash
balances and higher interest rates.
Income Taxes
The effective tax rate for the quarter ended July 3, 1994 was
30%, compared to 33% for the corresponding period in fiscal 1994.
The effective tax rates are below the combined federal and state
statutory rates as a result of the tax benefit associated with the income of
foreign
subsidiaries taxed at lower than statutory rates and the Company's
tax exempt income.
Liquidity and Capital Resources
At July 3, 1994, the Company had $371 million in cash and cash
equivalents and short-term investments, compared to $330 million at
March 31, 1994. The increase is due primarily to cash generated
from operations.
The Company plans to finance the $400 million acquisition cost
of Digital Equipment Corporation's Storage Business Unit with a combination of
cash and debt. The Company
expects to spend approximately $22 to $42 million for leasehold
improvements, capital equipment and the expansion of the Company's
facilities for the remainder of the fiscal year. If the acquisition is
consummated as planned, the Company anticipates a
significant amount of additional capital expenditures will be
required to ramp up the manufacturing facilities in Asia over the
next twelve months. The Company is presently in negotiations with
a consortium of banks in connection with the Digital acquisition
financing. The Company believes that such acquisition financing,
as well as cash generated from its operations, will be sufficient
to meet these capital requirements as well as working capital requirements during
the next twelve months.
The Company has an authorization outstanding from the Board of
Directors to repurchase 1.5 million shares of its common stock in
the open market.
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings - Not
Applicable.
Item 2. Changes in securities - Not
Applicable.
Item 3. Defaults upon senior
securities - Not Applicable.
Item 4. Submission of matters to a
vote of security holders - Not Applicable.
Item 5. Other information - Not Applicable.
Item 6. Exhibits and reports on
Form 8-K.
(a)
Exhibits. The exhibits listed on the
accompanying index to exhibits immediately
following the signature page are filed as part
of this report.
(b) Reports on Form 8-K. None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
QUANTUM CORPORATION
(Registrant)
Date: August 10, 1994 By:
Joseph T. Rodgers
Executive Vice President, Finance
and Chief Financial Officer
QUANTUM CORPORATION
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
11.1Statement of Computation of Net Income Per
Share
14
EXHIBIT 11.1
QUANTUM CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands except per share data)
Three Months Ended
July 3,
July 4,
1994 1993
PRIMARY
Weighted average number of common shares
during the period 44,749
43,439
Incremental common shares attributable to
exercise of outstanding options 2,106
1,317
Total shares 46,855
44,756
Net income $58,241 $
3,373
Net income per share $1.24
$0.08
FULLY DILUTED
Weighted average number of common shares
during the period 44,749
43,439
Incremental common shares attributable to
exercise of outstanding options and
conversion of 6 3/8% convertible
subordinated debentures 13,814
13,025
Total shares 58,563
56,464
Net income:
Net income $58,241 $ 3,373
Add 6 3/8% convertible subordinated
debentures interest, net of income
tax effect 2,093
2,151
Net income, as adjusted $60,334 $
5,524
Net income per share $1.03
$0.10 *
* The primary net income per share is shown in the statement of income as
both primary and fully diluted, as
the effect of the assumed conversion of the subordinated debentures
is anti dilutive.
