Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 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 October 24, 1999, Quantum Corporation had
164,766,625 shares of DLT & Storage Systems group common stock outstanding and
83,574,022 shares of Hard Disk Drive group common stock outstanding.
<PAGE>
<TABLE>
QUANTUM CORPORATION
INDEX
<CAPTION>
Page
Number
------
<S> <C>
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 13
Quantum Corporation DLT & Storage Systems Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 22
Condensed Combined Balance Sheets 23
Condensed Combined Statements of Cash Flows 24
Notes to Condensed Combined Financial Statements 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 29
Quantum Corporation Hard Disk Drive Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 38
Condensed Combined Balance Sheets 39
Condensed Combined Statements of Cash Flows 40
Notes to Condensed Combined Financial Statements 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations 46
PART II - OTHER INFORMATION 57
SIGNATURE 59
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTUM CORPORATION
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 1,125,124 $ 1,164,711 $ 2,208,359 $ 2,267,734
Cost of revenue - on net sales 932,719 972,822 1,836,035 1,909,473
Cost of revenue - special charge 57,068 -- 57,068 --
----------- ----------- ----------- -----------
Gross profit 135,337 191,889 315,256 358,261
Operating expenses:
Research and development 92,453 82,640 182,886 166,938
Sales and marketing 55,459 45,386 108,680 83,723
General and administrative 30,570 21,494 59,714 38,895
Purchased in-process research
and development 37,000 -- 37,000 --
Special charge 2,338 -- 2,338 --
----------- ----------- ----------- -----------
217,820 149,520 390,618 289,556
Income (loss) from operations (82,483) 42,369 (75,362) 68,705
Other income (expense):
Interest income and other, net 7,110 6,133 19,557 14,836
Interest expense (7,218) (6,725) (14,426) (13,227)
Loss from investee -- (17,114) -- (41,350)
----------- ----------- ----------- -----------
(108) (17,706) 5,131 (39,741)
Income (loss) before income taxes (82,591) 24,663 (70,231) 28,964
Income tax provision (benefit) (19,938) 7,399 (15,859) 8,689
----------- ----------- ----------- -----------
Net income (loss) $ (62,653) $ 17,264 $ (54,372) $ 20,275
=========== =========== =========== ===========
DLT & Storage Systems group:
Net income $ 21,060 $ 52,143 $ 72,525 $ 95,708
=========== =========== =========== ===========
Net income per share:
Basic $ 0.13 $ 0.34 $ 0.44 $ 0.62
Diluted $ 0.12 $ 0.33 $ 0.42 $ 0.59
Weighted average common shares:
Basic 165,378 151,527 166,019 155,122
Diluted 173,080 162,695 173,029 161,223
Hard Disk Drive group:
Net loss $ (83,687) $ (34,878) $ (126,871) $ (75,432)
=========== =========== =========== ===========
Net loss per share:
Basic $ (1.01) $ (0.46) $ (1.53) $ (0.97)
Diluted $ (1.01) $ (0.46) $ (1.53) $ (0.97)
Weighted average common shares:
Basic 82,883 75,763 83,107 77,561
Diluted 82,883 75,763 83,107 77,561
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
QUANTUM CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 26, March 31,
1999 1999
------------- ----------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 689,010 $ 772,368
Marketable securities 34,634 24,426
Accounts receivable, net of allowance for
doubtful accounts of $10,421 and $12,130 592,258 646,557
Inventories 273,647 271,986
Deferred taxes 107,701 107,701
Other current assets 149,951 104,835
------------ ----------
Total current assets 1,847,201 1,927,873
Property and equipment, net of accumulated
depreciation of $267,542 and $291,617 271,630 271,928
Intangible assets, net 292,348 225,567
Other assets 46,620 58,228
----------- ----------
$ 2,457,799 $2,483,596
=========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 377,364 $ 406,369
Accrued warranty 93,158 76,905
Accrued compensation 68,900 73,605
Income taxes payable 26,004 33,411
Current portion of long-term debt 1,072 1,024
Other accrued liabilities 151,834 90,691
----------- ----------
Total current liabilities 718,332 682,005
Deferred taxes 78,345 67,340
Long-term debt 48,412 56,961
Convertible subordinated debt 287,500 287,500
Stockholders' equity:
Common stocks 936,867 886,434
Retained earnings 449,833 504,206
Accumulated other comprehensive loss (77) (850)
Treasury stock, at cost (61,413) -
----------- ----------
Total stockholders' equity 1,325,210 1,389,790
----------- ----------
$ 2,457,799 $2,483,596
=========== ==========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
QUANTUM CORPORATION
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six Months Ended
September 26, September 27,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (54,372) $ 20,275
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Special charge 58,385 --
Purchased in-process research and development 37,000 --
Depreciation 48,496 45,341
Amortization 13,872 7,312
Loss from investee -- 41,350
Deferred income taxes 405 1,003
Compensation related to stock plans 1,640 3,443
Changes in assets and liabilities:
Accounts receivable 54,663 74,914
Inventories (520) 19,236
Accounts payable (31,120) (48,895)
Income taxes payable (7,407) (11,693)
Accrued warranty 15,668 (1,721)
Other assets and liabilities (36,972) 16,497
--------- ---------
Net cash provided by operating activities 99,738 167,062
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (33,406) (48,798)
Maturities of marketable securities 33,314 91,131
Acquisition of intangible assets (2,500) --
Investment in property and equipment (49,909) (57,442)
--------- ---------
Net cash used in investing activities (52,501) (15,109)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities 10,000 --
Principal payments on long-term credit facilities (18,501) (457)
Purchases of treasury stock (145,652) (264,220)
Proceeds from issuance of common stock, net 23,558 20,020
--------- ---------
Net cash used in financing activities (130,595) (244,657)
--------- ---------
Decrease in cash and cash equivalents (83,358) (92,704)
Cash and cash equivalents at beginning of period 772,368 642,150
--------- ---------
Cash and cash equivalents at end of period $ 689,010 $ 549,446
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 12,981 $ 12,472
Income taxes, net of (refunds) $ 18,341 $ (7,816)
Tangible and intangible assets acquired for shares of
DSSG and HDDG common stock, net of cash acquired and
liabilities assumed $ 104,698 $ --
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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 balances 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 Registration Statement on Form S-4 (SEC File No.
333-75153) filed with the Securities and Exchange Commission.
2. Recapitalization
On July 23, 1999, the Company's stockholders approved a 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 3, 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. On August 3, 1999, each authorized share of Quantum common
stock, $.01 par value per share, was exchanged for 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)
September 26, March 31,
1999 1999
-------------- ---------
Materials and purchased parts $ 60,550 $ 62,342
Work in process 37,002 27,531
Finished goods 176,095 182,113
-------- --------
$273,647 $271,986
======== ========
6
<PAGE>
4. Net income (loss) per share
As a result of the recapitalization, the Company has two tracking stocks, DSSG
common stock and HDDG common stock, that are intended 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.
<TABLE>
The following table sets forth the computation of basic and diluted net income
per share for DSSG:
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic net income per share
- income available to common stockholders $ 21,060 $ 52,143 $ 72,525 $ 95,708
Effect of dilutive securities:
7% convertible subordinated notes -- 2,013 -- --
-------- -------- -------- --------
Numerator for diluted net income per
share - income available to common
stockholders $ 21,060 $ 54,156 $ 72,525 $ 95,708
======== ======== ======== ========
Denominator:
Denominator for basic net income per
share - weighted average shares 165,378 151,527 166,019 155,122
Effect of dilutive securities:
Outstanding options 7,702 4,962 7,010 6,101
7% convertible subordinated notes -- 6,206 -- --
-------- -------- -------- --------
Denominator for diluted net income per
share - adjusted weighted average shares 173,080 162,695 173,029 161,223
======== ======== ======== ========
Basic net income per share $ 0.13 $ 0.34 $ 0.44 $ 0.62
======== ======== ======== ========
Diluted net income per share $ 0.12 $ 0.33 $ 0.42 $ 0.59
======== ======== ======== ========
</TABLE>
The computation of diluted net income per share for the three and six months
ended September 26, 1999, and the six months ended September 27, 1998, excluded
the effect of the 7% convertible subordinated notes issued in July 1997, which
are convertible into 6,206,152 shares of DSSG common stock, or 21.587 shares per
$1,000 note, because the effect would have been antidilutive.
7
<PAGE>
<TABLE>
The following table sets forth the computation of basic and diluted net loss per
share for HDDG:
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net loss
per share - loss available to common
stockholders $ (83,687) $ (34,878) $ (126,871) $ (75,432)
================ ================ =============== ================
Denominator:
Denominator for basic and diluted net
loss per share - weighted average
shares 82,883 75,763 83,107 77,561
================ ================ =============== ================
Basic and diluted net loss per share $ (1.01) $ (0.46) $ (1.53) $ (0.97)
================ ================ =============== ================
</TABLE>
The computation of diluted net loss per share for the three and six months ended
September 26, 1999 and September 27, 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 $1,000 note, because
the effect would have been antidilutive.
Options to purchase 15,234,101 and 10,390,490 shares of HDDG common stock were
outstanding at September 26, 1999 and September 27, 1998, respectively. However,
the corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for the three and six months ended
September 26, 1999 and September 27, 1998 because the effect would have been
antidilutive.
5. Stockholders' Equity
In September 1999, the Company issued 4.1 million DSSG shares and 2 million HDDG
shares to the stockholders of Meridian Data, Inc. ("Meridian") to complete the
acquisition of Meridian as a wholly owned subsidiary of the Company. In part,
the Company reissued DSSG and HDDG shares held as treasury stock to complete the
acquisition. The difference between the cost of the treasury stock and the value
at which the shares were reissued resulted in a $3.5 million addition to
paid-in-capital in the quarter ended September 26, 1999. For additional
information regarding the Meridian acquisition, refer to Note 7 of the Notes to
Condensed Consolidated Financial Statements.
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 was to minimize
the dilutive impact of the shares issued to complete the acquisition of
Meridian. During the six months ended September 26, 1999, the Company
repurchased 7.2 million shares of DSSG common stock and 2.2 million shares of
HDDG common stock for a combined total of $146 million.
In October 1999, the Board of Directors authorized an increase in the Company's
stock repurchase program, increasing the previously authorized amount of $200
million to a total of $600 million. The increase is intended primarily for
repurchase of the Company's DSSG common stock.
8
<PAGE>
6. Litigation
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 completed a full 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.
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. Business Combination
On September 10, 1999, the Company's DLT & Storage Systems group completed the
acquisition of Meridian. 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
acquisition has been accounted for as a purchase at a total cost of $115
million. The acquisition was completed with the issuance of 4.1 million shares
of DSSG common stock and 2 million shares of HDDG common stock valued at $74
million and $18 million, respectively, on the date of acquisition in exchange
for all outstanding shares of Meridian, the conversion of outstanding Meridian
stock options into options to purchase 630,000 shares of DSSG common stock and
315,000 shares of HDDG common stock valued at $8 million and $2 million,
respectively, and the assumption of Meridian liabilities and other acquisition
costs of approximately $13 million. At the date of acquisition, Meridian had $11
million of cash and marketable securities and a net operating loss carryforward
for U.S. federal income tax purposes of approximately $46 million. Meridian's
results of operations are included in the financial statements as of the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the date of acquisition. Pro forma results of operations
have not been presented because the effect of the acquisition was not material.
The excess of the purchase price over the fair value of the net tangible assets
acquired has been allocated to the following identifiable intangible assets:
goodwill, trademarks, workforce in place, developed technology and in-process
research and development. As of the acquisition date, technological feasibility
of the in-process technology has not been established and the technology has no
alternative future use. Therefore, the Company has expensed the amount of the
purchase price allocated to in-process research and development, estimated at
$37 million as of the date of acquisition. This amount and the other components
of the purchase price allocation are preliminary. The remaining identifiable
intangible assets, valued at $77 million, will be amortized on a straight-line
basis over periods ranging from five to ten years.
9
<PAGE>
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 21%, which represents a premium to the Company's cost of
capital. The expected revenue assumes an average compound annual revenue growth
rate of 64% during calendar years 1999 through 2007. Expected total revenue from
the purchased in-process projects peak in calendar year 2005 and then begin to
decline as other new products are expected to be introduced. These projections
are based on management's estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions. If products
are not successfully developed, the Company may not realize the value assigned
to the in-process research and development projects. In addition, the value of
the other acquired intangible assets may also become impaired.
8. Special Charge
During the quarter ended September 26, 1999, the Company's Hard Disk Drive group
recorded a special charge of $59.4 million. The charge reflected HDDG's strategy
to modify the hard disk drive business to more closely align product development
and the business' operating model with the requirements of the rapidly growing
low-cost PC market. The special charge was associated primarily with the
streamlining of HDDG's logistics model in order to create a faster and more
flexible fulfillment system, changes in the customer service strategy and
consolidation of certain product development programs. Upon full implementation
of the plan, HDDG currently expects to realize more than $100 million in cost
savings per year, beginning in fiscal year 2001.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. HDDG expects that the affected facilities will be
vacated within the next 12 months.
In connection with the charge, HDDG currently expects a workforce reduction of
approximately 600 employees. In addition, approximately 100 open requisitions
and budgeted positions have been eliminated. The reduction in force primarily
affects employees at HDDG's drive configuration centers and warehouses in
Milpitas, California and Dundalk, Ireland and employees within the desktop drive
business. Approximately 115 of the 600 employees had been terminated as of
September 26, 1999. HDDG anticipates that the remaining employees will be
terminated by the end of the second quarter of fiscal year 2001.
As of September 26, 1999, HDDG had incurred $1 million in cash expenditures
associated with employee severance and benefits. HDDG expects to incur
additional cash expenditures associated with employee severance and benefits,
facilities costs and other costs associated with the plan of approximately $35
million.
10
<PAGE>
<TABLE>
The following table summarizes activity related to the special charge for the
quarter ended September 26, 1999:
<CAPTION>
(In thousands) Severance
And Facilities Other
Benefits Costs Inventory Costs Total
-------- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Special charge $ 7,833 $ 26,359 $ 13,214 $ 12,000 $ 59,406
Cash payments (1,021) -- -- -- (1,021)
-------- -------- -------- -------- ---------
Balance at September 26, 1999 $ 6,812 $ 26,359 $ 13,214 $ 12,000 $ 58,385
======== ======== ======== ======== ========
</TABLE>
9. Comprehensive Income (Loss)
<TABLE>
Accumulated other comprehensive loss on the condensed consolidated balance
sheets consists of foreign currency translation adjustments. Total comprehensive
income (loss) for the three and six months ended September 26, 1999 and
September 27, 1998, is presented in the following table:
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(62,653) $ 17,264 $(54,372) $ 20,275
Other comprehensive income --
foreign currency translation
adjustments 1,693 1,188 773 183
-------- -------- -------- --------
Comprehensive income (loss) $(60,960) $ 18,452 $(53,599) $ 20,458
======== ======== ======== ========
</TABLE>
10. 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, network attached
storage systems 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 and six
months ended September 26, 1999 and September 27, 1998 are presented in the
following tables:
11
<PAGE>
<TABLE>
<CAPTION>
(In millions)
Three Months Ended
September 26, 1999 September 27, 1998
------------------ ------------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 768 $ 357 $ 1,125 $ 874 $ 291 $ 1,165
Segment profit
(loss) (84) 21 (63) (35) 52 17
</TABLE>
<TABLE>
<CAPTION>
(In millions)
Six Months Ended
September 26, 1999 September 27, 1998
------------------ ------------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,521 $688 $ 2,208 $ 1,722 $ 546 $ 2,268
Segment profit
(loss) (127) 73 (54) (76) 96 20
</TABLE>
12
<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 & 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 &
Storage Systems group ("DSSG") and the Hard Disk Drive group ("HDDG") as
described in their respective sections of this report.
Results of Operations
Revenue. Revenue in the three and six months ended September 26, 1999 was $1.125
billion and $2.208 billion, respectively, compared to $1.165 billion and $2.268
billion, respectively, for the corresponding periods in fiscal year 1999.
Revenue in the three and six months ended September 26, 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 DLTtape media royalties reached
record highs in the three and six month periods. 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
the sales of DLTtape media cartridges at licensed media manufacturers for which
DSSG earns a royalty fee. The increase in sales of 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 base of DLTtape drives.
While shipments of desktop hard disk drives increased from the first six months
of fiscal year 1999, intense competitive pricing pressures resulted in a
significantly lower average unit price and reduced desktop hard disk drive
revenue. Shipments of high-end hard disk drives increased slightly from the
first six months of fiscal year 1999 as HDDG completed a transition to new
high-end products, while revenue declined reflecting lower average unit prices.
Sales to our top five customers in the three and six months ended September 26,
1999 represented 48% and 47% of revenue, respectively, compared to 48% for the
corresponding periods in fiscal
13
<PAGE>
year 1999. These amounts reflected a retroactive combination of sales to Compaq
Computer, Inc. and Digital Equipment Corporation as a result of their merger in
June 1998 as well as a retroactive combination of sales to Ingram Micro Inc. and
Electronic Resources Limited as a result of the completion of their merger in
July 1999. Sales to Hewlett-Packard Company were 12% and 13% of revenue in the
three and six months ended September 26, 1999, respectively, compared to 15% of
sales in the corresponding periods in fiscal year 1999. Sales to Compaq were 12%
of revenue in the three and six months ended September 26, 1999, respectively,
compared to 16% of revenue for the corresponding periods in fiscal 1999,
including sales to Digital Equipment.
Sales to computer equipment manufacturers and distribution channel customers
were 59% and 35% of revenue in the three months ended September 26, 1999,
respectively, compared to 65% and 32% in the three months ended September 27,
1998. For the six months ended September 26, 1999, computer equipment
manufacturer and distribution channel sales were 59% and 35% of revenue,
compared to 64% and 33% of revenue for the corresponding period in fiscal year
1999. The remaining revenue in the three and six months ended September 27, 1998
represented media royalty revenue and in the three and six months ended
September 26, 1999 represented media royalty revenue and sales to value added
resellers.
Gross Margin Rate. The gross margin rate in the three months ended September 26,
1999 decreased to 12.0% from 16.5% in the three months ended September 27, 1998.
The gross margin for the first six months of fiscal year 2000 was 14.3%,
compared to 15.8% in the corresponding period in fiscal year 1999.
The gross margin rate in the three and six month periods of fiscal year 2000
reflected the impact of a $57.1 million special charge as discussed below. The
gross margin rate excluding the impact of the charge was 17.1% and 16.9% in the
three and six-month periods ended September 26, 1999, respectively.
Excluding the impact of the special charge in the three and six month
comparative periods, the increase in the gross margin rate reflected increased
revenues from DLTtape drives, storage systems and DLTtape media royalties, which
have significantly higher margins than our 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 third quarter of fiscal year 2000.
Research and Development Expenses. Research and development expenses in the
three and six months ended September 26, 1999, were $92 million, or 8.2% of
revenue, and $183 million, or 8.3% of revenue, respectively, compared to $83
million, or 7.1% of revenue, and $167 million, or 7.4% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in research and
development expenses reflected the consolidation of ATL's expenses which were
not included in the prior year periods, as the acquisition occurred on September
28, 1998, and higher research and development expenses related to new tape drive
products and other new information storage products, including Super DLTtape
technology.
14
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended September 26, 1999, were $55 million, or 4.9% of revenue, and $109
million, or 4.9% of revenue, respectively, compared to $45 million, or 3.9% of
revenue, and $84 million, or 3.7% of revenue, respectively, in the corresponding
periods of fiscal year 1999. The increase in sales and marketing expenses
reflected the consolidation of ATL's expenses and an increase in marketing and
advertising costs associated with the DLTtape products. We expect the amount of
sales and marketing expenses to increase in the third quarter of fiscal year
2000.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended September 26, 1999 were $31 million, or 2.7% of
revenue, and $60 million, or 2.7% of revenue, respectively, compared to $21
million, or 1.8% of revenue, and $39 million, or 1.7% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in general and
administrative expenses reflected the expansion of DSSG's infrastructure to
support increased revenue and earnings, the consolidation of ATL's expenses, 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.
Purchased In-process Research and Development Expense. The Company expensed
purchased in-process research and development, preliminarily valued at $37
million, as a result of the Meridian acquisition in the three months ended
September 26, 1999. For additional information regarding the Meridian
acquisition and the costs associated with in-process research and development,
refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.
Special Charge. During the three months ended September 26, 1999, the Company's
Hard Disk Drive group recorded a special charge of $59.4 million, of which $57.1
million is included in cost of sales and $2.3 million is included in operating
expenses. The charge reflected HDDG's strategy to modify the hard disk drive
business to more closely align product development and the business's operating
model with the requirements of the rapidly growing low-cost PC market. The
special charge was associated primarily with the streamlining of HDDG's
logistics model in order to create a faster and more flexible fulfillment
system, changes in the customer service strategy and consolidation of certain
product development programs. Upon full implementation of the plan, HDDG
currently expects to realize more than $100 million in cost savings per year,
beginning in fiscal year 2001.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and six months ended September 26, 1999 was $0.1 million expense and
$5.1 million income, respectively, compared to $0.6 million expense and $1.6
million income, respectively, in the corresponding periods of fiscal year 1999.
The income for the six months ended September 26,
15
<PAGE>
1999 reflected a $2.6 million gain on the sale of an equity investment in the
first quarter of fiscal year 2000.
Loss from Investee. The loss from investee reflected our 49% 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 and six
months ended September 27 1998, was $17.1 million and $41.4 million,
respectively.
Income Taxes. No tax benefit was recognizable for the charge for purchased
in-process research and development related to the acquisition of Meridian. The
Company recorded a benefit for income taxes before the charge of $20 million and
$16 million for the three months and six months ended September 26, 1999, for an
effective tax benefit rate of 44% and 48%, respectively, as compared to 30% for
the corresponding periods of fiscal year 1999. The increased tax benefit rate
reflects the effect of the larger percentage of HDDG losses as compared to DSSG
income.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $724 million at September
26, 1999 compared to $797 million at March 31, 1999. The Company used cash to
purchase $146 million of treasury stock, as discussed below and to invest in
property and equipment. Sources of cash were a reduction in accounts receivable
and the issuance of common stock.
In September 1999, the Company issued 4.1 million DSSG shares and 2 million HDDG
shares to the stockholders of Meridian to complete the acquisition of Meridian
as a wholly owned subsidiary of the Company. In part, the Company reissued DSSG
and HDDG shares held as treasury stock to complete the acquisition. The
difference between the cost of the treasury stock and the value at which the
shares were reissued resulted in a $3.5 million addition to paid-in-capital in
the quarter ended September 26, 1999. For additional information regarding the
Meridian acquisition, refer to Note 7 of the Notes to Condensed Consolidated
Financial Statements.
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 was to minimize
the dilutive impact of the shares issued to complete the acquisition of
Meridian. During the six months ended September 26, 1999, the Company
repurchased 7.2 million shares of DSSG common stock and 2.2 million shares of
HDDG common stock for a combined total of $146 million.
In October 1999, the Board of Directors authorized an increase in the Company's
stock repurchase program, increasing the previously authorized amount of $200
million to a total of $600 million. The increased authorization allows the
Company to repurchase Quantum's common stocks through the open market or through
other mechanisms. The increase is intended primarily for repurchase of the
Company's DSSG common stock.
In December 1998, ATL entered into a senior credit facility that provides a $35
million revolving credit line to ATL. The revolving credit line is co-terminous
with our $500 million revolving credit line, expiring in June 2000. As amended,
at the option of ATL, borrowings under the revolving credit line bear interest
at either the London interbank offered rate plus a margin determined by our
total funded
16
<PAGE>
debt ratio, or at a base rate, with option periods of two weeks to six months.
At September 26, 1999, $10 million was outstanding on ATL's revolving credit
line.
In June 1997, the Company entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At our
option, borrowings under the revolving credit line bear interest at either the
London interbank offered rate plus a margin determined by our total funded debt
ratio, or at a base rate, with option periods of one to six months. At September
26, 1999, there was no outstanding balance drawn on this line.
We expect to spend approximately $130 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 fiscal year 1999, the Company entered into a strategic alliance with TiVo,
Inc., to supply hard disk drives utilizing Quantum's QuickViewTM technology for
integration into TiVo's Personal Video Recorder. As part of the agreement, the
Company received warrants to purchase 800,000 shares of TiVo common stock. On
September 30, 1999, subsequent to the end of the Company's fiscal second
quarter, the Company exercised its warrants immediately prior to TiVo's initial
public offering. The Company is not allowed to sell TiVo common stock for a six
month period following the initial public offering and will account for its
investment as an available for sale security. As a result, any unrealized gain
or loss will be shown net of tax, as part of accumulated other comprehensive
income/loss in the equity section of the Company's consolidated balance sheet.
17
<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 from external parties on our
company is difficult.
We have determined that all critical internal systems are year 2000 compliant as
we continue to implement 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:
o In the inventory phase we are listing and reviewing for criticality and
risk all hardware, software, equipment, infrastructure, and desktop tools
and applications.
o In the assessment phase, we are determining whether we are converting,
replacing or eliminating the impacted system or application.
o In the resolution phase, we are developing and carrying out a formal plan.
o Under stringent procedures in the testing phase, we are validating the
system and application on its functionality to perform seamlessly in the
year 2000.
o 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:
o 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.
o 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
18
<PAGE>
to our operations. We can defer the work or devise manual back-up
procedures to handle the interim needs.
o 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, remedied and certified all critical and key areas of our own
operations, which include information technology, operating equipment with
embedded chips or software and products. We continue to address active level
areas and expect to complete any necessary remediation of these areas by
December 1999. In addition, we have completed the assessment, resolution,
testing, and certification of critical and key third parties.
We have developed contingency plans for internal systems and third parties and
continue to modify these plans as deemed necessary.
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
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
19
<PAGE>
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 extensively with third parties to
manufacture and transport products and services, a failure of third party
systems could result in a disruption of service, which may 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 with the possible exception of
certain Meridian products manufactured or released before December 31, 1997.
These Meridian products are no longer supported by Quantum. Our families of disk
drive products have no internal date clocks, and therefore are not impacted by
the year 2000 problem. Our DLTtape 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
$10.5 million, with $7 million and $3.5 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.
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
20
<PAGE>
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.
21
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Product revenue $ 312,074 $ 260,645 $ 603,381 $ 497,304
Royalty revenue 45,024 29,813 84,461 48,856
--------- --------- --------- ---------
Total revenue 357,098 290,458 687,842 546,160
Cost of revenue 186,892 158,783 365,986 300,811
--------- --------- --------- ---------
Gross profit 170,206 131,675 321,856 245,349
Operating expenses:
Research and development 30,480 21,979 58,205 43,930
Sales and marketing 26,599 14,866 51,989 27,633
General and administrative 15,238 7,264 29,637 13,711
Purchased in-process research
and development 37,000 -- 37,000 --
--------- --------- --------- ---------
109,317 44,109 176,831 85,274
Income from operations 60,889 87,566 145,025 160,075
Other income (expense):
Interest income and other, net 3,687 3,825 10,170 8,190
Interest expense (4,812) (4,488) (9,656) (8,753)
--------- --------- --------- ---------
(1,125) (663) 514 (563)
Income before income taxes 59,764 86,903 145,539 159,512
Income tax provision 38,704 34,760 73,014 63,804
--------- --------- --------- ---------
Net income $ 21,060 $ 52,143 $ 72,525 $ 95,708
========= ========= ========= =========
Net income per share:
Basic $ 0.13 $ 0.34 $ 0.44 $ 0.62
Diluted $ 0.12 $ 0.33 $ 0.42 $ 0.59
Weighted average common shares:
Basic 165,378 151,527 166,019 155,122
Diluted 173,080 162,695 173,029 161,223
<FN>
See accompanying notes to condensed combined financial statements.
</FN>
</TABLE>
22
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
<TABLE>
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<CAPTION>
September 26, March 31,
1999 1999
---------- ----------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 292,618 $ 272,643
Marketable securities 10,155 --
Accounts receivable, net of allowance for
doubtful accounts of $3,420 and $2,507 224,969 254,228
Inventories 122,541 124,462
Deferred taxes 35,701 35,594
Other current assets 32,154 8,434
---------- ----------
Total current assets 718,138 695,361
Property and equipment, net of accumulated
depreciation of $66,157 and $54,630 82,060 73,122
Intangible assets, net 288,791 220,368
Other assets 13,872 24,792
---------- ----------
$1,102,861 $1,013,643
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 84,044 $ 64,025
Accrued warranty 48,678 37,988
Accrued compensation 27,774 22,557
Current portion of long-term debt 715 683
Other accrued liabilities 29,340 32,850
---------- ----------
Total current liabilities 190,551 158,103
Deferred taxes 37,955 27,355
Long-term debt 32,275 37,974
Convertible subordinated debt 191,667 191,667
Group equity 650,413 598,544
---------- ----------
$1,102,861 $1,013,643
========== ==========
<FN>
See accompanying notes to condensed combined financial statements.
</FN>
</TABLE>
23
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
<TABLE>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six Months Ended
September 26, September 27,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 72,525 $ 95,708
Adjustments to reconcile net income to net cash provided by
operations:
Purchased in-process research and development 37,000 --
Depreciation 15,377 12,543
Amortization 11,916 4,736
Deferred income taxes (107) --
Compensation related to stock plans 1,096 2,296
Changes in assets and liabilities:
Accounts receivable 29,623 (50,870)
Inventories 3,062 5,458
Accounts payable 17,904 9,925
Accrued warranty 10,105 3,033
Other assets and liabilities (21,371) 5,929
--------- ---------
Net cash provided by operating activities 177,130 88,758
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (39) --
Acquisition of intangible assets (2,500) --
Investment in property and equipment (19,784) (16,274)
--------- ---------
Net cash used in investing activities (22,323) (16,274)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities 6,667 --
Principal payments on long-term credit facilities (12,334) (304)
Inter-group payment for common stock issued (2,835) --
Purchases of treasury stock (144,094) (264,220)
Proceeds from issuance of common stock, net 17,764 13,347
--------- ---------
Net cash used in financing activities (134,832) (251,177)
--------- ---------
Increase (decrease) in cash and cash equivalents 19,975 (178,693)
Cash and cash equivalents at beginning of period 272,643 388,910
--------- ---------
Cash and cash equivalents at end of period $ 292,618 $ 210,217
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,620 $ 8,315
Income taxes, net of (refunds) $ 3,866 $ (25,669)
Tangible and intangible assets acquired for shares of DSSG
and HDDG common stock, net of cash acquired and liabilities
assumed $ 101,863 $ --
<FN>
See accompanying notes to condensed combined financial statements.
</FN>
</TABLE>
24
<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 & 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 the
Registration Statement on Form S-4 (SEC File 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.
25
<PAGE>
2. Inventories
Inventories consisted of the following:
(In thousands)
September 26, March 31,
1999 1999
------------- ---------
Materials and purchased parts $ 58,716 $ 60,138
Work in process 26,547 22,154
Finished goods 37,278 42,170
-------- --------
$122,541 $124,462
======== ========
3. Net income per share
On July 23, 1999, Quantum's stockholders approved the tracking stock proposal
and Quantum implemented the tracking stock proposal on August 3, 1999.
Accordingly, the net income per share for the periods presented below have been
calculated in accordance with the Restated Certificate of Incorporation.
<TABLE>
The following table sets forth the computation of basic and diluted net income
per share:
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic net income per share
- income available to common stockholders $ 21,060 $ 52,143 $ 72,525 $ 95,708
Effect of dilutive securities:
7% convertible subordinated notes -- 2,013 -- --
-------- -------- -------- --------
Numerator for diluted net income per
share - income available to common
stockholders $ 21,060 $ 54,156 $ 72,525 $ 95,708
======== ======== ======== ========
Denominator:
Denominator for basic net income per
share - weighted average shares 165,378 151,527 166,019 155,122
Effect of dilutive securities:
Outstanding options 7,702 4,962 7,010 6,101
7% convertible subordinated notes -- 6,206 -- --
-------- -------- -------- --------
Denominator for diluted net income per
share - adjusted weighted average shares 173,080 162,695 173,029 161,223
======== ======== ======== ========
Basic net income per share $ 0.13 $ 0.34 $ 0.44 $ 0.62
======== ======== ======== ========
Diluted net income per share $ 0.12 $ 0.33 $ 0.42 $ 0.59
======== ======== ======== ========
</TABLE>
26
<PAGE>
The computation of diluted net income per share for the three and six months
ended September 26, 1999, and the six months ended September 27, 1998, excluded
the effect of the 7% convertible subordinated notes issued in July 1997, which
are convertible into 6,206,152 shares of DSSG common stock, or 21.587 shares per
$1,000 note, because the effect would have been antidilutive.
4. Group Equity
In September 1999, Quantum's DLT & Storage Systems group issued 4.1 million DSSG
shares and 1.9 million HDDG shares it had acquired (and HDDG issued 0.1 million
HDDG shares) to the stockholders of Meridian Data, Inc. ("Meridian") to complete
the acquisition of Meridian as a wholly owned subsidiary of Quantum. In part,
DSSG reissued DSSG and HDDG shares held as treasury stock to complete the
acquisition. The difference between the cost of the treasury stock and the value
at which the shares were reissued resulted in a $3.5 million addition to
paid-in-capital in the quarter ended September 26, 1999. For additional
information regarding the Meridian acquisition, refer to Note 5 of the Notes to
Condensed Combined Financial Statements.
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 was to minimize the
dilutive impact of the shares issued to complete the acquisition of Meridian.
During the six months ended September 26, 1999, DSSG repurchased 7.2 million
shares of DSSG common stock and acquired 1.9 million shares of HDDG common stock
for $144 million, and HDDG repurchased 0.3 million shares of HDDG common stock
for $2 million.
In October 1999, the Board of Directors authorized an increase in Quantum's
stock repurchase program, increasing the previously authorized amount of $200
million to a total of $600 million. The increase is intended primarily for
repurchase of DSSG common stock.
5. Business Combination
On September 10, 1999, Quantum's DLT & Storage Systems group completed the
acquisition of Meridian. 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
acquisition has been accounted for as a purchase at a total cost of $115
million. The acquisition was completed with the issuance of 4.1 million shares
of DSSG common stock and 2 million shares of HDDG common stock valued at $74
million and $18 million, respectively, on the date of acquisition in exchange
for all outstanding shares of Meridian, the conversion of outstanding Meridian
stock options into options to purchase 630,000 shares of DSSG common stock and
315,000 shares of HDDG common stock valued at $8 million and $2 million,
respectively, and the assumption of Meridian liabilities and other acquisition
costs of approximately $13 million. At the date of acquisition, Meridian had $11
million of cash and marketable securities and a net operating loss carryforward
for U.S. federal income tax purposes of approximately $46 million. Meridian's
results of operations are included in the financial statements as of the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the date of acquisition. Pro forma results of operations
have not been presented because the effect of the acquisition was not material.
27
<PAGE>
The excess of the purchase price over the fair value of the net tangible assets
acquired has been allocated to the following identifiable intangible assets:
goodwill, trademarks, workforce in place, developed technology and in-process
research and development. As of the acquisition date, technological feasibility
of the in-process technology has not been established and the technology has no
alternative future use. Therefore, DSSG has expensed the amount of the purchase
price allocated to in-process research and development, estimated at $37 million
as of the date of acquisition. This amount and the other components of the
purchase price allocation are preliminary. The remaining identifiable intangible
assets, valued at $77 million, will be amortized on a straight-line basis over
periods ranging from five to ten years.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 21%, which represents a premium to Quantum's cost of capital.
The expected revenue assumes an average compound annual revenue growth rate of
64% during calendar years 1999 through 2007. Expected total revenue from the
purchased in-process projects peak in calendar year 2005 and then begin to
decline as other new products are expected to be introduced. These projections
are based on management's estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions. If products
are not successfully developed, DSSG may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.
28
<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 & 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 storage
systems. DSSG's storage systems consist of DLTtape libraries, solid state
storage systems, network attached storage servers, CD-ROM/DVD-ROM enterprise
networking servers, and a new category of local area network storage appliance
which incorporates a DLTtape library.
DLTtape products 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.
DSSG's tape libraries serve the entire tape library data storage market from
desktop computers to enterprise class computers. DSSG's local area network
storage appliance is designed for remote site back-up that provides central
management and Web based customer service. With the acquisition of Meridian
Data, Inc. completed in September, 1999, DSSG has become a leader in 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.
Prior to 1998, 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 also 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. Currently, over 80% of media sales occur through this license model.
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.
29
<PAGE>
Products
The DLT & Storage Systems group's products include:
DLT:
----
o 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).
o 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:
----------------
o 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.
o 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 which enable significantly faster data access times than
magnetic disks used in standard hard disk drives.
o Network attached storage systems. DSSG's Snap! Server (TM) family of
network attached storage appliances offers options for 20GB and 40GB of
network storage. These products provide the ease of plug-and-play
features and can be directly attached to workgroup-level networks,
providing instant additional network storage capacity. No special
configurations are needed for ordinary use and advanced configuration
options enable added value features.
o CD-ROM/DVD-ROM enterprise networking systems. DSSG offers two families
of CD-ROM/DVD-ROM workgroup servers--network attached solutions and
SCSI attached solutions.
o LANvault (TM) tape backup appliance. DSSG recently announced the
introduction of LANvault, a product that incorporates a backup
appliance with a DLTtape library, a central management console and a
customer service Web portal. This product is intended to meet the
30
<PAGE>
requirements for remote site backup and is designed as a plug-and-play
appliance preloaded with industry-standard backup software for ease of
installation and use.
Results of Operations
Revenue. Revenue in the three and six months ended September 26, 1999 was $357
million and $688 million, respectively, compared to $290 million and $546
million, respectively, for the corresponding periods in fiscal year 1999. The
increase in revenue reflected increased revenue from sales of DLTtape drives,
tape libraries and increased DLTtape media royalties. Revenue from tape
libraries and DLTtape media royalties reached record highs in the three and six
month periods. 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 the sales of DLTtape media cartridges
at licensed media manufacturers for which DSSG earns a royalty fee. The overall
increase in sales of 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 base of DLTtape drives.
<TABLE>
The table below summarizes the components of DSSG's revenue in the three and six
months ended September 26, 1999 and September 27, 1998:
<CAPTION>
(in millions) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
DLT drives $219 $192 $438 $350
DLT media 36 50 64 113
DLT royalty 45 30 84 49
Storage systems 82 18 149 34
Intra-group elimination* (25) - (47) -
---- ---- ---- ----
Revenue $357 $290 $688 $546
==== ==== ==== ====
<FN>
* Represents intra-group sales of DLTtape drives for incorporation into DSSG's
tape libraries.
</FN>
</TABLE>
Sales to the top five customers in the three and six months ended September 26,
1999 represented 47% and 48% of revenue, respectively, compared to 56% and 55%
of revenue, respectively, for the corresponding periods in fiscal year 1999.
These amounts reflected a retroactive combination of sales to Compaq and Digital
Equipment as a result of their merger in June 1998. Sales to Compaq were 18% and
20% of revenue in the three and six months ended September 26, 1999,
respectively, compared to 27% and 26% of revenue, respectively, in the
corresponding periods in fiscal year 1999, including sales to Digital Equipment.
Sales to Hewlett Packard were 16% and 15% of revenue in the three and six months
ended September 26, 1999, respectively, compared to 14% and 13% of revenue,
respectively, in the corresponding periods in fiscal year 1999.
Sales to computer equipment manufacturers and distribution channel customers
were 62% and 18% of revenue in the three months ended September 26, 1999,
respectively, compared to 72% and 18% of revenue in the three months ended
September 27, 1998. For the six months ended September 26,
31
<PAGE>
1999, computer equipment manufacturer and distribution channel sales were 65%
and 15% of revenue, compared to 73% and 18% of revenue in the corresponding
period of fiscal year 1999. The remaining revenue in the three and six months
ended September 27, 1998 represented media royalty revenue and in the three and
six months ended September 26, 1999, represented media royalty revenue and sales
to value-added resellers.
Gross Margin Rate. The gross margin rate in the three months ended September 26,
1999, was 47.7%, compared to 45.3% in the three months ended September 27, 1998.
The gross margin rate for the first six months of fiscal year 2000 was 46.8%
compared to 44.9% for the corresponding period of fiscal year 1999. The increase
in the gross margin rate reflected an increase in the proportion of overall
revenue represented by DLTtape media royalty revenue partially offset by a
decline in the gross margin rate earned on DLTtape drives.
Research and Development Expenses. Research and development expenses in the
three and six months ended September 26, 1999, were $30 million, or 8.5% of
revenue, and $58 million, or 8.5% of revenue, respectively, compared to $22
million, or 7.6% of revenue, and $44 million, or 8.0% of revenue, respectively,
in the corresponding periods in fiscal year 1999. The increase in research and
development expenses reflected the combining of ATL's expenses which were not
included in the prior year periods, as the acquisition occurred on September 28,
1998, and higher research and development expenses related to new tape drive
products and other new information storage products, including Super DLTtape
technology.
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended September 26, 1999, were $27 million, or 7.4% of revenue, and $52
million, or 7.6% of revenue, respectively, compared to $15 million, or 5.1% of
revenue, and $28 million, or 5.1% of revenue, respectively, in the corresponding
periods in fiscal year 1999. The increase in sales and marketing expenses
reflected the increased level of sales, the combining of ATL's expenses, and an
overall increase in marketing and advertising costs associated with DLTtape
products. DSSG expects the amount of sales and marketing expenses to increase in
the third quarter of fiscal year 2000 as a result of including a full quarter of
expenses relating to the Meridian acquisition.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended September 26, 1999, were $15 million, or 4.3% of
revenue, and $30 million, or 4.3% of revenue, respectively, compared to $7
million, or 2.5% of revenue, and $14 million, or 2.5% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in general and
administrative expenses reflected the expansion of DSSG's infrastructure to
support increased revenue and earnings, the combining of ATL's expenses, and the
amortization of intangible assets, particularly goodwill. DSSG expects the
amount of general and administrative expenses to increase in the third quarter
of fiscal year 2000 as a result of including a full quarter of amortization of
intangible assets acquired as part of the Meridian acquisition.
Purchased In-process Research and Development Expense. DSSG expensed purchased
in-process research and development, preliminarily valued at $37 million, as a
result of the Meridian
32
<PAGE>
acquisition in the three months ended September 26, 1999. For additional
information regarding the Meridian acquisition and the costs associated with
in-process research and development, refer to Note 5 of the Notes to Condensed
Combined Financial Statements.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and six months ended September 26, 1999 was $1.1 million expense and
$0.5 million income, respectively, compared to $0.7 million expense and $0.6
million expense, respectively, in the corresponding periods of fiscal year 1999.
The income for the six months ended September 26, 1999 reflected a $2.6 million
gain on the sale of an equity investment recognized in the first quarter of
fiscal year 2000.
Income Taxes. No tax benefit was recognizable for the charge for purchased
in-process research and development related to the acquisition of Meridian.
DSSG's effective tax rate for the three and six months ended September 26, 1999,
and September 27, 1998, was 40%.
Liquidity and Capital Resources
Operating Activities. DSSG generated cash from operations of $177 million in the
six months ended September 26, 1999 compared to $89 million in the six months
ended September 27, 1998. The increase primarily reflected higher net income,
excluding the non-cash charge for purchased in-process research and development,
and collection of accounts receivable.
Investing Activities. Investments in the six months ended September 26, 1999
were $22 million, consisting of investments in property and equipment and
acquisition of intangible assets. Investments in the six months ended September
27, 1998 totaled $16 million.
Financing Activities. At September 26, 1999, and March 31, 1999, Quantum's debt
allocated to DSSG was $225 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
September 26, 1999, Quantum had total debt of $337 million with an average
interest rate of 8.5%. As discussed below, in the six months ended September 26,
1999, DSSG used cash to purchase $144 million of treasury stock.
In September 1999, Quantum's DLT & Storage Systems group issued 4.1 million DSSG
shares and 1.9 million HDDG shares it had acquired (and HDDG issued 0.1 million
HDDG shares) to the stockholders of Meridian to complete the acquisition of
Meridian as a wholly owned subsidiary of Quantum. In part, DSSG reissued DSSG
and HDDG shares held as treasury stock to complete the acquisition. The
difference between the cost of the treasury stock and the value at which the
shares were reissued resulted in a $3.5 million addition to paid-in-capital in
the quarter ended September 26, 1999. For additional information regarding the
Meridian acquisition, refer to Note 5 of the Notes to Condensed Combined
Financial Statements.
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 was to minimize the
dilutive impact of the shares issued to complete the
33
<PAGE>
acquisition of Meridian. During the six months ended September 26, 1999, DSSG
repurchased 7.2 million shares of DSSG common stock and acquired 1.9 million
shares of HDDG common stock for $144 million, and HDDG repurchased 0.3 million
shares of HDDG common stock for $2 million.
In October 1999, the Board of Directors authorized an increase in Quantum's
stock repurchase program, increasing the previously authorized amount of $200
million to a total of $600 million. The increased authorization allows Quantum
to repurchase its common stocks through the open market or through other
mechanisms. The increase is intended primarily for repurchase of DSSG common
stock.
In December 1998, ATL entered into a senior credit facility that provides a $35
million revolving credit line to ATL. The revolving credit line is co-terminous
with Quantum's $500 million revolving credit line, expiring in June 2000. As
amended, at the option of ATL, borrowings under the revolving credit line bear
interest at either London interbank offered rate plus a margin determined by
Quantum's total funded debt ratio, or at a base rate, with option periods of two
weeks to six months. At September 26, 1999, $10 million was outstanding on this
revolving credit line.
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either London interbank offered rate plus a margin determined by our total
funded debt ratio, or at a base rate, with option periods of one to six months.
At September 26, 1999, there was no outstanding balance drawn on this line.
DSSG expects to spend approximately $70 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
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.
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 its 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 Quantum assets or liabilities and did not affect ownership
of our assets or responsibility for our liabilities or those of our
subsidiaries. The assets we attribute to one group could be subject to the
liabilities of the other group, whether such liabilities arise from lawsuits,
contracts or indebtedness that we attribute to the other group. If we are unable
to satisfy one group's liabilities out of the assets we attribute to it, we may
be required to satisfy those liabilities with assets we attribute to the other
group.
34
<PAGE>
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.
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:
o it will introduce any of these new products in the time frame DSSG
currently forecasts;
o it will not experience technical or other difficulties that could
prevent or delay the introduction of these new products;
o its new products will achieve market acceptance;
o 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
o 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, changes in
customer requirements and increasing competition could result in declining sales
and gross margins on its existing products.
35
<PAGE>
Reliance on a limited number of 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.
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:
o delayed technology purchases as a result of caution before the year
2000 transition;
o an inadequate supply of DLTtape media cartridges;
o customers canceling, deferring or rescheduling significant orders as a
result of excess inventory levels or other factors;
o declines in network server demand; or
o 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
36
<PAGE>
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 inventories which could result in
inventory write-downs or losses or insufficient inventories which could have 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
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.
37
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 768,214 $ 874,253 $ 1,520,705 $ 1,721,574
Cost of revenue - on net sales 745,989 814,039 1,470,211 1,608,661
Cost of revenue - special charge 57,068 -- 57,068 --
----------- ----------- ----------- -----------
Gross profit (loss) (34,843) 60,214 (6,574) 112,913
Operating expenses:
Research and development 61,973 60,661 124,681 123,008
Sales and marketing 28,860 30,520 56,691 56,090
General and administrative 15,332 14,230 30,077 25,184
Special charge 2,338 -- 2,338 --
----------- ----------- ----------- -----------
108,503 105,411 213,787 204,282
Loss from operations (143,346) (45,197) (220,361) (91,369)
Other income (expense):
Interest income and other, net 3,423 2,307 9,387 6,645
Interest expense (2,406) (2,237) (4,770) (4,474)
Loss from investee -- (17,113) -- (41,350)
----------- ----------- ----------- -----------
1,017 (17,043) 4,617 (39,179)
Loss before income taxes (142,329) (62,240) (215,744) (130,548)
Income tax benefit (58,642) (27,362) (88,873) (55,116)
----------- ----------- ----------- -----------
Net loss $ (83,687) $ (34,878) $ (126,871) $ (75,432)
=========== =========== =========== ===========
Net loss per share:
Basic $ (1.01) $ (0.46) $ (1.53) $ (0.97)
Diluted $ (1.01) $ (0.46) $ (1.53) $ (0.97)
Weighted average common shares:
Basic 82,883 75,763 83,107 77,561
Diluted 82,883 75,763 83,107 77,561
<FN>
See accompanying notes to condensed combined financial statements.
</FN>
</TABLE>
38
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
September 26, March 31,
1999 1999
---------- ----------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 396,392 $ 499,725
Marketable securities 24,479 24,426
Accounts receivable, net of allowance for
doubtful accounts of $7,001 and $9,623 367,289 392,329
Inventories 151,132 147,524
Deferred taxes 72,000 72,107
Other current assets 117,797 96,401
---------- ----------
Total current assets 1,129,089 1,232,512
Property and equipment, net of accumulated
depreciation of $201,383 and $236,987 189,570 198,806
Intangible assets, net 3,557 5,199
Other assets 32,748 33,436
---------- ----------
$1,354,964 $1,469,953
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 293,320 $ 342,344
Accrued warranty 44,480 38,917
Accrued compensation 41,126 51,048
Income taxes payable 26,004 33,411
Current portion of long-term debt 357 341
Other accrued liabilities 122,494 57,841
---------- ----------
Total current liabilities 527,781 523,902
Deferred taxes 40,390 39,985
Long-term debt 16,137 18,987
Convertible subordinated debt 95,833 95,833
Group equity 674,823 791,246
---------- ----------
$1,354,964 $1,469,953
========== ==========
See accompanying notes to condensed combined financial statements.
39
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
<TABLE>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six Months Ended
September 26, September 27,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(126,871) $ (75,432)
Adjustments to reconcile net loss to net cash provided by (used in)
operations:
Special charge 58,385 --
Loss from investee -- 41,350
Depreciation 33,119 32,798
Amortization 1,956 2,576
Deferred income taxes 512 1,003
Compensation related to stock plans 544 1,147
Changes in assets and liabilities:
Accounts receivable 25,040 125,784
Inventories (3,608) 13,777
Accounts payable (49,024) (58,820)
Income taxes payable (7,407) (11,693)
Accrued warranty 5,563 (4,754)
Other assets and liabilities (15,601) 10,568
--------- ---------
Net cash provided by (used in) operating activities (77,392) 78,304
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (33,367) (48,798)
Maturities of marketable securities 33,314 91,131
Investment in property and equipment (30,125) (41,168)
--------- ---------
Net cash provided by (used in) investing activities (30,178) 1,165
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities 3,333 --
Principal payments on long-term credit facilities (6,167) (153)
Inter-group proceeds for common stock issued 2,835 --
Purchase of treasury stock (1,558) --
Proceeds from issuance of common stock, net 5,794 6,673
--------- ---------
Net cash provided by financing activities 4,237 6,520
--------- ---------
Increase (decrease) in cash and cash equivalents (103,333) 85,989
Cash and cash equivalents at beginning of period 499,725 253,240
--------- ---------
Cash and cash equivalents at end of period $ 396,392 $ 339,229
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,361 $ 4,157
Income taxes $ 14,475 $ 17,853
<FN>
See accompanying notes to condensed combined financial statements.
</FN>
</TABLE>
40
<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 the Registration
Statement on Form S-4 (SEC File 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.
41
<PAGE>
2. Inventories
Inventories consisted of the following:
(In thousands)
September 26, March 31,
1999 1999
------------- ----------
Materials and purchased parts $ 1,834 $ 2,204
Work in process 10,455 5,377
Finished goods 138,843 139,943
-------- --------
$151,132 $147,524
======== ========
3. Net income (loss) per share
On July 23, 1999, Quantum's stockholders approved the tracking stock proposal
and Quantum implemented the tracking stock proposal on August 3, 1999.
Accordingly, the net loss per share for the periods presented below have been
calculated in accordance with the Restated Certificate of Incorporation.
<TABLE>
The following table sets forth the computation of basic and diluted net loss per
share:
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net loss
per share - loss available to common
stockholders $ (83,687) $ (34,878) $ (126,871) $(75,432)
========= ========= ========== ========
Denominator:
Denominator for basic and diluted net
loss per share - weighted average
shares 82,883 75,763 83,107 77,561
========= ========= ========== ========
Basic and diluted net loss per share $ (1.01) $ (0.46) $ (1.53) $ (0.97)
========= ========= ========== ========
</TABLE>
The computation of diluted net loss per share for the three and six months ended
September 26, 1999 and September 27, 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 $1,000 note, because
the effect would have been antidilutive.
Options to purchase 15,234,101 and 10,390,490 shares of HDDG common stock were
outstanding at September 26, 1999 and September 27, 1998, respectively. However,
the corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for the three and six months ended
September 26, 1999 and September 27, 1998 because the effect would have been
antidilutive.
42
<PAGE>
4. Group Equity
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 was to minimize the
dilutive impact of the shares issued to complete the acquisition of Meridian.
During the six months ended September 26, 1999, DSSG repurchased 7.2 million
shares of DSSG common stock and acquired 1.9 million shares of HDDG common stock
for $144 million, and HDDG repurchased 0.3 million shares of HDDG common stock
for $2 million.
In October 1999, the Board of Directors authorized an increase in Quantum's
stock repurchase program, increasing the previously authorized amount of $200
million to a total of $600 million. The increase is intended primarily for
repurchase of DSSG common stock.
5. Litigation
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 completed a full 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.
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. Special Charge
During the quarter ended September 26, 1999, HDDG recorded a special charge of
$59.4 million. The charge reflected HDDG's strategy to modify the hard disk
drive business to more closely align product development and the business'
operating model with the requirements of the rapidly growing low-cost PC market.
The special charge was associated primarily with the streamlining of HDDG's
logistics model in order to create a faster and more flexible fulfillment
system, changes in the customer service strategy and consolidation of certain
product development programs. Upon full implementation of the plan, HDDG
currently expects to realize more than $100 million in cost savings per year,
beginning in fiscal year 2001.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
43
<PAGE>
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. HDDG expects that the affected facilities will be
vacated within the next 12 months.
In connection with the charge, HDDG currently expects a workforce reduction of
approximately 600 employees. In addition, approximately 100 open requisitions
and budgeted positions have been eliminated. The reduction in force primarily
affects employees at HDDG's drive configuration centers and warehouses in
Milpitas, California and Dundalk, Ireland and employees within the desktop drive
business. Approximately 115 of the 600 employees had been terminated as of
September 26, 1999. HDDG anticipates that the remaining employees will be
terminated by the end of the second quarter of fiscal year 2001.
As of September 26, 1999, HDDG had incurred $1 million in cash expenditures
associated with employee severance and benefits. HDDG expects to incur
additional cash expenditures associated with employee severance and benefits,
facilities costs and other costs associated with the plan of approximately $35
million.
<TABLE>
The following table summarizes activity related to the special charge for the
quarter ended September 26, 1999:
<CAPTION>
(In thousands) Severance
And Facilities Other
Benefits Costs Inventory Costs Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Special charge $ 7,833 $ 26,359 $ 13,214 $ 12,000 $ 59,406
Cash payments (1,021) -- -- -- (1,021)
-------- -------- -------- -------- --------
Balance at September 26, 1999 $ 6,812 $ 26,359 $ 13,214 $ 12,000 $ 58,385
======== ======== ======== ======== ========
</TABLE>
7. Comprehensive Income (Loss)
<TABLE>
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 and six
months ended September 26, 1999 and September 27, 1998 is presented in the
following table:
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (83,687) $ (34,878) $(126,871) $ (75,432)
Other comprehensive income --
foreign currency translation
adjustments 1,693 1,188 773 183
--------- --------- --------- ---------
Comprehensive loss $ (81,994) $ (33,690) $(126,098) $ (75,249)
========= ========= ========= =========
</TABLE>
44
<PAGE>
8. 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 converge and be reported on a combined basis.
<TABLE>
Results for HDDG's business units for the three and six months ended September
26, 1999 and September 27, 1998 are presented in the following table:
<CAPTION>
(In millions) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Business unit:
Desktop
Revenue $ 661 $ 749 $ 1,298 $ 1,465
Unit operating loss (133) (29) (194) (48)
High-end
Revenue 107 125 222 257
Unit operating loss (10) (16) (26) (43)
Recording heads
Loss from investee -- (17) -- (41)
</TABLE>
<TABLE>
<CAPTION>
(In millions) Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss reconciliation:
Total unit operating loss $(143) $ (45) $(220) $ (91)
Loss from investee -- (17) -- (41)
Unallocated amounts:
Interest and other income/(expense) 1 -- 4 2
----- ----- ----- -----
Loss before income taxes $(142) $ (62) $(216) $(130)
===== ===== ===== =====
</TABLE>
45
<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:
o dedicated sites that store large volumes of data;
o network servers such as those used for Internet and intranet services,
online transaction processing and enterprise wide applications;
o high-speed computers used for specialized engineering design software;
and
o 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.
46
<PAGE>
Products
Desktop products. HDDG offers two families of desktop hard disk drives--the
Quantum FireballTM and Quantum Fireball Plus. 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 SystemTM and Data
Protection SystemTM with its desktop products. These features substantially
reduce failure rates and provide increased reliability and performance. HDDG
also began offering the second-generation Shock Protection System II with its
most recent desktop products. 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 Atlas and Quantum Atlas 10K families. The Quantum Atlas
family offers high-capacity hard disk drives for high performance
storage-intensive applications such as enterprise servers and storage
subsystems. HDDG also offers the Shock Protection System with its high-end
products.
<TABLE>
The table below sets forth key performance characteristics for HDDG's current
products:
<CAPTION>
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
- -------- ---- ---- ----- --------
<S> <C> <C> <C> <C>
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 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 lct 10 10.0 5.0 to 30.0 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
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>
47
<PAGE>
Results of Operations
Revenue. Revenue in the three and six months ended September 26, 1999 was $768
million and $1.521 billion, respectively, compared to $874 million and $1.722
billion, respectively, for the corresponding periods in fiscal year 1999. The
decrease in revenue reflected lower revenue from sales of both desktop and
high-end hard disk drives.
o Desktop hard disk drive revenue in the three and six months ended
September 26, 1999 was $661 million and $1.298 billion, respectively,
compared to $749 million and $1.465 billion, respectively, for the
corresponding periods in fiscal year 1999. While shipments of desktop
hard disk drives increased from the first six months of fiscal year
1999, intense competitive pricing pressures resulted in significantly
lower average unit prices and reduced desktop hard disk drive revenue.
o High-end hard disk drive revenue for the three and six months ended
September 26, 1999 was $107 million and $222 million, respectively,
compared to $125 million and $257 million, respectively, for the
corresponding periods in fiscal year 1999. Shipments of high-end hard
disk drives increased slightly from the first six months of fiscal year
1999 as HDDG completed a transition to new high-end products, while
revenue declined reflecting reduced average unit prices.
Sales to the top five customers in the three and six months ended September 26,
1999 represented 51% and 49% of revenue, respectively, compared to 45% and 47%,
respectively, in the corresponding periods in fiscal year 1999. These amounts
reflected a retroactive combination of sales to Compaq and Digital Equipment as
a result of their merger in June 1998 as well as a retroactive combination of
sales to Ingram Micro and Electronic Resources as a result of the completion of
their merger in July 1999. Sales to Hewlett-Packard were 10% and 12% of revenue
in the three and six months ended September 26, 1999, respectively, compared to
16% of revenue for the corresponding periods in fiscal year 1999. Sales to Dell
Computer were 10% of revenue in the three months ended September 26, 1999 and
were less than 10% of revenue in the six months ended September 26, 1999 and the
corresponding periods in fiscal year 1999. Sales to Ingram Micro were 13% of
revenue for the three and six months ended September 26, 1999, and were less
than 10% of revenue for the corresponding periods in fiscal year 1999, including
sales to Electronic Resources.
Sales to computer equipment manufacturers and distribution channel customers
were 57% and 43% of revenue in the three months ended September 26, 1999,
respectively, compared to 64% and 36% of revenue in the three months ended
September 27, 1998. For the six months ended September 26, 1999, computer
equipment manufacturers and distribution channel sales were 56% and 44% of
revenue, compared to 62% and 38% for the corresponding period of fiscal year
1999.
Gross Margin Rate. The gross margin rate in the three months ended September 26,
1999 decreased to -4.5% from 6.9% in the three months ended September 27, 1998.
The gross margin rate for the first six months of fiscal year 2000 was -0.4%,
compared to 6.6% in the corresponding period in fiscal year 1999. The gross
margin rate in the three and six month periods of fiscal year 2000 reflected the
impact of a $57.1 million special charge as discussed below. The gross margin
48
<PAGE>
rate excluding the impact of the charge was 2.9% and 3.3% in the three and
six-month periods ended September 26, 1999.
o The desktop gross margin rate for the three and six months ended
September 26, 1999 was -8.6% and -3.7%, respectively, compared to 5.2%
and 6.0% for the corresponding periods in fiscal year 1999. Excluding
the desktop portion of the special charge of $51.4 million, the gross
margin rate was -0.8% and 0.3% for the three and six month periods
ended September 26, 1999. Excluding the impact of the special charge,
the decrease in the gross margin rate 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 third quarter of fiscal year 2000.
o The high-end gross margin rate for the three and six months ended
September 26, 1999 was 20.6% and 18.5%, respectively, compared to 16.7%
and 9.8% for the corresponding periods in year fiscal 1999. Excluding
the high-end portion of the special charge of $5.7 million, the gross
margin rate was 25.9% and 21.1% in the three and six-month periods
ended September 26, 1999. The increase in gross margins reflected the
transition to new, higher margin products.
Research and Development Expenses. Research and development expenses in the
three and six months ended September 26, 1999, were $62 million, or 8.1% of
revenue, and $125 million, or 8.2% of revenue, respectively, compared to $61
million, or 6.9% of revenue, and $123 million, or 7.1% of revenue, respectively,
in the corresponding periods in fiscal year 1999.
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended September 26, 1999, were $29 million, or 3.8% of revenue, and $57
million, or 3.7% of revenue, respectively, compared to $31 million, or 3.5% of
revenue, and $56 million, or 3.3% of revenue, respectively, in the corresponding
periods of fiscal year 1999.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended September 26, 1999, were $15 million, or 2.0% of
revenue, and $30 million, or 2% of revenue, respectively, compared to $14
million, or 1.6% of revenue, and $25 million, or 1.5% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in general and
administrative expenses for the six month period 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.
Special Charge. During the three months ended September 26, 1999, HDDG recorded
a special charge of $59.4 million, of which $57.1 million is included in cost of
sales and $2.3 million is included in operating expenses. The charge reflected
HDDG's strategy to modify the hard disk drive business to more closely align
product development and the business's operating model with the requirements of
the rapidly growing low-cost PC market. The special charge was associated
primarily with the streamlining of HDDG's logistics model in order to create a
faster and more flexible fulfillment system, changes in the customer service
strategy and consolidation of certain
49
<PAGE>
product development programs. Upon full implementation of the plan, HDDG
currently expects to realize more than $100 million in cost savings per year,
beginning in fiscal year 2001.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and six months ended September 26, 1999 was $1.0 million and $4.6
million income, respectively, compared to $70 thousand and $2.2 million income,
respectively, in the corresponding periods of fiscal year 1999.
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 three and six months
ended September 27, 1998 was $17.1 million and $41.4 million, respectively.
Income Taxes. HDDG recorded an effective tax benefit for the three and six
months ended September 26, 1999 of 41% as compared to 44% and 42%, respectively,
for the corresponding periods in fiscal year 1999. The decrease in the fiscal
year 2000 effective tax benefit rate reflects a decreased percentage of foreign
earnings taxed at less than the U.S. rate.
Liquidity and Capital Resources
Operating Activities. HDDG used cash of $77 million in operating activities in
the six months ended September 26, 1999. HDDG generated cash from operations of
$78 million in the six months ended September 27, 1998. The use of cash
primarily reflected higher net losses and reduced collections of accounts
receivable compared to the prior year period.
Investing Activities. Investments in the six months ended September 26, 1999
were $30 million, which consisted of investments in property and equipment. Net
cash provided by investing activities during the six months ended September 27,
1998 totaled $1 million.
Financing Activities. At September 26, 1999, and March 31, 1999, Quantum's debt
allocated to HDDG was $112 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
September 26, 1999, Quantum had a total debt of $337 million with an average
interest rate of 8.5%. Net cash provided by financing activities during the six
months ended September 26, 1999 was $4 million.
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 was to minimize the
dilutive impact of the shares issued to complete the
50
<PAGE>
acquisition of Meridian. During the six months ended September 26, 1999, DSSG
repurchased 7.2 million shares of DSSG common stock and acquired 1.9 million
shares of HDDG common stock for $144 million, and HDDG repurchased 0.3 million
shares of HDDG common stock for $2 million.
In October 1999, the Board of Directors authorized an increase in Quantum's
stock repurchase program, increasing the previously authorized amount of $200
million to a total of $600 million. The increased authorization allows Quantum
to repurchase its common stocks through the open market or through other
mechanisms. The increase is intended primarily for repurchase of DSSG common
stock.
In December 1998, ATL entered into a senior credit facility that provides a $35
million revolving credit line to ATL. The revolving credit line is co-terminous
with Quantum's $500 million revolving credit line, expiring in June 2000. As
amended, at the option of ATL, borrowings under the revolving credit line bear
interest at either London interbank offered rate plus a margin determined by
Quantum's total funded debt ratio, or at a base rate, with option periods of two
weeks to six months. At September 26, 1999, $10 million was outstanding on this
revolving credit line.
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either London interbank offered rate plus a margin determined by our total
funded debt ratio, or at a base rate, with option periods of one to six months.
At September 26, 1999, there was no outstanding balance drawn on this line.
HDDG expects to spend approximately $60 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the development and introduction of new disk drive products.
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.
In fiscal year 1999, Quantum entered into a strategic alliance with TiVo, Inc.,
to supply hard disk drives utilizing Quantum's QuickView(TM) technology for
integration into TiVo's Personal Video Recorder. As part of the agreement,
Quantum received warrants to purchase 800,000 shares of TiVo common stock. On
September 30, 1999, subsequent to the end of Quantum's fiscal second quarter,
Quantum exercised its warrants immediately prior to TiVo's initial public
offering. Quantum is not allowed to sell TiVo common stock for a six month
period following the initial public offering and will account for its investment
as an available for sale security. As a result, any unrealized gain or loss, net
of tax, will be included as part of accumulated other comprehensive income/loss
and will be combined with group equity on HDDG's combined balance sheet.
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
51
<PAGE>
of an investment in Quantum and all of its 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 Quantum assets or liabilities
and did not affect ownership of our assets or responsibility for our liabilities
or those of our subsidiaries. The assets we attribute to one group could be
subject to the liabilities of the other group, whether such liabilities arise
from lawsuits, contracts or indebtedness that we attribute to the other group.
If we are unable to satisfy one group's liabilities out of the assets we
attribute to it, we may be required to satisfy those liabilities with assets we
attribute 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.
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:
o it will successfully or timely develop or market any new hard disk
drives in response to technological changes or evolving industry
standards;
o it will not experience technical or other difficulties that could delay
or prevent the successful development, introduction or marketing of new
hard disk drives;
o 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;
o it will quickly achieve high volume production of new hard disk drives;
or
o 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.
52
<PAGE>
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:
o the ability of Matsushita-Kotobuki, HDDG's exclusive manufacturer, to
quickly achieve high volume production of HDDG's hard disk drives;
o customers canceling, deferring or rescheduling significant orders;
o returns by customers of unsold hard disk drives for credit;
o decline in PC demand; or
o 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
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
53
<PAGE>
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 six months 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 10 quarters.
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 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:
o 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.
o 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.
o 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.
54
<PAGE>
o 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.
o 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 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
55
<PAGE>
increase Matsushita-Kotobuki's manufacturing costs and could result in higher
product prices and/or declining margins for HDDG's products.
56
<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
A Special Meeting of Stockholders was held on July 23, 1999 to consider and vote
on proposals to adopt an Amended and Restated Certificate of Incorporation to
create two separate classes of common stock and an Amendment to the Quantum
Corporation Employee Stock Purchase Plan to increase the number of shares
reserved for issuance thereunder.
The stockholders approved the adoption of the Amended and Restated Certificate
of Incorporation and the creation of two separate classes of common stock. The
number of votes "For" were 99,276,111; the number of votes "Against" were
18,564,889; and the number of votes "Withheld" were 597,461.
The stockholders also approved the amendment to the Quantum Corporation Employee
Stock Purchase Plan to increase the number of shares reserved for issuance
thereunder. The number of votes "For" were 97,705,836; the number of votes
"Against" were 20,224,106; and the number of votes "Abstain" were 508,519.
The 1999 Annual Meeting of Stockholders was also held on July 23, 1999 to
consider and vote on proposals to elect management's candidates for the Board of
Directors and to appoint Ernst & Young LLP to serve as Quantum's independent
auditors for the fiscal year ending March 31, 2000.
57
<PAGE>
The stockholders elected each of management's candidates for the Board of
Directors. The votes were as follows:
For Withheld Authority
--- ------------------
Stephen M. Berkley 146,151,721 1,350,124
David A. Brown 146,151,721 1,350,124
Michael A. Brown 146,147,276 1,354,569
Robert J. Casale 146,151,721 1,350,124
Edward M. Esber, Jr. 146,151,721 1,350,124
Steven C. Wheelwright 146,151,721 1,350,124
The stockholders also approved the appointment of Ernst & Young LLP to serve as
Quantum's independent auditors for the fiscal year ending March 31, 2000. The
number of votes "For" were 147,182,511; the number of votes "Against" were
172,989; the number of votes "Abstain" were 146,345.
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
58
<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: November 2, 1999 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
59
<PAGE>
QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.1 THIRD AMENDMENT TO CREDIT AGREEMENT, dated August 31, 1999,
among Quantum Corporation, certain financial institutions
(collectively, the "Banks"), and CANADIAN IMPERIAL BANK OF
COMMERCE, as administrative agent for the Banks.
27.1 Financial Data Schedule
Footnotes to
Exhibits Footnote
None
EXECUTION VERSION
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of August 31, 1999, is entered into by and among:
(1) QUANTUM CORPORATION, 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") that execute this Amendment; and
(3) CANADIAN IMPERIAL BANK OF COMMERCE, as administrative
agent for the Banks (in such capacity, "Administrative Agent").
RECITALS
A. Each of (i) Borrower, (ii) the Banks, (iii) Administrative Agent,
(iv) ABN AMRO Bank, N.V ("ABN"), and CIBC Inc., as co-arrangers for the Banks,
(v) ABN, as syndication agent for the Banks, (vi) Bank of America, N.A.
(formerly known as Bank of America National Trust and Savings Association), as
documentation agent for the Banks, and (vii) BankBoston, N.A., The Bank of Nova
Scotia, Fleet National Bank and The Industrial Bank of Japan, Limited, as
co-agents for the Banks, are parties to a Credit Agreement dated as of June 6,
1997, as amended by that certain First Amendment to Credit Agreement dated as of
June 26, 1998 and as further amended by that certain Second Amendment to Credit
Agreement dated as of December 18, 1998 (as amended, the "Credit Agreement").
B. Borrower has requested Administrative Agent and the Banks to amend
the Credit Agreement in certain respects.
C. The Banks executing this Amendment and Administrative 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 and the Banks executing this Amendment and Administrative
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.
1
<PAGE>
2. Amendment to Credit Agreement. Subject to the satisfaction of the
conditions set forth in Paragraph 4 below, Subparagraph 5.02(f) of the Credit
Agreement is hereby amended by changing clause (iv) thereof to read in its
entirety as follows:
(iv) Borrower may purchase Equity Securities pursuant to stock
repurchase programs, provided that the aggregate payments under such
programs do not exceed (A) during fiscal year 1999, twenty-three
percent (23%) of Tangible Net Worth as determined as of the fiscal
quarter ending March 31, 1998, (B) during fiscal year 2000, twenty
percent (20%) of Tangible Net Worth as determined as of the fiscal
quarter ending June 27, 1999, and (C) during all other fiscal years
until the Maturity Date, ten percent (10%) of Tangible Net Worth as
determined as of the fiscal quarter immediately preceding the date of
determination;
3. Representations and Warranties. Borrower hereby represents and
warrants to Administrative Agent and the Banks that the following are true and
correct on the date of this Amendment and that, after giving effect to the
amendment 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 of the Credit Agreement and
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
and correct in all material respects 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.
(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 amendment effected by Paragraph 2 above shall
become effective on August 31, 1999 (the "Effective Date"), subject to receipt
by Administrative Agent and the Banks on or prior to the Effective Date of the
following, each in form and substance satisfactory to Administrative Agent, the
Banks executing this Amendment and their respective counsel:
(a) This Amendment duly executed by Borrower, the Majority
Banks and Administrative Agent;
(b) A Certificate of the Secretary or an Assistant Secretary
of Borrower, dated the Effective Date, certifying that (i) the
Certificate of Incorporation and Bylaws of Borrower, in the form
delivered to Administrative Agent on the Closing Date, are in full
force and effect and have not been amended, supplemented, revoked or
repealed since such date, (ii) that the resolution of Borrower, in the
form delivered to Administrative Agent on the Closing Date, is in full
force and effect and has not been amended,
2
<PAGE>
supplemented, revoked or repealed since such date, and (iii) the
incumbency, signatures and authority of the officers of Borrower
authorized to execute, deliver and perform the Credit Agreement, this
Amendment, the other Credit Documents and all other documents,
instruments or agreements relating thereto executed or to be executed
by Borrower and indicating each such officer which is an Executive
Officer or Authorized Financial Officer; and
(d) Such other evidence as Administrative Agent or any Bank
executing this Amendment 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 Administrative 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, Administrative Agent, Syndication Agent,
Documentation Agent and the Banks executing this Amendment have caused this
Amendment to be executed as of the day and year first above written.
QUANTUM CORPORATION, as Borrower
By: /s/ Andrew Kryder
---------------------------------
Name: Andrew Kryder
---------------------------------
Title: Vice President,
Finance &
General Counsel
---------------------------------
CANADIAN IMPERIAL BANK OF COMMERCE,
as Administrative Agent
By: /s/ Paul J. Chakmak
---------------------------------
Name: Paul J. Chakmak
---------------------------------
Title: Managing Director,
CIBC World Markets
Corp., AS AGENT
---------------------------------
ABN AMRO BANK N.V., as a Bank
By: /s/ Nanci H. Meyer
---------------------------------
Name: Nanci H. Meyer
---------------------------------
Title: Vice President
---------------------------------
By: /s/ Robert N. Hartinger
---------------------------------
Name: Robert N. Hartinger
---------------------------------
Title: Senior Vice President
---------------------------------
BANKBOSTON, N.A., as a Bank
By: /s/ Lee A. Merkle-Raymond
---------------------------------
Name: Lee A. Merkle-Raymond
---------------------------------
Title: Director
---------------------------------
BANK OF AMERICA, N.A., as a Bank
By: /s/ Kevin Mc Mahon
---------------------------------
Name: Kevin Mc Mahon
---------------------------------
Title: Managing Director
---------------------------------
4
<PAGE>
BANQUE NATIONALE DE PARIS, as a Bank
By: /s/ Michael D. McCorriston
---------------------------------
Name: Michael D. McCorriston
---------------------------------
Title: Vice President
---------------------------------
By: /s/ Jennifer Y. Cho
---------------------------------
Name: Jennifer Y. Cho
---------------------------------
Title: Vice President
---------------------------------
CIBC INC., as a Bank
By: /s/ Paul J. Chakmak
---------------------------------
Name: Paul J. Chakmak
---------------------------------
Title: Managing Director,
CIBC World Markets
Corp., AS AGENT
---------------------------------
DEUTSCHE BANK A.G., NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES, as a Bank
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
FLEET NATIONAL BANK, as a Bank
By: /s/ Mathew M. Glauninger
---------------------------------
Name: Mathew M. Glauninger
---------------------------------
Title: Senior Vice President
---------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION,
as a Bank
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
5
<PAGE>
KEYBANK NATIONAL ASSOCIATION,
as a Bank
By: /s/ Kevin P. McBride
---------------------------------
Name: Kevin P. McBride
---------------------------------
Title: Senior Vice President
---------------------------------
MELLON BANK, as a Bank
By: /s/ Lawrence C. Ivey
---------------------------------
Name: Lawrence C. Ivey
---------------------------------
Title: Vice President
---------------------------------
PARIBAS, as a Bank
By: /s/ John Kopcha
---------------------------------
Name: John Kopcha
---------------------------------
Title: Director
---------------------------------
By: /s/ Jonathan Leone
---------------------------------
Name: Jonathan Leone
---------------------------------
Title: Vice President
---------------------------------
ROYAL BANK OF CANADA, as a Bank
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
SANWA BANK LIMITED,
LOS ANGELES BRANCH, as a Bank
By: /s/ Peter G. Olson
---------------------------------
Name: Peter G. Olson
---------------------------------
Title: First Vice President
---------------------------------
6
<PAGE>
THE BANK OF NOVA SCOTIA, as a Bank
By: /s/ Chris Osborn
---------------------------------
Name: Chris Osborn
---------------------------------
Title: Relationship Manager
---------------------------------
THE FUJI BANK, LIMITED, as a Bank
By: /s/ Masahito Fukuda
---------------------------------
Name: Masahito Fukuda
---------------------------------
Title: SVP & GH
---------------------------------
THE INDUSTRIAL BANK OF
JAPAN, LIMITED, as a Bank
By: /s/ Ken Iwata
---------------------------------
Name: Ken Iwata
---------------------------------
Title: Senior Vice President
and Manager
---------------------------------
THE MITSUBISHI TRUST AND
BANKING CORPORATION, LOS ANGELES
AGENCY, as a Bank
By: /s/ Toshihiro Hayashi
---------------------------------
Name: Toshihiro Hayashi
---------------------------------
Title: Senior Vice President
---------------------------------
THE SUMITOMO BANK, LIMITED, as a Bank
By: /s/ Azar Shakeri
---------------------------------
Name: Azar Shakeri
---------------------------------
Title: Vice President
---------------------------------
7
<PAGE>
UNION BANK OF CALIFORNIA, N.A.,
as a Bank
By: /s/ Glenn Leyrer
---------------------------------
Name: Glenn Leyrer
---------------------------------
Title: Vice President
---------------------------------
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION FOR THE QUARTER ENDED SEPTEMBER 26,
1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-1999
<PERIOD-END> SEP-26-1999
<CASH> 689,010
<SECURITIES> 34,634
<RECEIVABLES> 602,679
<ALLOWANCES> 10,421
<INVENTORY> 273,647
<CURRENT-ASSETS> 257,652
<PP&E> 539,172
<DEPRECIATION> 267,542
<TOTAL-ASSETS> 2,457,799
<CURRENT-LIABILITIES> 718,332
<BONDS> 335,912
0
0
<COMMON> 936,867
<OTHER-SE> 388,343
<TOTAL-LIABILITY-AND-EQUITY> 2,457,799
<SALES> 2,208,359
<TOTAL-REVENUES> 2,208,359
<CGS> 1,893,103
<TOTAL-COSTS> 1,893,103
<OTHER-EXPENSES> 371,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,426
<INCOME-PRETAX> (70,231)
<INCOME-TAX> (15,859)
<INCOME-CONTINUING> (54,372)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54,372)
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>
DSS Group EPS-Basic 0.44
DSS Group EPS-Diluted 0.42
HDD Group EPS-Basic (1.53)
HDD Group EPS-Diluted (1.53)
</FN>
</TABLE>
