<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
____________________
Commission File Number 0-12390
QUANTUM CORPORATION
Incorporated Pursuant to the Laws of the State of Delaware
____________________
IRS Employer Identification Number 94-2665054
500 McCarthy Blvd., Milpitas, California 95035
(408) 894-4000
____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
-----
As of the close of business on August 4, 1999, Quantum Corporation had
approximately 165,427,054 shares of DLT & Storage Systems group common stock
outstanding and 82,713,527 shares of Hard Disk Drive group common stock
outstanding.
1
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QUANTUM CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Quantum Corporation - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Quantum Corporation DLT & Storage Systems Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 18
Condensed Combined Balance Sheets 19
Condensed Combined Statements of Cash Flows 20
Notes to Condensed Combined Financial Statements 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Quantum Corporation Hard Disk Drive Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 33
Condensed Combined Balance Sheets 34
Condensed Combined Statements of Cash Flows 35
Notes to Condensed Combined Financial Statements 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations 41
PART II - OTHER INFORMATION 50
SIGNATURE 51
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1999 1998
------------------ ------------------
<S> <C> <C>
Revenue $1,083,235 $1,103,023
Cost of revenue 903,316 936,650
---------- ----------
Gross profit 179,919 166,373
Operating expenses:
Research and development 90,433 84,298
Sales and marketing 53,221 38,337
General and administrative 29,144 17,402
---------- ----------
172,798 140,037
Income from operations 7,121 26,336
Other income (expense):
Interest income and other, net 12,447 8,704
Interest expense (7,208) (6,502)
Equity in loss of investee - (24,237)
---------- ----------
5,239 (22,035)
Income before income taxes 12,360 4,301
Income tax provision 4,079 1,291
---------- ----------
Net income $ 8,281 $ 3,010
========== ==========
DLT & Storage Systems group:
Net income $ 51,465 $ 43,565
========== ==========
Net income per share:
Basic $ 0.31 $ 0.27
Diluted $ 0.30 $ 0.26
Weighted-average common shares:
Basic 166,661 158,716
Diluted 172,977 165,956
Hard Disk Drive group:
Net loss $ (43,184) $ (40,554)
========== ==========
Net loss per share:
Basic $ (0.52) $ (0.51)
Diluted $ (0.52) $ (0.51)
Weighted-average common shares:
Basic 83,330 79,358
Diluted 83,330 79,358
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 27, March 31,
1999 1999
---------- ----------
<S> <C> <C>
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 649,425 $ 772,368
Marketable securities 33,426 24,426
Accounts receivable, net of allowance for
doubtful accounts of $12,126 and $12,130 638,978 646,557
Inventories 261,919 271,986
Deferred taxes 107,701 107,701
Other current assets 113,935 104,835
---------- ----------
Total current assets 1,805,384 1,927,873
Property and equipment, net of accumulated
depreciation of $311,797 and $291,617 269,919 271,928
Intangibles, net 219,384 225,567
Other assets 45,994 58,228
---------- ----------
$2,340,681 $2,483,596
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 351,394 $ 406,369
Accrued warranty 79,845 76,905
Accrued compensation 64,498 73,605
Income taxes payable 25,331 33,411
Current portion of long-term debt 1,048 1,024
Other accrued liabilities 92,613 90,691
---------- ----------
Total current liabilities 614,729 682,005
Deferred taxes 66,746 67,340
Long-term debt 50,190 56,961
Convertible subordinated debt 287,500 287,500
Stockholders' equity:
Common stocks 895,038 886,434
Retained earnings 512,487 504,206
Accumulated other comprehensive loss (1,770) (850)
Treasury stock, at cost (84,239) -
---------- ----------
Total stockholders' equity 1,321,516 1,389,790
---------- ----------
$2,340,681 $2,483,596
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,281 $ 3,010
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Loss from investee - 24,237
Depreciation 23,711 20,837
Amortization 6,688 3,987
Deferred income taxes (594) (607)
Compensation related to stock plans 960 2,053
Changes in assets and liabilities:
Accounts receivable 7,579 74,957
Inventories 10,067 (2,791)
Accounts payable (54,975) (54,482)
Income taxes payable (8,079) (12,782)
Accrued warranty 2,940 (5,901)
Other assets and liabilities (806) 9,519
--------- ---------
Net cash provided by (used in) operating activities (4,228) 62,037
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (23,641) (39,004)
Maturities of marketable securities 14,641 52,049
Investment in property and equipment (24,833) (30,348)
Proceeds from disposition of property and equipment 60 4,281
--------- ---------
Net cash used in investing activities (33,773) (13,022)
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock (84,239) (199,843)
Principal payments on long-term credit facilities (6,747) (226)
Proceeds from issuance of common stock 6,044 5,275
--------- --------
Net cash used in financing activities (84,942) (194,794)
--------- --------
Decrease in cash and cash equivalents (122,943) (145,779)
Cash and cash equivalents at beginning of period 772,368 642,150
--------- --------
Cash and cash equivalents at end of period $ 649,425 $496,371
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,212 $ 948
Income taxes, net of (refunds) $ 14,914 $(10,944)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Quantum Corporation ("Quantum" or the "Company") and its
majority owned subsidiaries. All material intercompany accounts and
transactions have been eliminated. The interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year.
Certain prior period amounts have been reclassified to conform to the current
period's presentation. The condensed consolidated balance sheet as of March
31, 1999 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements should be read in conjunction with the audited
financial statements of Quantum Corporation for the fiscal year ended March 31,
1999 included in its Annual Report on Form 10-K and Form S-4, Registration No.
333-75153 filed with the Securities and Exchange Commission.
2. Recapitalization
On July 23, 1999, the Company's stockholders approved the tracking stock
proposal. As a result, Quantum's Certificate of Incorporation has been amended
and restated (the "Restated Certificate of Incorporation"), effective as of the
close of business on August 4, 1999, designating two new classes of Quantum
Corporation common stock, DLT & Storage Systems group ("DSSG") common stock,
$.01 par value per share and Hard Disk Drive group ("HDDG") common stock, $.01
par value per share. Each authorized share of Quantum common stock, $.01 par
value per share, has been reclassified as one share of DSSG stock and one-half
share of HDDG stock. These two securities are intended to track separately the
performance of the DLT & Storage Systems group and the Hard Disk Drive group.
3. Inventories
Inventories consisted of the following:
(In thousands)
June 27, March 31,
1999 1999
------------ -----------
Materials and purchased parts $ 66,213 $ 62,342
Work in process 37,000 27,531
Finished goods 158,706 182,113
-------- --------
$261,919 $271,986
======== ========
4. Net income (loss) per share
As a result of the recapitalization, the Company uses two tracking stocks, DSSG
common stock and HDDG common stock, to reflect the performance of Quantum's
two business groups. Accordingly, the net income (loss) per share for each
group presented below has been calculated in accordance with the Restated
Certificate of Incorporation.
The following table sets forth the computation of basic and diluted net income
per share for DSSG:
(In thousands, except per share data) Three Months Ended
June 27, June 28,
1999 1998
---------- ----------
Numerator:
Numerator for basic and diluted net
income per share - income available to
common stockholders $ 51,465 $ 43,565
========== ==========
Denominator:
Denominator for basic net income per
share - weighted averages shares 166,661 158,716
Effect of dilutive securities:
Outstanding options 6,316 7,240
---------- ----------
Denominator for diluted net income per
share - adjusted weighted average shares 172,977 165,956
========== ==========
Basic net income per share $ 0.31 $ 0.27
========== ==========
Diluted net income per share $ 0.30 $ 0.26
========== ==========
The computation of diluted net income per share for the three months ended
June 27, 1999 and June 28, 1998 excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 6,206,152
shares of DSSG common stock, or 21.587 shares per $1000 note, because the effect
would have been antidilutive.
The following table sets forth the computation of basic and diluted net loss per
share for HDDG:
(In thousands, except per share data) Three Months Ended
June 27, June 28,
1999 1998
---------- ----------
Numerator:
Numerator for basic and diluted net loss
per share - loss available to common
stockholders $(43,184) $(40,554)
========== ==========
Denominator:
Denominator for basic and diluted net
loss per share - weighted average shares 83,330 79,358
========== ==========
Basic and diluted net loss per share $ (0.52) $ (0.51)
========== ==========
The computation of diluted net loss per share for the three months ended
June 27, 1999 and June 28, 1998 excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 3,103,076
shares of HDDG common stock, or 10.793 shares per $1000 note, because the effect
would have been antidilutive.
Options to purchase 10,413,571 and 10,592,948 shares of HDDG common stock were
outstanding at June 27, 1999 and June 28, 1998, respectively. However, the
corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for the three months ended June 27,
1999 and June 28, 1998, because the effect would have been antidilutive.
6
<PAGE>
5. Common Stock Repurchase
In May 1999, the Board of Directors authorized the Company to repurchase a
combined total of up to $200 million of Quantum's common stocks through the
open market from time to time. In part, the intent of the repurchase is to
offset the dilutive impact of the shares to be issued to complete acquisition
of Meridian Data, Inc.("Meridian"). At June 27, 1999, the Company had
repurchased 3.9 million shares of Quantum common stock for approximately $84
million.
6. Litigation
The Company and certain of its current and former officers and directors were
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 purported to represent a class of all
persons who purchased the Company's common stock between February 26, 1996, and
June 13, 1996. The complaints alleged that the defendants violated various
federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about the Company, and that
individual defendants sold shares of the Company's stock based on material
nonpublic information.
Following a hearing on plaintiff's appeal of the District Court's dismissal with
prejudice of plaintiff's amended complaint in the federal class action on May
13, 1999, and prior to a ruling on the appeal, the plaintiff agreed to dismiss
with prejudice the state and federal class action lawsuits. Pursuant to a
letter agreement dated May 21, 1999, plaintiff agreed to dismiss the lawsuits
with no financial contribution from the defendants. A stipulation of dismissal
with prejudice was filed in federal court on June 10, 1999, and in state court
on June 17, 1999. Each side agreed to bear its own costs and fees.
Certain of the Company's current and former officers and directors were also
named as defendants in a derivative lawsuit, which was filed on November 8,
1996, in the Superior Court of Santa Clara County. The derivative complaint was
based on factual allegations substantially similar to those alleged in the
class-action lawsuits. Defendants' demurrer to the derivative complaint was
sustained without prejudice on April 14, 1997. Plaintiffs did not file an
amended complaint. On August 7, 1997, the Court issued an order of dismissal
and entered final judgment dismissing the complaint.
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied many of these patents before and, of the patents it has
studied, believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not yet had time to make a complete study of all
the patents asserted by Papst and there can be no assurance that the Company has
not infringed these or other patents owned by Papst. The final results of this
litigation, as with any litigation, are uncertain. In addition, the costs of
engaging in litigation with Papst will be substantial.
7
<PAGE>
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.
7. Meridian Acquisition
In May 1999, the Company announced a definitive agreement to acquire Meridian,
pending approval of Meridian's stockholders and certain other closing
conditions. Meridian is a developer and manufacturer of network attached storage
solutions utilizing both conventional hard disk drive and optical disk
technologies for the PC local area network environment.
Under the terms of the proposed agreement, Meridian's stockholders will receive
both DSSG stock and HDDG stock. The acquisition is expected to be completed by
the end of September 1999. Each outstanding share of Meridian's common stock
will be converted into 0.489 of a share of DSSG stock and 0.2445 of a share of
HDDG stock, subject to adjustment based on the trading range of DSSG stock and
HDDG stock prior to the completion of the acquisition. In addition, under the
terms of the proposed transaction, all Meridian stock options will be assumed by
the Company. The acquisition will be accounted for as a purchase, and the
Company expects to recognize a charge for purchased in-process research and
development upon closing of the acquisition.
Meridian had revenue of $8 million and $18 million, and a net loss of $6 million
and $13 million for the six months ended June 30, 1999, and the year ended
December 31, 1998, respectively.
8. Comprehensive Income
Accumulated other comprehensive income (loss) on the condensed consolidated
balance sheets consists of foreign currency translation adjustments. Total
comprehensive income for the three months ended June 27, 1999 and June 28, 1998,
is presented in the following table:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
June 27, June 28,
1999 1998
--------- --------
<S> <C> <C>
Net income $8,281 $ 3,010
Other comprehensive loss -
foreign currency translation
adjustments (920) (1,005)
------ -------
Comprehensive income $7,361 $ 2,005
====== =======
</TABLE>
8
<PAGE>
9. Business Segment Information
Quantum Corporation's reportable segments are its two business groups, the Hard
Disk Drive group and the DLT & Storage Systems group, as further described in
their separate financial statements. The Hard Disk Drive group consists of
desktop and high-end hard disk drives. The DLT & Storage Systems group consists
of DLTtape(TM) drives and media, autoloaders and libraries, and solid state
storage systems. The Company directly markets its products to computer
manufacturers and through a broad range of distributors, resellers, and systems
integrators.
The Company evaluates segment performance based on net profit or loss not
including non-recurring gains or losses. Segment assets include those items that
can be specifically identified with or reasonably allocated to a particular
segment. Results for the Company's reportable segments for the three months
ended June 27, 1999 and June 28, 1998 are presented in the following table:
<TABLE>
<CAPTION>
(In millions) Three Months Ended
June 27, 1999 June 28, 1998
--------------- ---------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 752 $ 331 $1,083 $ 847 $256 $1,103
Segment profit
(loss) (43) 51 8 (41) 44 3
Segment assets 1,332 1,009 2,341 1,507 646 2,153
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 under Trends and Uncertainties relating to the DLT and Storage Systems
group and Trends and Uncertainties relating to the Hard Disk Drive group.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Business Description
Quantum operates its business through two separate business groups: the DLT and
Storage Systems group ("DSSG") and the Hard Disk Drive group ("HDDG") as
described in their respective sections of this report.
Recent Developments
In May 1999, we announced a definitive agreement to acquire Meridian Data, Inc.
Meridian is a developer and manufacturer of network attached storage solutions
utilizing both conventional hard disk drive and optical disk technologies for
the PC local area network environment. The closing of this acquisition is
subject to approval of Meridian's stockholders and certain other closing
conditions. For additional information on the terms and conditions of the
Meridian acquisition, see "--Liquidity and Capital Resources."
10
<PAGE>
Results of Operations
Revenue. Revenue in the three months ended June 27, 1999 was $1.083 billion,
compared to $1.103 billion in the three months ended June 28, 1998.
The three months ended June 27, 1999 reflected increased revenue from sales of
DLTtape drives, tape libraries, and increased DLTtape media royalties, offset by
lower revenue from sales of desktop and high-end hard disk drives. Revenue from
tape libraries and media royalties reached a record high in the quarter. The
increase in DLTtape drive revenue reflected an increase in shipments, partially
offset by a decline in the average unit price. The increase in tape library
revenue reflected an increase in shipments of tape libraries and the acquisition
of ATL Products, Inc. in September, 1998. The increase in DLTtape media
royalties reflected an increase in sales of DLTtape media cartridges at licensed
media manufacturers for which DSSG earns a royalty fee. The increase in DLTtape
media cartridges reflects sales of cartridges for use in both new DLTtape drives
and to meet the ongoing new media needs of the installed based of DLTtape
drives that remain in use.
While shipments of desktop hard disk drives increased from the first quarter of
fiscal year 1999, intense competitive pricing pressures resulted in
significantly lower average unit prices and reduced desktop hard disk drive
revenue. Shipments of high-end hard disk drives were flat from the first
quarter of fiscal year 1999 as HDDG transitioned to new high-end products,
while revenue declined reflecting reduced average unit prices.
Sales to our top five customers in the three months ended June 27, 1999
represented 42% of revenue, compared to 46% of revenue in the three months
ended June 28,1998. These amounts reflected a retroactive combination of the
sales to Compaq Computer, Inc. and Digital Equipment Corporation as a result
of their merger in June 1998. Sales to Hewlett-Packard Company were 14% of
revenue in the three months ended June 27, 1999 compared to 15% of revenue in
the three months ended June 28, 1998. Sales to Compaq were 12% of revenue in
the three months ended June 27, 1999 compared to 17% of revenue in the three
months ended June 28, 1998, including sales to Digital Equipment.
Sales to computer equipment manufacturers and distribution channel customers
were 59% and 35% of revenue, respectively, in the three months ended June 27,
1999, compared to 63% and 35% of revenue, respectively, in the three months
ended June 28, 1998. The remaining revenue in the three months ended June 28,
1998 represented media royalty revenue and in the three months ended June 27,
1999, represented media royalty revenue and sales to value added resellers.
Gross Margin Rate. The gross margin rate in the three months ended June 27,
1999, increased to 16.6% from 15.1% in the three months ended June 28, 1998.
The 1.5 percentage point increase reflected increased revenues from DLTtape
drives, storage systems and DLTtape media royalties which have significantly
higher margins than Quantum's other products. This was partially offset by the
decline in gross margins earned on desktop hard disk drives as a result of
intense competitive pricing pressures. We expect to experience continued gross
margin pressure with respect to desktop hard disk drive products through at
least the second quarter of fiscal year 2000. As a result of these conditions,
the Company's Hard Disk Drive group is currently examining a wide variety of
measures to reduce costs in its business model.
Research and Development Expenses. In the three months ended June 27, 1999,
research and development expenses were $90 million, or 8.3% of revenue, compared
to $84 million, or 7.6% of revenue, in the three months ended June 28, 1998.
The increase in research and development expenses reflected the consolidation of
ATL's expenses which were not included in the prior year period with the
acquisition occurring on September 28, 1998 and higher research and development
expenses related to new tape drive products and other new information storage
products and technologies, including Super DLTtape(TM) technology. We expect
the amount of research and development expenses to increase in the second
quarter of fiscal year 2000.
11
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses in the three months
ended June 27, 1999, were $53 million, or 4.9% of revenue, compared to $38
million, or 3.5% of revenue, in the three months ended June 28, 1998. The
increase in sales and marketing expenses reflected the consolidation of ATL's
expenses which were not included in the prior year period with the acquisition
occurring on September 28, 1998 and an increase in marketing and advertising
costs associated with DLTtape products. We expect the amount of sales and
marketing expenses to increase in the second quarter of fiscal year 2000.
General and Administrative Expenses. General and administrative expenses in the
three months ended June 27, 1999, were $29 million, or 2.7% of revenue, compared
to $17 million, or 1.6% of revenue, in the three months ended June 28, 1998. The
increase in general and administrative expenses reflected the expansion of
DSSG's infrastructure to support increased revenue and earnings growth, the
consolidation of ATL's expenses which were not included in the prior year period
with the acquisition occurring on September 28, 1998, the deferral of certain
programs in the first quarter of fiscal year 1999 and the implementation of a
new HDDG quality program reflected in the first quarter of fiscal year 2000.
Interest and Other Income/Expense. Net interest and other income and expense in
the three months ended June 27, 1999 was $5 million income, compared to $2
million income in the three months ended June 28, 1998. The increase reflected
a $2.6 million gain on the sale of an equity investment.
Loss from Investee. The loss from investee reflected our 49% equity share in
the operating losses of our recording heads joint venture with Matsushita-
Kotobuki Electronics Industries, Ltd., which was dissolved in the third quarter
of fiscal year 1999. Our share of the loss in the joint venture for the three
months ended June 28, 1998, was $24 million.
Income Taxes. Our effective tax rate for the three months ended June 27, 1999,
was 33%, compared to 30% for the three months ended June 28, 1998. The increase
in the effective tax rate reflected the increased contribution of DLTtape
product sales to operating results, which are primarily taxed at standard U.S.
corporate tax rates.
Meridian - Pending Acquisition. We expect to recognize a charge for acquired
in-process research and development upon closing of the acquisition of
Meridian, currently expected to occur by the end of September 1999. In
addition to the research and development charge, the acquisition is expected
to have a slightly negative impact on our results of operations in fiscal year
2000, primarily from the amortization of intangible assets and goodwill.
12
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $683 million at June 27,
1999 compared to $797 million at March 31, 1999. We used cash to purchase $84
million of treasury stock, as discussed below. Other uses of cash were a
reduction in accounts payable and investment in property and equipment. Sources
of cash were a reduction in accounts receivable and inventory, and the issuance
of common stock.
In May 1999, the Board of Directors authorized us to repurchase a combined
total of up to $200 million of Quantum's common stocks through the open market
from time to time. In part, the intent of the repurchase is to offset the
dilutive impact of the shares to be issued to complete the acquisition of
Meridian. At June 27, 1999, we had repurchased 3.9 million shares of Quantum
common stock for approximately $84 million.
We expect to spend approximately $155 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the disk drive and tape drive businesses, research and development, and general
corporate operations.
We believe that our existing capital resources, including the credit facility
and any cash generated from operations, will be sufficient to meet all currently
planned expenditures and sustain operations for the next 12 months. However,
this belief assumes that operating results and cash flow from operations will
meet our expectations.
In May 1999, we announced a definitive agreement to acquire Meridian Data, Inc.,
pending approval of Meridian's stockholders and certain other closing
conditions. Meridian is a developer and manufacturer of network attached storage
solutions utilizing both conventional hard disk drive and optical disk
technologies for the PC local area network environment.
Under the terms of the proposed agreement, Meridian's stockholders will receive
both DSSG stock and HDDG stock. The acquisition is expected to be completed by
the end of September 1999. Each outstanding share of Meridian's common stock
will be converted into 0.489 of a share of DSSG stock and 0.2445 of a share of
HDDG stock, subject to adjustment based on the trading range of DSSG stock and
HDDG stock prior to the completion of the acquisition. In addition, under the
terms of the proposed transaction, all Meridian stock options will be assumed by
us. The acquisition will be accounted for as a purchase, and we expect to
recognize a charge for purchased in-process research and development upon
closing of the acquisition.
Meridian had revenue of $8 million and $18 million in the six months ended June
30, 1999, and the year ended December 31, 1998, respectively. At June 30, 1999,
Meridian had total cash and marketable securities of $12 million. At December
31, 1998, Meridian had a net operating loss carryforward for U.S. federal income
tax purposes of approximately $32 million.
13
<PAGE>
Year 2000
The year 2000 computer issue refers to the possibility that computer systems may
not be able to distinguish the year 2000 from the year 1900. Two other date-
related issues may contribute to the year 2000 problem: (1) certain systems have
associated special values with date fields (for example, 9/9/99), and (2) these
same systems may fail to recognize that year 2000 is a leap year. Because of the
pervasive use and dependency on computer technology in all facets of modern
commerce, year 2000 issues present a potentially vast risk to companies,
including us. For example, there are potential disruptions or failures of our
products and operations and of the products and operations of our suppliers,
customers and service providers. Because the year 2000 issue can impact us
indirectly through our suppliers, service providers and customers, an assessment
and prediction of the impact of the year 2000 issue on our company is difficult.
We are in the process of implementing plans to address year 2000 issues both
within and outside Quantum. In addressing the year 2000 issues and risks, we
have focused our efforts on our enterprise-wide and departmental operations,
products, critical suppliers (including service providers) and key customers.
Within Quantum, these efforts are intended to encompass all major categories of
computer systems and operating equipment used by us, including those utilized in
manufacturing, research and development, sales, finance and human resources. To
ensure year 2000 compliance for all of our systems, we have adopted an approach
based on the U.S. General Accounting Office Year 2000 Assessment Guide. The
approach utilizes a multi-phased model, with major phases consisting of
inventory, assessment, resolution, testing and certification:
. In the inventory phase we are listing and reviewing for criticality and risk
all hardware, software, equipment, infrastructure, and desktop tools and
applications.
. In the assessment phase, we are determining whether we are converting,
replacing or eliminating the impacted system or application.
. Under stringent procedures in the testing phase, we are validating the system
and application on its functionality to perform seamlessly in the year 2000.
. In the certification phase, we are documenting and verifying all test
results.
Within each of the major categories of computer systems and operating equipment,
we prioritize our year 2000 issues and risks on three levels:
. The critical level reflects short-term failure which would have a severe
impact on our business operations and result in significant downtime or a
manual effort to perform the required functions. Without this system or
application, our business could not function.
. Key level applications or systems, although required by us, are not
mandatory for business survival. We do not expect the failure of key level
applications to cause significant disruption
14
<PAGE>
to our operations. We can defer the work or devise manual back-up procedures to
handle the interim needs.
. Active level applications, although currently in use, are not required for
our normal operations. We do not expect their failure to result in any
disruption to our business.
We have made significant progress in our preparedness for year 2000. We have
assessed and remedied all critical areas of our own operations, which include
information technology, operating equipment with embedded chips or software and
products. We have also certified readiness of these critical areas. In addition,
we have completed the assessment, resolution, testing, and certification of
critical and key third parties.
We are currently addressing key level areas of our own operations, which
includes information technology, operating equipment with embedded chips or
software and products.
. The inventory phase is complete.
. The assessment phase is complete.
. The resolution phase is 60% complete, with an expected completion date of
August 31, 1999.
. The testing and certification phases are expected to be complete by August
31, 1999.
We are also developing contingency plans, based in part on the assessment
results. Development of contingency plans is expected to be complete by
September 30, 1999.
Our failure to complete critical corrective actions or implement viable
contingency plans in a timely manner could have a material adverse effect on our
business, financial condition and operating results.
As indicated above, our risk assessment includes understanding the year 2000
readiness of our suppliers. Our risk assessment process associated with
suppliers includes soliciting and analyzing responses to questionnaires
distributed to these suppliers, as well as onsite interviews with certain
critical suppliers. Critical suppliers include a number of suppliers with
operations in China, India and Mexico that are our sole source of certain
components for tape drives. We have received 100% of responses from an initial
survey sent to suppliers and have received 100% of responses from a second
follow-up survey sent to those identified as critical suppliers. To further
assess year 2000 readiness, we have conducted on-site visits of our most
critical suppliers.
The year 2000 readiness of Matsushita-Kotobuki, our hard disk drive
manufacturing partner, is of particular importance. Matsushita-Kotobuki
implemented a year 2000 compliance project plan in April 1998, similar in
content and structure to that employed by us. We have been informed that all of
Matsushita-Kotobuki's critical processes, applications and hardware have been
tested and certified for year 2000 compliance. Also, we understand that all key
and active processes, applications and hardware are certified as year 2000
compliant. We have performed limited on-site evaluations of Matsushita-Kotobuki
operations in Japan, Singapore and Ireland. Additionally, we continue to be in
15
<PAGE>
close contact with Matsushita-Kotobuki and we understand that they will keep us
updated of any new developments concerning their year 2000 readiness. Our
reliance on Matsushita-Kotobuki and other critical suppliers, and therefore, on
the proper functioning of their information systems and software, means that any
failure by these critical suppliers to address year 2000 issues could have a
material adverse impact on our business, financial condition and results of
operations. Based on the level of risk assessed of critical suppliers, we have
developed contingency plans. However, we do not currently anticipate any
significant disruption of service from these critical suppliers.
We are also working closely with key customers to evaluate their readiness for
year 2000. The ability of customers to deal with year 2000 issues may affect
their operations and their ability to order and pay for products. We do not
currently anticipate that customer order patterns would disrupt our normal
course of business.
We believe that third party factors, rather than our internal systems and
applications, would be the cause of our most reasonably likely worst case
scenario. For example, since we deal heavily with third parties to manufacture
and transport products and services, a failure of third party systems could
result in a disruption of service, which could result in delays in shipments of
our products. For internal systems, we are developing workarounds, which may
involve providing manual or other automated processes in lieu of normal
procedures.
Our products are inherently year 2000 compliant; our families of disk drive
products have no internal date clocks, and therefore are not impacted by the
year 2000 problem. Our DLT tape drives use a four-character string to describe
the year and will not be affected by the year 2000 problem. Additionally, we do
not need to make any modifications to any disk or tape drive's internal firmware
to accommodate the transition to the year 2000. We consider a disk drive or tape
product to be year 2000 compliant when used in accordance with our product
information. That product will not generate an error in data related to the year
change from December 31, 1999 to January 1, 2000. Furthermore, year 2000
compliant products will correctly handle leap years, including leap years
beginning January 1, 2000 and thereafter. However, the assessment of whether a
complete computer system operates correctly depends on factors such as the
operating system, basic input/output systems, software and components, which
companies other than Quantum provide.
Costs incurred to date in addressing the year 2000 issue have been approximately
$10 million, with $6.7 million and $3.3 million of this cost in the Hard Disk
Drive group and the DLT & Storage Systems group, respectively. Based on
assessment and resolution projects underway, we currently expect that the total
cost of addressing the year 2000 issue, including both incremental spending and
redeployed resources, will not exceed $15 million, with $9.5 million and $5.5
million of this cost in the Hard Disk Drive group and the DLT & Storage Systems
group, respectively. However, as the year 2000 efforts continue, we may use
third-party vendors or service providers as necessary to assure that we
successfully meet program milestones. The use of these third-party vendors or
service providers may increase our expected costs. The costs related to the
year 2000 effort in fiscal year 2000 are expected to represent approximately 10%
of our total information technology budget for the fiscal year. We have not
deferred any significant system projects due to the year 2000 program. As our
risk assessment and correction activities continue, these costs may change. In
addition, our total cost estimate does not include potential costs related to
any customer or other claims resulting from our failure to adequately correct
year 2000 issues.
16
<PAGE>
Based on assessment and remediation completed to date, we do not expect any
significant disruption to our operations or operating results as a result of
year 2000 issues. We are taking all steps we believe are appropriate to identify
and resolve any year 2000 issues; however, the extent such issues may affect us
is uncertain. We cannot assure you that we will be able to assess, identify and
correct year 2000 issues in a timely or successful manner. We also cannot assure
you that our suppliers, service providers, customers or other third parties will
be year 2000 compliant.
The foregoing statements regarding our year 2000 plans and our expectations for
resolving these issues and the costs associated therewith are forward-looking
statements and actual results could vary. The severity of the problems to be
resolved within Quantum, the year 2000 issues affecting our suppliers and
service providers, and the costs associated with third party consultants and
software necessary to address these issues could affect our success in
addressing year 2000 issues.
Euro Impact
We believe that the adoption of a single currency, the Euro, by eleven European
countries will not materially affect our business, information systems or
consolidated financial position, operating results or cash flows.
Market Risk Disclosures
For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual Report
on Form 10-K for the year ended March 31, 1999.
17
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1999 1998
----------------- ------------------
<S> <C> <C>
Product revenue $291,307 $236,659
Royalty revenue 39,437 19,043
-------- --------
Total revenue 330,744 255,702
Cost of revenue 179,094 142,028
-------- --------
Gross profit 151,650 113,674
Operating expenses:
Research and development 27,725 21,951
Sales and marketing 25,390 12,767
General and administrative 14,399 6,447
-------- --------
67,514 41,165
Income from operations 84,136 72,509
Other income (expense):
Interest income and other, net 6,483 4,365
Interest expense (4,844) (4,265)
-------- --------
1,639 100
Income before income taxes 85,775 72,609
Income tax provision 34,310 29,044
-------- --------
Net income $ 51,465 $ 43,565
======== ========
Net income per share:
Basic $0.31 $0.27
Diluted $0.30 $0.26
Weighted-average common shares:
Basic 166,661 158,716
Diluted 172,977 165,956
</TABLE>
See accompanying notes to condensed combined financial statements.
18
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 27, March 31,
1999 1999
---------- ----------
<S> <C> <C>
(unaudited)
Assets
- --------
Current assets:
Cash and cash equivalents $ 267,030 $ 272,643
Accounts receivable, net of allowance for
doubtful accounts of $3,274 and $2,507 245,187 254,228
Inventories 138,082 124,462
Deferred taxes 35,594 35,594
Other current assets 17,713 8,434
--------- ----------
Total current assets 703,606 695,361
Property and equipment, net of accumulated
depreciation of $64,832 and $54,630 77,918 73,122
Intangibles, net 215,006 220,368
Other assets 12,625 24,792
---------- ----------
$1,009,155 $1,013,643
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 91,186 $ 64,025
Accrued warranty 43,445 37,988
Accrued compensation 22,296 22,557
Current portion of long-term debt 699 683
Other accrued liabilities 27,541 32,850
---------- ----------
Total current liabilities 185,167 158,103
Deferred taxes 27,355 27,355
Long-term debt 33,460 37,974
Convertible subordinated debt 191,667 191,667
Group equity 571,506 598,544
---------- ----------
$1,009,155 $1,013,643
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
19
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1999 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 51,465 $ 43,565
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 7,486 5,764
Amortization 5,710 2,713
Compensation related to stock plans 640 1,369
Changes in assets and liabilities:
Accounts receivable 9,041 (15,225)
Inventories (13,620) (4,163)
Accounts payable 27,161 4,047
Accrued warranty 5,457 1,891
Other assets and liabilities (3,554) (1,391)
-------- ---------
Net cash provided by operating activities 89,786 38,570
-------- ---------
Cash flows from investing activities:
Investment in property and equipment (10,691) (8,598)
-------- ---------
Net cash used in investing activities (10,691) (8,598)
-------- ---------
Cash flows from financing activities:
Purchase of treasury stock (84,239) (199,843)
Principal payments on long-term credit facilities (4,498) (150)
Proceeds from issuance of common stock 4,029 3,517
-------- ---------
Net cash used in financing activities (84,708) (196,476)
-------- ---------
Decrease in cash and cash equivalents (5,613) (166,504)
Cash and cash equivalents at beginning of period 272,643 388,910
-------- ---------
Cash and cash equivalents at end of period $267,030 $ 222,406
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 808 $ 632
Income taxes, net of (refunds) $ 1,500 $ (27,754)
</TABLE>
See accompanying notes to condensed combined financial statements.
20
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed combined financial statements of the DLT &
Storage Systems group ("DSSG"), together with the condensed combined financial
statements of the Hard Disk Drive group ("HDDG") include all of the accounts in
the condensed consolidated financial statements of Quantum. The separate group
condensed combined financial statements give effect to the accounting policies
applicable with the implementation of the tracking stock proposal. The separate
DSSG and HDDG financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include (i) the historical balance
sheets, results of operations, and cash flows of businesses that comprise each
of the groups, with all significant intragroup transactions and balances
eliminated, (ii) in the case of DSSG's financial statements, corporate assets
and liabilities of Quantum and related transactions identified with DSSG,
including allocated portions of Quantum's debt and selling, general and
administrative costs, and (iii) in the case of HDDG's financial statements,
corporate assets and liabilities of Quantum and related transactions identified
with HDDG, including allocated portions of Quantum's debt and selling, general
and administrative costs.
The condensed combined financial statements of the DLT and Storage Systems Group
provide DSSG stockholders with financial information about the DLT & Storage
Systems group operations. Holders of DSSG stock and HDDG stock are Quantum
stockholders and are subject to all of the risks of an investment in Quantum and
all of Quantum's businesses, assets and liabilities. Quantum retains ownership
and control of all of the assets and operations of each group. Financial
effects arising from one group that affect Quantum's consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
other group's stock. Any net losses of DSSG or HDDG, and dividends or
distributions on, or repurchases of HDDG stock, or repurchases of preferred
stock at a price per share greater than par value, will reduce the funds of
Quantum legally available for payment of dividends on DSSG stock. As a result,
DSSG's condensed combined financial statements should be read in conjunction
with Quantum's condensed consolidated financial statements and HDDG's condensed
combined financial statements. The condensed combined balance sheet as of March
31, 1999 has been derived from the audited financial statements included in Form
S-4 Registration No. 333-75153 filed with the Securities and Exchange
Commission, but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of
21
<PAGE>
the results expected for the full fiscal year. Certain prior period amounts have
been reclassified to conform to the current period's presentation.
2. Inventories
<TABLE>
<CAPTION>
Inventories consisted of the following:
(In thousands)
June 27, March 31,
1999 1999
------------------- -------------------
<S> <C> <C>
Materials and purchased parts $ 64,669 $ 60,138
Work in process 31,638 22,154
Finished goods 41,775 42,170
-------- --------
$138,082 $124,462
======== ========
</TABLE>
3. Net income per share
On July 23, 1999, Quantum's stockholders approved the tracking stock proposal.
Accordingly, the net income per share for the periods presented below have been
calculated in accordance with the Restated Certificate of Incorporation.
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended
June 27, June 28,
1999 1998
-------------- --------------
Numerator:
<S> <C> <C>
Numerator for basic and diluted net income per
share - income available to common stockholders $ 51,465 $ 43,565
============== ==============
Denominator:
Denominator for basic net income per share -
weighted average shares 166,661 158,716
Effect of dilutive securities:
Outstanding options 6,316 7,240
-------------- --------------
Denominator for diluted net income per share -
adjusted weighted average shares 172,977 165,956
============== ==============
Basic net income per share $ 0.31 $ 0.27
============== ==============
Diluted net income per share $ 0.30 $ 0.26
============== ==============
</TABLE>
The computation of diluted net income per share for the three months ended June
27, 1999 and June 28, 1998 excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are
22
<PAGE>
convertible into 6,206,152 shares of DSSG common stock, or 21.587 shares per
$1000 note, because the effect would have been antidilutive.
4. Common Stock Repurchase
In May 1999, the Board of Directors authorized Quantum to repurchase a
combined total of up to $200 million of Quantum's common stocks through the
open market from time to time. In part, the intent of the repurchase is to
offset the dilutive impact of the shares to be issued to complete the
acquisition of Meridian Data, Inc. ("Meridian"). At June 27, 1999, DSSG had
repurchased 3.9 million shares of Quantum common stock for approximately $84
million.
5. Meridian Acquisition
In May 1999, Quantum announced a definitive agreement to acquire Meridian,
pending approval of Meridian's stockholders and certain other closing
conditions. Meridian is a developer and manufacturer of network attached
storage solutions utilizing both conventional hard disk drive and optical disk
technologies for the PC local area network environment.
Under the terms of the proposed agreement, Meridian's stockholders will receive
both DSSG stock and HDDG stock. The acquisition is expected to be completed by
the end of September 1999. Each outstanding share of Meridian's common stock
will be converted into 0.489 of a share of DSSG stock and 0.2445 of a share of
HDDG stock, subject to adjustment based on the trading range of DSSG stock and
HDDG stock prior to the completion of the acquisition. In addition, under the
terms of the proposed transaction, all Meridian stock options will be assumed by
Quantum. The acquisition will be accounted for as a purchase, and DSSG expects
to recognize a charge for purchased in-process research and development upon
closing of the acquisition.
Meridian had revenue of $8 million and $18 million, and net loss of $6 million
and $13 million for the six months ended June 30, 1999, and the year ended
December 31, 1998, respectively.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 under Trends and Uncertainties relating to the DLT and Storage Systems
group. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
Business Overview
The DLT & Storage Systems group ("DSSG") designs, develops, manufactures,
licenses and markets DLTtape drives, DLTtape media cartridges and tape libraries
which are used to back-up large amounts of data stored on network servers.
Digital Linear Tape, or DLTtape, is DSSG's half-inch tape technology that is the
de facto industry standard for data back-up in the mid-range network server
market. DSSG's DLTtape media cartridges are manufactured primarily by licensed
third party manufacturers.
According to International Data Corporation, DSSG was the worldwide revenue
leader for all categories of tape drives used for data storage and back-up in
calendar year 1998. According to Dataquest, DLTtape drives are projected to
have accounted for 24% of total tape drive market revenue in calendar year 1998,
up from 2% in calendar year 1994. DSSG is also a leader in the tape library
market for mid-range network servers.
DSSG's tape libraries serve the entire tape library data storage market from
desktop computers to enterprise class computers. Upon completion of the pending
acquisition of Meridian Data, Inc., DSSG will enter the rapidly emerging market
for network attached storage appliances with products designed to meet the
requirements of entry and workgroup level computing environments where multiple
computer users access shared data files over a local area network.
Historically, DSSG derived revenue from the direct sale of both DLTtape drives
and DLTtape media cartridges. Beginning in 1998, DSSG's licensed third party
DLTtape media manufacturers began selling DLTtape media cartridges. DSSG
receives a royalty fee on DLTtape media cartridges sold by its licensees which,
while resulting in lower revenue than DLTtape media sold directly by DSSG,
generates comparable income from operations. DSSG prefers DLTtape media
cartridge sales to occur through its license model because this minimizes DSSG's
operational risks and expenses and provides a more efficient distribution
channel. DSSG believes that the large installed base of DLTtape drives and its
licensing of DLTtape drives and media cartridges give DSSG a unique competitive
advantage.
24
<PAGE>
Products
The DLT & Storage Systems group's products include:
DLT:
----
. DLTtape drives. DSSG offers three tape drive products--the DLT8000, the
DLT7000 and the DLT4000. The DLT8000 provides a combination of
40 gigabytes(GB) of native capacity (80GB compressed) and a sustained data
transfer rate of 6 megabytes (MB) per second (12MB compressed). The
DLT7000 provides a combination of 35GB of native capacity (70GB
compressed) and a sustained data transfer rate of 5MB per second (10MB
compressed). The DLT4000 provides a combination of 20GB of native capacity
(40GB compressed) and a sustained data transfer rate of 1.5MB per second
(3MB compressed). DSSG expects to introduce a next generation DLTtape
drive in calendar year 1999.
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges are designed and formulated specifically for use with DLTtape
drives. The capacity of a DLTtape media cartridge is up to 40GB (80GB
compressed). DSSG's half-inch tape cartridges take advantage of shorter
wavelength recording schemes to enable read compatibility with future
generations of DLTtape drives such as those based on Super DLTtape
technology.
Storage Systems:
----------------
. Tape libraries. DSSG offers a broad line of automated DLTtape libraries that
support a wide range of back-up and archival needs from workgroup servers to
enterprise-class servers. DSSG's tape libraries range from its tape
autoloaders which accommodate a single DLTtape drive and up to 280GB of
storage capacity to the P3000 series library which features Prism Library
Architecture(TM) and can be configured in multiple units to scale up to
11.4 Terabytes of storage capacity. In addition, DSSG offers WebAdmin(TM),
the industry's first Internet browser-based tape library management
system, allowing system administrators to monitor widely distributed
storage systems at remote locations with point-and-click ease.
. Solid state storage systems. DSSG offers two families of solid state storage
systems that are available in capacities ranging from 134MB to 3.2GB and
have data access times that are up to 15 times faster than magnetic hard
disk drives. Solid state storage systems store data on memory chips rather
than magnetic disks used in standard hard disk drives. Solid state storage
systems function within a computer system as if they were hard disk drives
and enable significantly faster data access times.
25
<PAGE>
Results of Operations
Revenue. Revenue in the three months ended June 27, 1999 was $331 million,
compared to $256 million in the three months ended June 28, 1998, an increase of
29%. The increase in revenue reflected increased revenue from sales of DLTtape
drives, tape libraries and increased DLTtape media royalties. Revenue from tape
libraries and media royalties reached a record high in the quarter. The increase
in DLTtape drive revenue reflected an increase in shipments, partially offset by
a decline in the average unit price. The increase in tape library revenue
reflected an increase in the shipments of tape libraries and the acquisition of
ATL Products, Inc. in September 1998. The increase in DLTtape media royalties
reflected an increase in the sales of DLTtape media cartridges at licensed media
manufacturers for which DSSG earns a royalty fee. The increase in DLTtape media
cartridges reflects sales of cartridges for use in both new DLTtape drives and
to meet the ongoing new media needs of the installed based of DLTtape drives
that remain in use. Sales of DLTtape media continued to shift to licensed media
manufacturers.
The table below summarizes the components of DSSG's revenue in the three months
ended June 27, 1999 and June 28, 1998, respectively:
<TABLE>
<CAPTION>
(in millions) Three Months Ended
June 27, June 28,
1999 1998
---- ----
<S> <C> <C>
DLT products (drives and media) $ 246 $ 221
DLT royalty 39 19
Storage systems 67 16
Intra-group elimination* (22) -
----- -----
Revenue $ 331 $ 256
===== =====
</TABLE>
*Represents intra-group sales of DLTtape drives for incorporation into DSSG's
tape libraries.
Sales to the top five customers in the three months ended June 27, 1999
represented 50% of revenue, compared to 55% of revenue in the three months ended
June 28, 1998. These amounts reflected a retroactive combination of the sales
to Compaq and Digital Equipment as a result of their merger in June 1998. Sales
to Compaq were 21% of revenue in the three months ended June 27, 1999 compared
to 25% of revenue in the three months ended June 28, 1998, including sales to
Digital Equipment. Sales to Hewlett-Packard were 13% of revenue in the three
months ended June 27, 1999 compared to 12% of revenue in the three months ended
June 28, 1998.
Sales to computer equipment manufacturers and distribution channel customers
were 69% and 12% of revenue, respectively, in the three months ended June 27,
1999, compared to 74% and 19% of revenue, respectively, in the three months
ended June 28, 1998. The remaining revenue in the three months ended June 28,
1998 represented media royalty revenue and in the three months ended June 27,
1999, represented media royalty revenue and sales to value-added resellers.
Gross Margin Rate. The gross margin rate in the three months ended June 27,
1999, was 45.9%, compared to 44.5% in the three months ended June 28, 1998. The
1.4 percentage point increase reflected an increase in the proportion of overall
revenue represented by media royalty revenue.
26
<PAGE>
Declines in the gross margin rate earned on DLTtape drives resulting from
price reductions aimed at expanding the overall market for DLTtape drives
partially offset the increase from royalty revenue.
Research and Development Expenses. Research and development expenses in the
three months ended June 27, 1999, were $28 million, or 8.4% of revenue, compared
to $22 million, or 8.6% of revenue, in the three months ended June 28, 1998. The
increase in research and development expenses reflected the combining of ATL's
expenses which were not included in the prior year period with the acquisition
occurring on September 28, 1998 and higher research and development expenses
related to new tape drive products and other new information storage products
and technologies, including Super DLTtape technology.
Sales and Marketing Expenses. Sales and marketing expenses in the three months
ended June 27, 1999, were $25 million, or 7.7% of revenue, compared to $13
million, or 5.0% of revenue in the three months ended June 28, 1998. The
increase in sales and marketing expenses reflected the increased level of sales,
the combining of ATL's expenses which were not included in the prior year period
with the acquisition occurring on September 28, 1998 and an increase in
marketing and advertising costs associated with DLTtape products. DSSG expects
the amount of sales and marketing expenses to increase in the second quarter of
fiscal year 2000.
General and Administrative Expenses. General and administrative expenses in
the three months ended June 27, 1999, were $14 million, or 4.4% of revenue,
compared to $6 million, or 2.5% of revenue, in the three months ended June 28,
1998. The increase in general and administrative expenses reflected expansion of
DSSG's infrastructure to support increased revenue and earnings growth, the
combining of ATL's expenses which were not included in the prior year period
with the acquisition occurring on September 28, 1998 and the amortization of
intangible assets, particularly goodwill.
Interest and Other Income/Expense. Net interest and other income and expense
in the three months ended June 27, 1999 was $1.6 million income, compared to
$0.1 million income in the three months ended June 28, 1998. The increase
reflected a $2.6 million gain on the sale of an equity investment, partially
offset by reduced interest income and increased interest expense.
Income Taxes. DSSG's effective tax rate for the three months ended June 27,
1999, and June 28, 1998, was 40%.
Meridian - Pending Acquisition. DSSG expects to recognize a charge for acquired
in-process research and development upon closing of the acquisition of Meridian,
currently expected to occur by the end of September 1999. In addition to the
research and development charge, the acquisition is expected to have a slightly
negative impact on DSSG's results of operations in fiscal year 2000, primarily
from the amortization of intangible assets and goodwill.
27
<PAGE>
Liquidity and Capital Resources
Operating Activities. DSSG generated cash from operations of $90 million in
the three months ended June 27, 1999 compared to $39 million in the three months
ended June 28, 1998. The increase primarily reflected higher net income and
collection of accounts receivable.
Investing Activities. Investments in the three months ended June 27, 1999 were
$11 million, which consisted of investments in property and equipment.
Investments in the three months ended June 28, 1998 totaled $9 million.
Financing Activities. At June 27, 1999, and March 31, 1999, Quantum's debt
allocated to DSSG was $226 million and $230 million, respectively. Debt
allocated to DSSG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At June
27, 1999, Quantum had total debt of $339 million with an average interest rate
of 8.4%. As discussed below, in the three months ended June 27, 1999, DSSG used
cash to purchase $84 million of treasury stock.
In May 1999, the Board of Directors authorized Quantum to repurchase a
combined total of up to $200 million of Quantum's common stocks through the
open market from time to time. In part, the intent of the repurchase is to
offset the dilutive impact of the shares to be issued to complete the
acquisition of Meridian. At June 27, 1999, DSSG had repurchased 3.9 million
shares of Quantum common stock for approximately $84 million.
DSSG expects to spend approximately $70 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the expansion of the DLTtape product line, production of Super DLTtape products
and DSSG's general infrastructure.
DSSG expects its cash flow from operations, together with available financing
sources, will be sufficient to meet all currently planned expenditures and
sustain operations for the next 12 months. However, this belief assumes that
operating results and cash flow from operations will meet our expectations.
In May 1999, Quantum announced a definitive agreement to acquire Meridian Data,
Inc., pending approval of Meridian's stockholders and certain other closing
conditions. Meridian is a developer and manufacturer of network attached storage
solutions utilizing both conventional hard disk drive and optical disk
technologies for the PC local area network environment.
Under the terms of the proposed agreement, Meridian's stockholders will receive
both DSSG stock and HDDG stock. The acquisition is expected to be completed by
the end of September 1999. Each outstanding share of Meridian's common stock
will be converted into 0.489 of a share of DSSG stock and 0.2445 of a share of
HDDG stock, subject to adjustment based on the trading range of DSSG stock and
HDDG stock prior to the completion of the acquisition. In addition, under the
terms of the proposed transaction, all Meridian stock options will be assumed by
Quantum. The acquisition will be accounted for as a purchase, and DSSG expects
to recognize a charge for purchased in-process research and development upon
closing of the acquisition.
28
<PAGE>
Meridian had revenue of $8 million and $18 million in the six months ended June
30, 1999, and the year ended December 31, 1998, respectively. At June 30, 1999,
Meridian had total cash and marketable securities of $12 million. At December
31, 1998, Meridian had a net operating loss carryforward for U.S. federal income
tax purposes of approximately $32 million.
Trends and Uncertainties Relating to the DLT & Storage Systems Group
Holders of DSSG stock remain stockholders of one company and, therefore,
financial effects on HDDG could adversely affect DSSG
Holders of DSSG stock and HDDG stock are stockholders of a single company. DSSG
and HDDG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of our businesses, assets and liabilities. The issuance of the DSSG stock and
the HDDG stock and the allocation of assets and liabilities and stockholders'
equity between DSSG and HDDG did not result in a distribution or spin-off to
stockholders of any of our assets or liabilities and did not affect ownership of
our assets or responsibility for our liabilities or those of our subsidiaries.
The assets we attributed to one group could be subject to the liabilities of the
other group, whether such liabilities arise from lawsuits, contracts or
indebtedness that we attributed to the other group. If we are unable to satisfy
one group's liabilities out of the assets we attributed to it, we may be
required to satisfy those liabilities with assets we have attributed to the
other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
tracking stock relating to the other group. In addition, net losses of either
group and dividends and distributions on, or repurchases of, either class of
tracking stock or repurchases of preferred stock at a price per share greater
than par value will reduce the funds we can pay on each class of tracking stock
under Delaware law. For these reasons, you should read our consolidated
financial information with the financial information we provide for each group.
Competition may increase in the tape drive market as a result of large
competitors introducing tape drive products based on new technology standards
DSSG competes with companies that develop, manufacture, market and sell tape
drive products. DSSG's principal competitors include Exabyte Corporation,
Hewlett-Packard, Seagate Technology, Inc., Sony Corporation and StorageTek.
These competitors are aggressively trying to develop new tape drive technologies
that compete more successfully with DLTtape technology. Hewlett-Packard, IBM and
Seagate have formed a consortium to develop new linear tape drive products. DSSG
expects products based on this developing technology standard to target the
high-capacity data back-up market and to compete with DSSG's products based on
Super DLTtape technology. Such competition could have a material adverse impact
on DSSG's operating results.
29
<PAGE>
DSSG's operating results depend on new product introductions which may not be
successful
To compete effectively, DSSG must improve existing products and introduce new
products, such as products based on Super DLTtape technology and network
attached storage appliances. DSSG cannot assure you that:
. it will introduce any of these new products in the time frame DSSG
currently forecasts;
. it will not experience technical or other difficulties that could
prevent or delay the introduction of these new products;
. its new products will achieve market acceptance;
. its new products will be successfully or timely qualified with DSSG's
customers by meeting customer performance and quality specifications.
A successful and timely customer qualification must occur before
customers will place large product orders; or
. it will achieve high volume production of these new products in a
timely manner, if at all.
This risk is magnified because DSSG expects technological changes, customer
requirements and increasing competition could result in declining sales and
gross margins on its existing products.
Reliance on a limited number third-party suppliers could result in significantly
increased costs and delays in the event these suppliers experience shortages or
quality problems
DSSG depends on a limited number of suppliers for components and sub-assemblies,
including recording heads, media cartridges and integrated circuits, all of
which are essential to the manufacture of DLTtape drives and tape libraries.
DSSG currently purchases the DLTtape media cartridges it sells primarily from
Fuji Photo Film Co., Ltd. and Hitachi Maxell, Ltd. DSSG cannot assure you that
Fuji or Maxell will continue to supply adequate high quality media cartridges in
the future. If component shortages occur, or if DSSG experiences quality
problems with component suppliers, shipments of products could be significantly
delayed and/or costs significantly increased. In addition, DSSG qualifies only a
single source for many components and sub-assemblies, which magnifies the risk
of future shortages.
DSSG's sole supplier of tape heads is located in China and political
instability, trade restrictions or currency fluctuations in China could have an
adverse impact on DSSG's operating results.
DSSG's sole supplier of tape heads is located in China and political
instability, trade restrictions, changes in tariff or freight rates or currency
fluctuations in China could result in increased costs, delays in shipment and
could have an adverse impact on DSSG's operating results.
30
<PAGE>
DSSG's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
DSSG's quarterly operating results have fluctuated significantly in the past and
could fluctuate significantly in the future. Quarterly operating results could
be adversely affected by:
. an inadequate supply of DLTtape media cartridges;
. customers canceling, deferring or rescheduling significant orders as
a result of excess inventory levels or other factors;
. declines in network server demand; or
. failure to complete shipments in the last month of a quarter during
which a substantial portion of DSSG's products are typically shipped.
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments
DSSG's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and DSSG's relationships with its
customers are terminable at will. The loss of, or a significant change in demand
from, one or more key customers could materially adversely impact DSSG's
operating results.
Unpredictable end-user demand may cause excess or insufficient inventories which
could result in inventory write-downs or losses and an adverse impact on DSSG's
customer relationships
Unpredictable end-user demand, combined with the computer equipment manufacturer
trend toward carrying minimal inventory levels, increases the risk that DSSG
will manufacture and custom configure too much or too little inventory for
particular customers. Significant excess inventory could result in inventory
write-downs and losses while inventory shortages could adversely impact DSSG's
relationship with its customers, either of which could adversely impact DSSG's
operating results.
DSSG does not control licensee pricing or licensee sales of DLTtape media
cartridges and as a result DSSG's royalty revenue may decline
DSSG receives a royalty fee based on sales of DLTtape media cartridges by Fuji
and Maxell. Under DSSG's license agreements with Fuji and Maxell, each of the
licensees determine the pricing and number of units of DLTtape media cartridges
sold by it. As a result, DSSG's royalty revenue will vary depending upon the
level of sales and prices set by Fuji and Maxell. In addition, lower licensee
31
<PAGE>
pricing could require DSSG to lower its prices on direct sales of DLTtape media
cartridges which would adversely impact DSSG's margins for this product.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege DSSG's infringement of and need for a
license under their patented or other proprietary technology. Adverse resolution
of any third party infringement claim could subject DSSG to substantial
liabilities and require it to refrain from manufacturing and selling certain
products. In addition, the costs incurred in intellectual property litigation
can be substantial, regardless of the outcome.
32
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1999 1998
----------------- ------------------
<S> <C> <C>
Revenue $752,491 $847,321
Cost of revenue 724,222 794,622
-------- --------
Gross profit 28,269 52,699
Operating expenses:
Research and development 62,708 62,347
Sales and marketing 27,831 25,570
General and administrative 14,745 10,954
-------- --------
105,284 98,871
Loss from operations (77,015) (46,172)
Other income (expense):
Interest income and other, net 5,964 4,338
Interest expense (2,364) (2,237)
Loss from investee - (24,237)
-------- --------
3,600 (22,136)
Loss before income taxes (73,415) (68,308)
Income tax benefit (30,231) (27,754)
-------- --------
Net loss $(43,184) $(40,554)
======== ========
Net loss per share:
Basic $(0.52) $(0.51)
Diluted $(0.52) $(0.51)
Weighted-average common shares:
Basic 83,330 79,358
Diluted 83,330 79,358
</TABLE>
See accompanying notes to condensed combined financial statements.
33
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 27, March 31,
1999 1999
------------------- ------------------
<S> <C> <C>
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 382,395 $ 499,725
Marketable securities 33,426 24,426
Accounts receivable, net of allowance for
doubtful accounts of $8,852 and $9,623 393,791 392,329
Inventories 123,837 147,524
Deferred taxes 72,107 72,107
Other current assets 96,222 96,401
---------- ----------
Total current assets 1,101,778 1,232,512
Property and equipment, net of accumulated
depreciation of $246,965 and $236,987 192,001 198,806
Intangibles, net 4,378 5,199
Other assets 33,369 33,436
---------- ----------
$1,331,526 $1,469,953
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 260,208 $ 342,344
Accrued warranty 36,400 38,917
Accrued compensation 42,202 51,048
Income taxes payable 25,331 33,411
Current portion of long-term debt 349 341
Other accrued liabilities 65,072 57,841
---------- ----------
Total current liabilities 429,562 523,902
Deferred taxes 39,391 39,985
Long-term debt 16,730 18,987
Convertible subordinated debt 95,833 95,833
Group equity 750,010 791,246
---------- ----------
$1,331,526 $1,469,953
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
34
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1999 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (43,184) $(40,554)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Loss from investee - 24,237
Depreciation 16,225 15,073
Amortization 978 1,274
Deferred income taxes (594) (607)
Compensation related to stock plans 320 684
Changes in assets and liabilities:
Accounts receivable (1,462) 90,182
Inventories 23,687 1,372
Accounts payable (82,136) (58,529)
Income taxes payable (8,079) (12,782)
Accrued warranty (2,517) (7,792)
Other assets and liabilities 2,748 10,909
--------- --------
Net cash provided by (used in) operating activities (94,014) 23,467
--------- --------
Cash flows from investing activities:
Purchase of marketable securities (23,641) (39,004)
Maturities of marketable securities 14,641 52,049
Investment in property and equipment (14,142) (21,750)
Proceeds from disposition of property and equipment 60 4,281
--------- --------
Net cash used in investing activities (23,082) (4,424)
--------- --------
Cash flows from financing activities:
Principal payments on long-term credit facilities (2,249) (76)
Proceeds from issuance of common stock 2,015 1,758
--------- --------
Net cash provided by (used in) financing activities (234) 1,682
--------- --------
Increase (decrease) in cash and cash equivalents (117,330) 20,725
Cash and cash equivalents at beginning of period 499,725 253,240
--------- --------
Cash and cash equivalents at end of period $ 382,395 $273,965
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 404 $ 316
Income taxes $ 13,414 $ 16,810
</TABLE>
See accompanying notes to condensed combined financial statements.
35
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed combined financial statements of the
Hard Disk Drive group ("HDDG"), together with the condensed combined
financial statements of the DLT & Storage Systems group ("DSSG") include all
of the accounts in the condensed consolidated financial statements of
Quantum. The separate group condensed combined financial statements give
effect to the accounting policies applicable with the implementation of the
tracking stock proposal. The separate HDDG and DSSG financial statements
have been prepared on a basis that management believes to be reasonable and
appropriate and include (i) the historical balance sheets, results of
operations, and cash flows of businesses that comprise each of the groups,
with all significant intragroup transactions and balances eliminated, (ii)
in the case of HDDG's financial statements, corporate assets and liabilities
of Quantum and related transactions identified with HDDG, including
allocated portions of Quantum's debt and selling, general and administrative
costs, and (iii) in the case of DSSG's financial statements, corporate
assets and liabilities of Quantum and related transactions identified with
DSSG, including allocated portions of Quantum's debt and selling, general
and administrative costs.
The condensed combined financial statements of the Hard Disk Drive group
provide HDDG stockholders with financial information about the Hard Disk
Drive group operations. Holders of HDDG stock and DSSG stock are Quantum
stockholders and are subject to all of the risks of an investment in Quantum
and all of Quantum's businesses, assets and liabilities. Quantum retains
ownership and control of all of the assets and operations of each group.
Financial effects arising from one group that affect Quantum's consolidated
results of operations or financial condition could, if significant, affect
the results of operations or financial condition of the other group and the
market price of the other group's stock. Any net losses of HDDG or DSSG, and
dividends or distributions on, or repurchases of DSSG stock, or repurchases
of preferred stock at a price per share greater than par value, will reduce
the funds of Quantum legally available for payment of dividends on HDDG
stock. As a result, HDDG's condensed combined financial statements should be
read in conjunction with Quantum's condensed consolidated financial
statements and DSSG's condensed combined financial statements. The condensed
combined balance sheet as of March 31, 1999 has been derived from the
audited financial statements included in Form S-4 Registration No. 333-75153
filed with the Securities and Exchange Commission, but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
These interim financial statements reflect all adjustments, consisting only
of normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the results for the periods shown. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year. Certain prior period amounts have
been reclassified to conform to the current period's presentation.
36
<PAGE>
2. Inventories
<TABLE>
<CAPTION>
Inventories consisted of the following:
(In thousands)
June 27, March 31,
1999 1999
------------------- -------------------
<S> <C> <C>
Materials and purchased parts $ 1,544 $ 2,204
Work in process 5,362 5,377
Finished goods 116,931 139,943
-------- --------
$123,837 $147,524
======== ========
</TABLE>
3. Net income (loss) per share
On July 23, 1999, Quantum's stockholders approved the tracking stock proposal.
Accordingly, the net loss per share for the periods presented below have been
calculated in accordance with the Restated Certificate of Incorporation.
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended
June 27, June 28,
1999 1998
-------------- --------------
Numerator:
<S> <C> <C>
Numerator for basic and diluted net loss per share
- loss available to common stockholders $(43,184) $(40,554)
============== ==============
Denominator:
Denominator for basic and diluted net loss per
share - weighted average shares 83,330 79,358
============== ==============
Basic and diluted net loss per share $ (0.52) $ (0.51)
============== ==============
</TABLE>
The computation of diluted net loss per share for the three months ended June
27, 1999 and June 28, 1998 excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 3,103,076
shares of HDDG common stock, or 10.793 shares per $1000 note, because the effect
would have been antidilutive.
Options to purchase 10,413,571 and 10,592,948 shares of HDDG common stock were
outstanding at June 27, 1999 and June 28, 1998, respectively. However, the
corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for the three months ended June 27,
1999 and June 28, 1998, because the effect would have been antidilutive.
37
<PAGE>
4. Common Stock Repurchase
In May 1999, the Board of Directors authorized Quantum to repurchase a
combined total of up to $200 million of Quantum's common stocks through the
open market from time to time. In part, the intent of the repurchase is to
offset the dilutive impact of the shares to be issued to complete the
acquisition of Meridian Data, Inc. At June 27, 1999, DSSG had repurchased 3.9
million shares of Quantum common stock for approximately $84 million.
5. Litigation
Quantum and certain of its current and former officers and directors were 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 purported to represent a class of all persons
who purchased Quantum's common stock between February 26, 1996, and June 13,
1996. The complaints alleged that the defendants violated various federal
securities laws and California statutes by concealing and/or misrepresenting
material adverse information about Quantum, and that individual defendants sold
shares of Quantum common stock based on material nonpublic information.
Following a hearing on plaintiff's appeal of the District Court's dismissal with
prejudice of plaintiff's amended complaint in the federal class action on May
13, 1999, and prior to a ruling on the appeal, the plaintiff agreed to dismiss
with prejudice the state and federal class action lawsuits. Pursuant to a
letter agreement dated May 21, 1999, plaintiff agreed to dismiss the lawsuits
with no financial contribution from the defendants. A stipulation of dismissal
with prejudice was filed in federal court on June 10, 1999, and in state court
on June 17, 1999. Each side agreed to bear its own costs and fees.
Certain of Quantum's current and former officers and directors were also named
as defendants in a derivative lawsuit, which was filed on November 8, 1996, in
the Superior Court of Santa Clara County. The derivative complaint was based on
factual allegations substantially similar to those alleged in the class-action
lawsuits. Defendants' demurrer to the derivative complaint was sustained
without prejudice on April 14, 1997. Plaintiffs did not file an amended
complaint. On August 7, 1997, the Court issued an order of dismissal and
entered final judgment dismissing the complaint.
On August 7, 1998, Quantum was named as one of several defendants in a patent
infringement lawsuit filed in the U.S. District Court for the Northern District
of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH, owns at
least 24 U.S. patents which it asserts that Quantum has infringed. Quantum has
studied many of these patents before and, of the patents it has studied,
believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not yet had time to make a complete study of all
the patents asserted by Papst and there can be no assurance that Quantum has not
infringed these or other patents owned by Papst. The final results of this
litigation, as with any litigation, are uncertain. In addition, the costs of
engaging in litigation with Papst will be substantial.
38
<PAGE>
Quantum 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 Quantum,
the ultimate outcome of any litigation is uncertain. Were an unfavorable
outcome to occur, the impact could be material to Quantum.
6. Comprehensive Income (Loss)
Accumulated other comprehensive loss included in group equity on the condensed
combined balance sheets of the Hard Disk Drive group consists of foreign
currency translation adjustments. Total comprehensive loss for the three months
ended June 27, 1999 and June 28, 1998 is presented in the following table:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
June 27, June 28,
1999 1998
------------------ ------------------
<S> <C> <C>
Net loss $(43,184) $(40,554)
Other comprehensive loss -
foreign currency translation
adjustments (920) (1,005)
-------- --------
Comprehensive loss $(44,104) $(41,559)
======== ========
</TABLE>
7. Business Units
The Hard Disk Drive group currently has two primary product lines, desktop hard
disk drives and high-end hard disk drives. HDDG has two separate business units
that support these two product lines. In addition, HDDG participated in the
manufacture of recording heads through its 49% equity interest in a recording
heads joint venture with Matsushita-Kotobuki Electronics, Ltd., from May 16,
1997 through October 28, 1998 when the joint venture was dissolved.
The desktop business unit designs, develops and markets desktop hard disk drives
designed to meet the storage requirements of entry-level to high-end desktop
personal computers in home and business environments. The high-end business unit
designs, develops and markets high-end hard disk drives designed to meet the
storage requirements of network servers, workstations and storage subsystems. In
the future, the two HDDG business units may become a single business unit as
their markets begin to merge and be reported on a combined basis.
39
<PAGE>
Results for HDDG's business units for the three months ended June 27, 1999 and
June 28, 1998 are presented in the following table:
<TABLE>
<CAPTION>
(In millions) Three Months Ended
June 27, June 28,
1999 1998
---- ----
Business unit:
Desktop
<S> <C> <C>
Revenue $ 637 $ 715
Unit operating loss (62) (19)
Inventory and property, plant and equipment,
net of accumulated depreciation 261 366
High-end
Revenue 115 132
Unit operating loss (15) (27)
Inventory and property, plant and equipment,
net of accumulated depreciation 55 73
Recording heads
Loss from investee - (24)
</TABLE>
<TABLE>
<CAPTION>
(In millions) Three Months Ended
June 27, June 28,
1999 1998
---- ----
Loss reconciliation:
<S> <C> <C>
Total unit operating loss $ (77) $ (46)
Loss from investee - (24)
Unallocated amounts:
Interest and other income/(expense) 4 2
----- -----
Loss before income taxes $ (73) $ (68)
===== =====
(In millions) June 27, June 28,
1999 1998
---- ----
Assets reconciliation:
Total unit inventory and property, plant and
equipment net of accumulated depreciation $ 316 $ 439
Cash and cash equivalents 382 274
Marketable securities 34 59
Accounts receivable, net of allowance for doubtful
accounts 394 496
Deferred taxes 72 90
Other current assets 96 87
Intangible assets, less accumulated amortization 5 8
Other assets 33 54
------ ------
Total combined assets $1,332 $1,507
====== ======
</TABLE>
Property plant and equipment, net of accumulated depreciation, included
equipment related to research and development, testing and configuration of hard
disk drives, logistics, customer service, and administration. Cash and cash
equivalents, marketable securities, accounts receivable, deferred taxes, other
current assets, intangible assets and other assets were not allocated to the
business units.
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 under Trends and Uncertainties relating to the Hard Disk Drive group.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Business Overview
The Hard Disk Drive group ("HDDG") designs, develops and markets a diversified
product portfolio of hard disk drives featuring leading-edge technology. HDDG's
hard disk drives are designed for the desktop market and the high-end hard disk
drive market which requires faster and higher capacity disk drives--as well as
the emerging market for hard disk drives specially designed for consumer
electronics applications such as new TV recording devices. HDDG has been the
leading volume supplier of hard disk drives for the desktop market for each of
the past six years. According to Dataquest, HDDG's market share in the desktop
market has grown from 3% in 1990 to an industry leading 22% in 1998.
HDDG designs desktop hard disk drives to meet the storage requirements of entry-
level to high-performance desktop PCs in home and business environments. HDDG
also designs high-end hard disk drives to store data on large computing systems
such as network servers. These high-end hard disk drives are generally used for:
. dedicated sites that store large volumes of data;
. network servers such as those used for Internet and intranet services,
online transaction processing and enterprise wide applications;
. high-speed computers used for specialized engineering design software;
and
. computer systems incorporating a large number of shared hard disk
drives.
HDDG recently introduced two new hard disk drives designed for the developing
consumer electronics market. These hard disk drives utilize Quantum
QuickView(TM)--HDDG's hard disk drive technology designed for consumer
electronics. The use of hard disk drive technology makes it possible to
simultaneously record and playback video content and to rapidly and
inexpensively access large amounts of video content--capabilities that are not
as well suited to competing technologies such as video tape and digital video
disk.
41
<PAGE>
Products
Desktop products. HDDG offers three families of desktop hard disk drives--the
Quantum Bigfoot(TM), Quantum Fireball(TM) and Quantum Fireball Plus. The Quantum
Bigfoot family offers 5.25-inch hard disk drives for PC users. The Quantum
Fireball family offers 3.5-inch hard disk drives for consumer and commercial
PCs, as well as entry-level workstations and network servers. Fireball Plus
offers superior performance for power users. HDDG offers the Shock Protection
System(TM) and Data Protection System(TM) with its recently released desktop
products. These features substantially reduce failure rates with customers and
provide increased reliability and performance. HDDG also began offering the
second-generation Shock Protection System II with its most recent product. This
new feature provides enhanced protection against both operating and non-
operating shock. Along with providing enhanced protection against shock during
handling and integration, Shock Protection System II guards against kicks and
jolts while the PC is running to reduce field failures.
High-end products. HDDG also offers a broad line of high-end 3.5-inch hard disk
drives--the Quantum Viking(TM), Quantum Atlas and Quantum Atlas 10K families.
The Quantum Viking II 3.5-inch hard disk drive is designed for low-profile
applications such as workgroup servers and desktop workstations, while the
Quantum Atlas family offers high-capacity hard disk drives for high performance
storage-intensive applications such as enterprise servers and storage
subsystems. HDDG began offering the Shock Protection System with its recently
released high-end products.
The table below sets forth key performance characteristics for HDDG's current
products:
<TABLE>
<CAPTION>
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
- -------- ---- ---- ----- --------
<S> <C> <C> <C> <C>
Bigfoot TS 6.4 6.4 to 19.2 4,000 Desktop PCs--Value, with Ultra ATA interface, 5.25- inch media
Fireball CR 4.3 4.3 to 13.0 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System and Data Protection System
Fireball CX 6.8 6.4 to 20.4 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System and Data Protection System
Fireball lct 8.7 4.3 to 26.0 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II and Data Protection System
Fireball Plus KA 4.5 6.4 to 18.2 7,200 Desktop PCs--Performance, with Ultra ATA/66 interface, Shock
Protection System and Data Protection System
Fireball Plus KX 6.8 6.8 to 27.3 7,200 Desktop PCs--Performance, with Ultra ATA/66 interface, Shock
Protection System and Data Protection System
Viking II 1.8 4.5 to 9.1 7,200 PC Servers and Workstations, with Ultra2 SCSI Low Voltage
Differential (LVD) or Ultra SCSI interface
Atlas III 1.8 4.5 to 18.2 7,200 Servers and Storage Subsystems, Ultra2 SCSI Low Voltage
Differential/Ultra SCSI interface
Atlas IV 4.5 9.1 to 36.4 7,200 Servers, Workstations and Storage Subsystems, with Ultra
160/m SCSI interface, Shock Protection System
Atlas 10K 3.0 9.1 to 36.4 10,000 Enterprise Servers and Storage Subsystems, with Ultra 160/m
SCSI interface or Fibre Channel optional interface, 3-inch
media, Shock Protection System
</TABLE>
42
<PAGE>
Results of Operations
Revenue. Revenue in the three months ended June 27, 1999 was $752 million,
compared to $847 million in the three months ended June 28, 1998, a decrease of
11%. The decrease in revenue reflected lower revenue from sales of both desktop
and high-end hard disk drives.
. Desktop hard disk drive revenue in the three months ended June 27, 1999
was $637 million, compared to $715 million in the three months ended
June 28, 1998. While shipments of desktop hard disk drives increased
from the first quarter of fiscal year 1999, intense competitive pricing
pressures resulted in significantly lower average unit prices and
reduced desktop hard disk drive revenue.
. High-end hard disk drive revenue in the three months ended June 27, 1999
was $115 million, compared to $132 million in the three months ended
June 28, 1998. Shipments of high-end hard disk drives were flat from the
first quarter of fiscal year 1999 as HDDG transitioned to new high-end
products, while revenue declined reflecting reduced average unit prices.
Sales to the top five customers in the three months ended June 27, 1999
represented 44% of revenue, compared to 47% of revenue in the three months ended
June 28, 1998. These amounts reflected a retroactive combination of the sales to
Compaq and Digital Equipment as a result of their merger in June 1998. Sales to
Hewlett-Packard were 15% of revenue in the three months ended June 27, 1999
compared to 16% of revenue in the three months ended June 28, 1998. Sales to
Compaq were less than 10% of revenue in the three months ended June 27, 1999,
compared to 14% of revenue in the three months ended June 27, 1998, including
sales to Digital Equipment.
Sales to computer equipment manufacturers and distribution channel customers
were 55% and 45% of revenue, respectively, in the three months ended June 27,
1999, compared to 60% and 40% of revenue, respectively, in the three months
ended June 28, 1998.
Gross Margin Rate. The gross margin rate decreased to 3.8% in the three months
ended June 27, 1999 from 6.2% in the three months ended June 28, 1998.
. The desktop gross margin rate was 1.4% in the three months ended June
27, 1999 compared to 6.8% in the three months ended June 28, 1998. The
decrease reflected the intense competitive pricing pressures in the
desktop market. HDDG expects to experience continued gross margin
pressure with respect to desktop hard disk drive products through at
least the second quarter of fiscal year 2000.
. The high-end gross margin rate was 16.6% in the three months ended June
27, 1999 compared to 3.2% in the three months ended June 28, 1998. The
increase reflected the transition to new, higher margin products.
The Hard Disk Drive group is currently examining a wide variety of measures to
reduce costs in its business model.
Research and Development Expenses. Research and development expenses in the
three months ended June 27, 1999, were $63 million, or 8.3% of revenue, compared
to $62 million, or 7.4% of
43
<PAGE>
revenue, in the three months ended June 28, 1998. HDDG expects the amount of
research and development expenses to increase in the second quarter of fiscal
year 2000.
Sales and Marketing Expenses. Sales and marketing expenses in the three months
ended June 27, 1999, were $28 million, or 3.7% of revenue, compared to $26
million, or 3.0% of revenue in the three months ended June 28, 1998.
General and Administrative Expenses. General and administrative expenses in
the three months ended June 27, 1999, were $15 million, or 2.0% of revenue,
compared to $11 million, or 1.3% of revenue, in the three months ended June 28,
1998. The increase in general and administrative expenses reflected a deferral
of certain programs in the first quarter of fiscal year 1999 and implementation
of a new quality program reflected in the first quarter of fiscal year 2000.
Interest and Other Income/Expense. Net interest and other income and expense
in the three months ended June 27, 1999 was $3.6 million income, compared to
$2.1 million income in the three months ended June 28, 1998. The increase
reflected higher interest income as a result of a higher average cash balance.
Loss from Investee. The loss from investee reflected HDDG's 49% equity share in
the operating losses of its recording heads joint venture with Matsushita-
Kotobuki, which was dissolved in the third quarter of fiscal year 1999. HDDG's
share of the loss in the joint venture for the quarter ended June 28, 1998, was
$24 million.
Income Taxes. HDDG recorded tax benefits of $30 million and $28 million for
effective benefit rates of 41% for the three months ended June 27, 1999, and
June 28, 1998, respectively.
Liquidity and Capital Resources
Operating Activities. HDDG used cash of $94 million in operating activities in
the three months ended June 27, 1999. HDDG generated cash from operations of
$23 million in the three months ended June 28, 1998. The use of cash primarily
reflected reduced collections of accounts receivable compared to the prior year
period.
Investing Activities. Investments in the three months ended June 27, 1999 were
$23 million, which consisted of investments in property and equipment and net
purchases of marketable securities. Investments in the three months ended June
28, 1998 totaled $4 million.
Financing Activities. At June 27, 1999, and March 31, 1999, Quantum's debt
allocated to HDDG was $113 million and $115 million, respectively. Debt
allocated to HDDG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At June
27, 1999, Quantum had a total debt of $339 million with an average interest rate
of 8.4%.
In May 1999, the Board of Directors authorized Quantum to repurchase a
combined total of up to $200 million of Quantum's common stocks through the
open market from time to time. In part, the intent of the repurchase is to
offset the dilutive impact of the shares to be issued to complete the
acquisition of
44
<PAGE>
Meridian Data, Inc. At June 27, 1999, DSSG had repurchased 3.9 million shares of
Quantum common stock for approximately $84 million.
HDDG expects to spend approximately $85 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the expansion of the desktop and high-end hard disk drive product lines and the
introduction of hard drives for consumer electronic applications.
HDDG expects its cash flow from operations, together with available financing
sources, will be sufficient to meet all currently planned expenditures and
sustain operations for the next 12 months. However, this belief assumes that
operating results and cash flow from operations will meet HDDG's expectations.
Trends and Uncertainties Relating to the Hard Disk Drive Group
Holders of HDDG stock remain stockholders of one company and, therefore,
financial effects on DSSG could adversely affect HDDG
Holders of HDDG stock and DSSG stock are stockholders of a single company. HDDG
and DSSG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of our businesses, assets and liabilities. The issuance of the HDDG stock and
the DSSG stock and the allocation of assets and liabilities and stockholders'
equity between HDDG and DSSG did not result in a distribution or spin-off to
stockholders of any of our assets or liabilities and did not affect ownership of
our assets or responsibility for our liabilities or those of our subsidiaries.
The assets we attributed to one group could be subject to the liabilities of the
other group, whether such liabilities arise from lawsuits, contracts or
indebtedness that we attributed to the other group. If we are unable to satisfy
one group's liabilities out of the assets we attributed to it, we may be
required to satisfy those liabilities with assets we have attributed to the
other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
tracking stock relating to the other group. In addition, net losses of either
group and dividends and distributions on, or repurchases of, either class of
tracking stock or repurchases of preferred stock at a price per share greater
than par value will reduce the funds we can pay on each class of tracking stock
under Delaware law. For these reasons, you should read our consolidated
financial information with the financial information we provide for each group.
45
<PAGE>
HDDG's operating results depend on new product introductions which may not be
successful
To compete effectively, HDDG must frequently introduce new hard disk drives.
HDDG cannot assure you that:
. it will successfully or timely develop or market any new hard disk
drives in response to technological changes or evolving industry
standards;
. it will not experience technical or other difficulties that could delay
or prevent the successful development, introduction or marketing of new
hard disk drives;
. it will successfully qualify new hard disk drives, particularly high-end
disk drives, with HDDG's customers by meeting customer performance and
quality specifications. A successful and timely customer qualification
must occur before customers will place large product orders;
. it will quickly achieve high volume production of new hard disk drives;
or
. its new products will achieve market acceptance.
These risks are magnified because HDDG expects technological changes, short
product life cycles and intense competitive pressures to result in declining
sales and gross margins on its current generation products.
HDDG's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
HDDG's quarterly operating results have fluctuated significantly in the past and
may fluctuate significantly in the future. As a result, you should not use
HDDG's past quarterly operating results to predict future performance. Quarterly
operating results could be adversely affected by:
. the ability of Matsushita-Kotobuki, HDDG's exclusive manufacturer, to
quickly achieve high volume production of HDDG's hard disk drives;
. customers canceling, deferring or rescheduling significant orders;
. returns by customers of unsold hard disk drives for credit;
. decline in PC demand; or
. failure to complete shipments in the last month of a quarter during
which a substantial portion of HDDG's products are typically shipped.
HDDG's prices and margins are subject to declines due to unpredictable end-user
demand and oversupply of hard disk drives
46
<PAGE>
End-user demand for the computer systems which contain HDDG's hard disk drives
has historically been subject to rapid and unpredictable fluctuations. As a
result, the hard disk drive market tends to experience periods of excess
capacity which typically lead to intense price competition. If intense price
competition occurs, HDDG may be forced to lower prices sooner and more than
expected and transition to new products sooner than expected. For example, in
fiscal year 1999 and the second half of fiscal year 1998, as a result of excess
inventory in the desktop hard disk drive market, aggressive pricing and
corresponding margin reductions materially adversely impacted HDDG's operating
results. HDDG experienced similar conditions in the high-end hard disk drive
market during most of fiscal years 1998 and 1999.
Growth of the lower priced PC markets is putting downward pressure on HDDG's
desktop hard disk drive prices and margins
The recent growth of the lower priced PC market has led to a shift toward lower
priced desktop hard disk drives, and to significantly reduced gross margins.
HDDG expects the trend toward lower prices and margins on hard disk drives to
continue. If HDDG is unable to lower the cost of its desktop hard disk drives
accordingly, gross margins will continue to decrease.
Intense competition in the desktop and high-end hard disk drive market could
adversely impact HDDG's operating results
In the desktop hard disk drive market, HDDG's primary competitors are Fujitsu
Limited, IBM, Maxtor Corporation, Samsung Electronics Co., Ltd., Seagate and
Western Digital Corporation. The desktop hard disk drive market is characterized
by more competitiveness than that seen in the computer industry in general.
HDDG's operating results and competitive position could be negatively impacted
by the introduction of competitive products with higher performance, higher
reliability and/or lower cost than HDDG's products. For example, in the first
quarter of fiscal year 2000, certain competitors reduced prices for their
products significantly. As a result, HDDG's operating results were materially
adversely impacted.
In the high-end hard disk drive market, HDDG's primary competitors are Fujitsu,
Hitachi, IBM, Seagate and Western Digital. Currently, Seagate and IBM have the
largest market share for high-end hard disk drives. Intense technology and
pricing competition has led to losses on HDDG's high-end hard disk drive
products over the past nine quarters. HDDG does not anticipate that its high-
end hard disk drive products will return to profitability prior to shipping its
next generation products.
A majority of sales come from a few customers that have no minimum or long-term
purchase commitments
HDDG's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and HDDG's customer relationships are
terminable at will. The loss of, or
47
<PAGE>
a significant change in demand from, one or more key HDDG customers could have a
material adverse impact on HDDG's operating results.
Because HDDG depends on Matsushita-Kotobuki for the manufacture of all hard disk
drives, adverse material developments in this critical manufacturing
relationship would adversely impact HDDG's operating results
HDDG's relationship with Matsushita-Kotobuki is critical to the Hard Disk Drive
group's operating results and overall business performance. HDDG's dependence
on Matsushita-Kotobuki includes the following principal risks:
. Quality and Delivery. HDDG relies on Matsushita-Kotobuki to quickly
achieve volume production of new hard disk drives at a competitive cost,
to meet HDDG's stringent quality requirements and to respond quickly to
changing product delivery schedules. Failure of Matsushita-Kotobuki to
satisfy these requirements could have a material adverse impact on
HDDG's operating results.
. Purchase Forecasts. Matsushita-Kotobuki's production schedule is based
on HDDG's forecasts of its purchase requirements, and HDDG has limited
rights to modify short-term purchase orders. The failure of HDDG to
accurately forecast its requirements or successfully adjust Matsushita-
Kotobuki's production schedule could lead to inventory shortages or
surpluses.
. Pricing. HDDG negotiates pricing arrangements with Matsushita-Kotobuki
on a quarterly basis. Any failure to reach competitive pricing
arrangements would have a material adverse impact on HDDG's operating
results.
. Capital Commitment. HDDG's future growth will require that Matsushita-
Kotobuki continue to devote substantial financial resources to property,
plant and equipment to support the manufacture of HDDG's products.
. Manufacturing Capacity. If Matsushita-Kotobuki is unable or unwilling to
meet HDDG's manufacturing requirements, an alternative manufacturing
source may not be available in the near-term.
Matsushita-Kotobuki depends on a limited number of component and sub-assembly
suppliers and component shortages and quality problems or delays from these
suppliers could result in increased costs and reduced sales
Matsushita-Kotobuki depends on a limited number of qualified suppliers for
components and sub-assemblies, including recording heads, media and integrated
circuits, all of which are essential to the manufacture of HDDG's hard disk
drives. Matsushita-Kotobuki may qualify only a single source for certain
components and sub-assemblies, which can magnify the risk of component
shortages. Component shortages have constrained HDDG's sales growth in the past,
and HDDG believes that it
48
<PAGE>
will periodically experience component shortages. If Matsushita-Kotobuki
experiences quality problems with its component suppliers, HDDG's hard disk
drive shipments could be significantly delayed or costs could be significantly
increased.
Unexpected warranty costs could have a material adverse impact on operating
results
HDDG warrants its products against defects for a period of one to five years.
Actual warranty costs could have a material adverse impact on HDDG's operating
results if the actual unit failure rate or unit repair costs are greater than
those for which HDDG established a warranty accrual.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege HDDG's infringement of and need for a
license under their patented or other proprietary technology. For example, in
August 1998 Quantum was named as one of several defendants in a patent
infringement lawsuit. The plaintiff, Papst Licensing GmbH, owns at least 24 U.S.
patents, which it asserts that HDDG has infringed. Adverse resolution of the
Papst litigation or any other third party infringement claim could subject HDDG
to substantial liabilities and require it to refrain from manufacturing and
selling certain products. HDDG cannot assure you that licenses to any technology
owned by Papst or any other third party alleging infringement could be obtained
on commercially reasonable terms, or at all. In addition, the costs of
litigation could be substantial, regardless of the outcome.
HDDG's foreign manufacturing costs could be adversely impacted by fluctuations
in currency exchange rates
Matsushita-Kotobuki generally purchases manufacturing components at prices
denominated in U.S. dollars. However, significant increases in currency exchange
rates against the U.S. Dollar could increase Matsushita-Kotobuki's manufacturing
costs and could result in higher product prices and/or declining margins for
HDDG's products.
49
<PAGE>
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements and
Note 5 of the Notes to Condensed Combined Financial Statements of the Hard Disk
Drive group.
Item 2. Changes in securities - Not Applicable
Item 3. Defaults upon senior securities - Not Applicable
Item 4. Submission of matters to a vote of security holders - Not Applicable
Item 5. Other information - Not Applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits. The exhibits listed on the accompanying index to
--------
exhibits immediately following the signature page
are filed as part of this report.
(b) Reports on Form 8-K.
-------------------
None
50
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUANTUM CORPORATION
(Registrant)
Date: August 11, 1999 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
51
<PAGE>
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.1 FIRST AMENDMENT TO CREDIT AGREEMENT, dated June 21, 1999, among ATL
Products, Inc., certain financial institutions (collectively, the
"Banks") and Fleet National Bank as agent for the Banks.
27.1 Financial Data Schedule
Footnotes to
Exhibits Footnote
None
<PAGE>
Exhibit 10.1
EXECUTION VERSION
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
---------
of June 21, 1999, is entered into by and among:
(1) ATL PRODUCTS, INC., a Delaware corporation ("Borrower");
--------
(2) Each of the financial institutions listed in Schedule I to the
-----------------
Credit Agreement referred to in Recital A below (collectively, the
---------------- ---------
"Banks"); and
-----
(3) FLEET NATIONAL BANK, a national banking association, as agent for
the Banks (in such capacity, "Agent").
-----
RECITALS
--------
A. Borrower, the Banks and Agent are parties to a Credit Agreement
dated as of December 18, 1998 (the "Credit Agreement").
----------------
B. Borrower has requested the Banks and Agent to amend the Credit
Agreement in certain respects.
C. The Banks and Agent are willing so to amend the Credit Agreement
upon the terms and subject to the conditions set forth below.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, the Banks and Agent hereby agree as follows:
1. Definitions, Interpretation. All capitalized terms defined above
---------------------------
and elsewhere in this Amendment shall be used herein as so defined. Unless
otherwise defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in the Credit Agreement, as amended by
this Amendment. The rules of construction set forth in Section I of the Credit
-----------------------
Agreement shall, to the extent not inconsistent with the terms of this
- ---------
Amendment, apply to this Amendment and are hereby incorporated by reference.
2. Amendments to Credit Agreement. Subject to the satisfaction of
------------------------------
the conditions set forth in Paragraph 4 below, the Credit Agreement is hereby
-----------
amended as follows:
(a) Clause (i) of Subparagraph 2.01(e) is amended to read in its
----------------------------------
entirety as follows:
(i) The initial and each subsequent Interest Period selected by
Borrower for a LIBOR Loan shall be one (1) month, three (3) months,
six (6)
<PAGE>
months (or, so long as the principal amount of the LIBOR Loan
for which the initial or subsequent Interest Period relates equals or
exceeds Ten Million Dollars ($10,000,000), two (2) weeks), as Borrower
may specify; provided, however, that (A) any Interest Period which
-------- -------
would otherwise end on a day which is not a Business Day shall be
extended to the next succeeding Business Day unless such next Business
Day falls in another calendar month, in which case such Interest
Period shall end on the immediately preceding Business Day; (B) any
Interest Period which begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall end on
the last Business Day of a calendar month; and (C) no Interest Period
shall end after the Maturity Date.
(b) Exhibit A is amended by changing item 2(c) thereof to read in its
--------- ---------
entirety as follows:
(c) If the requested Borrowing is to consist of LIBOR Loans, the
initial Interest Period for such Revolving Loans will be [two (2)
weeks] [one (1) month] [three (3) months] [six (6) months]; and
(c) Exhibit B is amended by changing item 2(c) thereof to read in its
--------- ---------
entirety as follows:
(c) If such Revolving Loans are to be converted into LIBOR Loans,
the initial Interest Period for such Revolving Loans commencing upon
conversion will be [two (2) weeks] [one (1) month] [three (3) months]
[six (6) months]; and
(d) Exhibit C is amended by changing item 2(c) thereof to read in its
--------- ---------
entirety as follows:
(c) The next Interest Period for such Revolving Loans commencing
upon the last day of the current Interest Period is to be [two (2)
weeks] [one (1) month] [three (3) months] [six (6) months].
3. Representations and Warranties. Borrower hereby represents and
------------------------------
warrants to Agent and the Banks that the following are true and correct on the
date of this Amendment and that, after giving effect to the amendments set forth
in Paragraph 2 above, the following will be true and correct on the Effective
-----------
Date (as defined below):
(a) The representations and warranties of Borrower and its
Subsidiaries set forth in Paragraph 4.01 and the representations and
--------------
warranties of Borrower and its Subsidiaries and Guarantor and its
Subsidiaries set forth in the other Credit Documents are true and correct
in all material respects as if made on such date (except for
representations and warranties expressly made as of a specified date, which
shall be true as of such date);
(b) No Default or Event of Default has occurred and is continuing; and
(c) Each of the Credit Documents is in full force and effect.
2
<PAGE>
(Without limiting the scope of the term "Credit Documents," Borrower expressly
acknowledges in making the representations and warranties set forth in this
Paragraph 3 that, on and after the date hereof, such term includes this
- -----------
Amendment.)
4. Effective Date. The amendments effected by Paragraph 2 above
-------------- -----------
shall become effective as of June 21, 1999 (the "Effective Date"), subject to
--------------
receipt by Agent and the Banks of the following, each in form and substance
satisfactory to Agent, the Banks and their respective counsel:
(a) This Amendment duly executed by Borrower, each Bank and Agent;
(b) A letter in the form of Exhibit A hereto, dated the Effective Date
---------
and duly executed by Guarantor; and
(c) Such other evidence as Agent or any Bank may reasonably request to
establish the accuracy and completeness of the representations and
warranties and the compliance with the terms and conditions contained in
this Amendment and the other Credit Documents.
5. Effect of this Amendment. On and after the Effective Date, each
------------------------
reference in the Credit Agreement and the other Credit Documents to the Credit
Agreement shall mean the Credit Agreement as amended hereby. Except as
specifically amended above, (a) the Credit Agreement and the other Credit
Documents shall remain in full force and effect and are hereby ratified and
confirmed and (b) the execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power, or remedy of the Banks or Agent, nor constitute a waiver of any
provision of the Credit Agreement or any other Credit Document.
6. Miscellaneous.
-------------
(a) Counterparts. This Amendment may be executed in any number of
------------
identical counterparts, any set of which signed by all the parties hereto
shall be deemed to constitute a complete, executed original for all
purposes.
(b) Headings. Headings in this Amendment are for convenience of
--------
reference only and are not part of the substance hereof.
(c) Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of California without reference to
conflicts of law rules.
3
<PAGE>
IN WITNESS WHEREOF, Borrower, Agent and the Banks have caused this
Amendment to be executed as of the day and year first above written.
BORROWER: ATL PRODUCTS, INC.
By: /s/ Mark P. de Raad
--------------------------------------
Name: Mark P. de Raad
-------------------------------
Title: Vice President, Finance and CFO
-------------------------------
AGENT: FLEET NATIONAL BANK
By: /s/ Michael S. Barclay
----------------------------------------
Name: Michael S. Barclay
---------------------------
Title: Vice President
--------------------------
BANKS: FLEET NATIONAL BANK
By: /s/ Michael S. Barclay
----------------------------------------
Name: Michael S. Barclay
---------------------------
Title: Vice President
--------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Kevin McMahon
----------------------------------------
Name: Kevin McMahon
---------------------------
Title: Managing Director
--------------------------
4
<PAGE>
EXHIBIT A
---------
GUARANTOR CONSENT LETTER
------------------------
As of June 21, 1999
TO: FLEET NATIONAL BANK,
As Agent for the Banks under the Credit Agreement referred to below
1. Reference is made to the following:
(a) The Credit Agreement dated as of December 18, 1998 (the "Credit
Agreement") among ATL Products, Inc. ("Borrower"), the financial
institutions which are from time to time parties thereto (the "Banks"), and
Fleet National Bank, as agent for the Banks ("Agent");
(b) The Guaranty dated as of December 18, 1998 (the "Guaranty")
executed by the undersigned ("Guarantor") in favor of the Banks and Agent;
and
(c) The First Amendment to Credit Agreement dated as of June 21, 1999
(the "First Amendment") among Borrower, the Banks and Agent.
2. Guarantor hereby consents to the First Amendment. Guarantor
expressly agrees that such amendment shall in no way affect or alter the rights,
duties, or obligations of Guarantor, the Banks or Agent under the Guaranty.
3. From and after the date hereof, the term "Credit Agreement" as
used in the Guaranty shall mean the Credit Agreement, as amended by the First
Amendment.
4. Guarantor's consent to the First Amendment shall not be construed
(i) to have been required by the terms of the Guaranty or any other document,
instrument or agreement relating thereto or (ii) to require the consent of
Guarantor in connection with any future amendment of the Credit Agreement or any
other Credit Document.
A-1
<PAGE>
IN WITNESS WHEREOF, Guarantor has executed this Guarantor Consent
Letter as of the day and year first written above.
QUANTUM CORPORATION
By: /s/ Anthony H. Lewis, Jr.
------------------------------------------
Name: Anthony H. Lewis, Jr.
------------------------------------
Title: Vice President, Finance & Treasurer
-----------------------------------
A-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTIUM CORPORATION FOR THE QUARTER ENDED JUNE 27,1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-27-1999
<CASH> 649,425
<SECURITIES> 33,426
<RECEIVABLES> 651,104
<ALLOWANCES> 12,126
<INVENTORY> 261,919
<CURRENT-ASSETS> 1,805,384
<PP&E> 581,716
<DEPRECIATION> 311,797
<TOTAL-ASSETS> 2,340,681
<CURRENT-LIABILITIES> 614,729
<BONDS> 337,690
0
0
<COMMON> 895,038
<OTHER-SE> 426,478
<TOTAL-LIABILITY-AND-EQUITY> 2,340,681
<SALES> 1,083,235
<TOTAL-REVENUES> 1,083,235
<CGS> 903,316
<TOTAL-COSTS> 903,316
<OTHER-EXPENSES> 160,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,208
<INCOME-PRETAX> 12,360
<INCOME-TAX> 4,079
<INCOME-CONTINUING> 8,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,281
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
