Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12390
QUANTUM CORPORATION
Incorporated Pursuant to the Laws of the State of Delaware
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IRS Employer Identification Number 94-2665054
500 McCarthy Blvd., Milpitas, California 95035
(408) 894-4000
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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 28, 1996: 57,669,553
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QUANTUM CORPORATION
10-Q REPORT
INDEX
Page
Number
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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 7
PART II - OTHER INFORMATION 16
SIGNATURE 17
<PAGE>
QUANTUM CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(unaudited)
Three Months Ended
June 30, July 2,
1996 1995
---------- ----------
Sales $1,153,502 $ 941,316
Cost of sales 1,012,223 816,827
---------- ----------
Gross profit 141,279 124,489
Operating expenses:
Research and development 66,665 55,111
Sales and marketing 36,195 33,703
General and administrative 21,487 12,182
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124,347 100,996
Income from operations 16,932 23,493
Other (income) expense:
Interest expense 10,272 8,147
Interest and other income 1,467 (2,882)
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11,739 5,265
Income before income taxes 5,193 18,228
Income tax provision 1,350 5,286
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Net income $ 3,843 $ 12,942
========== ==========
Net income per share:
Primary $ 0.07 $ 0.25
Fully diluted $ 0.07 $ 0.24
Weighted average common and common
equivalent shares:
Primary 57,846 51,712
Fully diluted 57,846 62,239
See accompanying notes to consolidated financial statements.
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
June 30, March 31,
1996 1996
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Assets
Current assets:
Cash and cash equivalents $ 140,036 $ 164,752
Accounts receivable, net of allowance for
doubtful accounts of $13,498 and
$10,497, respectively 730,221 711,107
Inventories 449,521 459,538
Deferred taxes 109,609 109,625
Other current assets 104,347 81,472
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Total current assets 1,533,734 1,526,494
Property and equipment, net of accumulated
depreciation of $179,289 and $161,334 384,099 364,111
Purchased intangibles, net 55,685 66,313
Other assets 18,061 18,437
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$1,991,579 $1,975,355
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 465,577 $ 498,829
Accrued warranty expense 48,341 62,289
Accrued compensation 40,152 45,439
Income taxes payable 46,304 40,994
Accrued restructuring and exit costs 56,266 115,537
Current portion of long-term debt 5,659 4,125
Other accrued liabilities 65,441 53,929
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Total current liabilities 727,740 821,142
Deferred taxes 11,232 11,232
Convertible subordinated debt 338,700 374,283
Long-term debt 315,992 223,875
Shareholders' equity:
Common stock 316,195 266,946
Retained earnings 281,720 277,877
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Total shareholders' equity 597,915 544,823
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$1,991,579 $1,975,355
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
June 30, July 2,
1996 1995
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Cash flows from operating activities:
Net income $ 3,843 $ 12,942
Items not requiring the current use of cash:
Depreciation and amortization 28,154 21,834
Compensation related to stock option plans 365 --
Changes in assets and liabilities:
Accounts receivable (19,114) (39,478)
Inventories 10,017 (67,209)
Accounts payable (33,252) 69,843
Income taxes payable (87) (16,207)
Accrued warranty expense (13,948) (373)
Other assets and liabilities (61,367) (46,793)
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Net cash provided by (used in) operating activities (85,389) (65,441)
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Cash flows from investing activities:
Investment in property and equipment (43,980) (38,118)
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Net cash provided by (used in) investing activities (43,980) (38,118)
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Cash flows from financing activities:
Proceeds from long-term credit facilities 125,000 85,000
Principal payments on long-term credit facilities (31,349) (10,000)
Proceeds from issuance of common stock 11,002 9,690
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Net cash provided by financing activities 104,653 84,690
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Net decrease in cash and cash equivalents (24,716) (18,869)
Cash and cash equivalents at beginning of period 164,752 187,753
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Cash and cash equivalents at end of period $ 140,036 $ 168,884
========= =========
Supplemental disclosure of cash flow information:
Conversion of debentures $ 35,583 --
Cash paid during the period for:
Interest $ 9,611 $ 9,081
Taxes $ 1,494 $ 21,976
See accompanying notes to consolidated financial statements.
<PAGE>
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,
1996.
2. Inventories
Inventories consisted of the following:
(In thousands)
June 30, March 31,
1996 1996
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Materials and purchased parts $ 89,504 $119,984
Work in process 60,490 98,591
Finished goods 299,527 240,963
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$449,521 $459,538
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3. 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
convertible subordinated debt. For the three month period ended June 30, 1996,
net income per share, on a fully diluted basis, did not assume conversion of the
outstanding convertible debt because the effect would have been anti-dilutive.
4. Debt
The Company has a senior credit facility with a $325 million revolving credit
line and an outstanding balance as of June 30, 1996, of $305 million. Subsequent
to the end of the period, certain of the related financial covenants were
amended, effective for the quarter ended June 30, 1996.
The Company's convertible subordinated debentures due 2002 are redeemable at the
Company's option, at prices ranging from 103.8% of the principal at April 1,
1996, to 100% at maturity. At the option of the holder, each debenture is
convertible into the Company's common stock at a conversion price of
approximately $18.15 per share. In the three months ended June 30, 1996, a total
of $35,583,000 of the debentures, or approximately 27% of the outstanding
<PAGE>
balance of $132,933,000 at the end of the prior fiscal year, were converted.
This resulted in the issuance of 1,960,622 shares of common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include the expected benefits of transitioning the manufacturing of the
Company's high-capacity hard disk drive products to Matsushita-Kotobuki
Electronics Industries, Ltd. ("MKE"), of Japan, as well as management's
expectations regarding financial results for fiscal 1997. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the factors set forth below in "Trends and Uncertainties" and
elsewhere in this report.
Results of Operations
SALES. Sales for the three months ended June 30, 1996, were $1,154 million
compared to $941 million for the three months ended July 2, 1995. The increase
in sales on a year-to-year basis was attributable to increased unit sales and a
change in sales mix to larger-capacity products in the desktop market, partially
offset by a decline in average unit prices on existing products. During the
first quarter of fiscal 1997, the Company experienced weaker than expected
demand for drives for the personal computer market that resulted in pressure on
pricing. (See the discussion under "Trends and Uncertainties" below.) In
addition, sales of high-capacity disk drive products declined as products
manufactured by Quantum are being phased out and shipments of high-capacity
products manufactured by MKE have not yet begun. Compared to the corresponding
period in fiscal 1996, total unit shipments for the first quarter of fiscal 1997
increased 18%, while sales for the first quarter of fiscal 1997 increased 23%
over the first quarter of fiscal 1996. Sales of a limited number of desktop and
portable storage products represented a significant majority of sales for the
three months ended June 30, 1996. The Company anticipates that this trend will
continue in the future.
Sales to the top five customers for the three months ended June 30, 1996,
represented 42% of sales, with one customer having sales greater than 10% of
sales for the period. For the corresponding period in fiscal 1996, sales to the
top five customers represented 47% of sales, with three customers having sales
greater than 10% of sales. Any significant decrease in sales to a major customer
or the loss of a major customer could have a material adverse effect on the
Company's results of operations.
GROSS MARGIN. The gross margin for the quarter ended June 30, 1996, decreased to
12.2% from 13.2% for the quarter ended July 2, 1995. Gross margin decreased due
to pricing pressures in the desktop market and the product transition in
conjunction with the restructuring of the high-capacity business. In the future,
gross margin may be affected by pricing and other competitive conditions, as
well as the Company's ability to phase out the older, lower gross margin product
<PAGE>
lines and transition to higher margin products incorporating advances in
technology. (See "Trends and Uncertainties" below for a discussion of certain
other factors that may affect the Company's gross margin.)
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
first quarter of fiscal 1997 were $67 million, or 5.8% of sales, compared to $55
million, or 5.9% of sales in the corresponding period in fiscal 1996. This
increase in research and development spending in absolute dollars was primarily
due to higher expenses related to pre-production activity for a larger number of
new products. The information storage industry, particularly the hard disk drive
business, is subject to rapid technological advances, and the future success of
the Company is dependent upon continued development and timely introduction of
new products and technologies. As a result, the Company expects to continue to
make significant expenditures for research and development. (See "Trends and
Uncertainties" below.)
SALES AND MARKETING EXPENSES. Sales and marketing expenses in the first quarter
of fiscal 1997 were $36 million, or 3.1% of sales, compared to $34 million, or
3.6% of sales in the corresponding period in fiscal 1996. The increase in
absolute dollars was related to the costs associated with supporting the
Company's higher volume of sales. The percentage decline was due to efficiencies
resulting from economies of scale.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in the
first quarter of fiscal 1997 were $21 million, or 1.9% of sales, compared to $12
million, or 1.3% of sales in the corresponding period in fiscal 1996. The
increase in absolute dollars was due to the larger infrastructure to support the
Company's operations, as well as an increase in bad debt expense. The percentage
increase was primarily due to the increase in bad debt expense.
OTHER (INCOME) EXPENSE. Net interest and other income/expense was $12 million
net expense for the quarter ended June 30, 1996, and $5 million for the
corresponding period in fiscal 1996. The increase in net interest expense was
the result of an increase in the level of debt and a reduction in interest
income.
INCOME TAXES. The effective tax rate for the three months ended June 30, 1996,
was 26%, compared to the effective rate of 29% for the three months ended July
2, 1995. The lower effective tax rate was primarily attributable to the
realization of deferred tax assets previously reserved and lower overall state
taxes.
Liquidity and Capital Resources
At June 30, 1996, the Company had $140 million in cash and cash equivalents,
compared to $165 million at March 31, 1996. Cash was used in operating
and investing activities, primarily as a result of increases in receivables
and other current assets and decreases in accounts payable and accruals,
as well as investment in property and equipment. Cash provided by financing
activities was primarily a result of additional borrowing under the credit
facility described below.
<PAGE>
The Company has a senior credit facility with a $325 million revolving credit
line governed by a borrowing base of eligible accounts receivable and inventory.
The borrowings, at the option of the Company, bear interest at either LIBOR plus
a margin or a base rate with option periods of one to six months. The facility
is secured by all the Company's domestic assets and 66% of the Company's
ownership of certain of its subsidiaries. The balance outstanding on the credit
line was $305 million at June 30, 1996. Subsequent to the end of the period,
certain of the financial covenants related to this facility were amended,
effective for the quarter ended June 30, 1996.
The Company expects to spend approximately $130 million for leasehold
improvements, capital equipment and expansion of the Company's facilities during
the remainder of fiscal 1997. These capital expenditures will support the
recording heads and tapes businesses as well as general corporate operations.
In the fourth quarter of fiscal 1996, the Company recorded a $209 million charge
associated with the transition of manufacturing for its high-capacity hard disk
drive products to MKE. During the three months ended June 30, 1996, there were
approximately $52 million in cash expenditures related to this charge. The
Company expects that cash expenditures related to the charge will be
approximately $45 million during the rest of fiscal 1997.
In conjunction with the purchase of certain businesses from Digital Equipment
Corporation in October 1994, the Company recorded an accrual for costs related
to exiting a portion of the facilities and operations acquired. During the three
months ended June 30, 1996, there were no significant cash expenditures related
to these exit costs. The Company anticipates that cash expenditures during the
remainder of fiscal 1997 for these exit activities will be approximately $12
million.
The Company believes that its existing capital resources, including its credit
facilities and any cash generated from operations, will be sufficient to meet
all currently planned expenditures and sustain operations for the remainder of
the fiscal year. However, this forward-looking statement assumes that operating
results and cash flow from operations will meet the Company's expectations, and
actual results could vary due to the factors described below. Although the
Company continues to work to identify additional sources of cash, there can be
no assurance that the Company will be able to obtain any required financing or
obtain it on acceptable terms.
Trends and Uncertainties
FLUCTUATION IN RESULTS OF OPERATIONS. The Company's results of operations are
subject to fluctuations from period to period. In this regard, the demand for
the Company's hard disk drive products depends on the demand for the computer
systems manufactured by its customers, which is affected by computer system
product cycles and by prevailing economic conditions. Growth in demand for
computer systems, especially in the personal computer ("PC") market segment,
where the Company derives a significant amount of its disk drive sales, has
historically been subject to significant fluctuations. Such fluctuations in end
user demand have in the past and may, in the future, result in the deferral or
cancellation of orders for the Company's products, each of which would have a
material adverse effect on the Company. During the past several years, there has
<PAGE>
been significant growth in the demand for PCs, a portion of which represented
sales of PCs for use in the home. However, many analysts predict that future
growth may be at a slower rate than the rate experienced in recent years.
In the first quarter of fiscal 1997, the Company experienced weaker than
expected demand for drives for the PC market and resulting pricing pressure.
This had an adverse impact on revenue and earnings for the quarter. Industry
factors included lackluster demand for home PCs in the U.S., and weakness in
Europe driven by Germany's economic slowdown. In addition, certain of the
Company's customers delayed introduction of new products and other significant
customers, such as Apple, experienced declines in market share. In response to
the changing demand outlook, the Company decided to reduce its drive build plan
at MKE through the second quarter of fiscal 1997. There can be no assurance that
this decline in demand is temporary, and the Company could experience additional
decreases in demand for its products in the near future. Any such additional
slowdowns in demand could have a material adverse effect on the Company
The hard disk drive industry has also been subject, from time to time, to
seasonal fluctuations in demand. The Company has typically experienced
relatively flat demand in the quarter ending September 30 as compared to the
quarter ending June 30 and increasing demand throughout the quarters ending
December 31 and March 31. The Company's shipments tend to be highest in the
third month of each quarter, and failure by the Company to complete shipments in
the final month could adversely affect the Company's operating results for the
quarter.
TRANSITION OF HIGH-CAPACITY MANUFACTURING OPERATIONS TO MKE; INTRODUCTION OF NEW
HIGH-CAPACITY PRODUCTS. Since the Company's acquisition of Digital's
high-capacity disk drive operations in late 1994, the Company has experienced
significant difficulties integrating these operations into its high-capacity
business. These difficulties have included problems involving both the
development and the manufacturing of its high-capacity products and have
resulted in, among other things, significant delays in meeting the qualification
standards imposed by certain major customers of the Company's high-capacity disk
drive products. As part of its strategy to address these problems, the Company
decided to transition its high-capacity disk drive product manufacturing to MKE.
As a result, in the Company's previous fiscal quarter ended March 31, 1996, the
Company incurred a charge of $209 million associated with the closure of the
Company's two high-capacity disk drive manufacturing facilities in Milpitas,
California and Penang, Malaysia. Future results could also be adversely impacted
by this transition if demand for the Company's current high-capacity products
declines faster than expected, resulting in additional excess inventory, or if
the Company experiences unanticipated problems or incurs greater than expected
costs in connection with the closure of its high-capacity manufacturing
operations.
The Company's transition of its high-capacity manufacturing operations to MKE
entails several risks, and there can be no assurance that the Company's efforts
in this regard will be successful. Although the Company has had a continuous
manufacturing relationship with MKE since 1984, the Company's high-capacity
products are more complex to manufacture than its desktop products. MKE has not
previously manufactured any significant amount of the Company's high-capacity
products, and there can be no assurance that the Company's previous difficulties
with its high-capacity products will be resolved or that new problems will not
<PAGE>
arise as a result of the transition of this manufacturing to MKE. Any failure of
the Company to successfully manage this transition would have a material adverse
effect on the Company.
DEPENDENCE ON MKE RELATIONSHIP. The Company is dependent upon MKE for the
manufacture of its disk drive products. During fiscal 1996 and the first quarter
of fiscal 1997, approximately 75% of the Company's sales were derived from
products manufactured by MKE. The Company and MKE have agreed that, following
the transition of the high-capacity product manufacturing, MKE will have the
exclusive right to manufacture all of the Company's hard disk drive products.
The Company's relationship with MKE is therefore critical to the Company's
business and financial performance.
The Company's dependence on MKE entails, among others, the following principal
risks:
QUALITY AND DELIVERY. The Company relies on MKE's ability to bring new
products rapidly to volume production at low cost, to meet the
Company's stringent quality requirements and to respond quickly to
changing product delivery schedules from the Company. This requires,
among other things, close and continuous collaboration between the
Company and MKE in all phases of design, engineering, and production.
The Company's business and financial results would be adversely
affected if products manufactured by MKE fail to satisfy the Company's
quality requirements or if MKE is unable to meet the Company's delivery
commitments. In the event MKE is unable to satisfy Quantum's production
requirements, the Company would not have an alternative manufacturing
source to meet the demand without substantial delay and disruption of
the Company's operations. As a result, the Company would be materially
adversely affected.
EXTENSION OF RELATIONSHIP. The Company's relationship with MKE, which
has been continuous since 1984, is currently governed by a master
agreement, that, unless extended, will expire in December 1997. The
failure of the parties to extend their relationship on terms favorable
to the Company would have a material adverse effect on the Company.
VOLUME AND PRICING. MKE's production schedule is based on the Company's
forecasts of its product purchase requirements and the Company has only
limited rights to modify short-term purchase orders issued to MKE. In
addition, the Company periodically renegotiates pricing arrangements
with MKE. The failure of the Company to accurately forecast its
requirements, which could lead to inventory shortages or surpluses, or
the failure to reach pricing agreements reasonable to the Company would
have a material adverse effect on the Company.
MANUFACTURING CAPACITY AND CAPITAL COMMITMENT. The Company believes
that MKE's current and committed manufacturing capacity should be
adequate to meet the Company's requirements at least through the end of
fiscal 1997. The Company's future growth will require, however, that
MKE continue to devote substantial financial resources to property,
plant and equipment and working capital to support manufacture of the
Company's products, as to which there can be no assurance. In the event
that MKE is unable or unwilling to meet the Company's manufacturing
<PAGE>
requirements, there can be no assurance that the Company would be able
to obtain an alternate source of supply. Any such failure to obtain an
alternative source would have a material adverse effect on the Company.
DEPENDENCE ON SUPPLIERS OF COMPONENTS AND SUB-ASSEMBLIES; COMPONENT SHORTAGES.
The Company and its manufacturing partner, MKE, are dependent upon suppliers for
components and sub-assemblies, including recording heads, media and integrated
circuits, which are essential to the manufacture of the Company's products. In
connection with certain products, the Company and MKE qualify only a single
source for certain components and sub-assemblies, which can magnify the risk of
shortages. Component shortages have constrained the Company's sales growth in
the past, and the Company believes that the industry will periodically
experience component shortages. If such shortages occur, or if the Company
experiences quality problems with component suppliers, shipments of products
could be significantly delayed or costs significantly increased, which would
have a material adverse effect on the Company's results of operations.
NEW PRODUCT DEVELOPMENT. Quantum operates in an industry characterized by
increasingly rapid technological changes and short product life cycles. For
these and other reasons, including competitive pressures, gross margins on
specific products can decrease rapidly. Any delay in introduction of more
advanced and more cost-effective products can result in significantly lower
sales and gross margins. The Company's future is therefore dependent on its
ability to anticipate what the customers will demand and to develop the new
products to meet this demand. The Company must also qualify these new products
with its customers, successfully introduce these products to the market on a
timely basis and commence volume production to meet customer demands. In this
regard, the Company expects that sales of new products, particularly a limited
number of products in the desktop market, will account for a significant portion
of fiscal 1997 sales and that sales of older products will decline. However,
there can be no assurance that such products will achieve or sustain market
acceptance and failure to achieve acceptance could have a material adverse
effect on the Company.
The Company expects sales of its current high-capacity products to continue to
decline through the second quarter of fiscal 1997, as the Company transitions
customers to new high-capacity products to be manufactured by MKE. The Company's
two new high-capacity products are still in the development and evaluation stage
and are not expected to achieve volume production and contribute to sales until
at least the latter half of fiscal 1997. The Company's product development
efforts entail a number of risks, and there can be no assurance that the Company
will be successful in these efforts. The Company's inability to successfully
manage this transition could have a material adverse effect on the Company.
The Company is also currently engaged in a substantial effort to advance the
development of its MR recording heads. The Company believes that MR head
technology, which enables higher capacity per disk than conventional thin film
inductive heads, will replace inductive heads as the leading recording head
technology. Although MR recording heads comprised a relatively small portion of
the recording head market demand for the entire industry in 1995, the Company
expects demand to increase significantly by 1998. The Company believes that by
establishing its own supply of MR heads it can lower the risk of supply
shortages of MR heads that may occur in the future and can create cost
advantages for its overall business. However, MR technology is relatively
<PAGE>
complex, and as is typical of new head technology, manufacturing yields begin at
relatively low levels and then possibly increase throughout the product life of
the recording head. While the Company has increased production yields in its MR
recording heads manufacturing in the past, several of the Company's important
new disk drive products which are scheduled to commence volume production during
fiscal 1997 are dependent on new MR recording heads currently under development,
and increases in the current levels of production yields for these new MR
recording heads will be required for the Company to meet its manufacturing
objectives for these new disk drive products. In the event that yields do not
improve, there are limited alternative sources of supply for MR recording heads,
and there can be no assurance that the Company will be able to locate and obtain
adequate supply from such alternative sources. In such event, the Company would
be materially adversely affected.
There can be no assurance that the Company will be successful in the development
and marketing of these and other new products and components that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and components, or that the
Company's new products and components will adequately meet the requirements of
the marketplace and achieve market acceptance. In addition, technological
advances in magnetic, optical or other technologies, or the development of new
technologies, could result in the introduction of competitive products with
superior performance to and substantially lower prices than the Company's
products. Further, the Company's new products and components are subject to
significant technical risks. If the Company experiences delays in the
commencement of commercial shipments of new products or components, the Company
could experience delays or loss of product sales. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, the Company would be materially adversely affected.
CUSTOMER CONCENTRATION. As is typical in the information storage industry, the
Company's customer base is concentrated with a small number of systems
manufacturers. The Company's sales to its customers are generally governed by
written agreements. In general, these agreements do not obligate a customer to
purchase any minimum volume of the Company's products, and these agreements are
generally terminable at will by the customer.
Sales of the Company's desktop products, which comprise a significant majority
of its overall sales, were concentrated with several key customers during the
quarter ended June 30, 1996, and the fiscal year ended March 31, 1996. Sales to
the top five customers of the Company represented 42% of total sales for the
first quarter of fiscal 1997 and 44% of sales for the 1996 fiscal year. For the
first quarter of fiscal 1997, sales to Compaq and IBM were each approximately
10% of total sales. Apple has been significantly restructuring its business and
Apple's share of the Company's sales, which was 11% in fiscal 1996, has declined
to less than 10% in the first quarter of fiscal 1997. As a result, it is
becoming increasingly difficult for the Company to accurately forecast the
demand for its products by Apple. In addition, the Company is unable to predict
whether or not there will be any significant change in demand for Apple's or any
of its other customers' products in the future. In the event that any such
changes result in decreased demand for the Company's products, whether by loss
or delays in orders, the Company could be materially adversely affected.
<PAGE>
INTENSELY COMPETITIVE INDUSTRY. The information storage products industry in
general, and the disk drive industry in particular, is characterized by intense
competition which results in rapid price erosion, short product life cycles, and
continuous introduction of new, more cost-effective products offering increased
levels of capacity and performance. In this regard, the Company intends to
introduce important new products during the latter half of fiscal 1997, and
there can be no assurance that it will be successful. If this does not occur,
the Company would be materially and adversely affected. The hard disk drive
industry also tends to experience periods of excess product inventory and
intense price competition. If price competition intensifies, the Company may be
forced to lower prices further than expected, which could adversely affect its
sales and gross margin.
Quantum faces direct competition from a number of companies, including Seagate,
Western Digital, IBM, Maxtor and Exabyte. In the event that the Company is
unable to compete effectively with these or any other companies, the Company
would be materially adversely affected.
DPSG. In the market for desktop products, Quantum competes primarily
with Seagate, Western Digital, and Maxtor. Quantum and its competitors
have developed and are developing a number of products targeted at
particular segments of this market, such as home PC buyers, and factors
such as time to market can have a significant effect on the success of
any particular product. The desktop market is characterized by more
competitors and shorter product life cycles than the hard disk drive
market in general.
WSSG. The Company faces competition in the high-capacity disk drive
market primarily from Seagate and IBM. Seagate has the largest share of
the market for high-capacity disk drives. Although the same competitive
factors generally applicable to the overall disk drive industry apply
to high-capacity disk drives, the Company believes that the performance
and quality of its products are more important to the users in this
market than to users in the desktop market. The Company's success in
the high-capacity market during the foreseeable future is dependent on
the successful development, timely introduction and market acceptance
of key new products, as to which there can be no assurance.
SSPG. In the market for tape drives, the Company competes with a large
number of companies, including Exabyte. During fiscal 1996, the Company
experienced increasing market acceptance of its tape drive products.
However, a number of competitors have announced or already introduced
tape drive product offerings, and the market could become significantly
more competitive during the remainder of fiscal 1997. As a result, the
Company could experience increased price competition. If price
competition occurs, the Company may be forced to lower prices, in which
case the Company could be materially adversely affected.
Finally, the Company's customers could commence the manufacture of disk and tape
drives for their own use or for sale to others. Any such loss of customers could
have a material adverse effect on the Company.
<PAGE>
RISKS ASSOCIATED WITH FOREIGN MANUFACTURING. Many of the Company's products are
currently manufactured outside the United States. As a result, the Company is
subject to certain risks associated with contracting with foreign manufacturers,
including obtaining requisite United States and foreign governmental permits and
approvals, currency exchange fluctuations, currency restrictions, political
instability, labor problems, trade restrictions and changes in tariff and
freight rates.
INTELLECTUAL PROPERTY MATTERS. The hard disk drive industry has been
characterized by significant litigation relating to patent and other
intellectual property rights. From time to time, the Company is approached by
companies and individuals alleging Quantum's need for a license under patented
technology that Quantum assertedly uses. If required, there can be no assurance
that licenses to any such technology could be obtained or obtained on
commercially reasonable terms. Adverse resolution of any intellectual property
litigation could subject the Company to substantial liabilities and require it
to refrain from manufacturing certain products. In addition, the costs of
engaging in such litigation may be substantial, regardless of the outcome.
FUTURE CAPITAL NEEDS. The information storage business is capital-intensive and
competitive. Although the Company is in the process of transitioning the
manufacturing of all of its hard disk drive products to MKE, the Company
believes that in order to remain competitive in the information storage
business, it will need significant additional financial resources over the next
several years for capital expenditures, working capital and research and
development. The Company believes that it will be able to fund these capital
requirements at least through fiscal 1997. However, if the Company decides to
increase its capital expenditures further or sooner than presently contemplated,
or if results of operations do not meet the Company's expectations, the Company
will require additional debt or equity financing. There can be no assurance that
such additional funds will be available to the Company or will be available on
favorable terms. In addition, the Company may require additional capital for
other purposes not presently contemplated. If the Company is unable to obtain
sufficient capital, it could be required to curtail its capital equipment and
research and development expenditures, which could adversely affect the Company.
VOLATILITY OF STOCK PRICE. The market price of the Company's common stock has
been, and may continue to be, extremely volatile. Factors such as new product
announcements by the Company or its competitors, quarterly fluctuations in the
operating results of the Company, its competitors and other technology companies
and general conditions in the computer market may have a significant impact on
the market price of the common stock. In particular, if the Company were to
report operating results that did not meet the expectations of research
analysts, the market price of the common stock could be materially adversely
affected. In addition, the stock market has recently experienced substantial
price and volume fluctuations, which have particularly affected the market
prices of the stock of many high technology companies.
<PAGE>
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.
(1) Form 8-K dated May 7, 1996, filed on May 8, 1996.
<PAGE>
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 14, 1996 By: /s/ G. Edward McClammy
----------------------
G. Edward McClammy
Acting Chief Financial Officer
(Principal financial and accounting
officer and officer duly authorized to
sign the report)
<PAGE>
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number
11.1 Statement of Computation of Net Income Per Share
27 Financial Data Schedule
EXHIBIT 11.1
QUANTUM CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands except per share data)
Three Months Ended
June 30, July 2,
1996 1995
------- -------
PRIMARY
Weighted average number of common
shares during the period 55,461 47,954
Incremental common shares attributable
to exercise of outstanding options 2,385 3,758
------- -------
Total shares 57,846 51,712
======= =======
Net income $ 3,843 $12,942
======= =======
Net income per share $ 0.07 $ 0.25
======= =======
FULLY DILUTED
Weighted average number of common
shares during the period 55,462 47,954
Incremental common shares attributable
to exercise of outstanding options and
conversion of 6 3/8% convertible
subordinated debentures and 5%
convertible subordinated notes 19,732 14,285
------- -------
Total shares 75,194 62,239
======= =======
Net income:
Net income $ 3,843 $12,942
Add 6 3/8% convertible subordinated
debentures and 5% convertible
subordinated notes interest,
net of income tax effect 3,627 1,837
------- -------
Net income, as adjusted $ 7,470 $14,779
======= =======
Net income per share $ 0.10 * $ 0.24
======= =======
* 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF QUANTUM CORPORATION FOR THE QUARTER ENDED
June 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 140,036
<SECURITIES> 0
<RECEIVABLES> 743,719
<ALLOWANCES> 13,498
<INVENTORY> 449,521
<CURRENT-ASSETS> 1,533,734
<PP&E> 563,388
<DEPRECIATION> 179,289
<TOTAL-ASSETS> 1,991,579
<CURRENT-LIABILITIES> 727,740
<BONDS> 654,692
0
0
<COMMON> 316,195
<OTHER-SE> 281,720
<TOTAL-LIABILITY-AND-EQUITY> 1,991,579
<SALES> 1,153,502
<TOTAL-REVENUES> 1,153,502
<CGS> 1,012,223
<TOTAL-COSTS> 1,012,223
<OTHER-EXPENSES> 125,814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,272
<INCOME-PRETAX> 5,193
<INCOME-TAX> 1,350
<INCOME-CONTINUING> 3,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,843
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
