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 October 2, 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
October 2, 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
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 October 30, 1994: 45,419,561
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QUANTUM CORPORATION
10-Q REPORT
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Operations 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 12
SIGNATURE 14
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QUANTUM CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1994 1993 1994 1993
Sales $726,169 $493,955 $1,451,473 $973,067
Cost of sales 593,439 483,422 1,172,666 904,040
Gross profit 132,730 10,533 278,807 69,027
Operating expenses:
Research and development 28,554 19,878 57,153 41,573
Sales and marketing 23,106 17,551 45,866 36,322
General and administrative 11,353 11,421 21,684 22,800
Restructuring and
non-recurring - 22,753 - 22,753
63,013 71,603 124,703 123,448
Income (loss) from operations 69,717 (61,070) 154,104 (54,421)
Other (income) expense:
Interest expense 3,448 3,433 7,004 7,041
Interest and other income (3,164) (1,979) (5,534) (3,973)
284 1,454 1,470 3,068
Income (loss) before income
taxes 69,433 (62,524) 152,634 (57,489)
Income tax provision (benefit) 20,830 (17,184) 45,790 (15,522)
Net income (loss) $48,603 $ (45,340) $ 106,844 $(41,967)
Net income (loss) per share:
Primary $1.03 $(1.02) $2.27 $(0.94)
Fully diluted 0.85 (1.02) $1.87 (0.94)
Weighted average common and
common equivalent shares:
Primary 47,326,797 44,269,296 47,090,888 44,512,893
Fully diluted 59,037,402 44,269,296 58,800,191 44,512,893
See accompanying notes to consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
Oct 2, March 31,
1994 1994
Assets
Current assets:
Cash and cash equivalents $ 316,851 $217,531
Short-term investments 19,208 112,508
Accounts receivable, net of allowance for
doubtful accounts of $11,379 and $9,391 436,168 324,376
Inventories 200,878 194,083
Deferred taxes 37,835 32,821
Other current assets 45,800 14,365
Total current assets 1,056,740 895,684
Property and equipment, net of accumulated
depreciation of $86,726 and $72,801 108,611 85,874
Other assets 15,905 15,880
$1,181,256 $997,438
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 310,447 $267,189
Accrued warranty expense 59,277 55,617
Accrued compensation 23,040 15,315
Income taxes payable 11,826 -
Other accrued liabilities 37,740 35,545
Total current liabilities 442,330 373,666
Subordinated debentures 212,500 212,500
Shareholders' equity:
Common stock 132,840 124,530
Retained earnings 393,586 286,742
Total shareholders' equity 526,426 411,272
$1,181,256 $997,438
See accompanying notes to consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
Oct. 2, Oct. 3,
1994 1993
Cash flows from operating activities:
Net income (loss) $106,843 $(41,967)
Items not requiring the current use of cash:
Depreciation and amortization 14,888 21,180
Changes in assets and liabilities:
Accounts receivable (111,792) 12,170
Inventories (6,795) 52,973
Accounts payable 43,258 (53,240)
Income taxes payable 12,651 (19,026)
Accrued warranty expense 3,660 11,849
Other assets and liabilities (26,946) 1,760
Net cash provided by (used in) operating activities 35,767 (14,301)
Cash flows from investing activities:
Purchase of short-term investments (20,474) (97,292)
Sales and maturities of short-term investments 113,774 155,531
Investment in property and equipment (37,232) (20,103)
Net cash provided by (used in) investing activities 56,068 38,136
Cash flows from financing activities:
Repurchase of common stock - (17,421)
Proceeds from issuance of common stock 7,485 5,870
Net cash provided by (used in) financing activities 7,485 (11,551)
Net increase in cash and cash equivalents 99,320 12,284
Cash and cash equivalents at beginning of period 217,531 121,838
Cash and cash equivalents at end of period $316,851 $134,122
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,870 $ 13,666
Income taxes $ 29,835 $ 11,306
See accompanying notes to consolidated financial statements.
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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
1994.
2. Inventories
Inventories consisted of the following:
(In thousands)
Oct. 2, Mar. 31,
1994 1994
Materials and purchased parts $ 35,818 $ 27,841
Work in process 13,368 14,729
Finished goods 151,692 151,513
$200,878 $194,083
3. Net income (loss) per share
Net income (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding. Net income per
share computed on a fully diluted basis 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 and six months ended October 3, 1993, the
primary net loss 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.
4. Subsequent events
On October 3, 1994, the Company acquired Digital Equipment Corporation's
("Digital's") hard disk drive, tape drive, solid state disk, and thin film heads
businesses ("the acquired Businesses"). The transaction includes Digital's 81%
ownership position in Rocky Mountain Magnetics, Inc. and substantially all of
the assets related to the data storage business conducted by Digital directly
and through its subsidiaries. The Company plans to continue to use the assets
in substantially the same business.
The total purchase price was $360 million, plus assumption by the Company
of specified liabilities related to the acquired Businesses. The purchase price
is subject to post-closing reductions to the extent that the value of inventory
transferred at closing was less than specified levels or if capital expenditures
made by Digital related to the acquired Businesses were less than specified
levels. To date, post-closing reductions total $12 million. The purchase was
financed with $278 million in cash and bank debt and a note to Digital for $70
million.
The bank debt consists of a three year $350 million senior credit facility
structured as a $225 million revolving credit and a $125 million term loan. The
revolving credit will be governed by a borrowing base of eligible accounts
receivable and inventory, and the term loan amortizes in five equal semi-annual
installments commencing twelve months from closing.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Consolidated sales for the three and six months ended October 2, 1994 were
$726 million and $1,452 million, respectively, compared to $494 million and $973
million for the corresponding periods in fiscal 1994. The increase in
consolidated sales on a year-to-year basis was attributable to increased unit
shipments. Unit shipments and consolidated sales for the six months ended
October 2, 1994 increased 49% compared to the corresponding period in fiscal
1994.
Sales to Compaq Computer, Inc. ("Compaq") and Apple Computer, Inc.
("Apple") represented 21% and 15% of consolidated sales for the second quarter
of fiscal 1995, respectively. For the second quarter of fiscal 1994, sales to
Compaq represented less than 10% of consolidated sales, while sales to Apple
represented 27% of consolidated sales. Sales to Compaq and Apple represented
18% and 14%, respectively, of consolidated sales for the six months ended
October 2, 1994. For the first half of the prior fiscal year, sales to Compaq
and Apple represented 11% and 28% of total consolidated sales, respectively.
The Company has no long-term supply commitments with these customers. Any
significant decrease in sales to these customers, or the loss of one or both of
these customers, could have a material adverse effect on the Company's results
of operations.
The gross margin for the quarter ended October 2, 1994 increased to 18.3%
from 2.1% for the second quarter of fiscal 1994. The Company's gross margin for
the first half of fiscal 1995 was 19.2%, compared to 7.1% for the corresponding
period in fiscal 1994. The improvement in gross margin from the previous fiscal
year was a result of the more normal pricing environment and the better
supply/demand mix experienced during the first half of fiscal 1995, compared to
the same period in fiscal 1994, which experienced intense pricing pressures in
both the distribution and OEM channels resulting primarily from an oversupply of
disk drives industry wide.
On October 3, 1994, the Company acquired Digital Equipment Corporation's
("Digital's") hard disk drive, tape drive, solid state disk, and thin film heads
businesses ("the acquired Businesses"). The transaction includes Digital's 81%
ownership position in Rocky Mountain Magnetics, Inc. and substantially all of
the assets related to the data storage business conducted by Digital directly
and through its subsidiaries. The Company plans to continue to use the assets in
substantially the same business.
During the next several quarters, the Company expects that gross margin
will be significantly lower, as certain transition issues associated with the
acquisition of the acquired Businesses are addressed. Key transition issues the
Company will be focusing on are phasing out the older, lower gross margin
product lines acquired from Digital and integrating the thin film heads across
the Company's existing product lines to reduce excess head manufacturing
capacity. Due to these transition issues, the Company anticipates that gross
margin for the December quarter could be less than 15%.
Over the past ten years, Quantum has established a strong business
relationship 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 MKE, which covers the general terms of the
business relationship, was renegotiated during fiscal 1993 and was extended for
a period of five years. In the first half of fiscal 1995 approximately 90% of
Quantum's sales were derived from products manufactured by MKE. In the event
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 purchases 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, including those products acquired from Digital, will
account for a significant portion of sales for the latter half of fiscal 1995
and will replace sales of some current products. The Company's continued
ability to produce new products economically and manage the transition of
customers to these new products is essential for continued 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.
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.
Although it is premature to estimate the impact of the acquisition on the
financial results of the Company at this time, the Company anticipates that the
acquisition will have a dilutive effect on earnings for at least the next few
quarters. During the December quarter, the Company expects profitability
(excluding non-recurring charges) to decline significantly from the September
quarter. Key transition issues that the Company anticipates will impact
profitability include the lower overall gross margins of the products acquired
from Digital and the excess capacity in the newly acquired recording heads
business.
Operating Expenses
Research and development expenses in the second quarter of fiscal 1995
were $29 million, compared to $20 million in the corresponding period in fiscal
1994. Research and development expenses in the six months ended October 2, 1994
were $57 million, compared to $42 million in the corresponding period in fiscal
1994. In each of these periods research and development expenses were 4% of
sales for the respective periods. The increases in absolute dollars are due to
increased headcount and higher expenses related to preproduction activity for a
larger number of new products. With the acquisition of the acquired Businesses
the Company expects research and development expenses to double. Additionally,
the Company anticipates that research and development expenditures will
represent a higher percentage of sales on an ongoing basis, reflecting spending
for both the vertically integrated heads business and the new high capacity
products, which tend to be more research and development intensive. 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 second quarter of fiscal 1995 were $23
million, or 3% of sales, a one percent decline from the corresponding period of
fiscal 1994 with expenses of $18 million, or 4% of sales. Sales and marketing
expenses in the six months ended October 2, 1994 were $46 million, or 3% of
sales, compared to $36 million, or 4% of sales in the corresponding period in
fiscal 1994. The increases in absolute dollars are due to costs associated with
supporting the higher sales volume and expanding the Company's international
infrastructure. The Company anticipates an increase in the absolute dollar
spending in sales and marketing related to the Digital acquisition, with
expenditures as a percentage of sales remaining relatively consistent.
General and administrative expenses in the second quarter of fiscal 1995
and 1994 were $11 million, or 2% of sales for each of the respective quarters.
General and administrative expenses in the six months ended October 2, 1994 were
$22 million, compared to $23 million in the corresponding period in fiscal 1994,
with each period's expenses representing 2% of sales for the respective periods.
Due to the acquisition of the acquired Businesses, the Company expects an
increase in general and administrative absolute dollar spending, with
expenditures as a percentage of sales remaining relatively consistent.
As a result of the acquisition of the acquired Businesses, the Company
anticipates recording non-recurring charges, including the write-off of in-
process research and development, during the December quarter of fiscal 1995.
At this time, it is premature to estimate the amount of these charges.
The Company's second quarter of fiscal 1994 results included restructuring
and non-recurring charges of $23 million. The charges were primarily associated
with the write-off of goodwill associated with it's former subsidiary, Plus
Development, the Company's reduction in force, product transitions and the
consolidation of sales offices and other facilities. Additionally, the Company
was in the process of consolidating repair facilities from three facilities
worldwide into a single location in Malaysia, the costs of which were included
in the second quarter fiscal 1994 restructuring charges.
Net interest and other income/expense in the second quarter of fiscal 1995
were $0.3 million net expense, compared to $1.5 million net expense in
the corresponding period in fiscal 1994. Net interest and other income/expense
for the six months ended October 2, 1994 were $1.5 million, compared to $3.1
million in the corresponding period in fiscal 1994. The decrease in net
expense in fiscal 1995 was due to increased interest income which resulted from
higher cash balances and higher interest rates.
Income Taxes
The effective tax rate for the quarter and six months ended October 2,
1994 was 30%, compared to an effective tax benefit rate of 27% for the
corresponding periods in fiscal 1994. The fiscal 1994 tax benefit resulted from
an overall net operating loss. The fiscal 1995 effective tax rate is 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.
Liquidity and Capital Resources
At October 2, 1994, the Company had $336 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 by operations.
On October 3, 1994, the Company purchased the acquired Businesses from
Digital for a total price of $360 million, plus assumption by the Company of
specified liabilities related to the acquired Businesses. The purchase price is
subject to post-closing reduction to the extent that the value of inventory
transferred at closing was less than specified levels or if capital expenditures
made by Digital related to the acquired Businesses were less than specified
levels. To date, post-closing reductions total $12 million. The purchase was
financed with $278 million in cash and bank debt and a note to Digital for $70
million.
The bank debt consists of a three year $350 million senior credit facility
structured as a $225 million revolving credit and a $125 million term loan. The
revolving credit will be governed by a borrowing base of eligible accounts
receivable and inventory, and the term loan amortizes in five equal semi-annual
installments commencing twelve months from closing.
The Company expects to spend approximately $10 to $30 million for
leasehold improvements, capital equipment and the expansion of the Company's
facilities for the remainder of fiscal year 1995. Over the next twelve months,
the Company anticipates a significant amount of additional capital expenditures
will be required to ramp the Asia manufacturing facilities and to support the
recording heads business of the acquired Businesses. The Company believes that
the credit facilities, 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.
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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.
The 1994 Annual Meeting of Shareholders was held on July 28, 1994. The
matters voted upon were the election of directors, an amendment to the
Company's Employee Stock Purchase Plan, an Annual Incentive Plan for
the Chief Executive Officer, and the appointment of the independent
auditors.
The Shareholders approved the election of directors as follows:
For Withheld
Stephen M. Berkley 36,644,978 228,027
David A. Brown 36,645,213 228,027
Robert J. Casale 36,642,193 228,527
Edward M. Esber, Jr. 36,645,198 228,027
William J. Miller 36,645,213 228,027
Steven C. Wheelwright 36,645,198 228,027
The Shareholders approved and ratified an amendment to the Company's
Employee Stock Purchase Plan, increasing the number of shares reserved
for issuance thereunder from 4,300,000 to 6,300,000 shares of Common
Stock. The number of affirmative votes cast for this matter was
34,495,673. The number of negative votes cast with respect to this
matter were 1,611,500 with 121,953 votes abstaining and 8,522,875
broker non-votes.
The Shareholders approved and ratified an Annual Incentive Plan for the
Chief Executive Officer of the Company. The payment of the bonus will
depend on the Company's achieving certain predetermined targets for the
fiscal year ending March 31, 1995 set by the Compensation Committee.
Stockholder approval of the bonus was necessitated by the recent
enactment of tax rules by the Internal Revenue Service, which provides
a $1,000,000 cap on deductions by publicly-held corporations for
certain compensation paid to the CEO effective for taxable years
beginning on or after January 1, 1994. If the Company's targets are
above certain specified levels, the CEO will be eligible to receive a
bonus in a predetermined amount ranging from $118,125 to a maximum of
$1,119,938. If the Company's minimum targets are not met, no bonus
will be paid to the CEO. The plan was approved with 33,482,137
affirmative votes, 1,959,253 negative votes, 171,984 votes abstaining
and 9,138,627 broker non-votes.
The appointment of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending March 31, 1995 was approved with
36,705,097 affirmative votes, 19,073 negative votes, 148,606 votes
abstaining and 7,879,225 broker non-votes.
In addition, the shareholders voted to allow the directors to vote on
any other matters of business that might come before the meeting with
36,872,776 affirmative votes, no negative or abstaining votes, and
7,897,225 broker non-votes.
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
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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: November 15, 1994 By: /s/JOSEPH T. RODGERS
Executive Vice President, Finance
and Chief Financial Officer
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QUANTUM CORPORATION
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
11.1 Statement of Computation of Net Income per Share 16
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EXHIBIT 11.1
QUANTUM CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands except per share data)
Three Months Ended Six Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1994 1993 1994 1993
PRIMARY
Weighted average number of
common shares during the
period 45,305 43,258 45,027 43,349
Incremental common shares
attributable to exercise
of outstanding options 2,022 1,011 2,064 1,164
Total shares 47,327 44,269 47,091 44,513
Net income (loss) $48,603 $(45,340) $106,844 $(41,967)
Net income (loss) per share $1.03 $(1.02) $2.27 $(0.94)
FULLY DILUTED
Weighted average number of
common shares during the
period 45,305 43,258 45,027 43,349
Incremental common shares
attributable to exercise
of outstanding options and
conversion of 6 3/8%
convertible subordinated
debentures 13,733 12,723 13,773 12,874
Total shares 59,037 55,981 58,800 56,223
Net income (loss):
Net income (loss) $48,603 $(45,340) $106,844 $(41,967)
Add 6 3/8% convertible
subordinated debentures
interest, net of income
tax effect 1,663 2,229 3,340 4,556
Net income, as adjusted $50,266 $(43,111) $110,184 $(37,411)
Net income per share $ 0.85 $ (0.77)* $ 1.87 $ (0.67)*
* The primary net income per share is shown in the statements of income as both
primary and fully diluted, as the effect of the assumed conversion of the
subordinated debentures is anti-dilutive.
