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 September 27, 1998
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 September 27, 1998: 151,100,273
<PAGE>
QUANTUM CORPORATION
10-Q REPORT
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION 35
SIGNATURE 37
2
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<TABLE>
QUANTUM CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 1,164,711 $ 1,553,491 $ 2,267,734 $ 2,999,635
Cost of sales 972,822 1,255,407 1,909,473 2,425,618
----------- ----------- ----------- -----------
Gross profit 191,889 298,084 358,261 574,017
Operating expenses:
Research and development 82,640 74,493 166,938 148,522
Sales and marketing 45,386 41,971 83,723 83,704
General and administrative 21,494 24,268 38,895 51,739
----------- ----------- ----------- -----------
149,520 140,732 289,556 283,965
Income from operations 42,369 157,352 68,705 290,052
Other (income) expense:
Interest expense 6,725 8,293 13,227 14,328
Interest income and other, net (6,133) (6,811) (14,836) (14,511)
Equity in loss of investee 17,114 15,629 41,350 19,571
----------- ----------- ----------- -----------
17,706 17,111 39,741 19,388
Income before income taxes 24,663 140,241 28,964 270,664
Income tax provision 7,399 36,463 8,689 70,372
----------- ----------- ----------- -----------
Net income $ 17,264 $ 103,778 $ 20,275 $ 200,292
=========== =========== =========== ===========
Net income per share:
Basic $ 0.11 $ 0.77 $ 0.13 $ 1.51
Diluted $ 0.11 $ 0.63 $ 0.13 $ 1.23
Weighted average common shares:
Basic 151,527 134,256 155,121 132,583
Diluted 156,489 171,250 161,223 166,714
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
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</TABLE>
<PAGE>
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 27, March 31,
1998 1998
----------- -----------
(unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 549,446 $ 642,150
Marketable securities 29,240 71,573
Accounts receivable, net of allowance for
doubtful accounts of $10,985 and $12,928 663,014 737,928
Inventories 295,799 315,035
Deferred taxes 133,993 133,981
Other current assets 92,061 124,670
----------- -----------
Total current assets 1,763,553 2,025,337
Property and equipment, net of accumulated
depreciation of $256,909 and $220,482 286,248 285,159
Purchased intangibles, net 18,040 24,490
Other assets 60,963 103,425
----------- -----------
$ 2,128,804 $ 2,438,411
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 397,349 $ 446,243
Accrued warranty 72,296 74,017
Accrued compensation 47,844 60,344
Income taxes payable 28,084 39,777
Current portion of long-term debt 978 935
Other accrued liabilities 61,027 78,920
----------- -----------
Total current liabilities 607,578 700,236
Deferred taxes 39,682 38,668
Convertible subordinated debt 287,500 287,500
Long-term debt 39,485 39,985
Shareholders' equity:
Common stock 802,590 776,291
Retained earnings 616,189 595,731
Treasury stock (264,220) --
----------- -----------
Total shareholders' equity 1,154,559 1,372,022
----------- -----------
$ 2,128,804 $ 2,438,411
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
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<TABLE>
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six Months Ended
September 27, September 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,275 $ 200,292
Items not requiring the current use of cash:
Depreciation 45,341 39,553
Amortization 7,312 5,986
Equity in loss of investee 41,350 19,571
Deferred income taxes 1,003 122
Compensation related to stock plans 3,443 1,733
Changes in assets and liabilities:
Accounts receivable 74,914 (142,352)
Inventories 19,236 (133,723)
Accounts payable (48,895) 124,869
Income taxes payable (11,693) 13,323
Accrued warranty (1,721) (10,543)
Other assets and liabilities 16,485 22,429
--------- ---------
Net cash provided by operating activities 167,050 141,260
--------- ---------
Cash flows from investing activities:
Investment in property and equipment (57,442) (78,804)
Purchase of marketable securities (48,798) --
Purchase of equity securities -- (15,000)
Purchase of intangible assets -- (10,000)
Proceeds from maturity of marketable securities 91,131 --
Proceeds from disposition of property and equipment 12 23,785
Proceeds from sale of interest in recording heads
operations -- 94,000
--------- ---------
Net cash provided by (used in) investing activities (15,097) 13,981
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock (264,220) --
Principal payments on credit facilities (457) (180,541)
Proceeds from issuance of convertible subordinated
note -- 287,500
Proceeds from issuance of common stock 20,020 30,419
--------- ---------
Net cash provided by (used in) financing activities (244,657) 137,378
--------- ---------
Net increase (decrease) in cash and cash equivalents (92,704) 292,619
Cash and cash equivalents at beginning of period 642,150 345,125
--------- ---------
Cash and cash equivalents at end of period $ 549,446 $ 637,744
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,882 $ 10,504
Income taxes, net of (refunds) $ (7,816) $ 21,517
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
5
</TABLE>
<PAGE>
QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed 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. Certain
prior period amounts have been reclassified to conform to the current period's
presentation. The condensed consolidated balance sheet as of March 31, 1998 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 ("Quantum" or the "Company") for the fiscal
year ended March 31, 1998 included in its Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
2. Inventories
Inventories consisted of the following:
(In thousands)
September 27, March 31,
1998 1998
-------- --------
Materials and purchased parts $ 48,294 $ 72,990
Work in process 25,550 44,303
Finished goods 221,955 197,742
-------- --------
$295,799 $315,035
======== ========
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3. Net income per share
<TABLE>
The following table sets forth the computation of basic and diluted net income
per share:
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic net income per
share - income available to common
stockholders $ 17,264 $103,778 $ 20,275 $200,292
Effect of dilutive securities:
5% convertible subordinated notes -- 1,810 -- 3,620
7% convertible subordinated notes -- 1,957 -- 1,957
-------- -------- -------- --------
Numerator for diluted net income per
share - income available to common
stockholders $ 17,264 $107,545 $ 20,275 $205,869
======== ======== ======== ========
Denominator:
Denominator for basic net income per
share - weighted average shares 151,527 134,256 155,121 132,583
Effect of dilutive securities:
Outstanding options 4,962 11,164 6,102 10,313
Series B preferred stock -- 180 -- 180
5% convertible subordinated notes -- 21,626 -- 21,626
7% convertible subordinated notes -- 4,024 -- 2,012
-------- -------- -------- --------
Denominator for diluted net income
per share - adjusted weighted average
shares and assumed conversions 156,489 171,250 161,223 166,714
======== ======== ======== ========
Basic net income per share $ 0.11 $ 0.77 $ 0.13 $ 1.51
======== ======== ======== ========
Diluted net income per share $ 0.11 $ 0.63 $ 0.13 $ 1.23
======== ======== ======== ========
</TABLE>
The computation of diluted net income per share for the three and six months
ended September 27, 1998, excluded the effect of the 7% convertible subordinated
notes issued in July 1997, which are convertible into 6,206,152 shares at a
conversion price of $46.325 per share because the effect would have been
antidilutive.
7
<PAGE>
4. Debt & Capital
In May 1998, the Board of Directors authorized the Company to repurchase
approximately $300 million of its common stock through the open market. The
intent of the repurchase is to minimize the dilutive impact of the shares issued
to complete the acquisition of ATL Products, Inc. ("ATL"), (refer to note 8 to
the condensed consolidated financial statements). At September 27, 1998, the
Company had repurchased 12.6 million shares of common stock for approximately
$264 million.
In July 1997, the Company issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option of
the holder at any time prior to maturity, unless previously redeemed, into
shares of the Company's common stock at a conversion price of $46.325 per share.
The notes are redeemable at the Company's option on or after August 1, 1999 and
prior to August 1, 2001, under certain conditions related to the price of the
Company's common stock. Subsequent to August 1, 2001, the notes are redeemable
at the Company's option at any time. In the event of certain changes involving
all or substantially all of the Company's common stock, the notes would become
redeemable at the option of the holder. Redemption prices range from 107% of the
principal to 100% at maturity. The notes are unsecured obligations subordinated
in right of payment to all existing and future senior indebtedness of the
Company.
5. Litigation
The Company and certain of its current and former officers and directors have
been named as defendants in two class-action lawsuits, one filed on August 28,
1996, in the Superior Court of Santa Clara County, California, and one filed on
August 30, 1996, in the U.S. District Court of the Northern District of
California. The plaintiff in both class actions purports to represent a class of
all persons who purchased the Company's common stock between February 26, 1996,
and June 13, 1996. The complaints allege that the defendants violated various
federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about the Company and that
individual defendants sold shares of the Company's stock based on material
nonpublic information.
On February 25, 1997, in the Santa Clara County action, the Court sustained
defendants' demurrer to most of the causes of action in the complaint, with
leave to amend. At a June 12, 1997, demurrer hearing in state court, the judge
dismissed the action as to four of the individual defendants with prejudice and
as to three of the individual defendants without prejudice. The demurrer as to
the Company was overruled. Defendants' motion that the action not be permitted
to proceed as a class action was denied without prejudice. The Court heard oral
argument on plaintiffs' motion for class certification on November 4, 1997. On
March 4, 1998, the Court entered an order denying plaintiffs' motion without
prejudice. On October 30, 1997, the Court granted defendants' motion for
creation of an ethical wall. Plaintiffs' motion for reconsideration of the
Court's order was denied on December 15, 1997.
With respect to the federal action, defendants filed their motion to dismiss on
April 16, 1997. On August 14, 1997, the Court granted defendants' motion to
dismiss without prejudice. On September
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11, 1997, plaintiff filed an amended complaint. Defendants filed a motion to
dismiss the amended complaint on October 24, 1997. The hearing on defendants'
motion took place on February 3, 1998. On April 16, 1998, the Court granted
defendants' motion to dismiss with prejudice. On May 19, 1998, plaintiff filed a
notice of appeal of the District Court's dismissal in the United States Court of
Appeals for the Ninth Circuit. On September 25, 1998, plaintiff filed his
opening appellate brief.
Certain of the Company's current and former officers and directors were also
named as defendants in a derivative lawsuit, which was filed on November 8,
1996, in the Superior Court of Santa Clara County. The derivative complaint was
based on factual allegations substantially similar to those alleged in the
class-action lawsuits. Defendants' demurrer to the derivative complaint was
sustained without prejudice on April 14, 1997. Plaintiffs did not file an
amended complaint. On August 7, 1997, the Court issued an order of dismissal and
entered final judgment dismissing the complaint.
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 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied many of these patents before and, of the patents it has
studied, believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not yet had time to make a complete study of all
the patents asserted by Papst and there can be no assurance that the Company has
not infringed on these or other patents owned by Papst. The final results of
this litigation, as with any litigation, are uncertain. If required, there can
be no assurance that licenses to any technology owned by Papst or any other
third party alleging infringement could be obtained or obtained on commercially
reasonable terms. Adverse resolution of the Papst litigation or any other
intellectual property litigation could subject the Company to substantial
liabilities and require it to refrain from manufacturing certain products which
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the costs of engaging in the
Papst litigation or other intellectual property litigation could be substantial,
regardless of the outcome.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity of
the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
9
<PAGE>
6. Equity Investee
On May 16, 1997, the Company sold a 51% majority interest in its recording heads
operations to Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), thereby
forming a recording heads joint venture with MKE, named MKE-Quantum Components
LLC ("MKQC"). MKQC is involved in the research, development, and manufacture of
MR recording heads used in the Company's disk drive products manufactured by
MKE. MKE and the Company share pro rata in MKQC's results of operations and
would share pro rata in any capital funding requirements.
Subsequent to May 16, 1997, the Company accounted for its 49% interest in MKQC
using the equity method of accounting. The results of the Company's involvement
in recording heads through May 15, 1997 were consolidated.
During the first half of fiscal year 1999, the Company provided support services
to MKQC. The support services were primarily comprised of finance, human
resources, facilities, legal, and computer support. MKQC is obligated to
reimburse the Company for the cost of the services.
The following is summarized financial information for MKQC:
Six Months
Ended
(In thousands) September 27, 1998
------------------
Sales $ 62,427
Gross profit (loss) (44,728)
Loss from operations (78,194)
Net loss (84,389)
September 27, 1998
------------------
Current assets $ 36,936
Noncurrent assets 187,317
Current liabilities 139,715
Note payable to Quantum 52,575
Other noncurrent liabilities 17,365
At September 27, 1998, MKQC was in contractual violation of a covenant related
to its financing relationship with a bank, under which approximately $80 million
and $27 million was outstanding under long-term debt/lease and revolving debt
agreements, respectively. MKQC has notified the bank of the violation and is
currently working towards obtaining a covenant waiver and/or amendments to the
loan agreement. MKQC management believes, based on discussions with the bank,
and MKQC's ability to continue to draw funds against the credit facility
subsequent to September 27, 1998, that it will obtain a covenant waiver and/or
amendments from the bank. However, there can be no assurances that such a
covenant waiver and/or amendments will be obtained or that such amendments, if
any, will be provided on terms favorable to MKQC.
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<PAGE>
As a result of the covenant violation, the associated obligations have been
classified as current.
7. Comprehensive Income
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards, ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, it has no impact on the Company's net income or
shareholders' equity. SFAS 130 requires foreign currency translation
adjustments, which prior to adoption were reported only in shareholders' equity,
to be included in the determination of comprehensive income.
<TABLE>
The components of comprehensive income, net of tax, are as follows:
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 17,264 $ 103,778 $ 20,275 $ 200,292
Change in cumulative translation adjustment 832 (792) 128 251
--------- --------- --------- ---------
Comprehensive income $ 18,096 $ 102,986 $ 20,403 $ 200,543
========= ========= ========= =========
</TABLE>
8. Subsequent Event - ATL Acquisition
On September 28, 1998, the Company completed the acquisition of ATL. ATL
designs, manufactures, markets and services automated tape libraries for the
networked computer market. ATL's products incorporate DLTtape drives as well as
ATL's proprietary IntelliGrip automation technology. The total acquisition cost
is approximately $300 million. Under the terms of the agreement, each
outstanding share of ATL's common stock was converted into 1.7554 shares of
Quantum common stock. On September 28, 1998, the Company issued approximately 17
million shares in exchange for the outstanding shares of ATL. In addition, on
September 28, 1998, the outstanding stock options to purchase ATL's common stock
became options to purchase approximately 1.8 million shares of the Company's
common stock. The acquisition will be accounted for as a purchase. The Company
expects to recognize a charge for acquired in-process research and development
in the third quarter of fiscal year 1999. ATL had revenue of $33 million and $98
million, and after-tax net income of $2 million and $8 million for the three
months ended June 30, 1998, and fiscal year ended March 31, 1998, respectively.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis includes:
o Business overview.
o Strategic Developments
o A comparison of Quantum's results of operations in the three and six months
ended September 27, 1998 with the results of operations in the
corresponding periods in fiscal 1998.
o Year 2000 update.
o A discussion of Quantum's operating liquidity and capital resources.
o A discussion of trends and uncertainties, which include those related to
the information storage industry and those related to more specific
characteristics of Quantum.
Forward-Looking Statements
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 can be identified
by the use of forward-looking terminology, such as "may," "will," "project,"
"estimate," "anticipate," "expect," "continue," "potential," "opportunity" or
the negative thereof or other variations thereon or comparable terminology or
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 below under Trends and Uncertainties. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.
Business Overview
Founded in 1980, Quantum Corporation ("Quantum" or the "Company") is a
diversified mass storage company with leadership positions in both the fixed and
removable storage markets. In calendar year 1997, Quantum was the highest-volume
global supplier of hard disk drives for personal computers and the worldwide
revenue leader for all classes of tape drives.
Quantum designs, develops, and markets information storage products, including
high-performance, high-quality half-inch cartridge tape drives, tape media, tape
autoloaders and libraries, hard disk drives, and solid state disk drives. The
half-inch cartridge tape drives and
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solid state disk drives are manufactured by the Company. The Company combines
its engineering and design expertise with the high-volume manufacturing
capabilities of its exclusive manufacturing partner, Matsushita-Kotobuki
Electronics Industries, Ltd. ("MKE") of Japan, a subsidiary of Matsushita
Electric Industrial Co., Ltd., to produce high-quality hard disk drives. MKE
manufactures all of Quantum's hard disk drives.
The Company's strategy is to offer a diversified storage product portfolio that
features leading-edge technology and high-quality manufacturing for a broad
range of storage applications. Inherent in this strategy is a focus on
anticipating and meeting customers' information storage needs and on the
research and development of storage technology.
Quantum's products meet the storage requirements of mid-range to high-end
computer systems, workstations, network servers, high-end to entry-level desktop
personal computers, and storage subsystems. The Company directly markets its
products to major original equipment manufacturers ("OEMs") and through a broad
range of distributors, resellers, and systems integrators worldwide.
The Company's information storage business currently includes two units, the
Specialty Storage Products Group and the Enterprise and Personal Storage
Products Group. The primary business activities of these two groups are
discussed below.
Specialty Storage Products. Quantum designs, develops, manufactures, and
markets half-inch cartridge tape drives, autoloaders and libraries based on
patented DLTtape(TM) technology, and solid state disk drives. Quantum also
designs, develops, and markets DLTtape media. In addition, the DLTtape
technology has been licensed to Tandberg Data ASA for the manufacture and
marketing of DLTtape drives based on current DLTtape and future Super
DLTtape technology, as well as to Fuji and Maxell for the manufacture of
tape media. The DLTtape drives (20 gigabytes to 70 gigabytes capacity,
compressed) use advanced linear recording technology and a highly accurate
tape guide system to perform mission-critical data backup for mid-range and
high-end computer systems. Quantum has worldwide manufacturing rights for
DLTtape drive and media technology and is currently the sole manufacturer
of DLTtape drives. The Company believes that DLTtape drives are the de
facto market standard in the mid-range segment of the tape storage market.
The Company's solid state disk drives have high execution speeds required
for applications such as imaging, multimedia, video-on-demand, online
transaction processing, material requirements planning, and scientific
modeling.
The Company's current DLTtape drive and automation product offerings
include:
Quantum DLT(TM) 7000 tape drive. This is the most recent offering in the
Company's DLTtape drive family. The DLT 7000 provides a combination of 35
gigabytes ("GB") native capacity (70 GB compressed) and a sustained data
transfer rate of 5 megabytes ("MB") per second (10 MB per second
compressed). The DLT 7000 tape drive features a SCSI-2 fast/wide interface
with single-ended and differential options.
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Quantum DLT 4000 tape drive. This product features a native storage
capacity of 20 GB per cartridge and a sustained data transfer rate of 1.5
MB per second.
Quantum PowerStor(TM) L500 library. This multiple-drive tape-automation
product has 14-cartridge capacity and accommodates up to three DLTtape
drives. A fully configured PowerStor Library provides a maximum native
storage capacity of 490 GB and a sustained data transfer rate of 15 MB per
second.
Quantum PowerStor L200 autoloader. This product accommodates a Quantum DLT
4000 or DLT 7000 tape drive and delivers a maximum native storage capacity
of 280 GB and a sustained data transfer rate of 5 MB per second.
Quantum DLT 4500, 4700 autoloaders. The Quantum DLT 4500 five-cartridge
autoloader provides native storage capacity of 100 GB. The Quantum DLT 4700
seven-cartridge autoloader provides native storage capacity of 140 GB.
These autoloaders have a sustained data transfer rate of 1.5 MB per second.
Quantum DLTtape(TM) III, IIIXT, IV tape media and cleaning cartridges. The
DLTtape family of half-inch cartridge tapes are designed and formulated
specifically for Quantum DLTtape drives, autoloaders and libraries. The
capacity of the DLTtape media is up to 35 GB, or 70 GB in compressed mode.
By combining both solid and liquid lubricants in the tape binder system,
tape and head wear are reduced while repelling airborne particles that
could affect read/write head performance. In addition, by using a uniform
particle shape, a dense binding system, a smooth coating surface, and a
specially selected base film, Quantum's half-inch cartridge tapes take
advantage of shorter wavelength recording schemes to ensure read
compatibility with future generations of DLT brand tape drives.
The Company's current solid state disk drives product offerings include:
Quantum Rushmore(TM) NTE family of solid state disk drives includes the
ESP3000 and ESP5000 series. These drives are available in capacities
ranging from 134 MB to 950 MB and have a data access time that is up to 15
times faster than magnetic hard disk drives.
Quantum Rushmore Ultra family of solid state disk drives includes the
RU3000 and RU5000 series. These drives are available in capacities ranging
from 134 MB to 1.66 GB and have a data access time that is up to 10 times
faster than magnetic hard disk drives.
Enterprise and Personal Storage Products. Quantum designs, develops, and
markets technologically advanced desktop and high-end hard disk drives.
These drives are designed to meet the storage needs of entry-level to
high-end desktop personal computers ("PCs"), servers, and workstations for
use in both home and business environments; and for the data-intensive
storage needs of high-end desktop systems, workstations, high-performance
network servers, and storage subsystems. The high-end disk drives are
designed for data-intensive applications, such as data warehousing, digital
content creation, digital video, file servers, financial services, Internet
and intranet services, mechanical CAD, multimedia,
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<PAGE>
online transaction processing, RAID storage, software development, and
workgroup computing.
The Company's current desktop disk drive product offerings include:
Quantum Bigfoot(TM) TS. Announced in September 1998 and began mass
production in October 1998. The latest drive in the Quantum Bigfoot family
and the first 5.25-inch drive with Shock Protection System(TM), a
technology that protects the mechanical platform against the impact of
mishandling during shipping or integration into a PC. The Bigfoot TS
features capacities of 6.4 GB, 8.4 GB, 12.7 GB and 19.2 GB, Ultra ATA
interface, MR heads, a PRML read channel, burst data transfer rates of up
to 33 MB per second, internal data rates up to 168 MB per second, average
seek time of 10.5 milliseconds ("ms"), and a rotational speed of 4,000 RPM.
Quantum Bigfoot TX. Features capacities of 4 GB, 6 GB, 8 GB and 12 GB,
Ultra ATA interface, MR heads, a PRML read channel, burst data transfer
rates of up to 33 MB per second, internal data rates up to 142 MB per
second, average seek time of 12 ms, and a rotational speed of 4,000 RPM.
Quantum Fireball(TM) EX. Features Shock Protection System, capacities of
3.2 GB, 5.1 GB, 6.4 GB, 10.2 GB and 12.7 GB, Ultra ATA interface, MR heads,
buffer-to-host data transfer rates of up to 33 MB per second, internal data
rates up to 187 MB per second, average seek times of 9.5 ms, and a
rotational speed of 5,400 RPM.
Quantum Fireball EL. Features Shock Protection System, capacities of 2.5
GB, 5.1 GB, 7.6 GB and 10.2 GB, Ultra ATA interface, MR heads,
buffer-to-host data transfer rates of up to 33 MB per second, internal data
rates up to 162 MB per second, average seek times of 9.5 ms, and a
rotational speed of 5,400 RPM.
Quantum Fireball SE. Features capacities of 2.1 GB, 3.2 GB, 4.3 GB, 6.4 GB
and 8.4 GB, Ultra ATA interface, MR heads, buffer-to-host data transfer
rates of up to 33 MB per second, internal data rates up to 158 MB per
second, average seek times of 9.5 ms, and a rotational speed of 5,400 RPM.
The Company's current high-end disk drive product offerings include:
Quantum Viking(TM) II. The Viking II 3.5-inch hard disk drive is available
in capacities of 4.5 GB and 9.1 GB with high bandwidth Ultra2 SCSI Low
Voltage Differential (LVD) or Ultra SCSI interface. The Viking II also
features MR heads, burst data transfer rates of up to 80 MB per second,
internal data rates of up to 170 MB per second, an average seek time of 7.5
ms, and a rotational speed of 7200 RPM.
Quantum Atlas(TM) III. The Atlas III multimode 3.5-inch hard disk drive is
available in capacities of 9.1 GB and 18.2 GB. It supports both the
high-speed Ultra2 SCSI LVD interface and the Ultra SCSI interface. The
Atlas III features broad interface availability with new Ultra-2 LVD
SCSI-3, Ultra single-ended SCSI-3 and Fibre Channel Arbitrated
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Loop (FC-AL). The drive's performance includes burst data transfer rates of
up to 80 MB per second, internal data rates up to 180 MB per second,
average seek time of 7.8 ms, and a rotational speed of 7200 RPM.
On September 28 1998, the Company completed the acquisition of ATL Products,
Inc. ("ATL"). ATL designs, manufactures, markets and services automated tape
libraries for the networked computer market. ATL's products incorporate DLTtape
drives as well as ATL's proprietary IntelliGrip automation technology. The
acquisition was made with Quantum common stock, for a total acquisition cost of
approximately $300 million. The acquisition will be accounted for as a purchase.
The Company owns 49% of MKE-Quantum Components LLC ("MKQC"), a joint venture
with MKE, that researches, develops, and manufactures magnetoresistive recording
heads for computer disk drives. The recording heads are used in the Company's
disk drive products. MKQC does not currently market heads to other companies.
The Company is currently concentrating its product research and development
efforts on broadening its existing tape, tape automation, and disk drive product
lines through the introduction of new products. These development efforts span
the Company's business and focus on the development of new tape drives,
autoloaders and libraries, desktop and high-end hard disk drives, and other
storage solutions. A key initiative involves Super DLTtape technology, which
includes four new tape drive technologies that the Company plans to develop into
a major extension of its DLTtape architecture. The Company expects to deliver
its first tape storage product based on the Super DLTtape technology in
mid-calendar year 1999.
Strategic Developments
Plans to Strengthen Desktop Hard Disk Drive Business. In September 1998, the
Company announced and made progress toward implementing plans to strengthen its
desktop hard disk drive business. The plans include the development of
lower-cost desktop hard disk drives targeted at the requirements of low-cost
PC's, a portion of the hard disk drive market which has expanded significantly
during the three quarters ended September 27, 1998. The plans call for
reductions in product complexity through fewer combinations of head/media and
motor sources, streamlining the shipment process, product design and process
improvements to increase reliability and reduce failure rates, and reductions in
infrastructure costs. These plans include a reduction in workforce, with 113
employees terminated, temporary employment reduced, and numerous open position
eliminated in September 1998, and further reductions planned through attrition
and delayed hiring. Implementation of the plan is expected to be substantially
completed by March 31, 1999, and is expected to result in approximately $60
million of annualized expense reduction as a result of lower expenses associated
with infrastructure and product development, manufacturing, shipping and
warranty.
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Tandberg Data ASA Manufacturing License and Marketing Agreement for DLTtape
Products. In September 1998, Quantum and Tandberg Data ASA ("Tandberg") entered
into a manufacturing license and marketing agreement through which Tandberg can
become an independent second source for DLTtape drives, including products under
development based on Quantum's Super DLTtape technology as well as current
DLTtape technology. Tandberg expects to implement full DLTtape manufacturing
operations within a year. As part of the agreement, Tandberg intends to market a
full spectrum of DLTtape products, including drives, media, and libraries. The
agreement also provides Quantum with the future option to negotiate a license to
manufacture Tandberg's Scalable Linear RecordingTM brand tape drives, which
could provide Quantum with complementary products for expanding into the
entry-level segment of the tape-drive market. Tandberg has its manufacturing
facilities in Oslo, Norway, and has significant marketing, sales and support
operations in the USA, UK, France, Germany, Norway, Singapore, and Japan. With
Tandberg's strong name recognition and established distribution channels in the
European market, Tandberg is expected to be a synergistic partner.
ATL Acquisition Completed - Subsequent Event. As discussed in the Business
Overview section, on September 28, 1998, the Company completed the acquisition
of ATL in an all-stock transaction valued at approximately $300 million. ATL
designs, manufactures, markets and services automated tape libraries for the
networked computer market. ATL's products incorporate DLTtape drives as well as
ATL's proprietary IntelliGrip automation technology. As a wholly owned
subsidiary of Quantum, ATL will retain its name. ATL's product line will combine
its existing high-end and mid-range tape-automation library products with the
entry-level tape-automation libraries and autoloaders offered by Quantum. ATL
will report to Peter van Cuylenburg, president of Quantum's Specialty Storage
Products Group. ATL will continue to be led by its president and chief executive
officer, Kevin C. Daly, Ph.D.
Results of Operations
Sales. Sales for the three and six months ended September 27, 1998 were
$1.165 billion and $2.268 billion, respectively, compared to $1.553 billion and
$3.000 billion, respectively, for the corresponding periods in fiscal year 1998.
The decrease in sales reflected increases in DLTtape media revenues which were
more than offset by lower revenue on sales of desktop and high-end hard disk
drives and DLTtape drives. The increase in DLTtape media revenue included
increased royalties earned from the shift of media sales to licensed media
manufacturers, an activity that became significant after the second quarter of
fiscal year 1998. Although high-end hard disk drive shipments increased in the
first half of fiscal year 1999, compared to the corresponding period in fiscal
year 1998, the decline in average unit prices, despite improved product
performance, resulted in lower comparative high-end revenue. The decline in
desktop hard disk drive revenues reflected a decline in shipments and average
unit prices, as intense competition and aggressive pricing, together with the
impact of growth in the value-PC market, significantly eroded
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desktop prices. The decline in DLTtape drive revenue resulted from a decline in
shipments and average unit prices, reflecting customers holding lower inventory
levels with the increase in DLTtape drive product availability, as well as
increased competition.
Sales to the Company's top five customers for the three and six months ended
September 27, 1998 represented 44% of sales, compared to 43% and 46% of sales,
respectively, for the corresponding periods in fiscal 1998 (these amounts
reflect a retroactive combination of the sales to Compaq Computer, Inc. and
Digital Equipment Corporation as a result of their merger in June 1998). Sales
to Hewlett-Packard were 15% of sales in the three and six months ended September
27, 1998, compared to 10% and 11% of sales, respectively, for the corresponding
periods in fiscal year 1998. Sales to Compaq Computer, Inc. were 13% and 14% of
sales in the three and six months ended September 27, 1998, respectively,
compared to 19% of sales for the corresponding periods in fiscal year 1998
(including sales made to Digital Equipment Corporation).
The OEM and distribution channel sales were 65% and 32% of sales in the quarter
ended September 27, 1998, respectively, compared to 60% and 40% of sales in the
quarter ended September 28, 1997. For the first six months of fiscal year 1999,
OEM and distribution channel sales were 64% and 33% of sales, compared to 61%
and 39% of sales for the corresponding periods of fiscal year 1998.
Gross Margin Rate. The gross margin rate for the quarter ended September 27,
1998 decreased to 16.5% from 19.2% in the quarter ended September 28, 1997. The
gross margin rate for the first six months of fiscal year 1999 was 15.8%,
compared to 19.1% in the corresponding period in fiscal year 1998. These margin
rate decreases reflected an increase in DLTtape media royalty revenue which
positively impacts the margin rate, an increase in the proportion of revenue
coming from the sale of higher margin DLTtape drive and automation products,
although at generally lower margin rates compared to the prior year periods, as
well as improvement in second quarter fiscal year 1999 margins on high-end hard
disk drives, being more than offset by the decline in prices and gross margins
earned on desktop hard disk drives. The decline in desktop hard disk drive
margins reflected intense competition and aggressive pricing together with the
impact of growth in the value-PC market significantly eroding desktop prices.
DLTtape products achieved a significantly higher gross margin rate than that
achieved on the Company's other products. Through at least the third quarter of
fiscal year 1999, the Company expects to experience increased gross margin
pressure with respect to its desktop and high-end hard disk drive products.
Research and Development Expenses. Research and development expenses in the
three and six months ended September 27, 1998, were $83 million, or 7.1% of
sales, and $167 million, or 7.4% of sales, respectively, compared to $74
million, or 4.8% of sales, and $149 million, or 5.0% of sales, respectively, in
the corresponding periods in fiscal year 1998. These increases in research and
development expenses reflected higher expenses related to pre-production
activity on new hard disk drive products, as well as research and development
expenses related to new information storage products and technologies, including
the Super DLTtape drive and optical storage technology. The amount of research
and development expenses is expected to increase in the third quarter of fiscal
year 1999 as compared to the second quarter of fiscal year 1999.
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Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended September 27, 1998, were $45 million, or 3.9% of sales, and $84
million, or 3.7% of sales, respectively, compared to $42 million, or 2.7% of
sales, and $84 million, or 2.8% of sales, respectively, in the corresponding
periods of fiscal year 1998. The increase in sales and marketing expenses as a
percentage of sales reflected decreasing sales, while sales and marketing
expenses remained relatively flat compared to the prior year. Fiscal 1999
expenses included an increase in marketing and advertising costs associated with
DLTtape products. The amount of sales and marketing expenses are expected to
increase in the third quarter of fiscal year 1999 as compared to the second
quarter of fiscal year 1999.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended September 27, 1998, were $21 million, or 1.8% of
sales, and $39 million, or 1.7% of sales, respectively, compared to $24 million,
or 1.6% of sales, and $52 million, or 1.7% of sales, respectively, in the
corresponding periods of fiscal year 1998. The decrease in general and
administrative expenses reflected the impact of cost control efforts, including
reduced bonus expenses, partially offset by severance and other costs incurred
in the second quarter of fiscal year 1999, in response to the lower level of
earnings and sales.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and six months ended September 27, 1998 was relatively flat compared
to the corresponding periods of fiscal year 1998.
Equity in Loss of Investee. The equity in loss of investee for the three and six
months ended September 27, 1998 was $17 million and $41 million, respectively,
compared to $16 million and $20 million for the corresponding periods of fiscal
1998. The equity in loss of investee reflects the Company's 49% equity share in
the operating losses of MKQC, a joint venture formed on May 16, 1997. Prior to
May 16, 1997, the recording heads operations of Quantum, which became the
operations of MKQC, were fully consolidated by Quantum. Although manufacturing
yields improved in the second quarter of fiscal year 1999, the increased equity
in loss of investee reflected MKQC's insufficient manufacturing volumes. Until
such time as MR recording heads are cost-effectively produced by MKQC, the
Company expects to continue to incur losses based on its pro rata ownership
interest in the joint venture. The Company anticipates that operating results in
the third quarter of fiscal 1999 will continue to be adversely impacted by
losses associated with MKQC.
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Income Taxes. The effective tax rate for the three and six months ended
September 27, 1998 was 30%, compared to 26% for the corresponding periods in
fiscal 1998. The increase in the effective tax rate reflected the increased
contribution of DLTtape product sales to operating results, which are primarily
taxed at standard U.S. corporate tax rates. This trend is expected to continue
and is expected to result in future increases to the effective tax rate.
ATL Acquisition. The Company's acquisition of ATL, which was completed on
September 28, 1998 is expected to have a substantial impact on the Company's
financial results in the third quarter of fiscal year 1999. The Company's sales
are expected to be impacted by the future sales of ATL's DLTtape libraries and
services. The Company's gross margin is expected to be impacted by these sales
as well as the impact of the amortization of completed technology and other
intangible assets recorded under the purchase method of accounting. Operating
and other expenses are expected to be impacted by a charge for acquired
in-process research and development, the amortization of intangible assets,
including goodwill, as well as the ongoing operating costs of ATL. Income taxes
are expected to be impacted by a deferred tax liability recorded under the
purchase method of accounting. Overall, including or excluding the impact of the
in-process research and development charge, the acquisition is expected to have
a negative impact on the Company's results of operations in fiscal year 1999,
primarily from the amortization of intangible assets, including goodwill.
Based on existing accounting and standard valuation practices, the Company had
estimated that between $90 million and $145 million of the purchase price would
be allocated to the value of in-process research and development under the
purchase method of accounting. However, a recent letter to the American
Institute of Certified Public Accountants ("AICPA") and other public
communications from the Securities and Exchange Commission ("SEC") have resulted
in uncertainty and confusion about valuation practices. Based on the Company's
understanding of the SEC's position, the Company expects the value assigned to
in-process research and development to be substantially less than previously
estimated.
Year 2000
A year 2000 computer issue is raised by the possibility that unless
modifications are made, by midnight on December 31, 1999, the vast majority of
computer systems may not be able to distinguish the year 2000 from the year
1900. Many experts fear that this programming flaw could debilitate computer
systems worldwide. The pervasive use and dependency on computer technology in
all facets of modern commerce means that the inherent risks to companies,
including Quantum, from this "Year 2000" issue is potentially quite vast. For
example, risks are associated with potential disruptions or failures within
Quantum (i.e., Quantum's products and operations), within Quantum's suppliers,
customers and service providers (i.e., their products and operations), and so
on. Because the Year 2000 issue can impact Quantum indirectly through its
suppliers, service providers and customers, an assessment and prediction of the
impact of the Year 2000 issue on the Company is difficult.
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The Company is in the process of implementing plans to address Year 2000 issues
both within and outside of Quantum. In addressing the Year 2000 issues and
risks, the Company has focused, and will continue to focus, its efforts on the
Company's enterprise-wide and departmental operations, products, critical
suppliers (including service providers), and key customers. Within Quantum,
these efforts are intended to encompass all major categories of computer systems
in use by the Company, including those utilized in manufacturing, research and
development, sales, finance, and human resources. Within each of these areas,
the Company prioritizes its Year 2000 issues and risks on three levels:
critical, key, or active. The Company is acting to remedy issues as they are
revealed while it simultaneously completes its assessment of Year 2000 risks.
Corrective action completed to date includes the implementation of significant
system upgrades that were completed in July 1998. The Company currently
anticipates that it will have assessed and remedied all critical areas of its
own operations by the end of December 1998, and that it will be prepared to
internally certify readiness of these critical areas by the end of March 1999.
The Company also plans to develop contingency plans based, in part, on the
assessment results.
The Company's estimated timetable for assessment and correction of Year 2000
issues is summarized in the following table:
-------------------- ------------------------------------------------------
Estimated Completion Date
-------------------- --------------------- ----------------- --------------
Critical Key Active
-------------------- --------------------- ----------------- --------------
Readiness:
-------------------- --------------------- ----------------- --------------
o Assessment November 1998 March 1999 August 1999
-------------------- --------------------- ----------------- --------------
o Correction December 1998 May 1999 October 1999
-------------------- --------------------- ----------------- --------------
The Company's failure to complete critical readiness assessments, critical
corrective actions or implement viable contingency plans in a timely matter
could have a material, adverse effect on the Company's business, financial
condition and results of operations.
Costs incurred to date in addressing the Year 2000 issue were approximately $5.5
million. Based on assessment and correction projects underway, the Company
currently expects that the total cost of addressing the Year 2000 issue,
including both incremental spending and redeployed resources, will not exceed
$15 million. A majority of the cost is expected to relate to the redeployed
resources. As the Company's risk assessment and correction activities continue,
these costs may change. In addition, the Company's total cost estimate does not
include potential costs related to any customer or other claims resulting from
the Company's failure to adequately correct Year 2000 issues.
As indicated above, the Company's risk assessment includes understanding the
Year 2000 readiness of its critical suppliers, and in particular MKE. The
Company's risk assessment process associated with critical suppliers includes
soliciting and analyzing responses to questionnaires distributed to these
critical suppliers, as well as onsite interviews with certain critical
suppliers. Quantum's reliance on critical suppliers, and, therefore, on the
proper functioning of their information systems and software, means that any
failure by these critical suppliers to address Year 2000 issues could have a
material adverse impact on the Company's business, financial condition and
results of operations.
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Although the Company does not currently expect any significant disruption to its
operations or operating results as a result of Year 2000 issues, the Company is
taking all steps it believes are appropriate to identify and resolve any Year
2000 issues. However, there can be no assurance that the Company will be able to
assess, identify and correct Year 2000 issues in a timely or successful manner.
The foregoing statements regarding the Company's Year 2000 plans and the
Company's expectations for resolving these issues and the costs associated
therewith are forward-looking statements and actual results could vary. The
Company's success in addressing Year 2000 issues could be impacted by the
severity of the problems to be resolved within the Company, by Year 2000 issues
affecting its suppliers and service providers, and by the costs associated with
third party consultants and software necessary to address these issues.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $579 million at September
27, 1998, compared to $714 million at March 31, 1998. The decrease in cash
reflected financing and investing activities, primarily the $264 million
purchase of treasury stock, as discussed below, and investment in property and
equipment. Partially offsetting this use of cash, operating activities generated
cash, primarily from the collection of accounts receivable and net income
adjusted for non-cash transactions, including depreciation, amortization, and
equity in loss of investee.
In May 1998, the Board of Directors authorized the Company to repurchase
approximately $300 million of its common stock through the open market from time
to time. The intent of the repurchase is to minimize the dilutive impact of the
shares issued to complete the ATL acquisition. At September 27, 1998, the
Company had repurchased 12.6 million shares of common stock for approximately
$264 million.
As discussed in the Business Overview section, on September 28, 1998, the
Company completed the acquisition of ATL. On September 28, 1998, the Company
issued approximately 17 million shares in exchange for the outstanding shares of
ATL, and outstanding stock options to purchase ATL's common stock became options
to purchase approximately 1.8 million shares of the Company's common stock.
In June 1997, the Company entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At the
option of the Company, borrowings under the revolving credit line bear interest
at either LIBOR plus a margin determined by a total funded debt ratio, or a base
rate, with option periods of one to six months. As of September 27, 1998, there
was no outstanding balance drawn on this line.
In September 1996, the Company entered into a $42 million mortgage financing
related to certain domestic facilities at an effective interest rate of
approximately 10.1%. The term of the mortgage is 10 years, with monthly payments
based on a 20-year amortization period, and a balloon payment at the end of the
10-year term.
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Based on the current adverse conditions in the hard disk drive market, the
Company has reduced capital spending and expects to spend less than $150 million
for capital equipment, expansion of the Company's facilities, and leasehold
improvements in fiscal year 1999. These capital expenditures will support the
disk drive and tape drive businesses, research and development, and general
corporate operations. Refer to the Future Capital Needs section of the Trends
and Uncertainties section for additional discussion of capital.
The Company believes that its existing capital resources, including the credit
facility 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 the Company's expectations, and actual results could vary
due to factors described in the Trends and Uncertainties section that follows.
Trends and Uncertainties
By operating in the information storage industry, Quantum is affected by
numerous trends and uncertainties, some of which are specific to the industry
while others relate more specifically to Quantum.
Trends and Uncertainties - Information Storage Industry
Key trends and uncertainties inherent in the information storage industry - and
how these trends and uncertainties specifically impact the Company - are
summarized below.
o Intense competition - The information storage products industry in
general, and the hard disk drive market in particular, is characterized
by intense competition that 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.
o Declining desktop hard disk drive prices - In conjunction with intense
competition, the growth of the low-cost PC market, often referred to as
the "sub $1,000" PC market, has led to a shift in the storage market
toward lower priced hard disk drives.
o Rapid technological change - Technology advancement in the information
storage industry is increasingly rapid and the customer qualification
process is difficult.
o Customer concentration - High-purchase-volume customers for information
storage products are concentrated within a small number of computer
system manufacturers, distribution channels, and systems integrators.
o Fluctuating product demand - The demand for hard disk drive products
depends on the demand for the computer systems in which hard disk
drives are used, which is in turn affected by computer system product
cycles and prevailing economic conditions.
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Intensely Competitive Industry. To compete within the information storage
industry, Quantum frequently introduces new products and transitions to newer
versions of existing products. Product introductions and transitions are
significant to the operating results of Quantum, and if they are not successful,
the Company is materially adversely affected. The hard disk drive market, in
particular, 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 more than expected and transition products sooner than
expected, which can materially adversely affect the Company. For example, in the
first half of fiscal year 1999 and the second half of fiscal year 1998, excess
inventory in the desktop hard disk drive market, aggressive pricing and
corresponding margin reduction adversely impacted the Company's operating
results during these periods. The Company experienced similar conditions in the
high-end of the hard disk drive market during most of fiscal year 1998 and in
the first half of fiscal year 1999, although with less of an adverse impact in
the first half of fiscal year 1999. As a result of these conditions, the Company
had diminished profitability, at near breakeven, in the first quarter of fiscal
year 1999 and fourth quarter of fiscal year 1998. Furthermore, losses in the
third quarter of fiscal year 1998 were largely attributable to a $103 million
special charge primarily for high-end hard disk drive inventory write-offs and
firm inventory purchase commitments. If competition and pricing further
intensifies, the Company's operating results could be further adversely
affected.
Another competitive risk is that 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.
Quantum faces direct competition from a number of companies, including Exabyte,
Fujitsu, Hewlett-Packard, IBM, Maxtor, Seagate, Sony, and Western Digital. In
the event that the Company is unable to compete effectively with these
companies, any other company, or any collaboration of companies, the Company
would be materially adversely affected. The Company's information storage
product competition can be further broken down as follows:
Specialty Storage Products. In the market for tape drives, the Company
competes with other companies that have tape drive product offerings and
alternative formats, including Exabyte, Hewlett-Packard, Sony, and Storage
Technology. In addition, Hewlett-Packard, IBM, and Seagate formed a
consortium to develop two tape drive products, one of which targets
high-capacity data storage. The Company targets and has the market
leadership position in the storage product market that provides
mission-critical backup systems, archiving, and disaster recovery for
mid-range servers. The Company has achieved market leadership and competes
in this segment based on the reliability, data integrity, performance,
capacity, and scalability of its tape drives. Although the Company has
experienced excellent market acceptance and conditions for its tape drive
products, the market would become more competitive if other companies
individually or collaboratively broaden their product lines in this market.
As a result, the Company could experience increased price and performance
competition. If price or performance competition increases, the Company
could be required to lower prices, resulting in decreased margins that
could materially adversely affect the Company's operating results.
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Hard Disk Drive Products. In the market for desktop products, Quantum
competes primarily with Fujitsu, IBM, Maxtor, Samsung, Seagate, and Western
Digital. Quantum and its competitors have developed and continue to develop
a number of products targeted at particular segments of this market, such
as business users and home PC buyers, and factors such as time-to-market,
cost, product performance, quality, and reliability have a significant
effect on the success of any particular product. The desktop market is
characterized by more competitiveness and shorter product life cycles than
the information storage industry in general. This competitiveness, which
intensified in the second half of fiscal year 1998 and continued in the
first half of fiscal year 1999, has resulted in a significant downward
trend in gross profit margins on desktop disk drive products during these
periods.
The Company faces competition in the high-end hard disk drive market
primarily from Fujitsu, Hitachi, IBM, and Seagate. Seagate and IBM have the
largest share of the market for high-end hard disk drives. Although the
same competitive factors identified above as being generally applicable to
the overall disk drive industry apply to high-end disk drives, the Company
believes that performance, quality, and reliability are even more important
to the users of high-end products than to users in the desktop market.
However, this does not lessen the intensely competitive nature of the
high-end of the hard disk drive market. For example, intense competition
has lead to the trend of losses on the Company's high-end hard disk drive
products over the past five quarters, although with decreased losses in the
first half of fiscal year 1999. The Company does not anticipate that the
high-end disk drive products will return to profitability without sustained
high-volume shipping of these products with less rapid price erosion.
However, there can be no assurance as to the profitability of current or
next generation products. The Company's gross margins on its high-end
products during the foreseeable future are dependent on the successful
development, timely introduction, market acceptance, and product transition
of new products, as to which there can be no positive assurance.
Declining Desktop Hard Disk Drive Prices. As discussed above, intense
competition has resulted in aggressive pricing in the desktop hard disk drive
market. The intense competition, when combined with the growth of the low-cost
PC market, often referred to as the "sub $1,000" PC market, has led to a shift
in the storage market toward lower priced desktop hard disk drives. To be
successful as a hard disk drive supplier in general as well as in the low cost
PC market, cost structure, including corporate infrastructure, materials,
distribution and warranty costs must be appropriately aligned to the product
performance and price required to compete in this market. Intense competition,
combined with the lower prices in the desktop disk drive market has resulted in
three consecutive quarters, including the second quarter of fiscal year 1999, of
increasing operating losses associated with the Company's desktop hard disk
drives. Although the Company has plans to bring the cost structure of desktop
hard disk drives into alignment with prices, there can be no assurance that the
Company's plans will be successful or implemented timely. Continued growth of
the low cost market as a portion of the overall hard disk drive market could
result in increasingly adverse pricing having an increasingly adverse impact on
the Company's results of operations. The Company will continue to evaluate its
business model for its desktop hard disk products given the challenging
environment in this market.
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Rapid Technological Change, New Product Development and Qualification, and
Technology Investments. In the hard disk drive market, the combination of an
environment of increasingly rapid technological changes, short product life
cycles, and intense competitive pressures results in rapidly decreasing gross
margins on specific products. Accordingly, any delay in the 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 customers will demand and to develop the new products
that meet this demand and effectively compete with the products of competitors.
For example, magnetoresistive ("MR") recording heads represent an important
technology and component related to the performance and competitiveness of the
Company's products. In particular, MR recording heads have been important to
achieving competitive storage density for the Company's products. The
anticipated next generation of MR recording heads is referred to as "Giant" MR
("GMR") recording heads. The Company expects industry-wide time-to-market
competition in calendar year 1999 using GMR technology to have an impact on
technology leadership and competitiveness. In this regard, the recent alliance
between IBM and Western Digital that includes a purchasing agreement and
technology licensing involving GMR recording heads is expected to increase the
competition in GMR recording head time-to-market. The Company can make no
assurance regarding its ability to incorporate GMR recording heads into its
products and, if successful, the competitiveness of the Company's products.
The Company's future is also dependent on its ability to qualify new products
with customers, to successfully introduce these products to the market on a
timely basis, and to commence and achieve volume production that meets customer
demand. Because of these factors, the Company expects sales of new products to
continue to account for a significant portion of its future hard disk drive
sales, and that sales of older products will decline rapidly.
The Company is frequently in the process of qualifying new products with its
customers. The customer qualification process for disk drive products,
particularly high-end products, can be lengthy, complex, and difficult. The
Company would be materially adversely affected if it were unable to achieve
customer qualifications for new products in a timely manner, or at all, or if
MKE were unable to continue to manufacture qualified products in volume with
consistent high quality.
In the mid-range tape drive market, the Company has experienced less rapid
technological change, as well as less technology and performance based
competition compared with the hard disk drive market. This has resulted in
favorable gross margins on sales of the Company's DLTtape brand products. Higher
margins on DLTtape products, as compared with the eroded gross margins on hard
disk drives, have resulted in tape drive and related media products becoming the
primary source of the Company's operating income in the first half of fiscal
year 1999 and the second half of fiscal year 1998. Given the favorable tape
drive market conditions that the Company has experienced, competitors are
aggressively trying to make technological advances and take other steps in order
to more successfully compete with the Company's DLTtape products. Successful
competitor product offerings that target the market in which the Company's
DLTtape products compete could have a material adverse effect on the Company. In
addition, in the event that the Company is not able to maintain DLTtape
technology competitiveness based on its performance,
26
<PAGE>
quality, reliability and scalability, or otherwise not meet the requirements of
the market, it could lose market share and experience declining sales and gross
margins, which would have a material adverse effect on the Company.
In the information storage industry in general, there can be no assurance that
the Company will be successful in the development and marketing of any new
products and components in response 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 or achieve market
acceptance. These significant risks apply to all new products, including those
expected to be based on optical and Super DLTtape technologies. 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 and substantially lower prices than the
Company's products. Furthermore, the Company's new products and components are
subject to significant technological 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, for technological
or other reasons, the Company is unable 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.
As part of the Company's strategy to remain technologically competitive, the
Company has invested in technologies, such as in optical technology through its
strategic alliance with and investment in TeraStor, and MR recording heads
through the MKQC joint venture. See "Trends and Uncertainties More Specific to
Quantum - MKQC Joint Venture for MR Recording Heads Development and
Manufacturing" below for additional discussion of MKQC. There can be no
assurance that the technologies, companies, and ventures in which the Company
has invested will be profitable in the information storage industry. Adverse
technological or operating outcomes could result in impairment and write-down of
associated investments that could have a material adverse effect on the Company.
Customer Concentration. In addition to the concentration of the information
storage industry and the Company's customer base, customers are generally not
obligated to purchase any minimum volume of the Company's products, and the
Company's relationships with its customers are generally terminable at will. In
June 1998, two Quantum customers, Compaq Computer, Inc. and Digital Equipment
Corporation merged, thereby increasing the Company's customer concentration and
associated risk.
Sales of the Company's desktop and tape products, which together comprise a
majority of its overall sales, were concentrated with several key customers in
the first half of fiscal year 1999 and in fiscal year 1998. Sales to the
Company's top five customers in the first half of fiscal year 1999 represented
44% of sales, compared to 46% of sales in the corresponding period in fiscal
year 1998 (percentage of sales reflects a retroactive combination of the sales
to Compaq Computer, Inc. and Digital Equipment Corporation as a result of their
merger in June 1998). Sales to the Company's top customers are even more
concentrated when sales to independent
27
<PAGE>
subcontractors for key customers are considered. Because of the rapid and
unpredictable changes in market conditions, and the short product life cycles
for its customers' products, the Company is unable to predict whether there will
be any significant change in demand for any of its customers' products in the
future. In the event that any such changes result in decreased demand for the
Company's products, whether by loss of or delays in orders, the Company could be
materially adversely affected. In addition, the loss of one or more key
customers could materially adversely affect the Company.
Fluctuation in Product Demand. Fluctuation in demand for the Company's products
results in fluctuations in operating results. Demand for the computer systems in
which the Company's storage products are used 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, either of which could have a material adverse effect on the
Company. During the past several years, there has been significant growth in the
demand for PCs, a portion of which represented sales of PCs for use in the home.
However, many analysts predict that future growth will be at a slower rate than
the rate experienced in recent years.
Sales of DLTtape drives and media have tended to be more stable and were a
significant component of sales for the Company. In addition, the Company has
experienced longer product cycles for its tape drives and tape drive-related
products compared with the short product cycles of disk drive products. However,
there can be no assurance that this trend will continue. Beginning in the third
quarter of fiscal year 1998, sales of tape drives and media achieved gross
margins that significantly exceeded gross margins from the sale of the Company's
hard drive products. In this regard the Company expects sales of DLTtape
products, which represented 25% of sales and the only profitable major product
family in the second quarter of fiscal year 1999, and 21% of sales and a
majority of operating profits in fiscal year 1998, will continue to represent a
major portion of the Company's operating profits in the future. The Company
expects the rate of sales growth to lessen in fiscal year 1999 compared with the
rate of growth achieved in fiscal year 1998. However, there can be no assurance
that any growth expectations will be achieved or that current market conditions
will continue.
The Company's shipments tend to be highest in the third month of each quarter.
Failure by the Company to complete shipments in the final month of a quarter
resulting from a decline in customer demand, manufacturing problems, or other
factors would adversely affect the Company's operating results for that quarter.
Because the Company has no long-term purchase commitments from its customers,
future demand is difficult to predict. The Company could experience decreases in
demand for any of its products in the future, which could have a material
adverse effect on the Company.
28
<PAGE>
Trends and Uncertainties More Specific to Quantum
Certain trends and uncertainties relate more specifically to Quantum and are not
necessarily indicative of the information storage industry as a whole. These
trends and uncertainties include intellectual property matters, the acquisition
of ATL, the Tandberg manufacturing license and marketing agreement, inventory
risk, dependence on MKE for the manufacture of the hard disk drives that Quantum
develops and markets, losses associated with MKQC, dependence on suppliers,
component shortages, future capital needs, warranty costs, foreign manufacturing
and sales, foreign exchange contracts, and price volatility of Quantum's common
stock. For information regarding litigation, refer to Note 5 of the Notes to
Condensed Consolidated Financial Statements.
Intellectual Property Matters. From time to time, the Company is approached by
companies and individuals alleging Quantum's infringement of and need for a
license under patented or proprietary technology that Quantum assertedly uses.
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 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied many of these patents before and, of the patents it has
studied, believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not yet had time to make a complete study of all
the patents asserted by Papst and there can be no assurance that the Company has
not infringed these or other patents owned by Papst. The final results of this
litigation, as with any litigation, are uncertain. If required, there can be no
assurance that licenses to any technology owned by Papst or any other third
party alleging infringement could be obtained or obtained on commercially
reasonable terms. Adverse resolution of the Papst litigation or any other
intellectual property litigation could subject the Company to substantial
liabilities and require it to refrain from manufacturing certain products which
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the costs of engaging in the
Papst litigation or other intellectual property litigation could be substantial,
regardless of the outcome.
Acquisition of ATL. As discussed in the Business Overview section, on September
28, 1998, the Company completed the acquisition of ATL. The acquisition of ATL
by the Company entails a number of risks, including successfully managing the
transition of ATL to a wholly-owned subsidiary of Quantum; retention of key
employees, customers, and suppliers; and managing a larger and more diverse
business.
The successful combination of Quantum and ATL, as a wholly owned subsidiary of
Quantum, will require substantial attention from management. The anticipated
benefits of the acquisition will not be achieved unless the operations of ATL
are successfully integrated with Quantum in a timely manner. The difficulties of
assimilation may be increased by the need to integrate personnel and corporate
cultures, and by Quantum's and ATL's limited personnel, management and other
resources. The successful combination of the two companies will also require
29
<PAGE>
integration of the companies' product offerings and the coordination of research
and development and sales and marketing efforts. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses and
could lead to certain customers to defer purchasing decisions. The diversion of
the attention of management from day-to-day operations of Quantum or ATL, or
difficulties encountered in the transition and integration of processes, could
have a material adverse effect on the business, financial condition and results
of operations of Quantum or ATL.
The success of Quantum and ATL after the acquisition is also dependent, in part,
on the retention and integration of key management, technical, marketing, sales
and customer support personnel of ATL, in particular its President and Chief
Executive Officer, Kevin C. Daly, Ph.D. Prior to the acquisition, ATL entered
into separation arrangements with Dr. Daly and certain other members of senior
management. The success of the acquisition will depend, in part, upon the
retention of these executives during the transition period following the
acquisition. There can be no assurance that such executives will remain with
Quantum for any specified period after the acquisition. Quantum's success with
the acquisition will also depend in large part upon its ability to attract,
retain and motivate highly skilled employees. Competition for such employees,
particularly development engineers and experienced senior management, is
intense, and there can be no assurance that Quantum will be able to continue to
attract and retain sufficient numbers of such highly skilled employees.
Quantum's inability to attract and retain additional key employees or the loss
of one or more of its current key employees could have a material adverse effect
on the Company's business, financial condition and results of operations
following the acquisition.
In addition, the success of Quantum and ATL after the acquisition is also
dependent, in part, on the retention of key customers of both Quantum and ATL. A
number of ATL's competitors are Quantum's customers and therefore the
acquisition will increase the Company's competition with its customers. Although
Quantum already competes with a number of its key customers, increased
competition could result in customers shifting storage strategies and purchases
away from Quantum products. A loss of a key customer could have a material
adverse effect on the Company's financial condition and results of operations.
Tandberg Manufacturing License and Marketing Agreement. In September 1998,
Quantum and Tandberg entered into a manufacturing license and marketing
agreement through which Tandberg can become an independent second source for
DLTtape drives, including products under development based on Quantum's Super
DLTtape technology as well as current DLTtape technology. Tandberg expects to
implement full DLTtape manufacturing operations within a year. As part of the
agreement, Tandberg intends to market a full spectrum of DLTtape products,
including drives, media, and libraries. With Tandberg's strong name recognition
and established distribution channels in the European market, Tandberg is
expected to be a synergistic partner. Tandberg will need Quantum's assistance to
ramp-up its production of DLTtape drives. There are a number of risks associated
with this agreement, including that Tandberg may not be successful or timely in
ramping-up its production of DLTtape drives for technical, operational, cost or
other reasons; if the Quantum/Tandberg alliance is unsuccessful, more broadly
licensed competitive
30
<PAGE>
products may be able to gain market share in the mid-range tape market;
manufacturing capacity added by Tandberg could lead to over supply and price
declines if demand in the mid-range tape storage market begins to slow down.
There can be no assurance that the agreement will be successful, synergistic, or
will not have an adverse impact on the Company's financial position and results
of operations.
Inventory Risk. As discussed in the "Customer Concentration" and "Fluctuation in
Product Demand" sections, the Company's customers generally are not obligated to
purchase any minimum volume of the Company's products and fluctuations in
end-user demand may result in the deferral or cancellation of orders for the
Company's products. These risk factors, when combined with the OEM trend toward
carrying minimal inventory levels related to just-in-time and build-to-order
type manufacturing processes, increase the risk that Quantum, as a supplier,
will manufacture and custom configure too much or too little inventory in
support of OEM manufacturing processes. Significant excess inventory conditions
could result in inventory write-downs and losses that could adversely impact the
Company's results of operations, whereas inventory shortages could adversely
impact the Company's relationship with its customers and the Company's results
of operations.
Dependence on MKE Relationship. Quantum is dependent on MKE for the manufacture
of all of its hard disk drive products. Approximately 76% and 79% of the
Company's sales in the first half of fiscal year 1999 and in fiscal year 1998,
respectively, were derived from products manufactured by MKE. In addition, the
MKQC joint venture with MKE to develop and produce recording heads used in disk
drive production represents additional dependence on MKE. The Company's
relationship with MKE is therefore critical to the Company's business and
financial performance.
Quantum's master agreement with MKE, which covers the general terms of the
business relationship is effective through May 2007. The agreement may be
terminated sooner as a result of certain specified events including a
change-in-control of either Quantum or MKE. Quantum's relationship with MKE,
which dates from 1984, is built on Quantum's engineering and design expertise
and MKE's high-volume, high-quality manufacturing expertise.
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
31
<PAGE>
demand without substantial delay and disruption to the Company's
operations. As a result, the Company would be materially adversely
affected.
Volume and Pricing. MKE's production schedule is based on the Company's
forecasts of its product purchase requirements, and the Company has limited
contractual rights to modify short-term purchase orders issued to MKE.
Further, the demand in the disk drive business is inherently volatile, and
there is no assurance that the Company's forecasts are accurate. In
addition, the Company periodically negotiates pricing arrangements with
MKE. The failure of the Company to accurately forecast its requirements or
successfully adjust MKE's production schedule, 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. For example, a portion of the $103 million special charge
recorded in the third quarter of fiscal year 1998 reflected losses on firm
inventory commitments associated with high-end disk drive production at
MKE.
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 for the next 12 months. The Company's
future growth will require, however, that MKE continue to devote
substantial financial resources to property, plant, and equipment and
working capital to support manufacture of the Company's products, as to
which there can be no assurance. In the event that MKE is unable or
unwilling to meet the Company's manufacturing requirements, there can be no
assurance that the Company would be able to obtain an alternate source of
supply. Any such failure to obtain an alternative source would have a
material adverse effect on the Company.
MKQC - Joint Venture for MR Recording Heads Development and Manufacturing. Since
the acquisition of MR recording heads technology in fiscal year 1995 as part of
certain businesses of the Storage Business Unit of Digital Equipment
Corporation, Quantum has made significant efforts to advance the development of
its MR recording heads capability. To further this effort, MKE and Quantum
formed a joint venture, MKQC, in the first quarter of fiscal year 1998 to
partner in the research, development, and production of MR recording heads and
technology. The Company's target has been to obtain 15% to 20% of the MR
recording heads used in its products from MKQC.
To date, MKQC's MR recording head manufacturing yields have been at a level that
was lower than necessary for cost-effective production. The Company does not
expect cost-effective production of MR recording heads by MKQC to be realized in
the near term. Until such time as MR recording heads are cost-effectively
produced by MKQC, the Company expects to continue to incur losses based on its
pro rata ownership interest in the joint venture. The Company is evaluating
strategic alternatives with regard to the MKQC joint venture. Although the
outcome of this process is currently unknown, certain alternatives could result
in charges associated with the Company's interest in MKQC. The Company
anticipates that operating results in the third quarter of fiscal 1999 will
continue to be adversely impacted by losses associated with MKQC.
32
<PAGE>
At September 27, 1998, MKQC was in contractual violation of a covenant related
to its financing relationship with a bank, under which approximately $80 million
and $27 million was outstanding under long-term debt/lease and revolving debt
agreements, respectively. MKQC has notified the bank of the violation and is
currently working towards obtaining a covenant waiver and/or amendments to the
loan agreement. MKQC management believes, based on discussions with the bank,
and MKQC's ability to continue to draw funds against the credit facility
subsequent to September 27, 1998, that it will obtain a covenant waiver and/or
amendments from the bank. However, there can be no assurances that such a
covenant waiver and/or amendments will be obtained or that such amendments, if
any, will be provided on terms favorable to MKQC. The Company could be
materially adversely affected if actions taken by the bank have an adverse
impact on MKQC.
Dependence on Suppliers of Components and Sub-Assemblies; Component Shortages.
Both the Company and its manufacturing partner, MKE, are dependent on qualified
suppliers for components and sub-assemblies, including recording heads, media,
and integrated circuits, which are essential to the manufacture of the Company's
disk drive and tape drive 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
component 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.
Future Capital Needs. The information storage industry is capital, research, and
development intensive, and the Company will need to maintain adequate financial
resources for capital expenditures, working capital, research and development in
order to remain competitive in the information storage business. The Company
believes that it will be able to fund these capital requirements over the next
12 months. 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 could 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. The Company
may also 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, research, and development
expenditures, which could adversely affect the Company.
Warranty. Quantum generally warrants its products against defects for a period
of three to five years. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped. Actual warranty costs
could have a material unfavorable impact on the
33
<PAGE>
Company if the actual rate of unit failure or the cost to repair a unit is
greater than what the Company used to estimate the warranty expense accrual.
Risks Associated with Foreign Manufacturing and Sales. Many of the Company's
products and product components are currently manufactured outside the United
States. In addition, close to half of the Company's revenue comes from sales
outside the United States, including sales to the overseas operations of
domestic companies. 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. In
addition, several Asian countries have recently experienced significant economic
downturns and significant declines in the value of their currencies relative to
the U.S. dollar. In the four quarters ending with the first quarter of fiscal
year 1999, the Company experienced a year-over-year reduction in sales to
certain Asian countries due, in part, to the effects of these factors. With most
of the Company's non-U.S. sales being denominated in U.S. dollars, the Company
is unable to predict what effect, if any, these factors will have on its ability
to maintain or increase its sales in these markets, general economic conditions,
and the Company's customers.
Foreign Exchange Contracts. The Company manages the impact of foreign currency
exchange rate changes on certain foreign currency receivables and payables using
foreign currency forward exchange contracts. With this approach the Company
expects to minimize the impact of changing foreign exchange rates on the
Company's net income. However, there can be no assurance that all foreign
currency exposures will be adequately managed, and the Company could incur
material charges as a result of changing foreign exchange rates.
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 information storage and computer market
may have a significant impact on the market price of the common stock. In
particular, when the Company reports operating results that are less than the
expectations of analysts, the market price of the common stock can be materially
adversely affected.
34
<PAGE>
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements.
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 1998 Annual Meeting of Stockholders was held on September 15, 1998. The
matters voted on were management's candidates for the Board of Directors and the
appointment of Ernst & Young LLP to serve as Quantum's independent auditors for
the fiscal year ending March 31, 1999.
The stockholders approved management's candidates for the Board of Directors.
The votes were as follows:
For Withheld Authority
Stephen M. Berkley 109,816,475 20,149,897
David A. Brown 109,816,536 20,149,836
Michael A. Brown 109,732,278 20,234,094
Robert J. Casale 109,855,877 20,110,495
Edward M. Esber, Jr. 109,829,969 20,136,403
Steven C. Wheelwright 109,855,966 20,110,406
The stockholders approved the appointment of Ernst & Young LLP to serve as
Quantum's independent auditors for the fiscal year ending March 31, 1999. The
number of votes "For" were 123,497,834; the number of votes "Against" were
157,473; the number of votes "Abstained" were 6,329,065; and there were zero
Broker Non-Votes.
Item 5. Other information - Not Applicable
35
<PAGE>
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.
36
<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: October 15, 1998 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President,
Finance and Chief
Financial Officer
37
<PAGE>
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.1 REIMBURSEMENT AGREEMENT, dated September 14, 1998, between Quantum
Peripherals (Europe) S.A. and The Sumitomo Bank, Limited, London Branch
10.2 THIS CHARGE, dated September 14, 1998, between Quantum Peripherals
(Europe) S.A. and The Sumitomo Bank, Limited
27.1 Financial Data Schedule
Footnotes to
Exhibits Footnote
None
38
REIMBURSEMENT AGREEMENT
To: The Sumitomo Bank, Limited
Temple Court
11 Queen Victoria Street
London EC4N 4TA
Date: 14th September 1998
DEFINITIONS
Company: Quantum Peripherals (Europe) S.A.
Bank: The Sumitomo Bank, Limited, London Branch.
Bank's Obligations: The obligations of the Bank
undertaken or to be undertaken as obligor
under two letters of credit in favour of
Matsushita - Kotobuki Electronics Industries
Ltd and Ireland - Kotobuki Electronics
Industries Ltd issued by the Bank at the
request of the Company as amended, varied or
replaced.
Deposit: The deposit made with the Bank as collateral
for the Bank's Obligations.
Required Currency: US Dollars.
INDEMNITY
1. In addition and without prejudice to any other express or implied
right to which the Bank may be entitled and in consideration of the
Bank undertaking the Bank's Obligations at the Company's request the
Company agrees:
1.1 At all times to keep the Bank indemnified on demand against
all costs claims losses demands proceedings and expenses
incurred or suffered by the Bank directly or indirectly by
reason of or in connection with the Bank's Obligations or
any of them.
1.2 To supply the Bank with such evidence as the Bank may
reasonably require of the termination of its liability
under the Bank's Obligations or any of them.
AUTHORITY TO PAY
2.1 The Company irrevocably and unconditionally authorises the
Bank to make such payments and comply with such demands as
may be claimed from or made on the Bank in respect the
Bank's Obligations
<PAGE>
or any of them as the Bank in its absolute discretion
thinks fit without any necessity to obtain the Company's
confirmation or verification and notwithstanding that the
Company may have disputed the Bank's liability to pay or
comply.
2.2 The Company agrees that any such payment or compliance by
the Bank shall as between the Bank and the Company be
conclusive evidence that the Bank was liable to make such
payment or comply with such demand.
PAYMENTS
3.1 The Company agrees to pay to the Bank on demand from time
to time the amount(s) due from the Company to the Bank
under Clause 1.1. The Bank shall notify the Company within
two Business days of any payment by the Bank of any draws
pursuant to the Bank's Obligations. Upon such notice, the
Company shall have five (5) Business Days to exercise an
option to either (i) break the Deposit in whole or part to
satisfy the amount due (in which event any break funding
costs incurred will be paid by the Company as set out in
clause 4.5 of the charge over the Deposit) or (ii) to pay
the amount due together with interest thereon at the Bank's
New York Prime Rate + 2% p.a. for the period from the date
of payment by the Bank to the date of reimbursement by the
Company.
3.2 Letter of Credit Fee. So long as the Letters of Credit
remain in effect, the Company shall pay to the Bank a
Letter of Credit Fee with respect to the Letters of Credit
equal to 0.05% per annum. The Letter of Credit Fee shall be
paid in arrears on the last Business Day of each calendar
quarter (commencing September 30th 1998) and on the
Termination Date.
CURRENCY
4.1 The Company's liability hereunder is to discharge the
amounts due under clause 1.1 in the Required Currency. All
payments shall be made without any deduction, withholding,
counterclaim or set-off and if required by law to make any
such deduction or withholding the Company will pay such
additional amounts to ensure that the Bank receives the
full amount due hereunder.
4.2 If at any time the Bank receives any payment by or on
behalf of the Company in a currency other than the Required
Currency then such payment shall take effect as a payment
to the Bank of the amount in the Required Currency which
the Bank is able (in accordance with its usual practice and
after deduction of the cost to the Bank of making such
purchase) to purchase with the amount of the payment so
received as soon as may be practicable.
<PAGE>
PRIMARY OBLIGATION
5. This indemnity is the Company's primary and continuing
obligation and extends to all Bank Obligations. It will
remain in full force and effect notwithstanding anything
which may operate to release a surety from its obligations.
GOVERNING LAW
6. This reimbursement agreement shall be governed by and
construed in accordance with the laws of England and both
parties submit to the jurisdiction of the English courts
for the settlement of any disputes arising hereunder, The
Company appoints Baker Mackenzie at Aldwych House London
WC2B 4SP as its agent for the service of process in
England.
IN WITNESS whereof this reimbursement agreement has been duly executed for and
on behalf of the QUANTUM PERIPHERALS (EUROPE) S.A.
By: 17 Sept 98
-----------------------------------
Name: Jean Charles Herpeux
-----------------------------------
Title: Vice President, European Operations
-----------------------------------
THIS CHARGE is dated 14th September 1998 and made BETWEEN:
(1) QUANTUM PERIPHERALS (EUROPE) S.A. (registered in Switzerland) whose
registered office is at Champs-Montants 16A, CH-2074, Marin, Neuchatel,
Switzerland (the "Company"); and
(2) THE SUMITOMO BANK, LIMITED whose principal office in England is at Temple
Court, 11 Queen Victoria Street, London EC4N 4TA (the 'Bank')
WITNESSES as follows:
1. Definitions and Interpretation
1.1 In this Charges unless the context otherwise requires:
'Deposit' means the sum of US $85,000,000 deposited in the
Security Account and all other monies from time to time standing
to the credit of the Security Account and any account opened by
the Bank in accordance with Clause 7.2 together with all interest
and other rights arising in connection therewith.
'Encumbrance' means any mortgage charge pledge lien assignment
hypothecation security interest title retention preferential right
or trust arrangement or other security arrangement or agreement or
any right conferring a priority of payment.
'Interest Calculation Period' means consecutive periods of 1 week,
1 month, 3 months, 6 months, 9 months or 1 year each as selected
by the Company and notified to the Bank not later than the close
of business in London on the third London Business Day prior to
the start of an Interest Calculation Period and in default of such
selection, one month.
'Letters of Credit' means the two standby letters of credit in
favour of Matsushita - Kotobuki Electronics Industries Ltd and
Ireland - Kotobuki Electronics Industries Ltd as the same may from
time to time be amended, increased or extended in accordance with
the instructions of the Company.
'LIBID' means the one-eighth of one percent below LIBOR for US
Dollars in the London Interbank Market at 11 am London time two
London Business Days prior to the first day of any Interest
Calculation Period as quoted on Telerate page 3750 (or an
alternative screen reference if it ceases to be quoted on that
page) except in respect of the first Interest Calculation Period
which will be fixed on receipt of the Deposit.
'LPA' means the Law of Property Act 1925
<PAGE>
'Reimbursement Agreement' means the reimbursement agreement [dated
14 September, 1998] between the Company and the Bank relating to
the issue of the Letters of Credit.
'Security Account' means the Deposit as defined in the
Reimbursement Agreement in the name of the Company with the Bank
and all rights of the Company in relation to such Deposit.
'Secured Liabilities' means all monies obligations and liabilities
whatsoever which may now or at any time in the future be due owing
or incurred by the Company to the Bank under the Reimbursement
Agreement and/or this Charge whether actual or contingent.
1.2 Any reference in this document to "this Charge shall be deemed to
include any instruments amending varying supplementing, novating
or replacing the terms of this document from time to time.
2. Covenant to Pay
2.1 In consideration of the Bank's agreement to issue the Letters of
Credit the Company covenants with the Bank that it will on demand
pay and discharge the Secured Liabilities when due to the Bank.
3. Charge
3.1 The Company with full title guarantee and as a continuing security
for the payment and discharge of the Secured Liabilities charges
in favour of the Bank by way of first fixed charge the Deposit and
all the entitlements to interest the right to repayment and other
rights and benefits accruing to or arising in connection with the
Deposit to the intent that such charge shall operate as a release
of the Deposit to the Bank until the Secured Liabilities have been
unconditionally and irrevocably paid and discharged in full
provided that interest will be remitted to the company as set out
in clause 4.2 below.
4. Terms of the Deposit
4.1 The Company shall not be entitled to withdraw or transfer all or
any part of the Deposit until the corresponding part or the
Secured Liabilities have been unconditionally and irrevocably paid
and discharged in full to the intent that the principal amount of
the Deposit shall at all times be equal to the aggregate of the
Bank's exposure for the "Stated Amounts" as defined in each of the
Letters of Credit.
4.2 Interest shall accrue on the Deposit at LIBID for consecutive
Interest Calculation Periods in accordance with normal Euromarket
conventions and be paid to the Company on the last day of each
Interest Calculation Period provided that if the Company is in
breach of any provision of this Charge or of any contract or
agreement giving rise to or otherwise
<PAGE>
concerning the Secured Liabilities then any such interest shall be
credited to the Security Account and form part of the Deposit.
4.3 Any agreement (whether before on or after the date of this Charge)
that the Deposit is to be held on fixed time deposit shall be for
the purposes of calculation and payment of interest only and shall
not prejudice the Bank's rights or obligations under any provision
of this Charge. The Bank may unilaterally terminate any such fixed
time deposit period at any time after the date on which all or any
part of the Secured Liabilities shall become due and payable and
adjust any interest payable by the Bank accordingly.
4.4 If the Deposit is held on fixed time deposit then on the expiry of
the relevant fixed time deposit period it shall be redeposited in
an amount not to exceed the Bank's Obligations as defined in the
Reimbursement Agreement or successively redeposited on such terms
(including without limitation successive fixed time deposits) as
may be from time to time between the Company and the Bank or
failing such agreement as may be determined by the Bank.
4.5 If any time deposit needs to be cancelled either pursuant to the
terms of the Reimbursement Agreement or the terms hereof, the
Company will be responsible for any broken funding cost thereby
incurred by the Bank in covering its position. The Bank will give
the Company details of its calculations.
5. Right of Set-off
The Company authorises the Bank subject to the conditions specified in
the Paragraph 3 of the Reimbursement Agreement, to apply the Deposit or
any part thereof at any time towards satisfaction of all or any of the
Secured Liabilities as are then due and payable as the Bank may think
fit. The Bank will give prompt notice of the exercise of any such set off
right.
6. Representations Warranties and Covenants by the Company
6.1 The Company represents and warrants to the Bank and undertakes that:
(a) it is and will be the sole absolute and beneficial owner
with full title guarantee of all the Deposit free from
Encumbrances and will not create or attempt to create or
permit to arise or subsist any Encumbrance (other than this
Charge) on or over the Security Account or all or any part
of the Deposit;
(b) it has not sold assigned or otherwise disposed of or agreed
to sell assign or dispose of and will not at any time
during the subsistence of this Charge sell assign or
dispose of or agree to sell assign or otherwise dispose of
or agree to dispose of all or any of the Company's right
title and interest in and to all or any part of the
Deposit.
<PAGE>
(c) it has and will at all times have the necessary power to
enter into and perform its obligations under this Charge;
(d) this Charge constitutes its legal valid binding and
enforceable obligations and is a security over all and
every part of the Deposit effective in accordance with its
terms;
(e) this Charge does not and will not conflict with or result
in any breach or constitute a default under any agreement
instrument or obligation to which the Company is a party or
by which it is bound;
(f) all necessary authorisations and consents to enable or
entitle it to enter into this Charge have been obtained and
will remain in full force and effect during the subsistence
of the security constituted by this Charge.
7. Continuing Security
7.1 The security constituted by this Charge shall be continuing and
shall not be considered as satisfied or discharged by any
intermediate payment or settlement of the whole or any part of the
Secured Liabilities or any other matter or thing whatsoever
including the insolvency liquidation or administration of the
Company or any analogous event occurring under the law of
incorporation of the Company and shall be binding until all the
Secured Liabilities have been unconditionally and irrevocably paid
and discharged in full.
7.2 The Secured Liabilities shall be deemed for the purposes of all
powers implied by statute to have become due and payable within
the meaning of Section 101 of the LPA immediately on the execution
of this Charge and Section 103 of the LPA (restricting the power
of sale) Section 109 of the LPA (restricting the power to appoint
a receiver) and Section 93 of the LPA (restricting the right of
consolidation) shall not apply to this Charge, save that the Bank
shall not exercise such powers unless and until the Company is in
breach of the Secured Obligations.
8. Power of Attorney
8.1 The Company by way of security irrevocably appoints the Bank to be
attorney of the Company (with full powers of substitution and
delegation) for the Company and in its name or otherwise and on
its behalf and as its act and deed to sign seal execute deliver
perfect and do all deeds instruments notices documents acts and
things which the Company may or ought to do under the covenants
and provisions contained in this Charge and generally its name and
on its behalf to exercise all or any of the powers authorities and
discretions conferred by or pursuant to this Charge or by the LPA
on the Bank and to execute and deliver and otherwise perfect any
deed assurance agreement instrument or act which it may deem
proper in
<PAGE>
the exercise of all or any of the powers authorities and
discretions conferred on the Bank pursuant to this Charge.
8.2 The Company ratifies and confirms and agrees to ratify and confirm
anything such attorney shall lawfully and properly do or purport
to do by virtue of Clause 8.1 and all reasonable money expended by
any such attorney shall be deemed to be expenses incurred by the
Bank under this Charge.
9. Further Assurances
9.1 Without prejudice to anything else contained in this Charge the
Company shall at any time at the request of the Bank but at the
cost of the Borrower promptly sign seal execute deliver and do all
deeds instruments notices documents acts and things in such form
as the Bank may from time to time require for perfecting or
protecting the security over the whole or any part of the Deposit
or for facilitating its realization.
10. Currency Indemnity
10.1 If under any applicable law or regulation or pursuant to a
judgment or order being made or registered against the Company or
the liquidation of the Company or without limitation for any other
reason any payment under or in connection with this Charge is made
or fails to be satisfied in a currency (the "payment currency")
other than the currency in which such payment is expressed to be
due under or in connection with this Charge (the "contractual
currency") then to the extent that the amount of such payment
actually received by the Bank when converted into the contractual
currency at the rate of exchange falls short of the amount due
under or in connection with this Charge the Company as a separate
and independent obligation shall indemnify and hold harmless the
Bank against the amount of such shortfall. For the purposes of
this Clause "rate of exchange" means the rate at which the Bank is
able on or about the date of such payment to purchase, in
accordance with its normal practice, the contractual currency with
the payment currency and shall take into account (and the Company
shall be liable for) any premium and other costs of exchange
including any taxes or duties incurred by reason of any such
exchange.
11. Costs
11.1 All reasonable cost charges and expenses properly incurred by the
Bank in relation to this Charge or the Secured Liabilities shall
be reimbursed by the Company to the Bank on demand on a full
indemnity basis and until so reimbursed shall carry interest at
the Bank's cost of funds from the date of payment to the date of
reimbursement.
<PAGE>
12. Miscellaneous
12.1 No reasonable delay or omission on the part of the Bank in
exercising any right or remedy under this Charge shall impair that
right or remedy or operate as to be taken to be a waiver of it nor
shall any single partial or defective exercise of any such right
or remedy preclude any other or further exercise under this Charge
of that or any other right or remedy.
12.2 The Bank's rights under this Charge are cumulative and not
exclusive of any rights provided by law and may be exercised from
time to time and as often as the Bank deems expedient.
12.3 Any waiver by the Bank of any terms of this Charge or any consent
or approval given by the Bank under it shall only be effective if
given in writing and then only for the purpose and upon the terms
and conditions if any on which it is given.
12.4 The security constituted by this Charge shall be in addition to
and shall not be prejudiced determined or affected by nor operate
so as in any way to determine prejudice affect or merge in any
Encumbrance which the Bank may now or at any time in the future
hold for or in respect of the Secured Liabilities or any of them
and shall not be prejudiced by time or indulgence granted to any
person or any abstention by the Bank in perfecting or enforcing
any remedies securities guarantees or rights it may now or in the
future have from or against the Company or any other person or any
waiver release variation act omission forbearance unenforceability
indulgence or invalidity of any such remedy security guarantee or
right.
12.5 If at any time any one or more of the provisions of the Charge is
or becomes illegal invalid or unenforceable in any respect under
any law of any jurisdiction neither the legality validity or
enforceability of the remaining provisions of this Charge nor the
legality validity or enforceability of such provision under the
law of any other jurisdiction shall in any way affected or
impaired as a result.
12.6 Any statement certificate or determination of the Bank as to the
Secured Liabilities the Deposit or without limitation any other
matter provided for in this Charge shall in the absence of
manifest error be conclusive and binding on the Company.
13. Communications
13.1 Every notice demand or other communication under this Charge shall
be in writing and may be delivered personally or by letter, telex
or facsimile transmission despatched by the Bank to the Company to
its address specified at the head of this Charge or to the
following numbers:
<PAGE>
Facsimile: 41-32-753-5541
--------------
for the attention of: Finance Director
----------------
or to such other address and or telex number and or facsimile
number as may be notified in accordance with this Clause by the
Borrower to the Bank for such purpose.
13.2 Every notice demand or other communication shall be deemed to have
been received (if sent by post) twenty-four hours after being
posted first class postage prepaid (if posted from and to an
address within the United Kingdom) and (if delivered personally or
despatched by telex (subject to receiving the correct telex
answerback) or by facsimile transmission) at the time of delivery
or despatch if during normal business hours on a working day in
the place of intended receipt and otherwise at the opening of
business in that place on the next succeeding such working day.
14. Governing Law and Jurisdiction
14.1 This Charge is governed by and shall be construed in accordance
with English law and both parties submit to the jurisdiction of
the English courts for the settlement of any disputes arising
hereunder, The Company appoints Baker McKenzie at Aldwych House,
London WC2B 45P as its agent for the service of process in
England..
IN WITNESS whereof the Company has executed and delivered this Charge as
a Deed the day and year first before written.
EXECUTED UNDER SEAL AND )
DELIVERED AS A DEED )
by QUANTUM PERIPHERALS ) ............................................Seal
(EUROPE) S.A. acting by )
Jean Charles Herpeux in the )
presence of: )
Witness:
Signature /s/ Kent Moerk
--------------------------------
Name Kent Moerk
-----------------------
Address Champs Montants 16a
-----------------------
2074 Marin
-----------------------
Switzerland
-----------------------
Occupation Acting Finance Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION FOR THE QUARTER ENDED SEPTEMBER
27, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-27-1998
<CASH> 549,446
<SECURITIES> 29,240
<RECEIVABLES> 673,999
<ALLOWANCES> 10,985
<INVENTORY> 295,799
<CURRENT-ASSETS> 1,763,553
<PP&E> 543,157
<DEPRECIATION> 256,909
<TOTAL-ASSETS> 2,128,804
<CURRENT-LIABILITIES> 607,578
<BONDS> 326,985
0
0
<COMMON> 802,590
<OTHER-SE> 351,969
<TOTAL-LIABILITY-AND-EQUITY> 2,128,804
<SALES> 2,267,734
<TOTAL-REVENUES> 2,267,734
<CGS> 1,909,473
<TOTAL-COSTS> 1,909,473
<OTHER-EXPENSES> 289,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,227
<INCOME-PRETAX> 28,964
<INCOME-TAX> 8,689
<INCOME-CONTINUING> 20,275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,275
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
