SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-12390
QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2665054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 McCarthy Blvd., Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 894-4000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
PREFERRED STOCK PURCHASE RIGHTS
7% CONVERTIBLE SUBORDINATED NOTES DUE 2004
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 24, 1998: $2,577,294,711 based upon the closing price
reported for such date on the NASDAQ National Market System. For purposes of
this disclosure, shares of Common Stock held by persons who hold more than 5% of
the outstanding shares of Common Stock and shares held by officers and directors
of the Registrant have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive.
The number of shares outstanding of the Registrant's Common Stock as of May 24,
1998, was 161,185,924.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1998 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part III
of this Form 10-K Report.
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PART I
ITEM 1. Business
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually contain the
words "estimate," "anticipate," "expect" or similar expressions. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties. These uncertainties could
cause actual results to differ materially from those expected for the reasons
set forth 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 Description
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 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 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. Quantum is also
involved in a joint venture with MKE, that researches, develops, and
manufactures magnetoresistive ("MR") recording heads that are used in the
Company'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 DLTtapeTM technology, and solid state disk drives. Quantum also
designs, develops, and markets DLTtape media. In addition, the DLTtape
technology has been licensed to Fuji and Maxell for the manufacturing of
tape media. Beginning in the fourth quarter of fiscal year 1998, the
Company began to sell DLTtape media over the worldwide web. The DLTtape
drives (20 gigabytes to 70 gigabytes capacity, compressed) use advanced
linear recording technology and a highly accurate tape
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guide system to perform mission-critical data backup for mid-range and
high-end computer systems. Quantum has exclusive worldwide manufacturing
rights for DLTtape drive and media technology and is 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, on-line
transaction processing, material requirements planning and scientific
modeling.
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, online transaction
processing, RAID storage, software development and workgroup computing.
Effective May 1997, the Company's involvement in the research, development and
manufacture of MR recording heads was through its 49% ownership interest in a
joint venture with MKE, named MKE-Quantum Components LLC ("MKQC"). The MR
recording heads are used in the Company's disk drive products. The Company
believes that MR technology, which provides higher capacity per disk than
conventional thin-film heads, has replaced thin-film heads as the leading
recording head technology. MKQC does not currently market MR heads to other
companies.
The Company is currently concentrating its product research and development
efforts on broadening its existing tape 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, desktop and
high-capacity hard disk drives, and other storage solutions. Key initiatives
include optical technology and new technologies with the potential to
dramatically increase the storage capacity of DLTtape products, as discussed in
the Strategic Developments section.
Strategic Developments
ATL Products, Inc. - Pending Acquisition. In May 1998, the Company announced an
agreement to acquire ATL Products, Inc. ("ATL"), pending approval of ATL's
shareholders as well as clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and other customary closing conditions. 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
estimated to be approximately $300 million. Under the terms of the agreement,
which was approved by the Boards of Directors of both companies, each
outstanding share of ATL's common stock will be converted into $29 worth of
Quantum common stock, with the conversion ratio based on the average Quantum
share price during the 45 trading days prior to the acquisition closing. The
average share price may be adjusted for certain impacts related to common stock
repurchases. In addition, ATL stock options would be assumed by the Company. The
acquisition is expected to close by September 1998.
Common Stock Repurchase. In May 1998, the Board of Directors authorized the
Company to repurchase approximately 14 million shares of its common stock
through the open market from time to time. The intent of the repurchases is to
minimize the dilutive impact of shares issued to complete the ATL acquisition.
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Next-Generation Super DLTtape Technology. In April 1998, the Company announced
four new tape drive technologies that are capable of delivering up to 500
gigabytes (uncompressed) of storage capacity per tape cartridge with a transfer
rate of up to 40 megabytes per second and even greater cost effectiveness than
current DLTtape technology. The four new technologies are:
o Pivoting Optical Servo, an optically assisted servo system designed for
high-duty-cycle applications
o Advanced Metal Powder Media, a media using durable metal powder technology
o Magneto Resistive Cluster Heads, a cluster of magnetoresistive tape heads
o Enhanced Partial Response Channel, a Partial Response Maximum Likelihood
(PRML) channel
With these four new technologies, the Company expects to make a major new
extension to its DLTtape architecture, Super DLTtape. Using the new
architecture, the Company plans to market a new family of competitively priced
tape storage products that range in capacity from 100 to 500 gigabytes
(uncompressed) and range in transfer rates from 10 to 40 megabytes per second
(uncompressed). The Company expects to deliver its first tape storage product
based on the Super DLTtape technology in mid-calendar year 1999.
Changes to Improve Operations Related to Quantum's High-End Hard Disk Drives. In
the third quarter of fiscal year 1998, the Company made changes to its
operations supporting hard disk drives designed to enhance product development
focus, improve time to market, and, as a result, improve operating results. The
key decisions and changes included:
o Adopting a common architecture for all of the Company's high-end products
o Refocusing on high-end product design platforms
o Simplifying the Company's product development plans for future products
o Focusing resources to develop platforms that can be modified for
utilization in both desktop or high-end applications
o Realigning certain development program engineering resources
o Combining the infrastructure supporting the desktop products (Desktop and
Portable Storage Group) and high-end products (Workstation and Systems
Storage Group) into one organizational unit, the Enterprise & Personal
Storage Group
The President of the Enterprise & Personal Storage Group is Mr. Young Sohn,
formerly President of the Desktop and Portable Storage Group. Mr. Kenneth Lee
will continue as the Company's Chief Technical Officer.
These changes eliminated the need for a previously planned increase in the hard
drive business headcount.
In conjunction with these changes and as a result of the intensified competitive
dynamics in the high-end disk drive market, in the third quarter of fiscal year
1998, the Company recorded a $103 million special charge that consisted
primarily of high-end disk drive product inventory write-offs and adjustments,
and losses related to firm inventory purchase commitments.
Renegotiated MKE Master Agreement. In May 1997, Quantum completed renegotiation
of its master agreement with MKE, which covers the general terms of the business
relationship. The agreement was extended for a period of 10 years, unless
terminated sooner as a result of certain specified events including a
change-in-control of either Quantum or MKE. MKE currently manufactures all of
the hard disk drives developed and marketed by Quantum. 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.
MKE/Quantum Recording Heads Joint Venture. On May 16, 1997, MKE and Quantum
formed a recording heads joint venture company, MKQC. Pursuant to the terms of
the transaction, Quantum
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contributed certain recording heads assets and operations, transferred employees
of the Company's recording heads operations, and leased certain premises to the
joint venture and retained a 49% ownership interest in the joint venture. The
joint venture assumed $51 million of debt payable to Quantum, and MKE paid
Quantum $94 million and contributed $110 million to the joint venture in
exchange for a 51% majority ownership interest in the joint venture.
Quantum and TeraStor - Strategic Cooperation. In September 1997, Quantum and
TeraStor Corporation entered into a strategic agreement involving Near Field
RecordingTM (NFR) disk drives and technology. Under the terms of the agreement,
Quantum licensed TeraStor's initial removable disk drive products and related
technology. Quantum and TeraStor will cooperate in the development of certain
future products, including the development of a disk drive that is optimized for
use in robotic libraries. Each company will manufacture, market, and sell the
initial products resulting from this agreement. Quantum will also have the right
to develop, manufacture, and market a variety of future products based on
TeraStor's NFR technology. NFR technology is a combination of Solid Immersion
Lens (which is an optical element), flying head, and first surface recording
technologies. NFR based products are not yet in production.
MKQC Strategic Actions. In the third quarter of fiscal year 1998, MKQC took
strategic actions to streamline its operations in order to improve its operating
efficiency and negative operating results. The primary strategic action was to
combine the manufacturing launch activity previously performed in Louisville,
Colorado, for wafer and Slider/HGA products with the existing volume
manufacturing of these products in Shrewsbury, Massachusetts, and Batam,
Indonesia, respectively. Consequently, the operation of the Louisville, Colorado
facility was refocused on research and development. As a result of these
actions, MKQC recorded a charge for severance, equipment write-offs, lease
termination, and other costs. The charge impacted Quantum's 49% equity share in
MKQC's loss by approximately $5 million.
Officers
The Chairman and officers of the Company and their respective ages and positions
with the Company, as of March 31, 1998, follows:
Name Age Position with the Company
Stephen M. Berkley (i) 54 Chairman of the Board
Michael A. Brown (i) 39 Chief Executive Officer
Deborah E. Barber (ii) 58 Vice President, Human Resources
Richard L. Clemmer 46 Executive Vice President, Finance, and
Chief Financial Officer
Curt Francis (iii) 48 Vice President, Strategic Developments
John Gannon (iv) 51 Executive Vice President, Worldwide Sales
and Corporate Marketing
Andrew Kryder 45 Vice President Finance, General Counsel
and Assistant Secretary
Kenneth Lee 60 Executive Vice President and Chief
Technical Officer
Anthony H. Lewis, Jr. 44 Vice President, Finance, and Treasurer
Debora C. Shoquist 43 Executive Vice President, Hard Disk Drive
Operations
Young K. Sohn 42 President and General Manager, Enterprise
and Personal Storage Group ("EPSG")
Peter van Cuylenburg 50 President and General Manager, Specialty
Storage Products Group ("SSPG")
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(i) Mr. Brown was appointed Chairman of the Board in May 1998. Mr.
Berkley will continue to serve as a member of the Board of
Directors.
(ii) Ms. Barber has resigned as an officer of Quantum effective April
1998.
(iii) Mr. Francis became an officer of Quantum effective May 1998.
(iv) Mr. Gannon became an officer of Quantum effective May 1998.
Mr. Berkley was Chairman of the Board from 1995 until May 1998, and had earlier
served as Chairman of the Board from 1987 to 1993. He also served as the
Company's Chief Executive Officer from 1987 until 1992. In 1983, as a pioneer in
the development of Hardcard, the first hard disk expansion board for personal
computers, Mr. Berkley became the founding President and Chief Executive Officer
of Plus Development Corporation, a Quantum subsidiary. Prior to joining the
Company in 1981 as Vice President of Marketing, Mr. Berkley was with Qume
Corporation since 1977 where he initially served as Vice President of Business
Development and later as General Manager of the Memory Products Division.
Mr. Brown was elected Chairman of the Board in May 1998, and will continue as
Chief Executive Officer, a position held since 1995. Earlier, he served as
President of DPSG from 1993 to 1995, as Executive Vice President from 1992 to
1993, and as Vice President of Marketing from 1990 to 1992. Previously, Mr.
Brown held positions in product and marketing management since joining the
Company's marketing organization in August 1984. Before joining Quantum, Mr.
Brown served in the marketing organization at Hewlett-Packard and provided
management consulting services at Braxton Associates.
Ms. Barber has been Vice President of Human Resources since joining the Company
in 1992. Prior to joining the Company, she served as Vice President of Human
Resources at Cray Research for five years. From 1978 to 1988, Ms. Barber was
employed by Honeywell, Inc., last serving as Director of Human Resources for the
Military Avionics Division.
Mr. Clemmer has been Executive Vice President of Finance and Chief Financial
Officer since joining the Company in August 1996. Prior to joining the Company,
Mr. Clemmer was Chief Financial Officer of Texas Instruments' Semiconductor
Group from 1989 to 1996. Previously, he held a variety of senior finance
positions with Texas Instruments.
Mr. Francis joined the Company as Vice President of Strategic Developments in
May 1998. Prior to joining the Company, Mr. Francis was Vice President of
Corporate Planning and Development with Advanced Micro Devices from 1995 to
1998. Mr. Francis was the Vice President of Corporate Development at Sun
Microsystems from 1993 to 1995. He was also with Advanced Micro Devices from
1980 to 1993, last serving as Vice President of Corporate Operational Planning
during this period, and previously was a consultant with the Boston Consulting
Group.
Mr. Gannon joined the Company as Executive Vice President of Worldwide Sales in
May 1998. Prior to joining the Company, Mr. Gannon was with Hewlett Packard from
1981 to 1998, last serving as General Manager of Commercial Desktop Personal
Computer Business from 1996 to 1998 and its Digital Audio Tape business from
1993 to 1996.
Mr. Kryder has been Vice President of Finance and General Counsel since April of
1995. Prior to joining the Company in 1990, Mr. Kryder was a tax partner in the
San Jose, California office of the accounting firm of Ernst & Young LLP.
Mr. Lee has been Executive Vice President and Chief Technical Officer since
1993. Earlier, he also served as President of Workstation System Storage Group
("WSSG") from 1995 to 1997, manager of the Recording Heads Group from 1994 to
1996, as Executive Vice President of Technology and Engineering from 1993 to
1994, and as Vice President of Engineering from 1990 to 1993. Mr. Lee
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joined the Company in 1989 as Director of Advanced Recording Technologies. Prior
to joining the Company, Mr. Lee was Vice President of Product Development for
Domain Technology for five years, and previously worked on advanced magnetic
storage devices during the 15 years he spent with the IBM Research Laboratory in
San Jose, California.
Mr. Lewis has been Vice President of Finance and Treasurer since February 1998.
Since joining the Company in 1995 to February 1998, he served as Vice President
of Finance and Corporate Controller. Before joining Quantum, Mr. Lewis was Vice
President and Corporate Controller at Tandem Computers from 1992 to 1995.
Previously, he held a variety of senior finance positions with Tandem Computers
between 1986 and 1992.
Ms. Shoquist is currently the Executive Vice President of Hard Disk Drive
Operations and responsible for production planning, logistics, and customer
service support for Quantum's hard drive group, EPSG. She has served in a
variety of manufacturing management positions, most recently as Vice President
of Product and Test Engineering for WSSG. Prior to that, Ms. Shoquist was Vice
President of Worldwide Operations for WSSG. Prior to joining the Company in
1991, Ms. Shoquist held a variety of operations management positions at
Hewlett-Packard.
Mr. Sohn is President and General Manager of EPSG. Earlier, he served as
President and General Manager of DPSG from 1996 to 1997, and as Vice President
of Marketing for DPSG beginning in 1994. Prior to joining the Company in 1992 as
President and Managing Director of Quantum Asia-Pacific, Mr. Sohn spent nine
years with Intel Corporation where, most recently, he managed that company's AT
chip set business.
Mr. van Cuylenburg has been President and General Manager of SSPG since joining
the Company in September 1996. Prior to joining Quantum, he served as Executive
Vice President at Xerox Corporation, responsible for the systems sector from
1993 to 1995. Mr. van Cuylenburg was also President and Chief Operating Officer
at NeXT Computer Inc. in Redwood City, California, from 1992 to 1993.
Products
Specialty Storage Products
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.
Quantum DLT 4000 tape drive. Features a native storage capacity of 20
GB per cartridge and a sustained data transfer rate of 1.5 MB per
second.
Quantum DLT 2000 tape drive. Features a native storage capacity of 15
GB and a sustained data transfer rate of 1.25 MB per second.
Quantum DLTstor(TM) autoloader and libraries. Autoloader consists of
an elevator mechanism that provides random or sequential cartridge
access between a tape drive and cartridge magazines. These products
provide automated operations for DLT tape drives, enhancing their
effectiveness for key applications such as backup and nearline
storage. Autoloader offerings consist of a single DLT 2000, 4000, or
7000 drive with a 5-, 7- or 14-cartridge magazines. Quantum's entry
level
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library offering, DLTstor, is currently shipping in a one to four
multi drive autoloader configurations with 14 cartridges, for a total
of 280 GB storage (uncompressed).
Quantum DLTtape(TM) III, XT, IV tape media and cleaning cartridges.
The DLTtape family of half-inch cartridge tapes are designed and
formulated specifically for Quantum DLTtape drives 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 drive 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(TM) Ultra family of solid state disk drive 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
The Company's current personal and business class desktop disk drive
product offerings include:
Quantum Bigfoot(TM) TX. The latest drive in the Quantum Bigfoot family
of 5.25-inch drives. The 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 times of 12 milliseconds
("ms"), and a rotational speed of 4,000 RPM.
Quantum Bigfoot CY. Features capacities of 2.1 GB, 4.3 GB and 6.4 GB,
Fast ATA interface, MR heads, buffer-to-host data transfer rates of up
to 16.6 MB per second, internal data rates up to 92.6 MB per second,
average seek time of 14 ms, and a rotational speed of 3,600 RPM.
Quantum Fireball(TM) EL. Began mass production of the 3.5-inch
Fireball EL in May 1998. Features Shock Protection SystemTM, a new
technology that protects the mechanical platform against the impact of
mishandling during shipping or integration into a PC; 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.
Quantum Fireball ST. Features capacities of 1.6 GB, 2.1 GB, 3.2 GB,
4.3 GB and 6.4 GB, Ultra ATA interface, MR heads, buffer-to-host data
transfer rates of up to 33 MB per second, internal data rates up to
132 MB per second, average seek times of 10 ms, and a rotational speed
of 5,400 RPM.
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The Company's current enterprise class high-end disk drive product
offerings include:
Quantum Viking(TM) II. Began mass production in March 1998. 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, a 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 Viking. Features capacities of 2.2 GB and 4.5 GB, MR heads,
PRML read channels, internal data rates up to 139 MB per second, a
wide selection of interfaces (Ultra SCSI-3 narrow, wide, or SCA-2), a
burst data transfer rates of up to 40 MB per second, internal data
rates of up to 139 MB per second, an average seek time of 8 ms, and a
rotational speed of 7200 RPM.
Quantum Atlas(TM) III. Began mass production in March 1998. The Atlas
III multimode 3.5-inch hard disk drive with capacities of 9.1 GB and
18.2 GB 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 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.
Quantum Atlas II. Features capacities of 2.2 GB, 4.5 GB and 9.1 GB,
Ultra SCSI-3 interface, MR heads, burst data transfer rates of up to
40 MB per second, internal data rates up to 121 MB per second average
seek time of 8 ms, and a rotational speed of 7200 RPM.
The Quantum Viking and Quantum Atlas II products were Quantum's first
high-end drives to be manufactured by MKE.
For information regarding the percentage of total revenue contributed by any
class of similar products, refer to Part II, Item 8, Note 17 of the Notes to
Consolidated Financial Statements.
Product Development
For a discussion of product development, refer to Part II, Item 7, "Results of
Operations - Research and Development Expenses," and "Trends and Uncertainties -
Rapid Technological Change, New Product Development and Qualification."
Manufacturing
The Company believes that its manufacturing strategies for hard disk drives,
half-inch cartridge disk drives, and solid state disk drives, and its
involvement in the manufacture of MR recording heads are key to its success.
For production of its hard disk drives, the Company depends exclusively on MKE.
MKE produces hard disk drives for Quantum in Japan, Singapore, and Ireland.
MKE's state-of-the-art manufacturing process is highly automated, employing
integrated computer networks and advanced control systems. For additional
discussion of the Company's dependence on MKE, refer to Part II, Item 7, "Trends
and Uncertainties - Dependence on MKE Relationship." The Company's relationship
with MKE, which has been continuous since 1984, is governed by a master
agreement. The current agreement between the Company and MKE gives MKE the
exclusive worldwide right to manufacture, and the Company the exclusive
worldwide right to design and market hard disk drives. The Company provides MKE
with forecasts of its requirements and places purchase orders approximately
three months prior to delivery. The Company has only a limited right to modify
these purchase orders. The Company's transactions with MKE are denominated in
U.S. dollars with prices for product purchases negotiated periodically,
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generally on a quarterly basis. Thus, fluctuations in the foreign currency
exchange rates have no material short-term impact on Quantum's results of
operations. However, such fluctuations may impact future negotiated prices. For
additional discussion of the MKE master agreement, refer to Part I, Item 1,
"Strategic Developments - Renegotiated MKE Master Agreement."
For production of its half-inch cartridge disk drives and solid state disk
drives, the Company operates a manufacturing facility in Colorado Springs,
Colorado, and a related research and development and preproduction facility in
Shrewsbury, Massachusetts.
The Company and its manufacturing partner, MKE, are dependent on suppliers for
components and sub-assemblies, which are essential to the manufacture of the
Company's products. For additional discussion of this dependence, refer to Part
II, Item 7, "Trends and Uncertainties - Dependence on Suppliers of Components
and Sub-Assemblies; Component Shortages."
The Company's current hard disk drive product manufacturing relies on MR
recording head technology. The Company is involved in the manufacture of MR
recording heads through a joint venture with MKE. For additional discussion of
the MR recording heads and the joint venture, refer to Part I, Item 1,
"Strategic Developments - MKE/Quantum Recording Heads Joint Venture," and
"Trends and Uncertainties - MR Recording Heads Development and Manufacturing";
and Part II, Item 8, Note 5 of the Notes to Consolidated Financial Statements.
Sales and Marketing
The Company markets its products directly to manufacturers of computer systems,
desktop personal computers, workstations; and to distributors; resellers and
systems integrators through its worldwide sales force. For additional discussion
of sales and customers, refer to Part II, Item 7, "Results of Operations -
Sales," and "Trends and Uncertainties - Customer Concentration."
Supporting international sales and operations, Quantum maintains a European
regional headquarters in Geneva, Switzerland; an Asia-Pacific regional
headquarters in Singapore; a Japanese headquarters in Tokyo; and sales offices
throughout the world. International sales, which included sales to foreign
subsidiaries of United States companies, were 48%, 53% and 52% in fiscal 1998,
1997 and 1996, respectively. For additional information on foreign operations
refer to Part II, Item 8, Note 17 of the Notes to Consolidated Financial
Statements.
Warranty and Service
The Company generally warrants its products against defects for a period of
three to five years from the date of sale. Warranty service is generally
provided on a return to factory basis. Supporting warranty obligations, the
Company maintains in-house service facilities for refurbishment or repair of its
products in Milpitas, California; Dundalk, Ireland; and Penang, Malaysia. For
additional discussion of warranty, refer to Part II, Item 7, "Trends and
Uncertainties - Warranty."
In April 1998, the Company introduced an enhancement to its warranty service on
Quantum DLT 2000, DLT 4000, and DLT 7000 tape drives. The enhancement is
referred to as the First StepTM rapid exchange program and applies to U.S.
customers of DLTtape drives purchased from Quantum-authorized distributors or
resellers. The program provides expedited replacement of DLTtape drive products
that are under Quantum warranty and in need of repair.
The Company expects to make enhancements to its service program related to its
DLTstorTM automation products in fiscal year 1999.
10
<PAGE>
Backlog
The Company's six-month order backlog at June 6, 1998 was approximately $785
million compared to approximately $1,350 million at May 30, 1997. The backlog
decreased approximately 42% year-over-year, reflecting DLT tape products no
longer being on allocation in June 1998. Whereas, as of May 1997, certain DLT
tape products were on allocation to the Company's customers, and the backlog in
May 1997 reflected this situation. In addition, the backlog as of June 1998
reflected the overall oversupply situation in the storage industry.
Backlog includes only firm orders for which the customers have released a
specific purchase order and specified a delivery schedule. Lead-time for the
release of purchase orders depends upon the scheduling practices of the
individual customer, and the rate of new order bookings varies from month to
month. For this reason, and the possibility of customer changes in delivery
schedules or cancellations of orders, Quantum's backlog as of any particular
date may not be representative of actual sales for any succeeding period. In
addition, it has been the Company's practice to permit customers to increase or
decrease (including canceling) orders for products with relatively short notice
to the Company. The Company believes that this practice enables customers to
improve the management of their inventory, minimizes the Company's exposure to
disputed accounts receivable and strengthens the Company's relationships with
its customers.
Competition
For a discussion of competition, refer to Part II, Item 7, "Trends and
Uncertainties - Intensely Competitive Industry."
Patents and Licenses
Quantum has been granted and/or owns by assignment 477 United States patents,
including patents originally issued to its former subsidiary Plus Development
Corporation, and patents originally issued to Digital Equipment Corporation. As
a general rule, these patents have 17-year terms from the date of issuance.
Quantum also has certain foreign patents and applications relative to certain of
the products and technologies. Although Quantum believes that its patents and
applications have significant value, the rapidly changing technology of the
computer industry makes Quantum's future success dependent primarily upon the
technical competence and creative skills of its personnel rather than on patent
protection. See also Item 3, "Legal Proceedings."
Several companies and individuals have approached Quantum concerning the need
for a license under patented technology that Quantum has assertedly used, or is
assertedly using, in the manufacture and sale of one or more of Quantum's
products. Quantum conducts ongoing investigations into these assertions and
presently believes that any licenses ultimately determined to be required could
be obtained on commercially reasonable terms. However, there is no assurance
that such licenses are presently obtainable, or if later determined to be
required, could be obtained. See also Item 3, "Legal Proceedings."
Quantum has signed cross-licensing agreements with Hewlett-Packard, IBM, Seagate
Technology, and others. These agreements enable Quantum to use certain patents
owned by these companies, and enables these companies to use certain patents
owned by Quantum.
Plant and Equipment
The Company anticipates that it will acquire additional facilities in fiscal
1999 to support expansion of half-inch cartridge tape drive manufacturing,
research and development and other corporate activities.
11
<PAGE>
Employees
At March 31, 1998, the Company had approximately 6,219 regular employees. In
connection with the MKE/Quantum recording heads joint venture, approximately
1,470 Quantum employees became employees of the joint venture and ceased to be
employees of Quantum in fiscal year 1998 (refer to Part I, Item 1, "Strategic
Developments - MKE/Quantum Recording Heads Joint Venture"; and Part II, Item 7,
"Trends and Uncertainties - MR Recording Heads Development and Manufacturing";
and Item 8, Note 5 of the Notes to Consolidated Financial Statements).
In the advanced electronics industry, competition for highly skilled employees
is intense. Quantum believes that a great part of its future success will depend
on its ability to attract and retain qualified employees. None of the Company's
employees are represented by a trade union, and the Company has experienced no
work stoppages. Quantum believes that its employee relations are favorable.
ITEM 2. Properties
<TABLE>
Quantum's headquarters is located in Milpitas, California. The company owns or
leases facilities in North America, Europe and Asia. The following is a summary
of the locations, functions and square footage:
<CAPTION>
Location Function Square Feet
<S> <C> <C>
North America
Milpitas, CA Corporate headquarters; and hard 1,200,000
drive research and development (R&D),
configuration and distribution
Shrewsbury, MA Hard drive R&D, DLT tape R&D, and 600,000
221,600 square feet leased to MKQC
Colorado Springs, CO DLT tape manufacturing 400,000
Louisville, CO Leased to MKQC 180,000
Other USA 9 Sales offices 75,000
Europe
Dundalk, Ireland Hard drive configuration and 110,000
distribution
Other Europe European headquarters, and 4 sales 50,000
offices
Asia
Singapore Hard drive configuration and 65,000
distribution
Penang, Malaysia Customer Service 158,000
Other Asia Asian headquarters and 7 Sales Offices 57,000
</TABLE>
ITEM 3. Legal Proceedings
For information regarding legal proceedings, refer to Part II, Item 8, Note 15
of the Notes to Consolidated Financial Statements.
12
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Quantum Corporation's common stock has been traded in the over-the-counter
market under the Nasdaq symbol QNTM since the Company's initial public offering
on December 10, 1982.
The prices per share reflected in the table represent the range of high and low
closing prices in the Nasdaq National Market System (adjusted to reflect a
two-for-one stock split in May 1997) for the quarter indicated.
Fiscal 1998 High Low
- -------------------------------------------------- ---- ---
Fourth quarter ended March 31, 1998 $26 1/2 $18 7/16
Third quarter ended December 28, 1997 42 7/16 18 15/16
Second quarter ended September 28, 1997 42 7/16 20 5/16
First quarter ended June 29, 1997 24 9/16 17 7/8
Fiscal 1997 High Low
- -------------------------------------------------- ---- ---
Fourth quarter ended March 31, 1997 $22 17/32 $13 3/4
Third quarter ended December 29, 1996 14 7/8 8 21/32
Second quarter ended September 29, 1996 9 3/16 5 1/2
First quarter ended June 30, 1996 13 7 1/32
Historically, the Company has not paid cash dividends on its common stock.
As of May 1, 1998, there were approximately 2,300 shareholders of record of the
Company.
13
<PAGE>
ITEM 6. Selected Consolidated Financial Data
<TABLE>
(In thousands, except per
share amounts, and ratios)
<CAPTION>
Year ended March 31 (v)
--------------------------------------------------------------------------------
1998(i) 1997 1996(ii) 1995(iv) 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 5,805,235 $ 5,319,457 $ 4,422,726 $ 3,367,984 $ 2,131,054
Research and development 321,741 291,332 239,116 169,282 89,837
Net income (loss) 170,801 148,515 (90,456) 81,591 2,674
Net income (loss) per share (vi):
Basic 1.25 1.27 (0.87) 0.90 0.03
Diluted 1.07 1.04 (0.87) 0.76 0.03
Property, plant and
equipment, net 285,159 407,206 364,111 280,099 85,874
Total assets 2,438,411 2,158,263 1,975,355 1,481,028 997,438
Total long-term debt and
redeemable preferred stock 327,485 422,906 598,158 327,500 212,500
Return on average
shareholders' equity 15.1% 20.8% (17.2)% 17.7% 0.7%
Ratios of earnings to
fixed charges 6.5 4.5 (iii) 6.0 1.2
<FN>
(i) The results of operations for fiscal year 1998 include the effect
of a $103 million special charge related to the Company's high-end
hard disk drive products.
(ii) The results of operations for fiscal year 1996 include the effect
of a $209 million charge related to the transition of manufacturing
of the Company's high-capacity products to MKE. Refer to Part II,
Item 8, Note 12 of the Notes to Consolidated Financial Statements.
(iii) Earnings (as defined) for fiscal year 1996 were insufficient to
cover fixed charges by $141.3 million.
(iv) On October 13, 1994, Quantum acquired portions of Digital Equipment
Corporation's business. The acquisition is not reflected in the
financial statements prior to fiscal year 1995, thus the results
for fiscal year 1995 are not comparable to the results prior to
fiscal year 1995.
(v) No cash dividends were paid for the years presented.
(vi) Net income (loss) per share amounts have been calculated and, where
necessary, restated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share."
</FN>
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fiscal Year 1998 Compared With Fiscal Year 1997
Sales. Sales in fiscal year 1998 increased 9%, to $5.8 billion, compared with
sales of $5.3 billion in fiscal year 1997. The increase in sales was led by an
increase in DLTtape drive and media product shipments. The increase also
reflected an increase in shipments across the Company's other key product lines,
including desktop and high-end hard disk drives. The increase in DLTtape drive
shipments reflected growth in market acceptance. The increase in DLTtape drive
sales also reflected a
14
<PAGE>
shift in sales mix to the higher capacity DLT 7000 tape drive which carries a
higher per unit price than the lower capacity DLT 4000 and DLT 2000 tape drives.
However, the average price by capacity point of DLTtape drives and media
products declined when compared with the prior fiscal year.
The increase in DLTtape drive shipments was made possible in part by an increase
in tape drive production volume, which beginning in the fiscal third quarter,
was at a level high enough to meet product demand. However, the transition of
DLTtape drives from a condition of supply constraint to one of general
availability resulted in sequentially lower DLTtape drive sales in the fourth
quarter of fiscal year 1998, as certain OEM customers reduced purchases in order
to adjust their inventory levels.
In addition, the impact of the increase in disk drive shipments was
substantially offset by declines in average prices for both desktop and high-end
disk drive products as a result of market conditions marked by oversupply and
intensely competitive pricing, particularly in the second half of fiscal year
1998 and more significantly for the high-end disk drive products. These
conditions resulted in desktop shipments, particularly to the distribution
channel, sequentially declining in the fourth quarter of fiscal year 1998.
Sales to the Company's top five customers were 40% of sales in fiscal year 1998,
compared with 38% in fiscal year 1997. Sales to Hewlett Packard were 13% of
sales in fiscal year 1998, compared with 11% of sales in fiscal year 1997. Sales
to Compaq Computer, Inc. were slightly less than 10% of sales in fiscal year
1998, compared with 11% of sales in fiscal year 1997.
The split of sales between OEM and distribution channel customers was 63% and
37% of sales, respectively, for both fiscal years 1998 and 1997.
Gross Margin Rate. The gross margin rate increased 0.6 percentage points to
15.1% in fiscal year 1998, from 14.5% in fiscal year 1997. The increase in gross
margin rate reflected an increase in the gross margin rate earned on DLTtape
drives and media, as well as the higher proportion of overall revenue coming
from DLTtape drives and media in fiscal year 1998, compared with fiscal year
1997. DLTtape brand products achieved a significantly higher gross margin rate
than that achieved on sales of the Company's other products. The increase in the
overall gross margin rate also reflected the slight impact of the application of
the equity method of accounting for the recording heads operations, subsequent
to May 16, 1997. The increases were largely offset by the erosion of margins
earned on desktop drives particularly in the second half of fiscal year 1998 and
the impact of the $103 million special charge in the third quarter of fiscal
year 1998. The special charge was related to the transition to the Company's
next generation high-end disk drive products, and consisted primarily of
inventory write-offs and adjustments, and losses related to firm inventory
purchase commitments. Excluding the impact of the special charge recorded in the
third quarter, the gross margin rate would have been 16.9% in fiscal year 1998.
The erosion of margins earned on desktop drives and the conditions that resulted
in the special charge both reflect market conditions marked by oversupply and
intensely competitive pricing, particularly in the second half of fiscal year
1998. For at least the first half of fiscal year 1999, the Company expects to
experience continued gross margin pressure with respect to its hard disk drive
products.
Research and Development Expenses. In fiscal year 1998, the Company invested
$322 million, or 5.5% of sales, in research and development, compared with $291
million, or 5.5% of sales, in fiscal year 1997. The $31 million increase in
research and development expenses reflected higher expenses related to
pre-production activity on new products, as well as expenses related to new
information storage products and technologies, including the Super DLTtape drive
and optical storage technologies. The increase was partially offset by the
impact of applying the equity method of accounting to the Company's involvement
in the recording heads joint venture, effective May 16, 1997. The amount of
research and development expenses in fiscal year 1999 is expected to increase
compared with the expense level for fiscal year 1998.
15
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year 1998
were $169 million, or 2.9% of sales, compared with $149 million, or 2.8% of
sales, in fiscal year 1997. The increase in expenses in fiscal year 1998 was
primarily due to the costs associated with supporting the Company's higher sales
volume. The amount of sales and marketing expenses in fiscal year 1999 is
expected to increase compared with the expense level for fiscal year 1998.
General and Administrative Expenses. General and administrative expenses in
fiscal year 1998 were $89 million, or 1.5% of sales, compared with $87 million,
or 1.6% of sales, in fiscal year 1997. The amount of general and administrative
expenses in fiscal year 1999 is expected to be relatively flat compared with the
expense level for fiscal year 1998.
Interest and Other Income/Expense. Net interest and other income and expense in
fiscal year 1998 was income of $1 million, compared with expense of $41 million
in fiscal year 1997. The change resulted from a combination of a decrease in
interest expense, reflecting a $172 million year-over-year decrease in the
average level of debt used to finance operations, and an increase in interest
income, reflecting an increase in the year-over-year average level of cash and
investments.
Equity in Loss of Investee. The equity in loss of investee reflected the
Company's equity share in the operating losses of MKQC since May 16, 1997, when
this joint venture was formed. Prior to May 16, 1997, the recording heads
operations of Quantum, which became the operations of MKQC, were fully
consolidated by Quantum. The equity in loss of investee for fiscal year 1998
included approximately $5 million representing the Company's share of the third
quarter charge in MKQC's operating results for severance, equipment write-offs,
lease termination, and other costs associated with MKQC's strategic actions. A
combination of reduced unit prices, operating costs, manufacturing yields,
product transitions and soft demand for certain recording heads programs,
primarily those related to high-end disk drive products, have resulted in the
loss performance of MKQC. Certain of these adverse conditions are expected to
continue for most of fiscal year 1999.
Income Taxes. The effective tax rate for fiscal years 1998 and 1997 was 26%. The
state valuation allowance was reversed in fiscal year 1998 as a result of the
realization of the state deferred tax assets through tax planning. The Company
has concluded that taxable income expected to be generated over future years
combined with the reversal of existing taxable temporary differences, will be
sufficient to realize the benefits of the recorded deferred tax assets. The
effective tax rate is expected to increase in fiscal year 1999, due to the
expected increase in the contribution of DLTtape product sales to operating
results, which are primarily taxed at standard U.S. corporate tax rates.
Net Income. After-tax earnings increased to a net income of $170.8 million in
fiscal year 1998 from a net income of $148.5 million in fiscal year 1997. The
increase in net income reflects increased sales and margins on DLTtape products,
increased interest income, decreased interest expense, and lower net losses
related to Quantum's involvement in the recording heads operations, due to
Quantum's reduced ownership of these operations. 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 a more significant
source of the Company's operating income in fiscal year 1998, particularly
during the second half of the fiscal year. The increases were partially offset
by lower margins on sales of desktop and high-end hard disk drives and the $103
million special charge related to high-end hard disk drives.
ATL-Pending Acquisition. The Company expects to recognize a charge for acquired
in-process research and development upon closing of the acquisition. In addition
to the research and development charge, the acquisition is expected to have a
slightly negative impact on the Company's results of operations in fiscal year
1999, primarily from the amortization of intangible assets and goodwill.
Fiscal Year 1997 Compared With Fiscal Year 1996
Sales. Sales in fiscal year 1997 increased 20%, to $5.3 billion, compared with
sales of $4.4 billion in fiscal year 1996. The increase reflected an increase in
shipments of desktop hard disk drives, DLTtape drives and media, as well as an
increase in the average drive price. The increase in the average drive price
reflected a change in sales mix to more advanced, larger-capacity drives; market
demand; and the limited market availability of DLTtape drives and
higher-capacity hard disk drives. Partially offsetting
16
<PAGE>
the increase in sales was a decline, particularly in the first through third
quarters of fiscal year 1997, in high-end disk drive sales. This decline
resulted from the transition of the manufacture of high-end disk drives to MKE
during fiscal year 1997, with older products ceasing production in July 1996,
and new high-end drives not ramping until the third and fourth quarters of
fiscal year 1997.
Sales to the Company's top five customers were 38% of sales in fiscal year 1997,
compared with 44% in fiscal year 1996. Sales to Compaq Computer, Inc. were 11%
of sales in fiscal year 1997, compared with 12% of sales in fiscal year 1996.
Sales to Hewlett Packard were 11% of sales in fiscal year 1997, and were less
than 10% of sales in fiscal year 1996. Sales to Apple Computer, Inc. were less
than 10% of sales in fiscal year 1997, compared with 11% of sales in fiscal year
1996.
The split of sales between OEM and distribution channel customers was 63% and
37% of sales, respectively, for fiscal year 1997, compared with 71% and 29% of
sales, respectively, in fiscal year 1996. Sales to the OEM and the distribution
channel customers were based on product availability and demand.
Gross Margin Rate. The gross margin rate increased 2.2 percentage points to
14.5% in fiscal year 1997, from 12.3% in fiscal year 1996. The increase
reflected a higher proportion of DLTtape drive and media sales in fiscal year
1997, compared with fiscal year 1996, as these products achieved a higher gross
margin rate than sales of other products of the Company. The 2.2 percentage
point gross margin rate increase in fiscal year 1997 also reflected the impact
of a resizing charge in fiscal year 1996 of $38 million, of which $36 million
impacted the gross margin. The fiscal year 1996 gross margin rate would have
been 13.1% without the resizing charge.
Research and Development Expenses. In fiscal year 1997, the Company's investment
in research and development was $291 million, or 5.5% of sales, compared with
$239 million, or 5.4% of sales, in fiscal year 1996. The $52 million increase in
research and development spending reflected higher expenses related to
pre-production activity for a number of new products for both the desktop and
high-capacity drive markets. Research and development spending also reflected
management's continuing focus on the development and timely introduction of new
information storage products and technologies.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year 1997
were $149 million, or 2.8% of sales, compared with $142 million, or 3.2% of
sales in fiscal year 1996. The fiscal year 1997 decline in sales and marketing
expenses as a percentage of sales reflected the increase in sales and
management-imposed spending constraints early in the year.
General and Administrative Expenses. General and administrative expenses in
fiscal year 1997 were $87 million, or 1.6% of sales, compared with $65 million,
or 1.5% of sales, in fiscal year 1996. The increase in expenses in fiscal year
1997 reflected expansion of the Company's infrastructure.
Interest and Other Income/Expense. Net interest and other income and expense in
fiscal year 1997 was $41 million expense, compared with $28 million expense in
fiscal year 1996. The increase in net expense reflected an increase in interest
expense as a result of an approximately $153 million increase in the average
amount of debt outstanding in fiscal year 1997, compared with fiscal year 1996.
The debt was utilized to finance operations.
Income Taxes. The effective tax rate in fiscal year 1997 was 26%, compared with
36% in fiscal year 1996. The decrease in the effective tax rate was attributable
primarily to the benefit of foreign earnings taxed at less than the U.S. rate
and a reversal of the federal valuation allowance previously provided for
certain state-deferred tax assets. The federal valuation allowance was reversed
in fiscal year 1997 as a result of the realization of the federal deferred tax
assets through tax planning. For financial reporting purposes, the Company has
provided a valuation allowance for certain deferred tax assets that are expected
to reverse over a 15-year period. The Company believes that the valuation
allowance is
17
<PAGE>
needed to reduce the deferred tax asset to an amount that is more likely than
not to be realized. The Company has concluded that taxable income expected to be
generated over future years, combined with the reversal of existing taxable
temporary differences, will be sufficient to realize the benefits of the
remaining deferred tax assets.
Net Income. After-tax earnings increased to a net income of $148.5 million in
fiscal year 1997, from a net loss of $90.5 million in fiscal year 1996. The
change to a net income in fiscal year 1997 from a net loss in fiscal year 1996
reflected the impact of the $209 million fiscal year 1996 charge related to the
transition of high-capacity product manufacturing to MKE.
Year 2000
As the millennium approaches, the Company is preparing all of its computer
systems and operations to be in compliance with Year 2000 requirements. Computer
system issues involving the Year 2000 exist because some of the Company's
computer hardware and software systems use only two digits to represent a year.
These systems will experience problems with dates beyond 1999, if this issue is
not corrected. Such problems could include errors in information or significant
system failures.
The Company has developed and is in the process of implementing a plan to deal
with the Year 2000 issues. The plan includes the implementation of system
upgrades in fiscal year 1999 that will address the Year 2000 issue. The upgrade
effort will involve both internal and external resources, but is not expected to
have a material incremental effect on the Company's financial position or
results of operations. In addition, the incremental expenses incurred to be in
compliance with Year 2000 requirements during fiscal years 1998, 1997, and 1996
were not material. However, there can be no assurance that there will not be a
delay or increased costs associated with the plan. An inability to implement the
plan would have a disruptive and adverse effect on the Company's results of
operations.
Quantum is also addressing the Year 2000 readiness of its customers and key
suppliers, including MKE. Quantum's reliance on key suppliers, and therefore, on
the proper functioning of their information systems and software, means that
their failure to address Year 2000 issues could have a material adverse impact
on the Company's financial results. However, the Company does not currently
expect any significant disruption to its operations or operating results as a
result of the Year 2000 issues.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which is effective for the Company's fiscal year ending March 31, 1999.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The adoption of SFAS No. 130, which
will be implemented in the Company's fiscal year 1999, may result in a change in
financial statement presentation but will not have an impact on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for financial statements
for periods in fiscal years beginning after December 15, 1997 but does not need
to be applied to interim financial statements in the initial year of its
application. SFAS No. 131 changes the way public companies report information
about operating segments. SFAS No. 131, which is based on the management
approach to segment reporting, establishes requirements to report selected
segment information quarterly and to report entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenue. Management has not yet completed its
evaluation of the effects of this change on its
18
<PAGE>
reporting of segment information. The Company plans to adopt SFAS No. 131 in its
fiscal year 1999. The adoption of SFAS No. 131 applies solely to disclosure and
will not have an impact on the Company's financial position or results of
operations.
Liquidity and Capital Resources
Cash and equivalents, and marketable securities were $714 million at March 31,
1998, an increase of $369 from the prior fiscal year-end. The increase primarily
resulted from cash provided by operating activities and to a lesser extent
through financing activities. Operating activities included cash provided from
net income and collection of accounts receivable, which was partially offset by
an increase in inventory and a decrease in accounts payable. Financing
activities included $288 million of proceeds from the issuance of 7% convertible
subordinated notes. Cash provided by financing activities was partially offset
by the repayment of the outstanding senior credit facility in the first quarter
of fiscal year 1998. Cash used in investing activities, primarily for investment
in property and equipment, was largely offset by cash provided from a $94
million payment from MKE as part of the formation of the recording heads joint
venture, MKQC.
The previously outstanding revolving credit line, term loan, and equipment loan,
which had carrying amounts of $110 million, $56 million, and $14 million,
respectively, as of March 31, 1997, were repaid and terminated in the first
quarter of fiscal year 1998.
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 March 31, 1998, there was
no outstanding balance drawn on this line.
The Company filed a registration statement which became effective on July 24,
1997, pursuant to which the Company may issue debt or equity securities, in one
or more series or issuances, limited to $450 million aggregate public offering
price. Under the registration statement, 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.
In fiscal year 1998, the Company extended until September 1998 an $85 million
unsecured letter of credit facility with certain banks to issue standby letters
of credit to MKE and its affiliates.
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.
In May, 1998, the Board of Directors authorized the Company to repurchase
approximately 14 million shares of its common stock through the open market from
time to time. The intent of the repurchase is to minimize the dilutive impact of
shares issued to complete the ATL acquisition.
The Company expects to spend approximately $180 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. The
Company believes that it will be able to fund these capital requirements at
least through
19
<PAGE>
fiscal year 1999. Refer to the Part II, Item 7, "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 fiscal year.
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 which follows.
Refer to Part II, Item 8, Note 7 of the Notes to Consolidated Financial
Statements for additional information regarding long-term debt.
Trends and Uncertainties
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. These are discussed below.
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 Rapid technological change - Technology advancement in the
information storage industry is increasingly rapid.
o Customer concentration - High-purchase-volume customers for
information storage products are concentrated within a small number of
computer system manufacturers, distribution channels, and system
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 are in turn affected by computer system product cycles
and by prevailing economic conditions.
o Intellectual property conflicts - The hard disk drive industry has
been characterized by significant litigation relating to patent and other
intellectual property rights.
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
second half of fiscal year 1998, excess inventory in the hard disk drive market,
aggressive pricing and corresponding margin reduction, particularly in the
distribution channel for desktop hard disk drives, and the transition related to
the Company's high-end hard disk drives adversely impacted the Company's
operating results during that
20
<PAGE>
period. As a result, the Company had diminished profitability, at near
breakeven, in the fourth quarter of fiscal year 1998, and losses in the third
quarter of fiscal year 1998 largely attributable to a $103 million special
charge that primarily consisted of inventory write-offs and adjustments, and
losses related to firm inventory purchase commitments. If competition and
pricing continue on this adverse trend, 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 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.
Hard Disk Drive Products. In the market for desktop products, Quantum
competes primarily with IBM, Fujitsu, Maxtor, 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 fiscal year 1998, has resulted in a downward trend in gross
profit margins during fiscal year 1998.
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 the 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, in the third
quarter of fiscal year 1998, the impact of intense competition, lower
demand and pricing pressure was reflected in the transition and losses
related to the Company's high-end products. The Company does not anticipate
that the high-end disk drive products will return to profitability prior to
high-volume shipping of its next generation products and there can be no
assurance as to the profitability of 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,
21
<PAGE>
market acceptance, and product transition of key new products, as to which
there can be no positive assurance.
Rapid Technological Change, New Product Development, and Qualification. 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 gross margins on specific products decreasing rapidly.
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. 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.
Due to 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-capacity 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 as compared with experiences in 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 a more significant source of the Company's operating income in
fiscal year 1998, particularly during the second half of the fiscal year. 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, which target the market in
which the Company's DLTtape products compete, could have a material adverse
effect on the Company. Additionally, in the event that the Company is not able
to maintain the competitiveness of its DLTtape technology, performance, 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, or 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 new Near Field Recording and Super DLTtape technology.
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.
22
<PAGE>
As part of the Company's strategy to remain technologically competitive, the
Company has invested in technologies, such as in Near Field Recording through
its strategic alliance with and investment in TeraStor, and its investment in MR
recording heads through the joint venture, 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 which could have a material adverse effect on the Company.
Customer Concentration. In addition to the information storage industry and the
Company's customer base being concentrated, the customers generally are 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.
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
fiscal years 1998 and 1997. Sales to the Company's top five customers in fiscal
years 1998 and 1997 represented 40% and 38% of sales, respectively. Because of
the rapid and unpredictable changes in market conditions, and the short product
life cycles for the customer's 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 resulted 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 have 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 may be at a moderately 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 is 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
desktop hard drive products. In this regard the Company expects sales of DLTtape
products, which represented 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.
The failure by the Company to complete shipments in the final month of a quarter
due to 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.
23
<PAGE>
Intellectual Property Matters. From time to time, the Company is approached by
companies and individuals alleging Quantum's need for a license under patented
technology that Quantum assertedly uses. If required, there can be no assurance
that licenses to any such technology could be obtained or obtained on
commercially reasonable terms. Adverse resolution of any intellectual property
litigation could subject the Company to substantial liabilities and require it
to refrain from manufacturing certain products. In addition, the costs of
engaging in such litigation could be substantial, regardless of the outcome.
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 the pending acquisition of ATL, 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 exchange contracts,
foreign manufacturing and sales, and price volatility of Quantum's common stock.
For information regarding litigation refer to Part II, Item 8, Note 15 of the
Notes to the Consolidated Financial Statements.
Pending Acquisition of ATL. As discussed in the Strategic Developments section,
in May 1998, the Company announced an agreement to acquire ATL. The proposed
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 customers, employees and suppliers, and managing a
larger and more diverse business. There can be no assurance that the transaction
contemplated by the Company's agreement to acquire ATL will close completely or
that the Company will successfully manage the risks of this transaction.
Dependence on MKE Relationship. Quantum is dependent on MKE for the manufacture
of all of its hard disk drive products. Approximately 79% and 81% of the
Company's sales in fiscal years 1998 and 1997, respectively, were derived from
products manufactured by MKE. In addition, the formation of the MKQC joint
venture with MKE to develop and produce recording heads used in disk drive
production has resulted in an increased dependence on MKE. The Company's
relationship with MKE is therefore critical to the Company's business and
financial performance.
In May 1997, Quantum completed renegotiation of its master agreement with MKE,
which covers the general terms of the business relationship. The agreement was
extended for a period of 10 years, unless 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
24
<PAGE>
alternative manufacturing source to meet the 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 at least through the end of fiscal year
1999. 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 fiscal year 1995 acquisition of MR recording heads technology as part of the
acquisition 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. However, MR technology is complex and, to date, the
Company and MKQC's MR recording head manufacturing yields have been lower than
was necessary for cost-effective production. The Company does not expect
cost-effective production of MR recording heads to be realized in the near term.
Until that time, the Company will incur losses based on its pro rata ownership
interest in the joint venture. However, there can be no assurance that the
anticipated benefits of the joint venture will be realized on a timely basis or
at all. The Company's current target is to obtain 15% to 20% of the MR recording
heads used in its products from MKQC.
In the third quarter of fiscal year 1998, MKQC took strategic actions to
streamline its operations in order to improve its operating efficiency and
negative operating results. The primary strategic action was to combine the
manufacturing launch activity previously performed in Louisville, Colorado, for
wafer and Slider/HGA products with the volume manufacturing of these products in
Shrewsbury, Massachusetts, and Batam, Indonesia, respectively. As a result of
the change, the operation of the Louisville, Colorado, facility will be
refocused on research and development. There can be no assurance that MKQC's
strategic actions will be successful in improving the operating losses of 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,
25
<PAGE>
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 in fiscal year
1999. 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 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 last three quarters of fiscal year 1998, 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-US
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
26
<PAGE>
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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative information about market risk, refer to Part
II, Item 7, "Trends and Uncertainties - Foreign Exchange Contracts," and Item 8,
Notes 1 and 2 of the Notes to Consolidated Financial Statements.
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 28
Consolidated Statements of Operations for each of the three 29
years in the period ended March 31, 1998
Consolidated Balance Sheets at March 31, 1998 and 1997 30
Consolidated Statements of Cash Flows for each of the three 31
years in the period ended March 31, 1998
Consolidated Statements of Shareholders' Equity for each of 32
the three years in the period ended March 31, 1998
Notes to Consolidated Financial Statements 33
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 52
Separate Financial Statements of fifty-percent-or-less-owned 53
persons accounted for by the equity method
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders Of
Quantum Corporation
We have audited the accompanying consolidated balance sheets of Quantum
Corporation (the "Company") as of March 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the consolidated
financial statements of MKE-Quantum Components LLC ("MKQC"), a forty-nine
percent equity investee of the Company, which statements reflect a net loss of
$134.8 million for the period from May 16, 1997 (inception) through March 31,
1998. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
MKQC, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Quantum Corporation at March 31, 1998 and
1997, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Palo Alto, California
April 21, 1998
28
<PAGE>
<TABLE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data) Year ended March 31,
<CAPTION>
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Sales $ 5,805,235 $ 5,319,457 $ 4,422,726
Cost of sales 4,929,714 4,550,716 3,880,309
----------- ----------- -----------
Gross profit 875,521 768,741 542,417
Operating expenses:
Research and development 321,741 291,332 239,116
Sales and marketing 169,031 149,371 142,413
General and administrative 89,364 86,507 65,145
Restructuring and other charges -- -- 209,122
----------- ----------- -----------
580,136 527,210 655,796
----------- ----------- -----------
Income (loss) from operations 295,385 241,531 (113,379)
Interest income and other, net 34,243 7,047 8,462
Interest expense (32,753) (47,882) (36,421)
Equity in loss of investee (66,060) -- --
----------- ----------- -----------
Income (loss) before income taxes 230,815 200,696 (141,338)
Income tax provision (benefit) 60,014 52,181 (50,882)
----------- ----------- -----------
Net income (loss) $ 170,801 $ 148,515 $ (90,456)
=========== =========== ===========
Net income (loss) per share:
Basic $ 1.25 $ 1.27 $ (0.87)
=========== =========== ===========
Diluted $ 1.07 $ 1.04 $ (0.87)
=========== =========== ===========
Weighted-average common shares:
Basic 136,407 117,218 103,416
=========== =========== ===========
Diluted 166,016 153,287 103,416
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
29
</TABLE>
<PAGE>
<TABLE>
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands except share and per share data) March 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 642,150 $ 345,125
Marketable securities 71,573 --
Accounts receivable, net of allowance for doubtful
accounts of $12,928 in 1998 and $10,610 in 1997 737,928 887,477
Inventories 315,035 252,802
Deferred taxes 133,981 122,899
Other current assets 124,670 80,116
---------- ----------
Total current assets 2,025,337 1,688,419
Property, plant, and equipment, less accumulated
depreciation 285,159 407,206
Intangible assets, less accumulated amortization 24,490 42,131
Other assets 103,425 20,507
---------- ----------
$2,438,411 $2,158,263
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 446,243 $ 502,069
Accrued warranty expense 74,017 94,989
Accrued compensation 60,344 63,093
Income taxes payable 39,777 31,153
Current portion of long-term debt 935 44,229
Other accrued liabilities 78,920 80,045
---------- ----------
Total current liabilities 700,236 815,578
Deferred taxes 38,668 33,587
Convertible subordinated debt 287,500 241,350
Long-term debt 39,985 177,668
Commitments and contingencies (Notes 15 and 16)
Redeemable preferred stock, Series B, $.01 par value; 90,000 shares issued
and outstanding at March 31, 1997; none at March 31, 1998 -- 3,888
Shareholders' equity:
Common stock, $.01 par value; authorized:
500,000,000 shares; issued and outstanding: 160,879,171 in 1998,
and 130,864,454 in 1997 1,609 1,308
Capital in excess of par value 774,682 458,492
Retained earnings 595,731 426,392
---------- ----------
Total shareholders' equity 1,372,022 886,192
---------- ----------
$2,438,411 $2,158,263
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
30
</TABLE>
<PAGE>
<TABLE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended March 31,
<CAPTION>
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 170,801 $ 148,515 $ (90,456)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Restructuring and other charges -- -- 208,571
Gain on sale of equity investment -- -- (3,844)
Depreciation 78,067 96,477 68,381
Amortization 13,532 27,959 28,727
Deferred taxes (6,001) 9,081 (54,339)
Compensation related to stock incentive plans 4,236 2,391 1,414
Changes in assets and liabilities:
Accounts receivable 149,549 (176,370) (216,499)
Inventories (62,233) 206,736 (188,444)
Accounts payable (55,826) 3,240 144,547
Income taxes payable 8,624 (9,841) (26,430)
Accrued warranty expense (20,972) 32,700 5,463
Other assets and liabilities 4,575 (28,189) (41,198)
--------- --------- ---------
Net cash provided by (used in) operating activities 284,352 312,699 (164,107)
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities (71,573) -- --
Purchases of equity securities/minority interest (15,000) (6,132) --
Acquisition of intangible assets (25,850) -- --
Proceeds from sale of interest in recording heads 94,000 -- --
operations
Investment in property and equipment (149,749) (174,977) (211,602)
Proceeds from disposition of property and equipment 5,962 9,665 --
Proceeds from sale of equity investment/subsidiary -- -- 11,151
Proceeds from repayment of note receivable 18,000 -- --
--------- --------- ---------
Net cash used in investing activities (144,210) (171,444) (200,451)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities -- 330,091 393,000
Proceeds from mortgage loan -- 42,105 --
Principal payments on long-term credit facilities (180,977) (378,339) (330,000)
Proceeds from issuance of common stock 50,360 45,261 37,207
Proceeds from issuance of convertible subordinated
notes 287,500 -- 241,350
--------- --------- ---------
Net cash provided by financing activities 156,883 39,118 341,557
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 297,025 180,373 (23,001)
Cash and cash equivalents at beginning of year 345,125 164,752 187,753
--------- --------- ---------
Cash and cash equivalents at end of year $ 642,150 $ 345,125 $ 164,752
========= ========= =========
Supplemental disclosure of cash flow information:
Conversion of debentures to common stock $ 241,350 $ 132,893 $ 79,567
========= ========= =========
Note received on disposition of property and
equipment -- $ 18,000 --
========= ========= =========
Issuance of redeemable preferred stock as part of
minority interest acquisition -- $ 3,888 --
========= ========= =========
Conversion of redeemable preferred stock to common
stock $ 3,888 -- --
========= ========= =========
Cash paid during the year for:
Interest $ 29,030 $ 48,500 $ 32,768
========= ========= =========
Income taxes $ 72,619 $ 5,663 $ 29,789
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
31
</TABLE>
<PAGE>
<TABLE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock Capital
--------------------------- in Excess Retained
(In thousands) Shares Amount of Par Value Earnings Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1995 92,328 $ 922 $ 140,232 $ 368,333 $ 509,487
Conversion of subordinated debentures 8,768 88 77,732 -- 77,820
Shares issued under employee
stock purchase plan 2,676 26 15,952 -- 15,978
Shares issued under employee
stock option plans, net 4,620 46 21,988 -- 22,034
Compensation expense -- -- 1,414 -- 1,414
Tax benefits related to stock
option plans -- -- 8,546 -- 8,546
Net loss -- -- -- (90,456) (90,456)
----------------------------------------------------------------------------
Balances at March 31, 1996 108,392 1,082 265,864 277,877 544,823
Conversion of subordinated debentures 14,644 146 131,118 -- 131,264
Shares issued under employee
stock purchase plan 3,216 32 17,370 -- 17,402
Shares issued under employee
stock option plans, net 4,612 48 27,811 -- 27,859
Compensation expense and other -- -- 5,299 -- 5,299
Tax benefits related to stock
option plans -- -- 11,030 -- 11,030
Net income -- -- -- 148,515 148,515
----------------------------------------------------------------------------
Balances at March 31, 1997 130,864 1,308 458,492 426,392 886,192
Conversion of subordinated debentures 21,626 216 236,506 -- 236,722
Conversion of Series B preferred shares 180 2 3,886 -- 3,888
Shares issued under employee
stock purchase plan 3,454 35 21,442 -- 21,477
Shares issued under employee
stock option plans, net 4,755 48 28,835 -- 28,883
Compensation expense and other -- -- 4,236 -- 4,236
Tax benefits related to stock
option plans -- -- 21,285 -- 21,285
Foreign currency translation -- -- -- (1,462) (1,462)
Net income -- -- -- 170,801 170,801
============================================================================
Balances at March 31, 1998 160,879 $ 1,609 $ 774,682 $ 595,731 $ 1,372,022
============================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
32
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Nature of Business: Quantum Corporation ("Quantum" or the "Company"), 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 solid state disk drives are manufactured by the
Company. Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") of Japan
manufactures all of Quantum's hard disk drives. Quantum is also involved in a
joint venture with MKE, that researches, develops, and manufactures
magnetoresistive ("MR") recording heads that are used in the Company's hard disk
drives.
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.
Accounting Policies: The summary of significant accounting policies is presented
to assist the reader in understanding and evaluating the consolidated financial
statements. These policies are in conformity with generally accepted accounting
principles.
Financial Statement Presentation: The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated. Certain amounts in prior periods have been reclassified to conform
to current presentation.
Use of Estimates: The preparation of the consolidated financial statements of
the Company in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the period. These estimates are based on
information available as of the date of the financial statements. Actual results
may differ from the estimates and assumptions used in preparing the consolidated
financial statements.
Revenue Recognition: Revenue from sales of products is recognized on shipment to
customers, with provision made for estimated returns. The Company accrues
royalty revenue based on licensees' sales that incorporate certain licensed
technology.
Foreign Currency Translation and Transactions: Assets, liabilities, and
operations of foreign offices and subsidiaries are recorded based on the
functional currency of the entity. For a majority of the Company's material
foreign operations, the functional currency is the U.S. Dollar. The assets and
liabilities of foreign offices with a local functional currency are translated,
for consolidation purposes, at current exchange rates from the local currency to
the reporting currency, the U.S. Dollar. The resulting gains or losses are
reported as a component of retained earnings within shareholder's equity.
Although close to half of the Company's sales are made to customers in non-U.S.
locations and all of the Company's hard disk drive products are manufactured in
Japan, Singapore and Ireland by MKE, a majority of the Company's material
transactions are denominated in U.S. dollars. Accordingly, the application of
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation," to the Company's historical financial statements has resulted in
transaction gains or losses that are immaterial to the Company's consolidated
financial statements for any year presented. The effect of foreign currency
exchange rate fluctuations on cash flows was also immaterial for the years
presented. Assets and liabilities denominated in other than the functional
currency are remeasured each month with the remeasurement gain or loss recorded
in other income.
33
<PAGE>
Foreign Exchange Contracts: The effect of foreign currency rate changes on the
remeasurement of certain assets and liabilities denominated in a foreign
currency are managed using foreign currency forward exchange contracts. Foreign
currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method. Foreign currency forward
exchange contracts are carried on the balance sheet at fair value, with changes
in that value recognized in other income.
Net Income (Loss) Per Share: The Company has adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No.
128 established new requirements for computing and presenting earnings per
share. Under the new requirements, the method previously used to compute
earnings per share is changed and all prior periods presented have been restated
to conform to the new requirements. The new requirements eliminate primary and
fully diluted earnings per share. As a result, under the new requirements, basic
net income (loss) per share excludes any dilutive effect of stock options. Also,
the dilutive effect of stock options used to compute diluted net income (loss)
per share is based on the average market price of the Company's common stock for
the period.
Cash Equivalents and Marketable Securities: The Company considers all highly
liquid debt instruments with a maturity of 90 days or less at the time of
purchase to be cash equivalents. Cash equivalents are carried at cost, which
approximates fair value. The Company's marketable securities have maturities of
more than 90 days at the time of purchase.
The Company has classified all cash equivalents and marketable securities as
available-for-sale. Securities classified available-for-sale are carried at fair
value with material unrealized gains and losses reported in shareholders'
equity. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary are recorded in other income or expense. The cost of
securities sold is based on the specific identification method.
Concentration of Credit Risk: The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral from its
customers. The Company maintains reserves for potential credit losses, and such
losses have historically been within management's expectations.
The Company invests its excess cash in deposits with major banks and in money
market and short-term debt securities of companies with strong credit ratings
from a variety of industries. These securities generally mature within 365 days
and, therefore, bear minimal risk. The Company has not experienced any material
losses on its investments. The Company, by Corporate policy, limits the amount
of credit exposure to any one issuer and to any one type of investment.
Investments in Joint Ventures and Other Entities: Investments in joint ventures
and other entities are recorded in other assets. Investments in joint ventures
are accounted for by the equity method. Dividends are recorded as a reduction of
the carrying value of the investment when received.
Investments in other entities (less-than-20-percent-owned companies) that are
not represented by marketable securities are carried at cost less write-downs
for declines in value that are judged to be other-than-temporary. These
valuation losses are recorded in other income when identified. Dividends are
recorded in other income when received.
Inventories: Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, Plant, and Equipment: Property, plant, and equipment are carried at
cost, less accumulated depreciation and amortization computed on a straight-line
basis over the lesser of the estimated useful
34
<PAGE>
lives of the assets (generally three to ten years for machinery, equipment,
furniture, and leasehold improvements; and twenty-five years for buildings) or
the lease term.
Acquired Intangibles: Acquired intangible assets are being amortized over their
estimated useful lives, which range from three to five years. The accumulated
amortization at March 31, 1998 and 1997, was $23.0 million and $60.9 million,
respectively. Intangible assets are reviewed for impairment whenever events or
circumstances indicate impairment might exist, or at least annually.
Warranty Expense: The Company 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 and revenue
recognized.
Advertising Expense: The Company accrues for co-operative advertising as the
related revenue is earned, and other advertising expense is recorded as
incurred. Advertising expense for the years ended March 31, 1998, 1997, and
1996, was $41.4 million, $35.2 million, and $25.1 million, respectively.
Stock-Based Compensation: The Company accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB Opinion No. 25").
Risks and Uncertainties: The Company's business entails a number of risks. As is
typical in the information storage industry, a significant portion of the
Company's customer base is concentrated with a small number of OEMs, and the
Company is not able to predict whether there will be any significant change in
the demand for its customers' products. The loss of any one of the Company's
more significant customers could have a material adverse effect on the Company's
results of operations. A limited number of disk and tape drive storage products
make up a significant majority of the Company's sales, and due to increasingly
rapid technological change in the industry, the Company's future depends on its
ability to develop and successfully introduce new products. Quantum utilizes a
third party, MKE, to manufacture a substantial majority of the products it
sells. The Company relies on MKE's ability to bring new products rapidly to
volume production and to meet stringent quality standards. MKE manufactures
Quantum's drives in Japan, Singapore, and Ireland. If MKE were unable to satisfy
Quantum's production requirements, the Company would not have an alternative
source to meet the demand for its products without substantial delay and
disruption to its operations. The actual results with regard to warranty
expenditures could have a material unfavorable impact on the Company if the
actual rate of unit failure or the cost to repair a unit is greater than what
the Company has used in estimating the warranty expense accrual. In addition,
the Company is also subject to legal proceedings and claims that arise in the
ordinary course of its business (refer to Note 15 of the Notes to Consolidated
Financial Statements).
Comprehensive Income: In June 1997, the FASB released Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements and is
effective for the Company's fiscal year 1999. The Company believes that adoption
of SFAS 130 will not have a material impact on the Company's consolidated
financial statements.
Segment Information: In June 1997, The FASB released Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS 131 will change the way companies report selected
segment information in annual financial statements and also requires companies
to report selected segment information in interim financial reports to
stockholders. SFAS 131 is effective for periods in fiscal years beginning after
December 15, 1997. Based on the current circumstances, the Company believes that
the application of this new rule will not have a material impact on the
Company's consolidated financial statements.
35
<PAGE>
Note 2 Financial Instruments
Available-For-Sale Securities
<TABLE>
The following is a summary of available-for-sale securities, all of which are
classified as cash equivalents and marketable securities:
<CAPTION>
March 31, 1998 March 31, 1997
--------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate commercial paper and bank notes $103,346 $103,339 $ 25,338 $ 25,338
U.S. Treasury securities and obligations of
U.S. government agencies 165,364 165,360 25,455 25,455
Other 4,613 4,613 83 83
-------- -------- -------- --------
$273,323 $273,312 $ 50,876 $ 50,876
======== ======== ======== ========
</TABLE>
The difference between the amortized cost of available-for-sale securities and
fair value was immaterial at March 31, 1998 and 1997, and therefore no gross
unrealized gains or losses were recorded in shareholders' equity. The estimated
fair value of available-for-sale securities is based on market quotations. There
were no sales of available-for-sale securities in fiscal years 1998 or 1997. At
March 31, 1998, the average available-for-sale portfolio duration was
approximately 23 days, and no security had a maturity longer than one year.
Derivative Financial Instruments
Foreign Exchange - Asset and Liability Management. During the periods covered by
the financial statements, the Company utilized foreign currency forward exchange
contracts to manage the effects of foreign currency remeasurement arising from
certain assets and liabilities denominated in a foreign currency. The gains and
losses from market rate changes on these contracts, which are intended to offset
the gains and losses on certain foreign currency denominated assets and
liabilities, are recorded monthly in other income.
The following is a summary of foreign currency forward contracts held for asset
and liability management purposes:
March 31,
---------------------------
(In millions except for forward rates) 1998 1997
---------------------------
Currency to be sold Yen Yen
Maturity dates April-May 1998 April-May 1997
Foreign currency notional amount 1,600 yen 3,300 yen
Weighted average forward rate 132.23 122.22
U.S. dollar notional amount $12.1 $27.0
U.S. dollar equivalent $12.3 $26.5
Fair value $(0.2) $ 0.5
36
<PAGE>
March 31,
----------------------------------------
(In millions except for forward rates) 1998 1997
----------------------------------------
Currency to be purchased Swiss Franc --
Maturity dates April 1998 --
Foreign currency notional amount 26.5 Swiss Francs --
Weighted average forward rate 1.51 --
U.S. dollar notional amount $17.5 --
U.S. dollar equivalent $17.4 --
Fair value $(0.1) --
The fair values for foreign currency forward contracts represent the difference
between the contracted forward rate and the quoted fair value of the underlying
Yen or Swiss Francs at the balance sheet dates. The Company generally does not
require collateral from the counterparties to foreign currency forward
contracts.
Carrying Amount and Fair Values of Financial Instruments
The carrying values of accounts receivable are deemed to be reasonable estimates
of their fair values.
<TABLE>
The estimated fair value of the Company's borrowings are summarized as follows:
<CAPTION>
March 31,
----------------------------------------------------------------
(In millions) 1998 1997
----------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- -------- --------
<S> <C> <C> <C> <C>
Convertible subordinated debt $ 287.5 $ 281.8 $ 241.4 $ 433.8
Revolving credit line -- -- 110.0 110.0
Term loan -- -- 56.3 56.3
Mortgage loan 40.9 41.8 41.8 41.3
Equipment loan -- -- 13.9 15.2
</TABLE>
The fair values for the convertible subordinated debt were based on the quoted
market price at the balance sheet dates. Fair values for the revolving credit
agreement and term loan approximated their carrying amounts, since interest
rates on these borrowings were adjusted periodically to reflect market interest
rates. The fair value of the mortgage and equipment loans were based on the
estimated present value of the remaining payments, utilizing risk-adjusted
market interest rates of similar instruments at the balance sheet dates.
37
<PAGE>
Note 3 Inventories
Inventories consisted of:
(In thousands) March 31,
-------------------------
1998 1997
-------------------------
Materials and purchased parts $ 72,990 $ 39,898
Work in process 44,303 48,005
Finished goods 197,742 164,899
-------- --------
$315,035 $252,802
======== ========
Note 4 Property, Plant, and Equipment
Property, plant, and equipment consisted of:
(In thousands) March 31,
-----------------------
1998 1997
-----------------------
Machinery and equipment $ 328,402 $ 446,677
Furniture and fixtures 31,307 27,453
Buildings and leasehold improvements 140,629 151,418
Land 5,302 8,349
--------- ---------
505,640 633,897
Less accumulated depreciation and amortization (220,481) (226,691)
--------- ---------
$ 285,159 $ 407,206
========= =========
Note 5 MKE/Quantum Recording Heads Joint Venture
On May 16, 1997, the Company sold a controlling interest in its recording heads
operations to MKE, thereby initiating a recording heads joint venture with MKE.
The operations are involved in the research, development, and manufacture of MR
recording heads used in the Company's disk drive products manufactured by MKE.
MKE-Quantum Components LLC ("MKQC") was formed by the Company to hold the
operations, assets, and certain liabilities of the Company's recording heads
operations. Quantum contributed recording heads assets and operations, and
leased certain premises to MKQC. MKQC assumed $51 million of debt payable to
Quantum, which matures in the year 2022 with periodic amortization based on
certain available cash. MKE paid Quantum $94 million and contributed $110
million to MKQC in exchange for a 51% majority ownership interest in MKQC.
Quantum retained a 49% minority ownership interest in MKQC.
The recording heads assets that Quantum contributed to MKQC consisted of
inventory, equipment, accounts receivable, and intangibles, which aggregated
$211 million. MKQC assumed $24 million of third party liabilities. Quantum's
employees that were involved in the recording heads operations became employees
of MKQC.
MKE and the Company share pro rata in MKQC's results of operations, and would
share pro rata in any capital funding requirements. The Company and MKE plan to
continue to utilize the recording heads manufactured by MKQC in its disk drive
products manufactured by MKE.
38
<PAGE>
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.
The Company provided support services to MKQC. The support services were mainly
finance, human resources, legal and computer support. MKQC reimbursed the
Company for the estimated cost of the services.
Summarized Financial Information
The following is summarized financial information for MKQC:
Period from
(In thousands) May 16, 1997 to
March 31, 1998
--------------
Sales $ 165,775
Gross margin (loss) (43,677)
Net loss (134,816)
March 31, 1998
--------------
Current assets $ 49,520
Noncurrent assets 213,230
Current liabilities 94,707
Note payable to Quantum 50,823
Other noncurrent liabilities 14,964
Unaudited Pro Forma Information
Giving effect to the above-noted sale transaction as if it had occurred on April
1, 1996, the pro forma effect on the Company's consolidated balance sheet at
March 31, 1997, would not have been significant, and net income would have been
approximately $174 million and $180 million for fiscal years 1998 and 1997,
respectively, and diluted net income per share would have been $1.09 and $1.25,
respectively. This unaudited pro forma information is intended for information
purposes only and is not necessarily indicative of the future results of
operations of MKQC or the results of the Company that would have occurred had
the joint venture arrangement been in effect for the full fiscal year presented.
Note 6 Credit Agreements
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 March 31, 1998, there was
no outstanding balance drawn on this line.
The Company has a one-year $85 million unsecured letter of credit facility with
certain banks to issue standby letters of credit to MKE and its affiliates,
which expires in September 1998. As of March 31, 1998, there was no outstanding
balance under this letter of credit facility.
Note 7 Long-Term Debt
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
39
<PAGE>
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.
In March 1998, the Company called for redemption of all of the Company's
outstanding 5% convertible subordinated debentures due March 1, 2003, at a
redemption price of $1,035.71 per $1,000 principal amount of debenture. At the
time of the call for redemption, the entire original issue amount of the
debentures of approximately $241 million was outstanding. Holders of the
debentures exercised their option to convert debentures held into 21,626,327
shares of the Company's common stock at a conversion price of approximately
$11.16 per share. No debentures were redeemed for cash.
The previously outstanding revolving credit line, term loan, and equipment loan,
which had carrying amounts of $110 million, $56 million, and $14 million,
respectively, as of March 31, 1997, were repaid and terminated in the first
quarter of fiscal year 1998.
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. The debt is secured by specified real estate.
Payments required on long-term debt outstanding at March 31, 1998, are $0.9
million in fiscal year 1999, $1.0 million in fiscal year 2000, $1.1 million in
fiscal year 2001, $1.2 million in fiscal year 2002, $1.3 million in fiscal year
2001, and $35.3 million thereafter.
Note 8 Redeemable Preferred Stock and Acquisition of Minority Interest in
Quantum Peripherals Colorado, Inc.
In fiscal year 1997, the Company issued 90,000 shares of Redeemable Convertible
Participating Series B Preferred Stock in conjunction with the acquisition of
the 19% minority ownership interest in Quantum Peripherals Colorado, Inc.
("QPC"), a consolidated subsidiary involved in the development and manufacture
of recording heads.
In fiscal year 1998, the holder of the 90,000 shares of Redeemable Convertible
Participating Series B Preferred Stock exercised its right to convert the shares
to Quantum common stock. The Company issued 180,000 shares of its common stock
pursuant to the conversion.
Note 9 Stock Incentive Plans
Long-Term Incentive Plan: The Company has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates of
the Company. The Plan has available and reserved for future issuance 14.6
million shares and allows for an annual increase in the number of shares
available for issuance, subject to a limitation. Available for grant as of March
31, 1998, were 1,105,000 shares. Options under the Plan expire no later than ten
years from the grant date and generally vest over four years. Restricted stock
granted under the Plan generally vests over two to three years. In fiscal years
1998, 1997 and 1996, the Company recorded compensation expense of $3,179,000,
$1,916,000 and $899,000, respectively,
40
<PAGE>
related to restricted stock granted pursuant to stock purchase rights under the
Plan. The number of shares of restricted stock granted under the Plan were
65,500 shares, 354,290 shares, and 596,000 shares, in fiscal years 1998, 1997
and 1996, respectively, at an exercise price of $.01.
Stock Option Plans: The Company has Stock Option Plans (the "Plans") under which
600,000 shares of common stock was reserved for future issuance at March 31,
1998 to directors of the Company. Options under the Plans are granted at prices
determined by the Board of Directors, but at not less than the fair market
value, and accordingly no compensation accounting has been required at the
original date of grant. Options currently expire no later than ten years from
the grant date and generally vest ratably over one to four years. At March 31,
1998, options with respect to 532,500 shares were available for grant.
<TABLE>
Stock Option Summary Information: A summary of activity relating to the
Long-Term Incentive Plan and the Stock Option Plans follows:
<CAPTION>
Year ended March 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- --------------------------- --------------------------
Shares Weighted-Avg. Shares Weighted-Avg. Options Weighted-Avg.
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 16,354 $ 7.52 16,746 $ 6.75 16,104 $ 5.71
Granted 6,163 $19.80 5,850 $ 8.59 6,528 $ 7.90
Canceled (718) $14.11 (1,564) $ 7.94 (1,252) $ 6.85
Exercised (4,794) $ 6.10 (4,678) $ 5.97 (4,634) $ 4.76
------- ------- -------
Outstanding at
end of period 17,005 $12.09 16,354 $ 7.52 16,746 $ 6.75
======= ======= =======
Exercisable at
end of period 8,332 $ 8.84 8,514 $ 6.53 8,214 $ 5.92
======= ======= =======
</TABLE>
The range of exercise prices for options outstanding at March 31, 1998 was $1.11
to $40.38. Compensation expense of $1,057,000, $475,000 and $525,000 was
recorded in fiscal years 1998, 1997 and 1996, respectively, on accelerated stock
options under the Plans.
<TABLE>
The following tables summarize information about options outstanding at March
31, 1998:
<CAPTION>
Outstanding Options
--------------------------------------------------------------
Shares Outstanding Weighted-Average
at March 31, 1998 Remaining Weighted-Average
Range of Exercise Prices (000's) Contractual Life Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1.11 - $ 7.22 5,546 6.38 $ 6.41
$ 7.32 - $15.22 5,551 7.62 $ 9.49
$17.38 - $40.38 5,908 9.15 $19.87
--------------------------------------------------------
17,005 7.75 $12.09
======
41
</TABLE>
<PAGE>
Options Exercisable
------------------------------------------------
Shares Exercisable
at March 31, 1998 Weighted-Average
Range of Exercise Prices (000's) Exercise Price
- --------------------------------------------------------------------------------
$ 1.11 - $ 7.22 4,168 $ 6.16
$ 7.32 - $15.22 3,084 $ 9.17
$17.38 - $40.38 1,080 $18.25
------------------------------------------------
8,332 $ 8.84
=====
Expiration dates ranged from July 25, 1998 to March 25, 2008 for options
outstanding at March 31, 1998. Prices for options exercised during the
three-year period ended March 31, 1998, ranged from $0.01 to $19.81. Proceeds
received by the Company from exercises are credited to common stock and capital
in excess of par value.
Stock Purchase Plan: The Company has an employee stock purchase plan (the
"Purchase Plan") that allows for the purchase of stock at 85% of fair market
value at the date of grant or the exercise date, whichever value is less. The
Purchase Plan is qualified under Section 423 of the Internal Revenue Code. Of
the 22.8 million shares authorized to be issued under the plan, 3,922,000 shares
were available for issuance at March 31, 1998. Employees purchased 3,454,000
shares, 3,216,000 shares, and 2,676,000 shares under the Purchase Plan in fiscal
years 1998, 1997, and 1996, respectively. The weighted average exercise price of
stock purchased under the Purchase Plan was $6.22, $5.41 and $5.98 in fiscal
years 1998, 1997, and 1996, respectively.
Pro forma information: Pro forma information regarding net income and earnings
per share is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its employee stock options
(including shares issued under the Long-Term Incentive Plan, Stock Option Plans,
and the Stock Purchase Plan, collectively called "options") granted subsequent
to March 31, 1995, under the fair value method of that statement.
<TABLE>
The fair value of options granted in fiscal years 1998, 1997, and 1996 reported
below have been estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
<CAPTION>
Long-Term Incentive Plan and Stock
Option Plans Stock Purchase Plan
----------------------------------- ----------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Option life (in years) 2.9 2.9 2.8 1.6 0.8 1.1
Risk-free interest rate 6.25% 6.0% 6.7% 6.13% 6.0% 6.7%
Stock price volatility .56 .50 .50 .53 .50 .50
Dividend yield -- -- -- -- -- --
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of the options.
42
<PAGE>
<TABLE>
The following is a summary of weighted-average grant date fair values:
<CAPTION>
Weighted-Average Grant Date Fair Value
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------- ----------- -----------
<S> <C> <C> <C>
Options granted under the Long-Term Incentive
Plan and Stock Option Plans $ 8.39 $ 3.67 $ 3.30
Restricted stock granted under the Long-Term
Incentive Plan $23.68 $14.28 $10.70
Shares granted under the Stock Purchase Plan $ 3.56 $ 2.46 $ 2.66
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma net income and earnings per share follows:
Year Ended March 31,
----------------------------------------
1998 1997 1996
----------------------------------------
Net income (in thousands) $ 139,907 $ 132,678 $ (101,600)
========== ========== ===========
Net income (loss) per share:
Basic $ 1.03 $ 1.13 $ (0.98)
========== ========== ===========
Diluted $ 0.88 $ 0.93 $ (0.98)
========== ========== ===========
Since pro forma compensation cost relates to all periods over which the options
vest, the initial impact on pro forma net income may not be representative of
option expense in subsequent years, when the effect of the amortization of
multiple awards would be reflected.
Note 10 Common Stock and Shareholder Rights Plan
Effective April 28, 1997, the number of authorized shares of Common Stock
increased to 500,000,000 from 150,000,000.
On May 13, 1997, Quantum declared a two-for-one stock split to be effected as a
stock dividend of one share of Common Stock for every one share of Common Stock
outstanding. New stock was issued in June 1997, to shareholders of record on May
27, 1997. The share and per share amounts for all periods presented in the
Consolidated Financial Statements prior to the split reflect retroactive
recognition of the two-for-one stock split.
The Company has a shareholder rights plan (the "Rights Plan") that provides
existing shareholders with the right to purchase 1/100 preferred share for each
common share held in the event of certain changes in the Company's ownership.
The Board of Directors approved the extension of the protections of the Rights
Plan, which expires August 4, 1998, through the adoption of a New Rights Plan.
The new Rights Plan provides the existing shareholders with the right to
purchase 1/1000 of a share of preferred stock for each common share held in the
event of certain changes in the Company's ownership. The Rights Plan may serve
as a deterrent to takeover tactics that are not in the best interests of
shareholders.
43
<PAGE>
Note 11 Earnings Per Share
SFAS No. 128 replaced the previously reported primary and fully diluted net
income (loss) per share with basic and diluted net income (loss) per share.
Unlike primary net income (loss) per share, basic net income (loss) per share
excludes any dilutive effects of options and convertible securities. Diluted net
income (loss) per share is very similar to the previously reported fully diluted
net income (loss) per share.
<TABLE>
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<CAPTION>
(In thousands except per share data) Year ended March 31,
---------------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Numerator:
Numerator for basic net income (loss) per
share - income (loss) available to
common stockholders $ 170,801 $ 148,515 $ (90,456)
Effect of dilutive securities:
6 3/8% Convertible subordinated notes -- 3,135 --
5% Convertible subordinated notes 6,668 7,240 --
--------- --------- ---------
Numerator for diluted net income (loss)
per share - income (loss) available to
common stockholders $ 177,469 $ 158,890 $ (90,456)
--------- --------- ---------
Denominator:
Denominator for basic net income (loss)
per share - weighted-average shares 136,407 117,218 103,416
Effect of dilutive securities:
Outstanding options 9,600 5,388 --
Series B preferred stock 90 23 --
6 3/8% convertible subordinated notes -- 9,032 --
5% convertible subordinated notes 19,919 21,626 --
--------- --------- ---------
Denominator for diluted net income (loss)
per share - adjusted weighted-average
shares and assumed conversions 166,016 153,287 103,416
========= ========= =========
Basic net income (loss) per share $ 1.25 $ 1.27 $ (0.87)
========= ========= =========
Diluted net income (loss) per share $ 1.07 $ 1.04 $ (0.87)
========= ========= =========
</TABLE>
The computation of diluted net income per share for fiscal year 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 anti-dilutive.
The computation of diluted net loss per share for fiscal year 1996 excluded the
effect of the 6 3/8% convertible subordinated notes issued in April 1992, which
were called for redemption in December 1996, because the effect would have been
anti-dilutive. For the year ended March 31, 1996, options to purchase 16,708,062
shares of common stock were outstanding at March 31, 1996, but the corresponding
weighted average outstanding options were not included in the computation of
diluted net loss per share
44
<PAGE>
because the Company reported a net loss for the period and accordingly the
effect would have been anti-dilutive.
Note 12 Restructuring and Other Expenses
In the fourth quarter of fiscal year 1996, the Company recorded a restructuring
charge of $209 million, pre-tax, associated with the transition of its
high-capacity products manufacturing to MKE. As part of the transition, the
Company discontinued its manufacture of these products and completed the
shutdown of the related facilities in fiscal year 1997. The related
manufacturing work force was terminated in fiscal year 1997. The Company closed,
sold, or disposed of certain high-capacity manufacturing facilities and
equipment located in Penang, Malaysia; and Milpitas, California, which as of
March 31, 1996, were carried at a fair value of approximately $30 million, net
of estimated cost to dispose. Facilities sold included the manufacturing
building in Malaysia, which occurred in the second quarter of fiscal year 1997.
The restructuring charge provided for costs associated with employee termination
benefits for over 2,200 employees that were associated with the high-capacity
product manufacturing process; the difference between the carrying value and
estimated fair value on disposal of high-capacity manufacturing property and
equipment; and incremental impairments in the carrying value of certain
high-capacity product inventories and losses on supplier commitments arising
directly from the decision to stop manufacturing, as follows:
(In millions)
Employee termination benefits $ 10
Write-down of capital assets to fair value 45
Write-down of inventories to net realizable value and
losses on supplier commitments 144
Other exit costs 10
----
$209
====
The activities contemplated in the transition and related restructuring reserve
were substantially completed at March 31, 1997, and fully completed at March 31,
1998 without a material change in the estimated cost of such activities.
Note 13 Savings and Investment Plan
Substantially all of the regular domestic employees are eligible to make
contributions to the Company's 401(k) savings and investment plan. The Company
matches a percentage of the employees' contributions and may also make
additional discretionary contributions to the plan. Company contributions were
$6.3 million in fiscal year 1998, $5.2 million in fiscal year 1997, and $4.0
million in fiscal year 1996.
45
<PAGE>
Note 14 Income Taxes
<TABLE>
The income tax provision consists of the following:
<CAPTION>
(In thousands) Year ended March 31,
--------------------------------------------------------
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Federal: Current $ 19,343 $ 13,344 $(31,160)
Deferred 12,396 (10,289) (44,686)
-------- -------- --------
31,739 3,055 (75,846)
-------- -------- --------
State: Current 19,814 9,669 9,691
Deferred (17,803) 1,441 (9,691)
-------- -------- --------
2,011 11,110 --
-------- -------- --------
Foreign: Current 26,857 20,088 24,926
Deferred (593) 17,928 38
-------- -------- --------
26,264 38,016 24,964
-------- -------- --------
Income tax provision (benefit) $ 60,014 $ 52,181 $(50,882)
======== ======== ========
</TABLE>
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of stock options, and employee stock purchase plan shares reduce
taxes currently payable as shown above by $21.3 million, $11.1 million, and $8.5
million in fiscal years 1998, 1997, and 1996, respectively. Such benefits are
credited to capital in excess of par value when realized.
<TABLE>
The Company's income tax provision differs from the amount computed by applying
the federal statutory rate of 35% to income before income taxes as follows:
<CAPTION>
(In thousands) Year ended March 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate $ 80,788 $ 70,243 $(49,468)
State income tax, net of federal benefit 1,307 7,222 --
Research and development credit (7,680) -- --
Foreign earnings taxed at less than U.S. rates (15,813) (17,169) (3,545)
Federal valuation allowance -- (8,431) (4,855)
Other items 1,412 316 6,986
-------- -------- --------
$ 60,014 $ 52,181 $(50,882)
======== ======== ========
Effective tax rate 26% 26% 36%
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
46
<PAGE>
<TABLE>
Significant components of deferred tax assets and liabilities are as follows:
<CAPTION>
(In thousands) Year ended March 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods $ 57,630 $ 42,236
Accrued warranty expense 33,824 53,995
Allowance for doubtful accounts 4,563 3,625
Distribution reserves 7,002 6,821
Restructuring reserve 20,422 26,230
Other accruals and reserves not currently deductible for tax purposes 27,927 16,873
Depreciation methods 24,634 17,079
Amortization methods 30,711 29,275
Federal and state valuation allowance 0 (6,375)
--------- ---------
206,713 189,759
--------- ---------
Deferred tax liabilities:
Foreign inventory valuation methods (17,912)
(17,912)
Tax on unremitted foreign earnings net of foreign tax credits and
foreign deferred taxes (77,180) (68,435)
Other (16,899) (14,100)
--------- ---------
(111,401) (100,447)
Net deferred tax asset $ 95,312 $ 89,312
========= =========
</TABLE>
For financial reporting purposes, the Company had provided a valuation allowance
for certain deferred tax assets that are expected to reverse over a 15-year
period. The valuation allowance decreased approximately $6.4 million during
fiscal year 1998. Management has determined, based upon the Company's history of
prior operating earnings and its expectations for the future, that no valuation
allowance for deferred tax assets should be provided as of March 31, 1998.
Pretax income from foreign operations was $138.9 million, $241.2 million, and
$124.3 million for the fiscal years ended March 31, 1998, 1997, and 1996,
respectively. U.S. taxes have not been provided for unremitted foreign earnings
of $326.8 million. The residual U.S. tax liability if such amounts were remitted
would be approximately $80.7 million.
The Company's federal income tax returns have been examined by the Internal
Revenue Service (IRS) for all years through 1993. All issues have been resolved
with no material effect, and the IRS has closed those years. The Company's U.S.
tax returns for the years 1994-1996 are presently under examination by the IRS.
Management believes sufficient accruals have been provided in prior years for
any adjustments that may result for the years under examination.
Note 15 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
47
<PAGE>
misrepresenting material adverse information about the Company and that
individual defendants sold shares of the Company's stock based upon 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 Plaintiff's 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 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.
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.
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.
Note 16 Commitments
The Company leases its present facilities under non-cancelable operating lease
agreements for periods of up to 15 years. Some of the leases have renewal
options ranging from one to ten years and contain provisions for maintenance,
taxes, or insurance.
Rent expense was $26.9 million, $26.4 million, and $29.7 million for the fiscal
years ended March 31, 1998, 1997, and 1996, respectively.
Future minimum lease payments under operating leases are as follows:
(In thousands)
Year ended March 31,
1999 $ 28,657
2000 28,026
2001 26,524
2002 25,338
2003 22,335
Thereafter 100,928
-----------
Total future minimum lease payments $ 231,808
===========
48
<PAGE>
<TABLE>
Note 17 Business Segment and Foreign Operations
<CAPTION>
(In millions) Geographic Area
------------------------------------
Rest of
U.S. Europe World Corp. Eliminations Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year 1998
Revenue from unaffiliated
customers $ 2,951 $ 2,644 $ 210 -- -- $ 5,805
Transfers between geographic
locations 480 132 16 -- $ (628) --
------- ------- ------- ------- ------- -------
Total net sales $ 3,431 $ 2,776 $ 226 -- $ (628) $ 5,805
Operating income (loss) $ 170 $ 319 $ 22 $ (216) -- $ 295
Identifiable assets $ 1,434 $ 871 $ 74 $ 59 -- $ 2,438
Fiscal Year 1997
Revenue from unaffiliated
customers $ 2,557 $ 2,579 $ 183 -- -- $ 5,319
Transfers between geographic
locations 301 82 46 -- $ (429) --
------- ------- ------- ------- ------- -------
Total net sales $ 2,858 $ 2,661 $ 229 -- $ (429) $ 5,319
Operating income (loss) $ 51 $ 416 $ (13) $ (212) -- $ 242
Identifiable assets $ 1,162 $ 809 $ 150 $ 37 -- $ 2,158
Fiscal Year 1996
Revenue from unaffiliated
customers $ 2,141 $ 2,121 $ 161 -- -- $ 4,423
Transfers between geographic
locations 461 66 -- -- $ (527) --
------- ------- ------- ------- ------- -------
Total net sales $ 2,602 $ 2,187 $ 161 -- $ (527) $ 4,423
Operating income (loss) $ (167) $ 337 $ (117) $ (166) -- $ (113)
Identifiable assets $ 1,163 $ 578 $ 189 $ 45 -- $ 1,975
</TABLE>
Information on operations by geographic area is presented in the preceding
tables. Transfers between geographic areas are accounted for at amounts that are
generally above cost and are eliminated in the consolidated financial
statements. Identifiable assets are those assets that can be directly associated
with a particular geographic location. Operating income (loss) by geographic
area does not include an allocation of general corporate expenses.
Quantum, operating in the information storage industry, designs, develops, and
markets information storage products, including high-performance, high-quality
half-inch cartridge DLTtape drives, media, autoloaders, and libraries; desktop
and high-end 3.5-inch hard disk drives; desktop 5.25-inch hard disk drives; and
solid state disk drives. The half-inch cartridge tape drives, autoloaders and
libraries; and solid state disk drives are manufactured by the Company. Quantum
is also involved, through a joint venture with MKE, in the research,
development, and manufacture of MR recording heads that are used in the
Company's hard disk drives, which are manufactured by the Company's exclusive
manufacturing partner, MKE (refer to Note 5 of the Notes to Consolidated
Financial Statements). Total percentage of revenue by product category follows:
Fiscal Year Percentage of Revenue
Product Family 1998 1997 1996
-------------- ----------------------------------------
Hard disk drives 79% 87% 92%
DLTtape and solid state products 21% 13% 8%
49
<PAGE>
One major customer accounted for 13%, 11%, and less than 10% of consolidated
sales in fiscal years 1998, 1997 and 1996, respectively. In addition, another
customer accounted for less than 10%, 11% and 12% of consolidated sales in
fiscal years 1998, 1997 and 1996, respectively.
Close to half of the Company's sales are made to customers in non-U.S. locations
and a majority of the Company's products are manufactured by MKE in Japan,
Singapore, and Ireland. Quantum also operates a customer service facility in
Malaysia, and a configuration and distribution center in Ireland. As a result,
the Company is subject to risks associated with foreign operations, such as
obtaining governmental permits and approvals, currency exchange fluctuations,
currency restrictions, political instability, labor problems, trade
restrictions, and changes in tariff and freight rates.
Export sales for fiscal years 1998, 1997, and 1996 were less than 10% of
consolidated sales.
<TABLE>
Note 18 Unaudited Quarterly Consolidated Financial Data
<CAPTION>
Fiscal year 1998
---------------------------------------------------------------------------
(In thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter (i) 4th Quarter (ii)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,446,144 $ 1,553,491 $ 1,519,881 $ 1,285,719
Gross profit 275,934 298,084 135,673 165,831
Net income (loss) 96,514 103,778 (32,183) 2,692
Net income (loss) per share:
Basic 0.74 0.77 (0.24) 0.02
Diluted 0.61 0.63 (0.24) 0.02
Fiscal year 1997
---------------------------------------------------------------------------
(In thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter (i) 4th Quarter (ii)
---------------------------------------------------------------------------
Sales $1,153,502 $1,124,144 $1,477,951 $1,563,860
Gross profit 141,279 135,478 215,457 276,527
Net income (loss) 3,843 4,573 52,435 87,664
Net income (loss) per share:
Basic 0.03 0.04 0.45 0.69
Diluted 0.03 0.04 0.36 0.56
<FN>
(i) The results of operations for the third quarter in fiscal year 1998
included the effect of a $103 million special charge related to the
Company's high-end hard disk drive products.
(ii) The results of operations for the fourth quarter of fiscal year 1998 were
impacted by year-end adjustment, particularly the reduction in the
estimated bonus payout accrued earlier in the fiscal year.
</FN>
</TABLE>
50
<PAGE>
Note 19 Subsequent Events (Unaudited)
In May 1998, the Company announced an agreement to acquire ATL Products, Inc.
("ATL"), pending approval of ATL's shareholders as well as clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing
conditions. 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 estimated to be approximately $300 million. Under the terms
of the agreement, which was approved by the Boards of Directors of both
companies, each outstanding share of ATL's common stock will be converted into
$29 worth of Quantum common stock, with the conversion ratio based on the
average Quantum share price during the 45 trading days prior to the acquisition
closing. The average share price may be adjusted for certain impacts related to
common stock repurchases. The acquisition is expected to close by September 1998
and will be accounted for as a purchase. The Company expects to recognize a
charge for acquired in-process research and development upon closing of the
acquisition. ATL had revenue of $98 million and after-tax net income of $8
million for its fiscal year ended March 31, 1998.
In May 1998, the Board of Directors authorized the Company to repurchase
approximately 14 million shares of its common stock through the open market from
time to time. The intent of the repurchases is to minimize the dilutive impact
of shares issued to complete the ATL acquisition.
51
<PAGE>
<TABLE>
QUANTUM CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions
Balance at (reductions) Balance at
Classification beginning of charged to end of
(In thousands) period expense Deductions (i) period
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful Accounts year ended:
March 31, 1998 $ 10,610 $ 5,142 $ (2,824 $ 12,928
March 31, 1997 $ 10,497 $ 7,165 $ (7,052) $ 10,610
March 31, 1996 $ 11,962 $ (813) $ (652) $ 10,497
Accrued restructuring and exit costs
year ended: (ii)
March 31, 1998 $ 5,983 -- $ (5,983) --
March 31, 1997 $ 115,537 -- $(109,554) $ 5,983
March 31, 1996 $ 32,213 $ 116,187 $ (32,863) $ 115,537
<FN>
(i) For the allowance for doubtful accounts, deductions represent write-offs;
and for the accrued restructuring and exit costs, deductions represent usage of
the accrual.
(ii) Established October 3, 1994, when recording the Digital acquisition.
Additions in fiscal 1996 were related to the restructuring charge resulting from
the transition of the high-capacity product manufacturing to MKE.
</FN>
</TABLE>
52
<PAGE>
QUANTUM CORPORATION
SEPARATE FINANCIAL STATEMENTS OF FIFTY-PERCENT-OR-LESS-OWNED PERSONS ACCOUNTED
FOR BY THE EQUITY METHOD:
MKE-QUANTUM COMPONENTS LLC
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1998
(With Independent Auditors' Report Thereon)
53
<PAGE>
Independent Auditors' Report
The Board of Directors and Members
MKE-Quantum Components LLC:
We have audited the accompanying consolidated balance sheet of MKE-Quantum
Components LLC and subsidiaries as of March 31, 1998 and the related
consolidated statements of operations, members' equity, and cash flows for the
period from May 16, 1997 (Inception) through March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MKE-Quantum
Components LLC and subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the period from May 16, 1997 (Inception)
through March 31, 1998 in conformity with generally accepted accounting
principles.
Boston, Massachusetts KPMG Peat Marwick LLP
April 14, 1998, except for notes 6(b) and 12
which are as of June 5, 1998
54
<PAGE>
MKE-QUANTUM COMPONENTS LLC
Consolidated Balance Sheet
March 31, 1998
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 4,335
Investment securities 10,657
Accounts receivable 19,102
Inventories (note 2) 10,996
Prepaid expenses 2,716
Other current assets 1,714
--------
Total current assets 49,520
--------
Property, plant and equipment, net (note 3) 197,898
Intangible assets, net (note 1) 12,969
Other assets 2,363
--------
$262,750
========
Liabilities and Members' Equity
Current liabilities:
Note payable to bank (note 6) $ 27,000
Current portion of obligation under capital lease (note 11) 353
Accounts payable 19,471
Accrued expenses (note 4) 24,521
Due to members 23,362
--------
Total current liabilities 94,707
========
Note payable to member (notes 6 and 12) 50,823
Obligation under capital lease, less current portion (note 11) 14,964
--------
Total liabilities 160,494
--------
Commitments (notes 6 and 11)
Members' equity:
Class A units 57,436
Class B units 44,820
--------
Total members' equity 102,256
--------
$262,750
========
See accompanying notes to consolidated financial statements.
55
<PAGE>
MKE-QUANTUM COMPONENTS LLC
Statement of Operations
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
Net sales $ 165,775
Cost of sales 209,452
---------
Gross margin (loss) (43,677)
---------
Operating expenses:
Research and development 42,215
General and administrative 35,763
Restructuring 10,038
---------
88,016
Loss from operations (131,693)
Interest and other income, net 2,342
Interest expense (4,434)
---------
Loss before income taxes (133,785)
Income taxes 1,031
---------
Net loss $(134,816)
=========
See accompanying notes to consolidated financial statements.
56
<PAGE>
<TABLE>
MKE-QUANTUM COMPONENTS LLC
Statement of Members' Equity
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
<CAPTION>
Class A Class B
Units Units Total
--------- --------- ---------
<S> <C> <C> <C>
Initial capital contribution at May 16, 1997 $ 125,732 120,801 246,533
Distribution to member -- (10,363) (10,363)
Unrealized gain on investment securities 460 442 902
Net loss (68,756) (66,060) (134,816)
--------- --------- ---------
Members' equity at March 31, 1998 $ 57,436 44,820 102,256
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
57
</TABLE>
<PAGE>
<TABLE>
MKE-QUANTUM COMPONENTS LLC
Statement of Cash Flows
<CAPTION>
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
<S> <C>
Cash flows from operating activities:
Net loss $(134,816)
Adjustments to reconcile net loss to net cash used in operating activities:
Restructuring 1,295
Depreciation and amortization 48,426
Loss on the disposal of property, plant and equipment 7,550
Effect of foreign currency exchange on property, plant and equipment 1,924
Changes in assets and liabilities:
Accounts receivable (18,875)
Inventories 12,166
Prepaid expenses (1,003)
Other assets (3,403)
Accounts payable 3,999
Accrued expenses and other liabilities 14,888
Due to members 45,757
---------
Net cash used in operating activities (22,092)
---------
Cash flows from investing activities:
Purchases of investment securities (9,754)
Investment in property, plant and equipment (96,681)
Proceeds from disposition of property, plant and equipment 3,462
---------
Net cash used in investing activities (102,973)
---------
Cash flows from financing activities:
Borrowings on note payable to bank 27,000
Distribution to member (10,363)
Principal payments under capital lease obligations (283)
---------
Net cash provided by financing activities 16,354
---------
Decrease in cash and cash equivalents (108,711)
Cash and cash equivalents at beginning of period 113,046
---------
Cash and cash equivalents at end of period $ 4,335
=========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,434
=========
(Continued)
58
</TABLE>
<PAGE>
<TABLE>
MKE-QUANTUM COMPONENTS LLC
Statement of Cash Flows, Continued
<CAPTION>
Period from May 16, 1997 (Inception) through March 31, 1998
(in thousands)
<S> <C>
Supplemental disclosure of noncash financing and investing activities:
Increase in capital lease obligations $ 15,600
========
Assets and liabilities contributed at May 16, 1997:
Assets:
Cash $113,046
Accounts receivable 227
Due from member 22,395
Inventories 23,162
Prepaid expenses 1,713
Property, plant and equipment 130,971
Intangible assets 28,977
Other assets 674
--------
$321,165
========
Liabilities:
Accounts payable $ 15,472
Accrued expenses and other liabilities 6,724
Note payable to member 50,823
Other liabilities 1,613
--------
$ 74,632
========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
59
</TABLE>
<PAGE>
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements
March 31, 1998
(1) Nature of Business and Summary of Significant Accounting Policies
(a) Nature of Business
MKE-Quantum Components LLC ("MKQC" or "the Company") commenced
operations on May 16, 1997, and was formed as a joint venture between
Matsushita-Kotubuki Electronics, Inc. ("MKE"), a Japanese corporation,
through its wholly-owned subsidiary, Matsushita-Kotubuki Peripherals
Corporation ("MKPC"), a Delaware corporation, and Quantum Corporation
("Quantum"). MKQC manufactures magnetic recording heads for computer
disk drives at its facilities in Shrewsbury, Massachusetts, and Batam,
Indonesia, and performs research and development activities at its
Louisville, Colorado facilities. Substantially all of its products are
sold to MKE and its affiliated entities.
Quantum contributed to MKQC its Recording Heads Group operations in
exchange for 4,900,000 Class B member units and 2,350,000 Class A units
and MKPC contributed $110.0 million in exchange for 2,750,000 Class A
units. In addition, Quantum received $94.0 million from the sale of
2,350,000 Class A units to MKPC. Quantum contributed assets of $211.1
million and liabilities of $74.6 million, which were recorded at their
historical cost. Contributed assets and liabilities consisted of the
following (in thousands):
Assets:
Cash $ 3,046
Accounts receivable 22,622
Inventory 23,162
Property, plant and equipment 130,971
Intangible assets 28,977
Other assets 2,387
--------
211,165
========
Liabilities:
Accounts payable 15,472
Accrued expenses and other liabilities 6,724
Note payable to Quantum 50,823
Other liabilities 1,613
--------
$ 74,632
========
The Company is operated under a Restated Operating Agreement (the
"Agreement") whereby management and control of the Company is vested in
the members acting by consent, which is defined as a supermajority. The
Agreement provides that earnings and profits be allocated to each
member based on their respective ownership interest and that liability
for losses, debt and obligations are limited to each members' original
capital contribution.
60
<PAGE>
2
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(1) Continued
(b) Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. These estimates are based on information available as of the
date of the financial statements. Actual results may differ from these
estimates.
(c) Cash Equivalents
The Company considers all highly liquid debt instruments with original
or remaining maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
(e) Investment Securities
Investment securities consist of 500,000 shares of Quantum common
stock, which is being held for use in the Company's Time Accelerated
Restricted Stock Award Plan (note 8). Investment securities are
classified as available-for-sale and have a cost basis of $9.8 million,
determined based on specific identification, and a fair value of $10.7
million at March 31, 1998.
Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and are reported as a separate component of
members' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific
identification basis.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are initially stated at the present
value of the future minimum lease payments. Depreciation on property,
plant and equipment is calculated using the straight-line method over
the estimated useful lives of the assets. Property, plant and equipment
held under capital leases and leasehold improvements are amortized
using the straight line method over the shorter of the lease term or
estimated useful life of the asset.
61
<PAGE>
3
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(1) Continued
(g) Intangible Assets
Intangible assets, which include acquired completed technology and work
force in place, are being amortized over their remaining estimated
useful lives, generally one to three years. Accumulated amortization at
March 31, 1998 totaled $59.3 million.
(h) Income Taxes
The Company, a Limited Liability Company ("LLC"), is treated as a
partnership for US and state income tax purposes and therefore is not
subject to US or state income taxes. The Company shall distribute to
the members amounts sufficient to pay the tax liability generated by
their ownership interests. The provision for income taxes in the
financial statements relates solely to the Company's wholly-owned
foreign subsidiaries. The current provision for income taxes
attributable to the foreign subsidiaries is $1,031,000.
(i) Revenue Recognition
Revenue from sales of products is recognized upon shipment to
customers, with provision made for estimated returns.
(j) Foreign Currency Translation and Transactions
Assets, liabilities, and operations of foreign subsidiaries are
recorded based on the functional currency of the entity. For the
Company's foreign operations, the functional currency is the U.S.
Dollar. Accordingly, the application of Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
to the Company's historical financial statements has resulted in
transaction gains or losses that are immaterial to the Company's
consolidated financial statements. The effect of foreign currency
exchange rate fluctuations on cash flows was also immaterial for the
period presented. Assets and liabilities denominated in other than the
functional currency are remeasured each month with the remeasurement
gain or loss recorded in other income.
(k) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No.
123 establishes financial accounting and reporting standards for
stock-based compensation plans. The Company elected to continue
accounting for stock-based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations, as SFAS No. 123
permits, and to follow the pro forma net loss and stock-based
compensation plan disclosure requirements set forth in SFAS No 123.
62
<PAGE>
4
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(1) Continued
(l) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Company has reviewed the
recoverability of its long-lived assets at March 31, 1998 and
determined that no impairment is present as of March 31, 1998.
(m) Year 2000
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The
Company has developed a plan to deal with the Year 2000 problem and has
begun converting its computer systems to be Year 2000 compliant. The
plan provides for conversion efforts to be completed by the end of
calendar 1999. The Company expenses all costs associated with these
systems changes as costs are incurred. Costs related to these systems
changes are not considered to be material.
(n) Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components (revenue, expense, gains and
losses) in a full set of general purpose financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement, and display the
accumulated balance of other comprehensive income separately from
members' equity in the statement of members' equity. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. SFAS 130
requires comparative financial statements for earlier years to be
restated and is not expected to have a material impact to the Company's
statement of operations or financial position.
63
<PAGE>
5
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(2) Inventories
Inventories consisted of the following at March 31, 1998 (in thousands):
Raw materials $ 5,263
Work in process 4,541
Finished goods 1,192
-------
$10,996
=======
(3) Property, Plant, and Equipment
<TABLE>
Property, plant, and equipment consisted of the following at March 31, 1998
(in thousands):
<CAPTION>
Depreciable
Life
----
<S> <C> <C>
Machinery and equipment 3-5 years $ 111,025
Furniture and fixtures 5 years 1,620
Buildings and leasehold improvements 10-25 years 37,846
Construction in progress -- 54,076
Land -- 2,340
-----------
206,907
Less accumulated depreciation and amortization (9,009)
-----------
$ 197,898
===========
</TABLE>
Included in property, plant and equipment is $15.6 million of assets under
a capital lease (see note 11) and $69.7 million of net assets held outside
the United States, primarily in Batam, Indonesia.
(4) Accrued Expenses
Accrued expenses consist of the following at March 31, 1998 (in thousands):
Accrued compensation $10,617
Restructuring 5,173
Other 8,731
-------
$24,521
=======
64
<PAGE>
6
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets, other assets, note payable to bank, accounts payable,
and accrued expenses approximate their fair values because of the
short-term nature of these instruments. The carrying amount of note payable
to member approximates its fair value because the note bears interest at a
variable interest rate, changes to which are derived from market rate
changes.
(6) Notes Payable
(a) Note Payable to Member
At March 31, 1998, the Company has a note payable in the amount of
$50.8 million due to Quantum. The note is payable in quarterly
installments of principal and interest, with interest payments
commencing September 30, 1997 and principal payments commencing April
30, 1998, subject to Available Cash, as defined (maximum of 33 1/3% of
net operating cash flow less any interest payment on the subordinated
note). The note bears interest at the Applicable Federal Rate plus 1.5%
(6.8% at March 31, 1998). Any unpaid amounts under this note are due in
their entirety on May 15, 2022. The note is subordinated to any senior
indebtedness, including note payable to bank, and is subject to certain
operating covenants. All interest was paid through March 31, 1998.
(b) Note Payable to Bank
In March 1998 as part of the Company's financing agreement (see note
12), the Company entered into a bridge note financing facility with a
bank for up to $50.0 million which was subsequently increased to $65.0
million on March 26, 1998. Interest on outstanding borrowings accrues
at either the London Inter-Bank Offering Rate ("LIBOR"), Reserve
Adjusted LIBOR, Federal Funds Rate or the bank's prime rate. The
interest rate at March 31, 1998 was 7.05%. Borrowings under the bridge
note financing facility are secured by substantially all assets of the
Company. At March 31, 1998, there was $27.0 million of outstanding
borrowings under this note. The bridge note was due to expire on April
30, 1998, however the expiration date was subsequently extended to May
29, 1998 and was repaid in full upon the closing of the Company's
financing agreement (see note 12).
65
<PAGE>
7
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(7) Restructuring
During the period from May 16, 1997 (Inception) through March 31, 1998,
the Company recorded a restructuring charge of $10.0 million associated
with the transition of its manufacturing operations in Colorado to a
research and development operation. As part of the transition, production
at the Colorado facility was moved to Massachusetts. The restructuring
charge provided for $5.2 million associated with employee termination
benefits for more than 400 employees who were associated with the
manufacturing process, non-cash charges of $1.5 million associated with
the disposal of manufacturing property and equipment, $0.4 million
related to a writedown in the carrying value of certain intangible and
other assets, and $2.8 million related to the remaining lease term of
certain Colorado facilities. At March 31, 1998, $5.2 million of accrued
restructuring costs are included in accrued expenses.
(8) Stock Compensation Plans
(a) Restricted Stock Award Plan
During the period from May 16, 1997 (Inception) to March 31, 1998, the
Company adopted a Time Accelerated Restricted Stock Award Plan (the
"Plan") pursuant to which the Company's Board of Directors may grant up
to 500,000 shares of Quantum common stock to officers and key
employees. All stock awards vest over 4 years from the date of grant
and may accelerate to a two-year vesting schedule if the Company meets
certain performance criteria. The performance criteria are based on
obtaining predetermined yield, operating income and net income goals.
At March 31, 1998, there were 92,700 shares available for grant under
the Plan. Total compensation expense recognized for the period from May
16, 1997, (Inception) to March 31, 1998 amounted to $2.0 million.
(b) Quantum Stock Incentive Plans
As affiliates, certain of the Company's employees are eligible to
participate in Quantum's stock incentive plans, which include stock
options and restricted stock. All stock incentive awards outstanding at
May 16, 1997, which have been issued while the respective employees
were employed by Quantum, were effectively assumed by the Company.
During the period from May 16, 1997 (Inception) to March 31, 1998,
25,000 stock incentive awards were granted to the Company's employees.
The Company has no specific rights to have stock incentive awards
granted under the Quantum plans to its employees in the future.
Restricted stock previously granted generally vests over two to three
years. Stock options were granted with exercise prices determined by
Quantum's Board of Directors, but not less than the grant date fair
market value of Quantum's common stock. Stock options currently expire
no later than ten years from the grant date and generally vest ratably
over one to four years.
66
<PAGE>
8
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(8) Continued
(c) Stock Option Summary Information
A summary of activity related to Company employees' involvement in
Quantum's stock incentive plans follows:
Period from May 16, 1997 (Inception)
to March 31, 1998
------------------------------
Options Weighted-Average
(in thousands) Exercise Price
-------------- --------------
Outstanding at May 16, 1997 780 $ 7.29
Granted 25 21.00
Canceled (28) 7.54
Exercised (229) 6.47
---- ------
Outstanding at March 31, 1998 548 $ 8.24
==== ======
Exercisable at March 31, 1998 303 $ 7.70
==== ======
<TABLE>
The range of exercise prices for options held by Company employees and
outstanding at March 31, 1998 was $6.44 to $21.00. The following tables
summarize information about options held by Company employees that were
outstanding at March 31, 1998:
<CAPTION>
Outstanding Options
--------------------------------------------------------------
Options Outstanding Weighted-Average
at March 31, 1998 Weighted-Average Remaining
Range of Exercise Prices (in thousands) Exercise Price Contractual Life
------------------------ -------------- -------------- ----------------
<S> <C> <C> <C>
$6.44 - $ 7.13 84 $ 7.06 6.77
$7.22 253 7.22 8.25
$7.81 - $21.00 211 9.94 7.63
--- -------- ----
548 $ 8.24 7.78
=== ======== ====
</TABLE>
Exercisable Options
-------------------------------------
Shares
Exercisable
at March 31, 1998 Weighted-Average
Range of Exercise Prices (in thousands) Exercise Price
------------------------ -------------- --------------
$6.44 - $ 7.13 66 $ 7.05
$7.22 114 7.22
$7.81 - $21.00 123 8.49
--- --------
303 $ 7.70
=== ========
67
<PAGE>
9
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(8) Continued
Expiration dates range from May 16, 2004 to January 26, 2008 for
Company employee options outstanding at March 31, 1998. Prices for
options exercised by Company employees during the period from May 16,
1997 (Inception) to March 31, 1998 ranged from $0.01 to $11.44.
Proceeds received from exercises are paid directly to Quantum.
(d) Pro Forma Information
Certain pro forma information is required by SFAS No. 123. This
information is required to be determined as if the Company had
accounted for stock incentives granted to its employees subsequent to
March 31, 1995, under the fair value method.
<TABLE>
The fair value of options granted to the Company's employees by Quantum
subsequent to March 31, 1995, reported below, were estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
<CAPTION>
Stock Options Stock Purchase Plan
--------------------------- ---------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1998 Fiscal 1997
----------- ----------- ----------- -----------
<S> <S> <C> <C> <C>
Option life (in years) 2.94 2.78 0.98 1.40
Risk-free interest rate 6.30% 6.25% 5.90% 6.14%
Stock price volatility .56 .53 .53 .52
Dividend yield -- -- -- --
</TABLE>
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of
the fair value of the options.
The following is a summary of weighted-average grant date fair values:
Weighted Average Grant Date Fair Value
--------------------------------------
Fiscal 1998 Fiscal 1997
----------- -----------
Options granted under stock
incentive plans $ 8.78 $ 2.93
Restricted stock granted
under stock incentive plan -- 14.86
68
<PAGE>
10
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(8) Continued
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense ratably over the options'
vesting period. Had the Company determined stock compensation expense in
accordance with SFAS 123, the pro forma net loss would have been $(135.8)
million for the period from May 16, 1997 (Inception) to March 31, 1998.
(9) Savings and Investment Plan
Substantially all of the Company's domestic employees are eligible to make
contributions to the Company's 401(k) savings and investment plan. The
Company matches a percentage of the employees' contributions and may also
make additional discretionary contributions to the plan. Company
contributions were $0.9 million during the period from May 16, 1997
(Inception) to March 31, 1998.
(10) Related Party Transactions
During the period from May 16, 1997 (Inception) to March 31, 1998, the
Company had revenues of $152 million from the sale of product to MKE and
its affiliates. At March 31, 1998, there was a net receivable balance of
$15.9 million due from MKE and its affiliates. The Company purchased $4.1
million in fixed assets and $0.4 million in services from MKE and its
affiliates during the period from May 16, 1997 (Inception) to March 31,
1998. A balance of $3.8 million was due to MKE and its affiliates at March
31, 1998 related to these purchases.
During the period from May 16, 1997 (Inception) to March 31, 1998, the
Company had the following transactions with Quantum (in millions):
Product sales $ 12.5
Sales of equipment 3.5
Purchases of property, plant and equipment 17.0
Purchase of support services 16.0
Reimbursement for accounts payable disbursements 14.4
Rent of Shrewsbury, Massachusetts facilities 4.7
Interest on note 3.1
Amounts paid for employee health insurance coverage 2.5
Interest on capital lease (see note 11) 1.2
Amounts reimbursed for employee payroll 17.3
69
<PAGE>
11
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(10) Continued
The support services provided by Quantum to the Company were mainly
comprised of finance, human resources, and computer support services.
Quantum charges the Company for these services on a basis which reflects
the costs directly attributable to the Company. Management believes these
methods are reasonable based upon the Company's use of such services. At
March 31, 1998, the Company owed $19.5 million to Quantum, representing
$14.1 million in capital improvements at the Shrewsbury facility and $5.4
million for services. See also notes 6 and 11.
(11) Leases
The Company is obligated under a capital lease with Quantum for its
research and development facility in Louisville, Colorado. At March 31,
1998, the gross amount of building, land and related accumulated
amortization recorded under the capital lease was as follows (in
thousands):
Building $ 13,260
Land 2,340
--------
15,600
Less accumulated amortization (576)
--------
$ 15,024
========
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has a non-cancelable operating lease with Quantum
Corporation for its manufacturing and office space in Shrewsbury,
Massachusetts. The lease expires in May 2002 and contains renewal options
for three five-year periods, and requires the Company to pay all executory
costs such as maintenance and insurance. In addition, the Company leases
manufacturing space for its Batam, Indonesia operations. Rental expense
amounted to $6.4 million for the period from May 16, 1997 (Inception)
through March 31, 1998.
Future minimum lease payments under operating leases (with initial or
remaining lease terms in excess of one year) as of March 31, 1998 are (in
thousands):
1999 $ 8,625
2000 9,655
2001 7,460
2002 7,460
2003 1,912
-------
Total future minimum
lease payments $35,112
=======
70
<PAGE>
12
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(11) Continued
Future minimum capital lease payments as of March 31, 1998 are (in
thousands):
1999 $ 2,074
2000 2,074
2001 2,074
2002 2,074
2003 2,074
Thereafter 18,210
---------
Total minimum lease payments 28,580
Less: executory costs (such as taxes,
maintenance and insurance, included
in minimum lease payments) 2,752
---------
Net minimum lease payments 25,828
Less: interest 10,511
Less: current portion of obligation under capital lease 353
---------
Obligation under capital lease, less current portion $ 14,964
=========
(12) Subsequent Events
(a) Financing Agreement
On May 26, 1998, the Company entered into a financing agreement with a
bank to permit the Company to borrow up to $80.0 million. The agreement
provides for a $30.0 million revolving credit facility and a $50.0
million long term credit facility to be used for equipment purchases.
Certain assets located in the United States collateralize the credit
facility. The Company's ownership interest in its foreign subsidiaries
is also pledged. Under the terms of the agreement, the Company is
required to meet certain financial ratios and other financial
covenants. The borrowings under the revolving credit facility and long
term facility bear a variable interest rate based on the bank's
available funds, as defined. The revolving credit facility has a term
of one year. The long-term credit facility is available for borrowing
until January 28, 1999. The principal amount of the long-term facility
will be repaid in sixteen quarterly installments beginning on June 30,
1999, with a maturity date of March 31, 2003. The note payable to
Quantum for $50.8 million (see note 6) is subordinated to this credit
facility.
On June 5, 1998, the Company executed a $40.0 million lease agreement
with a bank. Under the terms of this agreement, the $40.0 million will
be used by the Company to obtain manufacturing equipment through
leasing arrangements with the bank. The Company will make semi-annual
rental payments for the equipment.
71
<PAGE>
13
MKE-QUANTUM COMPONENTS LLC
Notes to Consolidated Financial Statements, Continued
(12) Continued
(b) Restructuring
On June 4, 1998, the Company recorded a restructuring charge of
approximately $1.7 million associated with a strategic plan designed to
improve manufacturing technology and efficiency. The restructuring
charge primarily provided for costs associated with employee
termination benefits for more than 150 employees located primarily in
Shrewsbury, Massachusetts.
72
<PAGE>
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to Part I,
Item 1 of this document and to the Company's Proxy Statement.
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and 13 of
this Form 10-K Annual Report, the Company's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders is not deemed "filed" as part of this Form
10-K Annual Report.
73
<PAGE>
PART IV
ITEM 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements - See Index to Consolidated Financial Statements at
Item 8 on page 27 of this report.
2. Financial Statement Schedule - See Index to Consolidated Financial
Statements at Item 8 on page 27 of this report.
3. Exhibits
Exhibit
Number Exhibit
------ -------
2.1(a)(1) Stock and Asset Purchase Agreement by and among Quantum
Corporation, Quantum Peripherals (Europe) S.A. and Digital
Equipment Corporation, dated as of July 18, 1994
2.1(b)(1) Amendment No. 1 dated as of October 3, 1994, to the Stock and
Asset Purchase Agreement by and among Quantum Corporation,
Quantum Peripherals (Europe) S.A. and Digital Equipment
Corporation, dated as of July 18, 1994
2.1(c)(1) Supplemental agreement to the Stock and Asset Purchase
Agreement by and among Quantum Corporation, Quantum
Peripherals (Europe) S.A. and Digital Equipment Corporation,
dated as of July 18, 1994
2.2(1) RMMI Stock Purchase Agreement, dated as of July 18, 1994,
among Quantum Corporation, Digital Equipment Corporation and
Rocky Mountain Magnetics, Inc
3.1(a)(2) Certificate of Incorporation of Registrant
3.1(b)(3) Certificate of Amendment of Certificate of Incorporation of
Registrant
3.1(c)(19) Certificate of Amendment of Certificate of Incorporation of
Quantum Corporation, dated April 29, 1997
3.2(3) By-laws of Registrant, as amended
4.2(4) Shareholder Rights Plan
10.9(5) Registrant's Employee Stock Purchase Plan and form of
Subscription Agreement, as amended
10.10(6) Form of Indemnification Agreement between Registrant and
Certain Officers and Directors
10.13(9) Lease (dated October 13, 1989) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.14(10) Lease (dated September 17, 1990) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.15(3) Lease (dated April 10, 1992) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.17(11) Form of Statement of Employment Terms executed by Stephen M.
Berkley, David A. Brown and William J. Miller, directors of
Registrant, and Joseph T. Rodgers, William F. Roach and
Michael A. Brown, executive officers of Registrant
10.18(7) Lease (dated November 13, 1992) and First Amendment to Lease
(dated November 17, 1992) between Registrant and Milpitas
Realty Delaware, Inc.
10.21(12) 1993 Long-Term Incentive Plan
10.23(13) Second Amendment (dated April 15, 1993) to Lease (dated
November 13, 1992) between Registrant and Milpitas Realty
Delaware, Inc.
10.24(13) Lease (dated April 14, 1993) between Registrant and Milpitas
Realty Delaware, Inc.
74
<PAGE>
10.25(1) Patent Assignment and License Agreement, dated as of October
3, 1994, by and between Digital Equipment Corporation and
Quantum Corporation
10.27(8)(14) Supply Agreement between Digital Equipment Corporation (Buyer)
and Quantum Corporation (Seller) for Storage Devices, as dated
as of October 3, 1994
10.32(15) Credit Agreement dated September 22, 1995, among Quantum
Corporation and the Banks named therein and THE SUMITOMO BANK,
LIMITED, acting through its San Francisco branch, as Agent for
the Banks and as Issuer
10.40(16) Mortgage and Security Agreement made as of the 10th day of
September 1996, by Quantum Peripherals Realty Corporation, as
Mortgagor, to CS First Boston Mortgage Capital Corporation, as
Mortgagee
10.41(16) Deed of Trust and Security Agreement dated: As of September
10, 1996, by Quantum Peripherals Realty Corporation (Grantor)
to Public Trustee of Boulder County, Colorado, as Trustee for
the benefit of CS First Boston Mortgage Capital Corp.
(Beneficiary)
10.42(16) Master Lease between Quantum Peripherals Realty Corporation,
Lessor, and Quantum Corporation, Lessee, dated as of September
10, 1996
10.43(16) 1996 Board of Directors Stock Option Plan and Form of Option
Agreement, as amended
10.44(17) Stock Purchase Agreement dated as of February 13, 1997 among
Registrant, Quantum Peripherals Colorado, Inc. and Storage
Technology Corporation
10.45(18) Indenture, dated August 1, 1997, between the Registrant and La
Salle National Bank as trustee ("Trustee") related to the
Registrants subordinated debt securities
10.46(18) Supplemental Indenture, dated August 1, 1997, between the
Registrant and Trustee, relating to the Notes (including the
form of Note)
10.47(19) Lease (dated April 16, 1997) between Registrant and John
Arrillaga, Trustee
10.48(19) Credit Agreement dated June 6, 1997, among Quantum Corporation
and the Banks Named Herein and ABN AMRO BANK N.V., San
Francisco International Branch and CIBC INC. as Co-Arrangers
for the Banks and CANADIAN IMPERIAL BANK OF COMMERCE, as
Administrative Agent for the Banks and ABN AMRO BANK N.V., San
Francisco International Branch, as Syndication Agent for the
Banks and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION as Documentation Agent for the Banks
10.49(19) Amended and Restated Master Agreement, dated April 30, 1997
between Registrant and MKE
10.50(19) Amended and Restated Purchase Agreement, dated April 30, 1997
between Registrant and MKE
10.51(19) License Agreement, effective January 1, 1996, dated April 17,
1997, between International Business Machines Corporation and
Quantum Corporation
10.52(20) MASTER LEASE dated as of August 22, 1997 between LEASE PLAN
NORTH AMERICA, INC., as the Lessor and Quantum Corporation, as
the Lessee.
10.53(20) PARTICIPATION AGREEMENT dated as of August 22, 1997 among
Quantum Corporation, as Lessee, LEASE PLAN NORTH AMERICA,
INC., as Lessor and as a Participant, ABN AMRO BANK N.V., SAN
FRANCISCO INTERNATIONAL BRANCH, as a Participant, and ABN AMRO
BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as Agent.
10.54(20) APPENDIX 1 to Participation Agreement, Master Lease and
Construction Deed of Trust each dated as of August 22, 1997
(Specialty Storage Product Group Facilities)
10.55(20) Second Extension and Modification of Credit Agreement, dated
September 18, 1997, among Quantum Corporation and the Banks
and THE SUMITOMO BANK, LIMITED, acting through its San
Francisco Branch, as agent for the Banks and as Issuer.
12 Statement of Computation of Ratios of Earnings to Fixed
Charges
21 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
24 Power of Attorney
75
<PAGE>
27 Financial Data Schedule
Footnotes to
Exhibits Footnote
(1) Incorporated by reference from Form 8-K filed with the
Securities and Exchange Commission on October 17, 1994.
(2) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1987.
(3) Incorporated by reference from exhibits filed with
Registrant's Annual Report on Form 10-K for fiscal year ended
March 31, 1992.
(4) Incorporated by reference from Form 8-A filed with the
Securities and Exchange Commission on August 5, 1988.
(5) Incorporated by reference from exhibits filed with
Registrant's Form S-8, No. 33-52192 filed with the Securities
and Exchange Commission on September 21, 1992.
(6) Incorporated by reference to the Registrant's Definitive
Special Meeting Proxy Statement filed with the Securities and
Exchange Commission on March 24, 1987.
(7) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
27, 1989, filed with the Securities and Exchange Commission on
February 10, 1993.
(8) Confidential Treatment Requested. Granted by the Securities
and Exchange Commission.
(9) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
31, 1989, filed with the Securities and Exchange Commission on
February 14, 1990.
(10) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December
30, 1990, filed with the Securities and Exchange Commission on
February 13, 1991.
(11) Incorporated by reference to the Registrant's Amendment No. 1
to Form 10-Q for the quarter ended June 30, 1991.
(12) Incorporated by reference from Registration Statement No.
33-72222 on Form S-8 filed with the Securities and Exchange
Commission on November 30, 1993.
(13) Incorporated by reference from exhibits filed with
Registrant's Annual Report on Form 10-K for fiscal year ended
March 31, 1994.
(14) Incorporated by reference from Form 8-K/A-1 filed with the
Securities and Exchange Commission on January 31, 1995.
(15) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended October
1, 1995, filed with the Securities and Exchange Commission on
November 20, 1995.
(16) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended
September 29,1996 filed with the Securities and Exchange
Commission on November 13, 1996.
(17) Incorporated by reference from exhibits filed with
Registrant's Annual Report on Form 10-K for fiscal year ended
March 31, 1997.
(18) Incorporated by reference from Form 8-K filed with the
Securities and Exchange Commission, dated August 6, 1997.
(19) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended June
29,1997 filed with the Securities and Exchange Commission on
August 13, 1997.
(20) Incorporated by reference from exhibits filed with
Registrant's Form 10-Q for the quarterly period ended
September 28,1997 filed with the Securities and Exchange
Commission on October 29, 1997.
76
<PAGE>
(b) Reports on Form 8-K: None.
(c) Exhibits: See Item 14(a) above.
(d) Financial Statement Schedules: See Item 14(a) above.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANTUM CORPORATION
Dated: June 26, 1998 \s\ Richard L. Clemmer
------------------------
Richard L. Clemmer
Executive Vice President,
Finance Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard L. Clemmer and Andrew Kryder, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on June 26,
1998.
<CAPTION>
Signature Title
- ---------------------------------------------------------------------------------------------
<S> <C>
\s\ MICHAEL A. BROWN Chairman of the Board, and Chief
- --------------------------------------------- Executive Officer (Principal Executive
(Michael A. Brown) Officer)
\s\ RICHARD L. CLEMMER Executive Vice President, Finance, Chief
- --------------------------------------------- Financial Officer (Principal Financial
(Richard L. Clemmer) and Accounting Officer)
\s\ STEPHEN M. BERKLEY Director
- ---------------------------------------------
(Stephen M. Berkley)
\s\ DAVID A. BROWN Director
- ---------------------------------------------
(David A. Brown)
\s\ ROBERT J. CASALE Director
- ---------------------------------------------
(Robert J. Casale)
\s\ EDWARD M. ESBER, JR. Director
- ---------------------------------------------
(Edward M. Esber, Jr.)
\s\ STEVEN C. WHEELWRIGHT Director
- ---------------------------------------------
(Steven C. Wheelwright)
78
</TABLE>
<TABLE>
QUANTUM CORPORATION
EXHIBIT 12
STATEMENT OF COMPUTATION OF RATIOS
OF EARNINGS TO FIXED CHARGES
<CAPTION>
Years Ended March 31,
------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 230,814 $ 200,696 $(141,338) $ 145,305 $ 3,663
Add fixed charges 41,711 56,669 48,226 29,277 18,906
--------- --------- --------- --------- ---------
Earnings (as defined) $ 272,525 $ 257,365 $ (93,112) $ 174,582 $ 22,569
========= ========= ========= ========= =========
Fixed charges
Interest expense $ 32,753 $ 47,882 $ 35,904 $ 21,557 $ 14,305
Amortization of debt issuance costs (ii) (ii) 2,427 1,458 577
Estimated interest component of rent expenses 8,958 8,787 9,895 6,262 4,024
--------- --------- --------- --------- ---------
Total fixed charges $ 41,711 $ 56,669 $ 48,226 $ 29,277 $ 18,906
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 6.5 4.5 (i) 6.0 1.2
========= ========= ========= ========= =========
<FN>
(i) Earnings (as defined) for fiscal 1996 were insufficient to cover fixed
charges by $141.3 million.
(ii) In 1997 and 1998 the amortization of debt issuance costs is included in
interest expense.
</FN>
</TABLE>
79
QUANTUM CORPORATION
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
1. Quantum International Inc., a California corporation
2. Quantum International DISC Inc., a California corporation
3. Quantum Foreign Sales Corporation, a Barbados corporation
4. Quantum GmbH, a German corporation
5. Quantum Peripheral Products Ltd., a United Kingdom corporation
6. Quantum France SARL, a French corporation
7. Quantum Asia Pacific Pte. Ltd., a Singapore corporation
8. Quantum Peripherals Japan Corporation, a Japanese corporation
9. Quantum Data Storage B.V., a Netherlands corporation
10. Quantum Peripheral Products (Ireland) Ltd., an Ireland corporation
11. Quantum Peripherals (Europe) S.A., a Swiss corporation
12. Quantum Singapore Pte. Ltd., a Singapore corporation
13. Quantum Korea Corporation, a Korean corporation
14. Quantum Hong Kong Ltd., a Hong Kong corporation
15. Quantum Peripherals (Malaysia) Sdn. Bhd., a Malaysian corporation
16. Quantum Storage (Malaysia) Sdn. Bhd., a Malaysian corporation
17. Quantum Peripherals Realty Corporation, a Delaware corporation
80
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-94170, 33-37388, 33-52190, 33-19412, 33-52192, 33-54343,
33-55503, 33-72222, 33-61059, 33-64625, 333-09983, 333-30623, 333-30627,
333-32691) pertaining to the 1996 Board of Directors Stock Option Plan, the 1993
Long-Term Incentive Plan, and the Employee Stock Purchase Plan of Quantum
Corporation, and the Registration Statement (Form S-3, No. 333-29525) filed June
19, 1997, as amended on July 24, 1997, and related prospectus pertaining to the
registration of debt securities, common stock, and rights of our report dated
April 21, 1998, with respect to the consolidated financial statements and
schedule of Quantum Corporation included in its Annual Report (Form 10-K) for
the year ended March 31, 1998.
Ernst & Young LLP
Palo Alto, California
June 26, 1998
81
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
MKE Quantum Components LLC:
We consent to the inclusion of our report dated April 14, 1998, except for notes
6(b) and 12, which are as of June 5, 1998, with respect to the consolidated
balance sheet of MKE Quantum Components LLC and subsidiaries as of March 31,
1998, and the related consolidated statements of operations, members' equity,
and cash flows for the period from May 16, 1997 (Inception) through March 31,
1998, which report appears in the Form 10-K of Quantum Corporation dated June
26, 1998.
KPMG Peat Marwick LLP
Boston, Massachusetts
June 26, 1998
82
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997 MAR-31-1996
<PERIOD-START> APR-01-1997 APR-01-1996 APR-01-1995
<PERIOD-END> MAR-31-1998 MAR-31-1997 MAR-31-1996
<CASH> 642,150 345,125 164,752
<SECURITIES> 71,573 0 0
<RECEIVABLES> 750,856 898,087 721,604
<ALLOWANCES> 12,928 10,610 10,497
<INVENTORY> 315,035 252,802 711,107
<CURRENT-ASSETS> 2,025,337 1,688,419 1,526,494
<PP&E> 505,640 633,897 525,445
<DEPRECIATION> 220,481 226,691 161,334
<TOTAL-ASSETS> 2,438,411 2,158,263 1,975,355
<CURRENT-LIABILITIES> 700,236 815,578 821,142
<BONDS> 327,485 419,018 598,158
0 3,888 0
0 0 0
<COMMON> 776,291 459,800 266,946
<OTHER-SE> 595,731 426,392 277,877
<TOTAL-LIABILITY-AND-EQUITY> 2,438,411 2,158,263 1,975,355
<SALES> 5,805,235 5,319,457 4,422,726
<TOTAL-REVENUES> 5,805,235 5,319,457 4,422,726
<CGS> 4,929,714 4,550,716 3,880,309
<TOTAL-COSTS> 4,929,714 4,550,716 3,880,309
<OTHER-EXPENSES> 580,136 527,210 655,796
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 32,753 47,882 36,421
<INCOME-PRETAX> 230,815 200,696 (141,338)
<INCOME-TAX> 60,014 52,181 (50,882)
<INCOME-CONTINUING> 170,801 148,515 (90,456)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 170,801 148,515 (90,456)
<EPS-PRIMARY> 1.25 1.27 (0.87)
<EPS-DILUTED> 1.07 1.04 (0.87)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998 MAR-31-1998
<PERIOD-START> APR-01-1997 APR-01-1997 APR-01-1997
<PERIOD-END> DEC-28-1997 SEP-28-1997 JUN-29-1997
<CASH> 716,588 637,744 365,973
<SECURITIES> 0 0 0
<RECEIVABLES> 836,938 1,040,023 897,928
<ALLOWANCES> 13,912 10,194 10,539
<INVENTORY> 423,445 386,525 295,251
<CURRENT-ASSETS> 2,191,559 2,219,710 1,720,617
<PP&E> 484,550 447,090 409,802
<DEPRECIATION> 202,705 188,231 177,957
<TOTAL-ASSETS> 2,627,503 2,651,698 2,113,430
<CURRENT-LIABILITIES> 911,464 905,405 797,432
<BONDS> 569,077 569,313 282,044
0 3,888 3,888
0 0 0
<COMMON> 520,130 512,700 472,896
<OTHER-SE> 593,582 626,683 522,906
<TOTAL-LIABILITY-AND-EQUITY> 2,627,503 2,651,698 2,113,430
<SALES> 4,519,516 2,999,635 1,446,144
<TOTAL-REVENUES> 4,519,516 2,999,635 1,446,144
<CGS> 3,809,826 2,425,618 1,170,210
<TOTAL-COSTS> 3,809,826 2,425,618 1,170,210
<OTHER-EXPENSES> 458,382 289,025 139,475
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 24,135 14,328 6,035
<INCOME-PRETAX> 227,173 270,664 130,424
<INCOME-TAX> 59,065 70,373 33,910
<INCOME-CONTINUING> 168,108 200,292 96,514
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 168,108 200,292 96,514
<EPS-PRIMARY> 1.26 1.51 0.74
<EPS-DILUTED> 1.05 1.23 0.61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997 MAR-31-1997
<PERIOD-START> APR-01-1996 APR-01-1996 APR-01-1996
<PERIOD-END> DEC-29-1996 SEP-29-1996 JUN-30-1996
<CASH> 219,315 148,594 140,036
<SECURITIES> 0 0 0
<RECEIVABLES> 815,617 762,845 743,719
<ALLOWANCES> 12,486 11,188 13,498
<INVENTORY> 252,825 358,859 449,521
<CURRENT-ASSETS> 1,495,370 1,477,253 1,533,734
<PP&E> 606,869 576,076 563,388
<DEPRECIATION> 203,409 189,813 179,289
<TOTAL-ASSETS> 1,972,065 1,941,202 1,991,579
<CURRENT-LIABILITIES> 669,940 590,425 727,740
<BONDS> 605,422 727,065 654,692
0 0 0
0 0 0
<COMMON> 346,743 326,187 316,195
<OTHER-SE> 338,728 286,293 281,720
<TOTAL-LIABILITY-AND-EQUITY> 1,972,065 1,941,202 1,991,579
<SALES> 3,755,598 2,277,646 1,153,502
<TOTAL-REVENUES> 3,755,598 2,277,646 1,153,502
<CGS> 3,263,384 2,000,889 1,012,223
<TOTAL-COSTS> 3,263,384 2,000,889 1,012,223
<OTHER-EXPENSES> 372,122 136,214 125,814
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 37,861 24,006 10,272
<INCOME-PRETAX> 82,231 11,373 5,193
<INCOME-TAX> 21,380 2,957 1,350
<INCOME-CONTINUING> 60,851 8,416 3,843
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 60,851 8,416 3,843
<EPS-PRIMARY> 0.54 0.07 0.03
<EPS-DILUTED> 0.46 0.07 0.03
</TABLE>
