<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
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 29, 2000, Quantum Corporation had
148,935,551 shares of DLT & Storage Systems group common stock outstanding and
77,287,924 shares of Hard Disk Drive group common stock outstanding.
<PAGE>
QUANTUM CORPORATION
INDEX
<TABLE>
<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 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Quantitative and Qualitative Disclosures About Market Risk 22
Quantum Corporation DLT & Storage Systems Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 23
Condensed Combined Balance Sheets 24
Condensed Combined Statements of Cash Flows 25
Notes to Condensed Combined Financial Statements 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations 31
Quantitative and Qualitative Disclosures About Market Risk 41
Quantum Corporation Hard Disk Drive Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 42
Condensed Combined Balance Sheets 43
Condensed Combined Statements of Cash Flows 44
Notes to Condensed Combined Financial Statements 45
Management's Discussion and Analysis of Financial Condition
and Results of Operations 51
Quantitative and Qualitative Disclosure About Market Risk 62
PART II - OTHER INFORMATION 63
SIGNATURE 65
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $1,181,011 $1,125,124 $2,406,064 $2,208,359
Cost of revenue - on net sales 955,958 932,719 1,900,536 1,836,035
Cost of revenue - special charge (benefit) (15,825) 57,068 (15,825) 57,068
---------- ---------- ---------- ----------
Gross profit 240,878 135,337 521,353 315,256
Operating expenses:
Research and development 91,811 92,453 185,890 182,886
Sales and marketing 61,214 55,459 127,700 108,680
General and administrative 35,402 30,570 70,043 59,714
Purchased in-process research
and development - 37,000 - 37,000
Special charge (benefit) (90) 2,338 (90) 2,338
---------- ---------- ---------- ----------
188,337 217,820 383,543 390,618
Income (loss) from operations 52,541 (82,483) 137,810 (75,362)
Other income (expense):
Interest income and other, net 10,837 7,110 25,214 19,557
Interest expense (6,937) (7,218) (13,688) (14,426)
---------- ---------- ---------- ----------
3,900 (108) 11,526 5,131
Income (loss) before income taxes 56,441 (82,591) 149,336 (70,231)
Income tax provision (benefit) 20,827 (19,938) 53,302 (15,859)
---------- ---------- ---------- ----------
Net income (loss) $ 35,614 $ (62,653) $ 96,034 $ (54,372)
========== ========== ========== ==========
Quantum common stock (1) :
Net loss $ (25,474) $ (17,193)
========== ==========
Net loss per share:
Basic $ (0.15) $ (0.10)
Diluted $ (0.15) $ (0.10)
Weighted average common shares:
Basic 164,916 165,788
Diluted 164,916 165,788
DLT & Storage Systems group (1) :
Net income $ 44,285 $ 12,497 $ 88,235 $ 12,497
========== ========== ========== ==========
Net income per share:
Basic $ 0.30 $ 0.08 $ 0.60 $ 0.08
Diluted $ 0.29 $ 0.07 $ 0.57 $ 0.07
Weighted average common shares:
Basic 146,230 165,377 148,274 165,377
Diluted 154,797 173,080 154,714 173,080
Hard Disk Drive group (1):
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net income (loss) $ (8,671) $ (49,650) $ 7,799 $ (49,650)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ (0.11) $ (0.60) $ 0.10 $ (0.60)
Diluted $ (0.11) $ (0.60) $ 0.09 $ (0.60)
Weighted average common shares:
Basic 77,336 82,883 79,390 82,883
Diluted 77,336 82,883 85,533 82,883
</TABLE>
(1) As discussed in Note 2 of the Notes to Condensed Consolidated Financial
Statements, a recapitalization occurred on August 3, 1999. As a result,
earnings per share for Quantum Corporation common stock reflect earnings
through the recapitalization date, while earnings for DLT & Storage Systems
group common stock and Hard Disk Drive group common stock reflect results
subsequent to that date.
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 1, March 31,
2000 2000
---------- ----------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 795,504 $ 918,262
Marketable securities 16,814 32,080
Accounts receivable, net of allowance for
doubtful accounts of $22,638 and $23,110 619,038 609,225
Inventories 243,754 223,825
Deferred taxes 138,676 133,382
Other current assets 114,631 96,780
---------- ----------
Total current assets 1,928,417 2,013,554
Property and equipment, net of accumulated
depreciation of $322,158 and $299,671 232,409 236,685
Intangible assets, net 239,006 250,203
Other assets 57,696 33,510
---------- ----------
$2,457,528 $2,533,952
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 436,048 $ 470,210
Accrued warranty 96,987 99,560
Accrued compensation 75,400 90,452
Income taxes payable 73,525 44,284
Accrued special charges 24,538 43,363
Current portion of long-term debt 1,175 1,033
Other accrued liabilities 175,058 105,345
---------- ----------
Total current liabilities 882,731 854,247
Deferred taxes 71,517 55,336
Long-term debt 37,237 37,838
Convertible subordinated debt 287,500 287,500
Stockholders' equity:
Common stock 723,697 737,020
Treasury stock (94,554) -
Retained earnings 542,581 545,050
Accumulated other comprehensive income 6,819 16,961
---------- ----------
Total stockholders' equity 1,178,543 1,299,031
---------- ----------
$2,457,528 $2,533,952
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 1, September 26,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 96,034 $ (54,372)
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 44,707 48,496
Amortization 16,609 13,872
Deferred income taxes (1,231) 405
Compensation related to stock plans 10,432 1,640
Changes in assets and liabilities:
Accounts receivable (9,813) 54,663
Inventories (19,929) (520)
Accounts payable (34,162) (31,120)
Income taxes payable 29,241 (7,407)
Accrued warranty (2,573) 15,668
Other assets and liabilities (48,692) (36,972)
--------- ---------
Net cash provided by operating activities 80,623 99,738
--------- ---------
Cash flows from investing activities:
Investment in equity securities (23,353) -
Purchases of marketable securities - (33,406)
Maturities of marketable securities 2,032 33,314
Acquisition of intangible assets - (2,500)
Investment in property and equipment (34,789) (49,909)
--------- ---------
Net cash used in investing activities (56,110) (52,501)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities - 10,000
Principal payments on long-term credit facilities (459) (18,501)
Purchases of treasury stock (240,848) (145,652)
Proceeds from factoring 70,000 -
Proceeds from issuance of common stock, net 24,036 23,558
--------- ---------
Net cash used in financing activities (147,271) (130,595)
--------- ---------
Decrease in cash and cash equivalents (122,758) (83,358)
Cash and cash equivalents at beginning of period 918,262 772,368
--------- ---------
Cash and cash equivalents at end of period $ 795,504 $ 689,010
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 13,485 $ 12,981
Income taxes $ 2,361 $ 18,341
Tangible and intangible assets acquired for shares
of DSSG and HDDG common stock, net of cash acquired
and liabilities assumed - $ 104,698
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<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 that, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year. The
condensed consolidated balance sheet as of March 31, 2000 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, 2000 included in its Annual
Report on Form 10-K 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 was amended and restated,
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. Securitized Assets
HDDG has an asset securitization program with Capital Factors Inc., under which
we sell them our eligible accounts receivable, on a with recourse basis. At
October 1, 2000, $70 million of our accounts receivable were securitized under
the program. Given the with recourse nature of the arrangement, the securitized
accounts receivable are included within the accounts receivable balance, with
the corresponding credit being included in other liabilities.
4. Inventories
Inventories consisted of the following:
(In thousands)
October 1, March 31,
2000 2000
---------- ---------
Materials and purchased parts $ 56,774 $ 49,206
Work in process 37,227 42,323
Finished goods 149,753 132,296
-------- --------
$243,754 $223,825
======== ========
7
<PAGE>
5. Net Income (Loss) Per Share
Net income (loss) per share was calculated on a consolidated basis until DSSG
stock and HDDG stock were created as a result of the recapitalization on August
3, 1999. Subsequent to this date, net income (loss) per share was computed
individually for DSSG and HDDG.
The following tables set forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Period from
June 28,
Period from 1999 to
Three Months Ended August 4, 1999 to August 3,
October 1, 2000 September 26, 1999 1999
----------------------- ----------------------- -------------
Quantum
DSSG HDDG DSSG HDDG Corporation
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
net income (loss) per share -
income (loss) available to
common stockholders $ 44,285 $(8,671) $ 12,497 $(49,650) $(25,474)
======== ======= ======== ======== ========
Denominator:
Denominator for basic net income
(loss) per share - weighted average
shares 146,230 77,336 165,377 82,883 164,916
Effect of dilutive securities:
Outstanding options 8,567 - 7,703 - -
-------- ------- -------- -------- --------
Denominator for diluted net
income (loss) per share -
adjusted weighted average shares 154,797 77,336 173,080 82,883 164,916
======== ======= ======== ======== ========
Basic net income (loss) per share $ 0.30 $( 0.11) $ 0.08 $ (0.60) $ (0.15)
======== ======= ======== ======== ========
Diluted net income (loss) per share $ 0.29 $( 0.11) $ 0.07 $ (0.60) $ (0.15)
======== ======= ======== ======== ========
</TABLE>
8
<PAGE>
(In thousands, except per
share data)
<TABLE>
<CAPTION>
Six Months Ended Period from
October 1, 2000 April 1,
1999 to
August 3,
1999
----------------------------------- -----------------
DSSG HDDG Quantum
Corporation
--------------- --------------- -----------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and
diluted net income (loss)
per share - income (loss)
available to common
stockholders $ 88,235 $ 7,799 $(17,193)
======== ======= ========
Denominator:
Denominator for basic
net income (loss) per
share - weighted average
shares 148,274 79,390 165,788
Effect of dilutive
securities:
Outstanding options 6,440 6,143 -
-------- ------- --------
Denominator for diluted
net income (loss) per
share - adjusted
weighted average shares 154,714 85,533 165,788
======== ======= ========
Basic net income (loss) per
share $ 0.60 $ 0.10 $ (0.10)
======== ======= ========
Diluted net income (loss)
per share $ 0.57 $ 0.09 $ (0.10)
======== ======= ========
</TABLE>
The computation of diluted net income per share for DSSG for the three and six
months ended October 1, 2000 and for the period August 4, 1999 through September
26, 1999, 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.
The computation of diluted net income (loss) per share for HDDG for the three
and six months ended October 1, 2000 and for the period August 4, 1999 through
September 26, 1999, 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.
The computation of diluted net loss per share for Quantum for the period June
28, 1999 through August 3, 1999 and the period April 1, 1999 through August 3,
1999, excluded the effect of the 7% convertible subordinated notes issued in
July 1997, which were convertible into 6,206,152 shares of
9
<PAGE>
Quantum common stock, or 21.587 shares per $1,000 note, because the effect would
have been antidilutive.
Options to purchase 18,723,101 and 15,234,101 shares of HDDG common stock were
outstanding at October 1, 2000 and September 26, 1999, respectively. However,
the corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for HDDG for the three months ended
October 1, 2000, and the period August 4, 1999 through September 26, 1999,
because the effect would have been antidilutive.
Options to purchase 26,411,958 shares of Quantum common stock were outstanding
at August 3, 1999. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
Quantum for the period June 28, 1999 through August 3, 1999 and for the period
April 1, 1999 through August 3, 1999, because the effect would have been
antidilutive.
Options to purchase 13,845,438 shares of DSSG common stock were outstanding for
the three and six months ended October 1, 2000, but were not included in the
computation of diluted net income per share because the options' exercise price
was greater than the average market price of the common stock and, therefore,
the effect would have been antidilutive.
Options to purchase 7,360,119 shares of HDDG common stock were outstanding for
the six months ended October 1, 2000, but were not included in the computation
of diluted net income per share because the options' exercise price was greater
than the average market price of the common stock and, therefore, the effect
would have been antidilutive.
6. Common Stock Repurchase
During fiscal year 2000, the Board of Directors authorized the Company to
repurchase up to $700 million of the Company's common stock in open market or
private transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSSG or HDDG common stock. An
additional $100 million was authorized for repurchase of HDDG common stock.
Under these authorizations, as of October 1, 2000, the Company had repurchased a
total of 3.9 million shares of Quantum common stock, 29.2 million shares of DSSG
common stock and 13.5 million shares of HDDG common stock for a combined total
of $566 million. During the first six months of fiscal year 2001, the Company
repurchased 13.5 million shares of DSSG common stock and 10 million shares of
HDDG common stock for a combined total of $241 million.
7. Credit Line
In April 2000, the Company entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the Company's option, borrowings
under the revolving credit lines bear interest at either the London interbank
offered rate or a base rate, plus a margin determined by a leverage ratio with
option periods of one to six months. At October 1, 2000, there were no
outstanding balances drawn on these lines.
10
<PAGE>
8. 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, the Company 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. In October, 1999 the case was
transferred to a federal district court in New Orleans, Louisiana, where it has
been joined with suits brought against Papst by Hewlett-Packard Company, Maxtor
Corporation and Minebea Company, Ltd. for the purposes of coordinated discovery
under multi-district litigation rules. Hewlett-Packard settled its dispute with
Papst in April, 2000 and has withdrawn from the litigation. To date, discovery
has not begun to any significant extent. Quantum does not believe that the
transfer will affect the final disposition of this matter in a significant way.
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. For example, in fiscal year 2000,
Discovision Associates brought patents they hold to the Company's attention.
While management currently believes the amount of ultimate liability, if any,
with respect to these actions will not materially affect the financial position,
results of operations, or liquidity of the Company, the ultimate outcome of any
litigation is uncertain. Were an unfavorable outcome to occur, the impact could
be material to the Company.
9. Special Charges
Hard Disk Drive Group
During the second quarter of fiscal year 2000, 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 streamlining HDDG's logistics
model in order to create a faster and more flexible fulfillment system, changes
in customer service strategy and consolidation of certain product development
programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes 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 by the end of the third quarter of fiscal year 2001.
Subsequent to the end of the second quarter of fiscal year 2000, HDDG revised
its estimate of costs required to implement the restructuring plan. HDDG
estimated that severance and benefits, inventory and other costs, which
included the disposition of additional capital assets, would be more than
previously estimated as a result of the planned changes in customer service
strategy.
11
<PAGE>
HDDG also estimated that costs associated with vacating leased facilities would
be less than previously estimated as a result of disposing of a major facility
earlier than previously expected. Accordingly, HDDG reallocated amounts between
these categories during the second half of fiscal year 2000.
In the second quarter of fiscal year 2001, HDDG reversed $15.9 million as a
special charge benefit on the income statement. This reversal was primarily
due to negotiated lease cancellations and reduced severance and benefits due
to attrition and redeployment of certain employees. Higher than previously
experienced turnover has enabled the redeployment and continued utilization of
certain employees who were included in workforce reduction plans. In addition,
fixed assets that were intended to be written-off are now being utilized
elsewhere in the organization as a result of technology and product roadmap
plans.
In connection with the charge, HDDG currently expects a workforce reduction of
approximately 513 employees, down from the original expectation of 600
employees. In addition, approximately 100 open 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. As of October 1, 2000,
481 employees have been terminated. The remaining employees will be terminated
by the end of the third quarter of fiscal year 2001.
As of October 1, 2000, HDDG had incurred $9 million in cash expenditures
associated with employee severance and benefits, facilities and other costs.
HDDG expects to incur additional cash expenditures associated with the plan of
approximately $6 million.
The following table summarizes activity related to the special charge at October
1, 2000.
<TABLE>
<CAPTION>
(In thousands) Severance
And Facilities Other
Benefits Costs Inventory Costs Total
-------- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Special charge provision $ 7,833 $26,359 $ 13,214 $12,000 $ 59,406
Cash Payments (5,963) (1,559) - (1,883) (9,405)
Non-cash charges - (7,296) (15,588) (5,502) (28,386)
Adjustments 1,166 (7,852) 2,374 4,312 -
Special charge benefit (2,284) (7,787) - (5,798) (15,869)
------- ------- -------- ------- --------
Balance at October 1, 2000 $ 752 $ 1,865 $ - $ 3,129 $ 5,746
======= ======= ======== ======= ========
</TABLE>
DLT & Storage Systems Group
During the fourth quarter of fiscal year 2000, DSSG recorded a special charge of
$40.1 million. The charge was primarily focused on DSSG's DLTtape Division and
reflected DSSG's strategy to align its DLTtape drive operations with market
conditions. These conditions include slower growth in the mid-range server
market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTtape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated
12
<PAGE>
employees, $3.2 million for fixed asset write-offs, primarily related to the
transfer of manufacturing to Penang, Malaysia and $1.9 million in other costs
associated with the plan.
The facilities costs noted above include lease payments for vacant space in a
facility in Colorado Springs, Colorado, the write-off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang, Malaysia, as this space
was converted to DSSG manufacturing. DSSG expects that the Colorado facility
will be vacated by the end of fiscal year 2001.
The write-off of investments reflects DSSG's decision to end its research on
certain optical based storage solutions. As a result, DSSG has written-off an
equity investment and technology licenses related to optical technology.
DSSG currently expects a workforce reduction of approximately 900 employees.
The reduction in force primarily affects employees at DSSG's manufacturing
operations in Colorado Springs, Colorado, as well as administrative employees
within the DLTtape Division. As of October 1, 2000, 294 employees have been
terminated. DSSG anticipates that the remaining employees will be terminated by
the end of the fourth quarter of fiscal year 2001.
As of October 1, 2000, DSSG had incurred cash expenditures of $4 million
associated with employee severance and benefits, facilities and other costs.
DSSG expects to incur additional cash expenditures associated with the plan of
approximately $14 million, which will be funded out of operations.
The following table summarizes activity related to the special charge at October
1, 2000:
<TABLE>
<CAPTION>
(In thousands) Severance
And Facilities Fixed Other
Benefits Costs Investments Assets Costs Total
<S> <C> <C> <C> <C> <C> <C>
Special charge provision $ 7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments (2,997) (85) -- -- (1,138) (4,220)
Non-cash charges -- -- (13,908) (3,163) -- (17,071)
------- ------- -------- ------- ------- --------
Balance at October 1, 2000 $ 4,649 $13,415 $ -- $ -- $ 728 $ 18,792
======= ======= ======== ======= ======= ========
</TABLE>
10. Comprehensive Income
Accumulated other comprehensive income on the condensed consolidated balance
sheets consists of unrealized gains on available for sale investments and
foreign currency translation adjustments. Total comprehensive income for the
three months and six months ended October 1, 2000 and September 26, 1999, is
presented in the following table:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
------------------------------ ------------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 35,614 $(62,653) $ 96,034 $(54,372)
Other comprehensive income -
Change in unrealized gain on
investments (8,135) - (7,940) -
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Foreign currency translation
adjustments (1,972) 1,693 (2,202) 773
-------- -------- -------- --------
Comprehensive income $ 25,507 $(60,960) $ 85,892 $(53,599)
======== ======== ======== ========
</TABLE>
11. 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. HDDG consists of desktop and high-end hard
disk drives. DSSG consists of DLTtape(TM) drives and media, autoloaders and
libraries, network attached storage solutions and solid state storage systems.
The Company markets its products to computer manufacturers and through a broad
range of distributors, resellers and systems integrators.
The Company evaluates segment performance based on net profit or loss not
including non-recurring gains or losses. Segment assets include those items
that can be specifically identified with or reasonably allocated to a particular
segment. Results for the Company's reportable segments for the three months and
six months ended October 1, 2000 and September 26, 1999 are presented in the
following table:
<TABLE>
<CAPTION>
(In millions)
Three Months Ended
-----------------------------------------------
October 1, 2000 September 26, 1999
------------------- ----------------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $819 $362 $1,181 $768 $357 $1,125
Intersegment revenues 4 - 4 - - -
Segment profit (loss) (8) 44 36 (84) 21 (63)
</TABLE>
<TABLE>
<CAPTION>
(In millions)
Six Months Ended
-----------------------------------------------
October 1, 2000 September 26, 1999
------------------- ----------------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $1,678 $728 $2,406 $1,521 $688 $2,208
Intersegment revenues 9 - 9 - - -
Segment profit (loss) 8 88 96 (127) 73 (54)
</TABLE>
12. Subsequent Events
On October 3, 2000, the Company entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDDG in an all-stock transaction. The merger
agreement envisages that HDDG's stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDDG common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected to be completed in early calendar 2001. The transaction is expected to
be tax-free to Quantum stockholders. This transaction is subject to stockholders
and regulatory
14
<PAGE>
approval.
If the combination is completed,
a. Quantum's DLT & Storage Systems Group will operate as a legally separate,
stand-alone company that will be known as Quantum Corporation;
b. DSSG stockholders will receive on a one-for-one basis, shares of the then-
independent company comprising all of the operations and assets of the
Quantum DLT & Storage Systems Group; and
c. DSSG intends to issue restricted stock to Quantum employees that become
employees of the combined HDDG/Maxtor company, in exchange for the loss of
unvested DSSG stock options held by such employees. As a result, Quantum is
expected to incur substantial compensation charges if the combination is
completed.
These expectations are forward-looking statements and actual results may
differ.
On October 24, 2000 the Company announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000 Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following the IPO, Quantum will own at least 80%
of Snap Appliances' outstanding common stock. Quantum intends to distribute
these shares to Quantum DSSG stockholders subject to receiving a favorable IRS
ruling and Board of Directors approval. After the IPO the remaining DSSG
business will be comprised of two business groups, Enterprise Solutions and
DLTtape.
On November 8, 2000, Quantum DSSG announced plans to expand its product design
and new product introduction resources for the Company's DLTtape Group in
Colorado. Under the plan, the Company will move more than 100 engineering,
marketing and administrative positions relating to the DLTtape business to
Colorado from its Shrewsbury, MA facility. In addition, the Company will
create an Advanced Technology Development Lab in Shrewsbury that will focus on
advancing future tape drive innovations. There will be costs associated with
this plan. DSSG is currently not able to quantify these costs.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Quantum Corporation
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 are
phrased in the future tense or 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.
On October 3, 2000, the Company entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDDG in an all-stock transaction. The merger
agreement envisages that HDDG's stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDDG common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected to be completed in early calendar 2001. The transaction is expected to
be tax-free to Quantum stockholders. This transaction is subject to stockholders
and regulatory approval. These expectations are forward-looking statements and
actual results may differ.
On October 24, 2000 the Company announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000 Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following the IPO, Quantum will own at least 80%
of Snap Appliances' outstanding common stock. Quantum intends to distribute
these shares to Quantum DSSG stockholders subject to receiving a favorable IRS
ruling and Board of Directors approval. After the IPO the remaining DSSG
business will be comprised of two business groups, Enterprise Solutions and
DLTtape.
On November 8, 2000, the Company's DSSG announced plans to expand its product
design and new product introduction resources for the Company's DLTtape Group in
Colorado. Under the
16
<PAGE>
plan, the Company will move more than 100 engineering, marketing and
administrative positions relating to the DLTtape business to Colorado from its
Shrewsbury, MA facility. In addition, the Company will create an Advanced
Technology Development Lab in Shrewsbury that will focus on advancing future
tape drive innovations. There will be costs associated with this plan. DSSG is
currently not able to quantify these costs.
Results of Operations
Revenue. Revenue in the three and six months ended October 1, 2000 was $1.181
billion and $2.406 billion, respectively, compared to $1.125 billion and $2.208
billion, respectively, for the corresponding periods in fiscal year 2000.
Revenue in the three and six months ended October 1, 2000 reflected increased
revenue from sales of DLTtape libraries and Snap servers, increased DLTtape
media royalties, and increased revenue from sales of high-end hard disk drives.
The increase in revenue in the six month period also reflected increased revenue
from sales of desktop hard disk drives.
The increased revenue from Snap server network attached storage appliances
reflected the acquisition of Meridian Data, Inc. ("Meridian") in September 1999.
Th increased sales of DLTtape libraries reflect an increase in unit sales of
DLTtape libraries. The increase in DLTtape media royalties reflected an increase
in total market media unit sales and a shift to licensee sales from direct
sales. The increase in total market media unit sales reflected an increase in
the installed base of DLTtape drives. DSSG earns a royalty fee from sales of
DLTtape media cartridges by licensed media manufacturers.
The increase in revenue from high-end hard disk drives reflected increased
shipments as a result of strong demand, particularly from computer equipment
manufacturers, as HDDG transitioned to new high performance products, as well as
a mix shift toward higher capacity products which carry higher average unit
prices. The increase in revenue from desktop hard disk drives in the six month
period reflected an increase in shipments, partially offset by lower average
unit prices. Shipments of desktop hard disk drives reached a record high in the
second quarter of fiscal year 2001. However, revenue in the three month period
declined reflecting lower average unit prices as a result of competitive pricing
pressures.
Sales to our top five customers in the three and six months ended October 1,
2000 represented 49% and 48% of revenue, respectively, compared to 48% and 47%,
respectively, for the corresponding periods in fiscal year 2000. These amounts
reflected a retroactive combination of the sales to Ingram Micro and Electronic
Resources Limited as a result of their merger in July 1999. Sales to Compaq
Computer Corporation were 15% and 12% of revenue in the three and six months
ended October 1, 2000, respectively, compared to 12% of revenue in the
corresponding periods in fiscal year 2000. Sales to Dell Computer Corporation
were 12% and 10% of revenue in the three and six months ended October 1, 2000,
compared to less than 10% of revenue for the corresponding periods in fiscal
year 2000. Sales to Hewlett-Packard Company were 11% and less than 10% of
revenue in the three and six months ended October 1, 2000, respectively,
compared to 12% and 13% of revenue in the corresponding periods of fiscal year
2000.
17
<PAGE>
Sales to computer equipment manufacturers and distribution channel customers
were 64% and 28% of revenue, respectively, in the three months ended October 1,
2000, compared to 59% and 35% of revenue, respectively, in the three months
ended September 26, 1999. For the six months ended October 1, 2000, computer
equipment manufacturer and distribution channel sales were 64% and 29% of
revenue, respectively, compared to 59% and 35% of revenue, respectively, for the
corresponding periods in fiscal year 2000. The remaining revenue in the three
and six months ended September 26, 1999 represented media royalty revenue and
sales to value added resellers and in the three and six months ended October 1,
2000 represented media royalty revenue, sales to value added resellers and
direct sales.
Gross Margin Rate. The gross margin rate in the three months ended October 1,
2000 increased to 20.4% from 12.0% in the three months ended September 26, 1999.
The gross margin for the first six months of fiscal year 2001 was 21.7%,
compared to 14.3% in the corresponding period in fiscal year 2000.
The gross margin rate in the three and six month periods of fiscal year 2001
reflected the impact of a $15.8 million special charge benefit. The benefit
was primarily due to negotiated lease cancellations and reduced severance and
benefits due to attrition and redeployment of certain employees. The gross
margin rate excluding the impact of the benefit was 19.1% and 21.0% in the three
and six month periods ended October 1, 2000, respectively.
The gross margin rate in the three and six month periods for fiscal year 2000
reflected the impact of a $57.1 million special charge related to 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 rapidly
growing low-cost PC market. 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.
Excluding the impact of the special benefit and charge, the increase in the
gross margin rate reflected increased revenue from DLTtape libraries and Snap
Servers and DLTtape media royalties, which have significantly higher margins
than Quantum's hard disk drive products. The increase also reflected higher
margins earned on desktop and high-end hard disk drives. Gross margins earned on
sales of DLTtape drives and DLTtape media cartridges declined, reflecting lower
average unit prices.
Research and Development Expenses. Research and development expenses in the
three and six months ended October 1, 2000, were $92 million, or 7.8% of
revenue, and $186 million, or 7.7% of revenue, respectively, compared to $92
million, or 8.2% of revenue, and $183 million, or 8.3% of revenue, respectively,
for the corresponding periods of fiscal year 2000. The increase in research and
development expenses reflecting the inclusion of Snap Appliances' expenses,
which were not included in the periods prior year periods as the acquisition
occurred on September 10, 1999, were offset by the expense reductions in the
hard disk drive business associated with the special charge taken in the second
quarter of fiscal year 2000.
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended October 1, 2000, were $61 million, or 5.2% of revenue, and $128
million, or 5.3% of revenue, respectively, compared to $55 million, or 4.9% of
revenue, and $109 million, or 4.9% of revenue, respectively, for the
corresponding periods of fiscal year 2000. The increase in sales and marketing
expenses reflected the inclusion of Snap Appliances expenses and an increase in
costs associated with the DLTtape libraries. Spending in Snap Appliances
increased as DSSG continued to build
18
<PAGE>
both category awareness for network attached storage (NAS) appliances and brand
awareness for the Snap! Server(TM) line. The increase in DSSG spending was
partially offset by decreased HDDG sales and marketing expenses.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended October 1, 2000, were $35 million, or 3.0% of
revenue, and $70 million, or 2.9% of revenue, respectively, compared to $31
million, or 2.7% of revenue, and $60 million, or 2.7% of revenue, respectively,
for the corresponding periods of fiscal year 2000. The increase in general and
administrative expenses reflected the inclusion of Snap Appliances expenses,
which were not comparatively included in the prior year periods as the
acquisition occurred on September 10, 1999, increased expenses associated with
DLTtape libraries and an increase in human resource spending within HDDG in
support of change management, process reengineering and retention.
Purchased In-process Research and Development Expense. DSSG expensed purchased
in-process research and development of $37 million, as a result of the
Meridian acquisition in the second quarter ended September 26, 1999.
Special Charge - HDDG. During the second quarter of fiscal year 2000, 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 our operating model with the requirements of the rapidly growing
low-cost PC market. The special charge was associated primarily with
streamlining HDDG's logistics model in order to create a faster and more
flexible fulfillment system, changes in customer service strategy and
consolidation of certain product development programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes 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.
HDDG is proceeding according to plan and expects to realize more than $100
million in cost savings per year, beginning in fiscal year 2001. The majority
of the savings are expected in cost of revenue as a result of a more efficient
distribution system and reduced customer service costs, with the remaining
savings in research and development, as a result of the consolidation of product
development programs. As compared to fiscal year 2000, HDDG expects operating
expenses to be relatively flat in fiscal year 2001, with increased investments
in disk drive and other storage products, primarily reflected in research and
development, offsetting the operating cost savings resulting from the special
charge. These expectations are forward-looking statements and actual results
may differ.
In the second quarter of fiscal year 2001, HDDG reversed $15.9 million as a
special charge benefit on the income statement. This reversal was primarily due
to negotiated lease cancellations and reduced severance and benefits due to
attrition and redeployment of certain employees. In addition, fixed assets that
were intended to be written-off are now being utilized elsewhere in the
organization as a result of technology and product roadmap plan.
Special Charge - DSSG. During the fourth quarter of fiscal year 2000, DSSG
recorded a special charge of $40.1 million. The charge was primarily focused on
DSSG's DLTtape Division and
19
<PAGE>
reflected DSSG's strategy to align its DLTtape drive operations with market
conditions. These conditions include slower growth in the mid-range server
market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTtape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed asset
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
DSSG is proceeding according to plan and expects to realize annual cost savings
from the plan of approximately $40 million beginning upon full implementation of
the plan at the end of fiscal year 2001. Approximately $30 million of the
savings are expected in cost of revenue as a result of reduced manufacturing
costs with the remaining amount in operating expenses, primarily research and
development, as a result of ending research on certain optical-based storage
solutions. As compared to fiscal year 2000, DSSG expects operating expenses to
increase because of increased investments in storage systems products and
marketing in fiscal year 2001 and as a result of including the Snap Appliances'
operations for a full year following the acquisition of Meridian in September
1999. These expectations are forward-looking statements and actual results may
differ.
Interest and Other Income/Expense. Net interest and other income for the three
and six months ended October 1, 2000 were $3.9 million and $11.5 million,
respectively, compared to $0.1 million expense and $5 million income,
respectively, for the corresponding periods of fiscal year 2000. The increase
reflected increased interest income as a result of a higher average cash balance
and an increase in gain on currency translation.
Income Taxes. The Company's effective tax rate for the three months and six
months ended October 1, 2000 was 37% and 36%, respectively, as compared to an
effective benefit rate of 44% and 48% on losses before purchased in-process
research and development and special charges for the corresponding periods in
the prior year. The difference in tax rates is primarily attributable to pre-
tax profits this year compared to pre-tax losses in the prior year.
Liquidity and Capital Resources. Cash, cash equivalents and marketable
securities were $812 million at October 1, 2000 compared to $950 million at
March 31, 2000. The Company used cash in the six months ended October 1, 2000
to purchase $241 million of treasury stock, as discussed below. Other uses of
cash included $34 million for investments in property and equipment. The Company
generated approximately $81 million of cash from operations, primarily related
to net income and non-cash expenses, partially offset by changes in other assets
and liabilities and a decrease in accounts payable and an increase in
inventories. Other sources of cash were $94 million in proceeds from accounts
receivable factoring and the issuance of common stock.
HDDG has an asset securitization program with Capital Factors Inc, under which
we sell our eligible accounts receivable on a with recourse basis. At October
1, 2000, $70 million of our accounts receivable were securitized under the
program. Given the with recourse nature of the
20
<PAGE>
arrangement, the securitized accounts receivable are included within the
accounts receivable balance, with the corresponding credit being included in
other liabilities.
During fiscal year 2000, the Board of Directors authorized the Company to
repurchase up to $700 million of the Company's common stock in open market or
private transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSSG or HDDG common stock. An
additional $100 million was authorized for repurchase of HDDG common stock.
Under these authorizations, as of October 1, 2000, the Company had repurchased a
total of 3.9 million shares of Quantum common stock, 29.2 million shares of DSSG
common stock and 13.5 million shares of HDDG common stock for a combined total
of $566 million. During the first six months of fiscal year 2001, the Company
repurchased 13.5 million shares of DSSG common stock and 10 million shares of
HDDG common stock for a combined total of $241 million.
In April 2000, the Company entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the Company's option, borrowings
under the revolving credit lines bear interest at either the London interbank
offered rate or a base rate, plus a margin determined by a leverage ratio with
option periods of one to six months. At October 1, 2000, there were no
outstanding balances drawn on these lines.
The Company expects to spend approximately $98 million in fiscal year 2001 for
capital equipment and leasehold improvements. These capital expenditures will
support the disk drive, tape drive and storage solutions businesses, research
and development, and general corporate operations.
The Company believes that its existing capital resources, including the credit
facilities 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. These expectations are forward-looking
statements and actual results may be affected by the factors discussed in
"Trends and Uncertainties Relating to the DLT & Storage Systems Group and Hard
Disk Drive Group" in this report.
In the future, the Company may seek to raise cash through the issuance of debt
or equity securities. There can be no assurance that such financing would be
available on terms favorable to the Company, if at all.
Euro Impact
The Company believes that the adoption of a single currency, the Euro, by eleven
European countries has not and will not materially affect our business,
information systems or consolidated financial position, operating results or
cash flows.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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, 2000.
The Company is exposed to equity price risk on its investment in TiVo, Inc.
common stock. The Company does not attempt to reduce or eliminate its market
exposure on this security. The Company entered into a strategic alliance with
TiVo in fiscal year 1999 to supply hard disk drives utilizing Quantum's
QuickView technology for integration into TiVo's Personal Video Recorder. At
October 1, 2000, the fair market value of the Company's investment was
approximately $17 million. As TiVo is a relatively new company and has
introduced a new product in the consumer electronics market, the Company does
not believe it is possible to reasonably estimate any future price movement of
TiVo common stock.
In addition, Quantum's operating results are expected to be affected by charges
to be incurred in connection with the merger of HDDG and Maxtor and the November
8, 2000 DLTtape business plan. See "Trends and Uncertainties Relating to the
DLT & Storage System Group and Hard Disk Drive Group."
22
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Product revenue $311,887 $312,074 $625,110 $603,381
Royalty revenue 49,864 45,024 102,825 84,461
-------- -------- -------- --------
Total revenue 361,751 357,098 727,935 687,842
Cost of revenue 203,913 186,892 410,262 365,986
-------- -------- -------- --------
Gross profit 157,838 170,206 317,673 321,856
Operating expenses:
Research and development 31,901 30,480 67,730 58,205
Sales and marketing 37,043 26,599 75,813 51,989
General and administrative 19,046 15,238 37,411 29,637
Purchased in-process research
and development - 37,000 - 37,000
-------- -------- -------- --------
87,990 109,317 180,954 176,831
Income from operations 69,848 60,889 136,719 145,025
Other income (expense):
Interest income and other, net 3,839 3,687 10,161 10,170
Interest expense (4,494) (4,812) (9,013) (9,656)
-------- -------- -------- --------
(655) (1,125) 1,148 514
Income before income taxes 69,193 59,764 137,867 145,539
Income tax provision 24,908 38,704 49,632 73,014
-------- -------- -------- --------
Net income $ 44,285 $ 21,060 $ 88,235 $ 72,525
======== ======== ======== ========
Net income per share (1):
Basic $0.30 $0.13 $0.60 $0.44
Diluted $0.29 $0.12 $0.57 $0.42
Weighted average common shares (1):
Basic 146,230 165,377 148,274 166,019
Diluted 154,797 173,080 154,714 173,029
Net income for the period from
August 4, 1999 to September
26, 1999 $ 12,497 $ 12,497
======== ========
Net income per share:
Basic $0.08 $0.08
Diluted $0.07 $0.07
Weighted average common shares:
Basic 165,377 165,377
Diluted 173,080 173,080
</TABLE>
(1) Basic and diluted net income per share and weighted average common shares
for the three and six months ended September 26, 1999 are pro forma and assume
the recapitalization occurred at the beginning of fiscal year 2000.
See accompanying notes to condensed combined financial statements.
23
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 1, March 31,
2000 2000
---------- ----------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 320,437 $ 336,720
Marketable securities - 2,032
Accounts receivable, net of allowance for
doubtful accounts of $3,906 and $3,492 238,606 214,107
Inventories 103,485 101,478
Deferred taxes 54,668 54,669
Other current assets 57,162 38,424
---------- ----------
Total current assets 774,358 747,430
Property and equipment, net of accumulated
depreciation of $100,696 and $80,997 84,763 78,137
Intangible assets, net 238,732 248,288
Other assets 21,596 12,149
---------- ----------
$1,119,449 $1,086,004
========== ==========
Liabilities and Group Equity
----------------------------
Current liabilities:
Accounts payable $ 128,262 $ 94,596
Accrued warranty 55,862 52,593
Accrued compensation 35,920 36,379
Income taxes payable 48,303 -
Accrued special charge 18,792 20,954
Current portion of long-term debt 783 689
Due to the Hard Disk Drive group - 30,100
Other accrued liabilities 27,682 27,749
---------- ----------
Total current liabilities 315,604 263,060
Deferred taxes 30,992 13,578
Long-term debt 24,825 25,225
Convertible subordinated debt 191,667 191,667
Group equity 556,361 592,474
---------- ----------
$1,119,449 $1,086,004
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
24
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 1, September 26,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 88,235 $ 72,525
Adjustments to reconcile net income to net cash provided by
operations:
Purchased in-process research and development - 37,000
Depreciation 19,244 15,377
Amortization 14,513 11,916
Deferred income taxes 2 (107)
Compensation related to stock plans 7,165 1,096
Changes in assets and liabilities:
Accounts receivable (24,499) 29,623
Inventories (2,007) 3,062
Accounts payable 33,666 17,904
Income taxes payable 48,303 -
Accrued warranty 3,269 10,105
Other assets and liabilities (41,750) (21,371)
--------- ---------
Net cash provided by operating activities 146,141 177,130
--------- ---------
Cash flows from investing activities:
Investment in equity securities (9,343) -
Maturities of marketable securities 2,032 -
Purchases of marketable securities - (39)
Acquisition of intangible assets - (2,500)
Investment in property and equipment (23,527) (19,784)
--------- ---------
Net cash used in investing activities (30,838) (22,323)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities - 6,667
Principal payments on long-term credit facilities (306) (12,334)
Inter-group payment for common stock issued - (2,835)
Purchases of treasury stock (146,251) (144,094)
Proceeds from issuance of common stock, net 14,971 17,764
--------- ---------
Net cash used in financing activities (131,586) (134,832)
--------- ---------
Increase (decrease) in cash and cash equivalents (16,283) 19,975
Cash and cash equivalents at beginning of period 336,720 272,643
--------- ---------
Cash and cash equivalents at end of period $ 320,437 $ 292,618
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,946 $ 8,620
Income taxes $ 8,222 $ 3,866
Tangible and intangible assets acquired for shares of DSSG
and HDDG common stock, net of cash acquired and liabilities
assumed $ - $ 101,863
</TABLE>
See accompanying notes to condensed combined financial statements.
25
<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. Intergroup transactions and balances are not
eliminated in the separate financial statements of DSSG or HDDG.
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, 2000 has been derived from the audited financial statements of Quantum
Corporation included in its Annual Report on Form 10-K 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.
26
<PAGE>
2. Inventories
Inventories consisted of the following:
(In thousands)
<TABLE>
<CAPTION>
October 1, March 31,
2000 2000
---------- --------
<S> <C> <C>
Materials and purchased parts $ 52,766 $ 41,819
Work in process 33,005 37,024
Finished goods 17,714 22,635
-------- --------
$103,485 $101,478
======== ========
</TABLE>
3. Net Income Per Share
As a result of the recapitalization, net income per share for DSSG has been
calculated based on the group's net income subsequent to August 3, 1999. It was
not calculated on a group basis for periods prior to the recapitalization
because DSSG stock was not part of Quantum's capital structure at that time.
The following table sets forth the computation of basic and diluted net income
per share for DSSG:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Period from Six Months
Ended August 4, 1999 Ended
October 1, to September 26, October 1,
2000 1999 2000
------------ ---------------- ------------
<S> <C> <C> <C>
Numerator:
Numerator for diluted net income per
share - income available to common
stockholders $ 44,285 $ 12,497 $ 88,235
============ ================ ============
Denominator:
Denominator for basic net income per
share - weighted average shares 146,230 165,377 148,274
Effect of dilutive securities:
Outstanding options 8,567 7,703 6,440
------------ ---------------- ------------
Denominator for diluted net income per
share - adjusted weighted average shares 154,797 173,080 154,714
============ ================ ============
Basic net income per share $ 0.30 $ 0.08 $ 0.60
============ ================ ============
Diluted net income per share $ 0.29 $ 0.07 $ 0.57
============ ================ ============
</TABLE>
The computation of diluted net income per share for DSSG for the three and six
months ended October 1, 2000 and for the period August 4, 1999 through September
26, 1999, 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.
27
<PAGE>
Options to purchase 13,845,438 shares of DSSG common stock were outstanding for
the three and six months ended October 1, 2000, but were not included in the
computation of diluted net income per share because the options' exercise price
was greater than the average market price of the common stock and, therefore,
the effect would have been antidilutive.
4. Common Stock Repurchase
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stocks in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSSG or HDDG common stock. An
additional $100 million was authorized for repurchase of HDDG common stock.
Under these authorizations, as of October 1, 2000, Quantum had repurchased a
total of 3.9 million shares of Quantum common stock, 29.2 million shares of DSSG
common stock and 13.5 million shares of HDDG common stock for a combined total
of $566 million. During the first six months of fiscal year 2001, Quantum
repurchased 13.5 million shares of DSSG common stock and 10 million shares of
HDDG common stock for a combined total of $241 million.
5. Credit Line
In April 2000, Quantum entered into two new unsecured senior credit facilities,
each providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At Quantum's option, borrowings under the
revolving credit lines bear interest at either the London interbank offered rate
or a base rate, plus a margin determined by a leverage ratio with option periods
of one to six months. At October 1, 2000, there were no outstanding balances
drawn on these lines.
6. Special Charge
During the fourth quarter of fiscal year 2000, DSSG recorded a special charge of
$40.1 million. The charge was primarily focused on DSSG's DLTtape Division and
reflected DSSG's strategy to align its DLTtape drive operations with market
conditions. These conditions include slower growth in the mid-range server
market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTtape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed asset
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia, and $1.9 million in other costs associated with the plan.
The facilities costs noted above include lease payments for vacant space in a
facility in Colorado Springs, Colorado, the write-off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang,
28
<PAGE>
Malaysia, as this space was converted to DSSG manufacturing. DSSG expects that
the Colorado facility will be vacated by the end of fiscal year 2001.
The write-off of investments reflects DSSG's decision to end its research on
certain optical based storage solutions. As a result, DSSG has written-off an
equity investment and technology licenses related to optical technology.
DSSG currently expects a workforce reduction of approximately 900 employees.
The reduction in force primarily affects employees at DSSG's manufacturing
operations in Colorado Springs, Colorado, as well as administrative employees
within the DLTtape Division. As of October 1, 2000, 294 employees have been
terminated. DSSG anticipates that the remaining employees will be terminated by
the end of the fourth quarter of fiscal year 2001.
As of October 1, 2000, DSSG had incurred cash expenditures of $4 million
associated with employee severance and benefits, facilities and other costs.
DSSG expects to incur additional cash expenditures associated with the plan of
approximately $14 million, which will be funded out of operations.
The following table summarizes activity related to the special charge at October
1, 2000:
<TABLE>
<CAPTION>
(In thousands) Severance
And Facilities Fixed Other
Benefits Costs Investments Assets Costs Total
<S> <C> <C> <C> <C> <C> <C>
Special charge provision $ 7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments (2,997) (85) -- -- (1,138) (4,220)
Non-cash charges -- -- (13,908) (3,163) -- (17,071)
------- ------- -------- ------- ------- --------
Balance at October 1, 2000 $ 4,649 $13,415 $ -- $ -- $ 728 $ 18,792
======= ======= ======== ======= ======= ========
</TABLE>
7. Comprehensive Income
Accumulated other comprehensive income included in group equity on the condensed
combined balance sheets of the DLT & Storage System group consists of foreign
currency translation adjustments. Total comprehensive income for the three
months and six months ended October 1, 2000 and September 26, 1999 is presented
in the following table:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
--------------------------- --------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Net income $ 44,285 $ 21,034 $ 88,235 $ 72,499
Other comprehensive income -
Foreign currency translation
adjustments (233) - (233) -
-------- -------- -------- --------
Comprehensive income $ 44,052 $ 21,034 $ 88,002 $ 72,499
======== ======== ======== ========
</TABLE>
8. Subsequent Events
29
<PAGE>
On October 3, 2000, Quantum entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDDG in an all-stock transaction. The merger
agreement envisages that HDDG's stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDDG common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected to be completed in early 2001. The transaction is expected to be tax-
free to Quantum stockholders, this transaction is subject to stockholders and
regulatory approval. If the combination is completed,
a. Quantum's DLT & Storage Systems Group will operate as a legally separate,
stand-alone company that will be known as Quantum Corporation;
b. DSSG stockholders will receive on a one-for-one basis, shares of the then-
independent company comprising all of the operations and assets of the
Quantum DLT & Storage Systems Group; and
c. DSSG intends to issue restricted stock to Quantum employees that become
employees of the combined HDDG/Maxtor company, in exchange for the loss of
unvested DSSG stock options held by such employees. As a result, Quantum
is expected to incur substantial compensation charges if the combination is
completed.
These expectations are forward-looking statements and actual results may
differ.
On October 24, 2000 Quantum announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances,
Inc. On October 30, 2000 Snap Appliances filed a registration statement with
the Securities and Exchange Commission for the initial public offering ("IPO")
of its common stock. Immediately following the IPO, Quantum will own at least
80% of Snap Appliances' outstanding common stock. Quantum intends to
distribute these shares to DSSG stockholders subject to receiving a favorable
IRS ruling and Board of Directors approval. After the IPO the remaining DSSG
business will be comprised of two business groups, Enterprise Solutions and
DLTtape.
On November 8, 2000, Quantum announced plans to expand its product design and
new product introduction resources for it's DLTtape group in Colorado. Under
the plan, Quantum will move more than 100 engineering, marketing and
administrative positions relating to the DLTtape business to Colorado from its
Shrewsbury, MA facility. In addition, Quantum will create an Advanced
Technology Development Lab in Shrewsbury that will focus on advancing future
tape drive innovations. There will be substantial costs associated with this
plan. DSSG is currently not able to quantify these costs.
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - DLT & Storage Systems Group
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 are phrased
in the future tense or 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(TM) drives, DLTtape media cartridges and storage
solutions. DSSG's storage solutions consist of DLTtape libraries, network
attached storage solutions, solid state storage systems and service.
Digital Linear Tape, or DLTtape, is DSSG's half-inch tape technology that is the
industry standard for mid-range UNIX and NT system backup and archive
applications. DSSG recently introduced a new family of tape drive products based
on Super DLTtape technology, targeted to serve workgroup, mid-range and
enterprise business needs. Super DLTtape technology is an extension of the
DLTtape technology product set. Super DLTtape continues to build on generations
of DLTtape success while ensuring compatibility with previous DLTtape formats.
DSSG's tape libraries are part of our Enterprise Solutions business and serve
the entire tape library data storage market from desktop computers to
enterprise class computers. DSSG offers a broad line of automated tape
libraries which are used to manage, store and transfer data in enterprise
networked computing environments.
DSSG is a leading provider of network attached storage, or NAS, solutions for
workgroups. DSSG's NAS appliances offer a combination of interoperability,
reliability, ease of use and cost-effectiveness that we believe is better suited
to the storage needs of workgroups than other storage alternatives. Our Snap
Server appliances utilize our optimized hardware and proprietary operating
system, the Snap OS, to enable our customers to add additional storage capacity
to a network quickly, inexpensively and conveniently. The target end-users for
Snap Server appliances are workgroups within small to large organizations and
application service providers and Internet service providers.
31
<PAGE>
DLTtape drives store data on DLTtape media cartridges. Historical use of DLTtape
drives has shown that drives use many media cartridges per year. DSSG's DLTtape
media cartridges are manufactured and sold by licensed third party
manufacturers. 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 to
sell a substantial portion of DLTtape media cartridge through its license model
because this minimizes DSSG's operational risks and expenses and provides an
efficient distribution channel. Currently, approximately 85% of media sales
occur through this license model.
On October 24, 2000 Quantum announced plans to make its server appliances
subsidiary an independent, publicly-traded company called Snap Appliances, Inc.
On October 30, 2000 Snap Appliances filed a registration statement with the
Securities and Exchange Commission for the initial public offering ("IPO") of
its common stock. Immediately following the IPO, Quantum will own at least 80%
of Snap Appliances' outstanding common stock. Quantum intends to distribute
these shares to DSSG stockholders subject to receiving a favorable IRS
ruling and Board of Directors approval. After the IPO the remaining DSSG
business will be comprised of two business groups, Enterprise Solutions and
DLTtape.
On November 8, 2000, Quantum announced plans to expand its product design and
new product introduction resources for its DLTtape Group in Colorado. Under
the plan, Quantum will move more than 100 engineering, marketing and
administrative positions relating to the DLTtape business to Colorado from its
Shrewsbury, MA facility. In addition, Quantum will create an Advanced
Technology Development Lab in Shrewsbury that will focus on advancing future
tape drive innovations. There will be costs associated with this plan. DSSG is
currently not able to quantify these costs.
Products
The DLT & Storage Systems group's products include:
DLT:
----
. Super DLTtape (TM) drives. DSSG recently introduced a new family of tape
drive products based on Super DLTtape technology, targeted to serve
workgroup, mid-range and enterprise business needs. The mid-range market
including workgroup and department servers, large corporate departments and
mid-size automated libraries will see a drive with a native capacity of
110GB (220GB compressed) and a sustained transfer rate of 11MB per second
(22MB compressed). In response to high performance enterprise needs, DSSG
also offers a Super DLTtape drive with a sustained transfer rate of greater
than 16MB per second (32MB compressed). Super DLTtape drives are expected
to begin volume shipment in the second half of calendar year 2000.
. DLTtape drives. DSSG currently offers three tape drive products--the
DLT8000, the DLT7000 and the DLT4000. The DLT8000 provides a combination of
40GB of native capacity (80GB compressed) and a sustained data transfer
rate of 6MB 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).
32
<PAGE>
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges is 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 ensure read compatibility with future
generations of DLTtape drives. The tape itself features a special high-
grade metal particle formula that reduces tape and head wear. The result is
tape that delivers a proven one million passes with a negligible impact on
soft error rates and a 30-year archival life. DSSG has qualified the one
supplier of Super DLTtape media and is currently qualifying others; the
tape will include enhanced features to support Super DLTtape products.
Storage Solutions:
------------------
. 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 P6000 series library which features Prism
Library Architecture(TM) and can be configured in multiple units to scale
up to 22.8 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.
. Network attached storage solutions. DSSG's Snap! Server(TM) family of
network attached storage appliances, include the Snap Server 1000, Snap
Server 2000, and Snap Server 4100, including storage capacities ranging
from 15GB to 240GB. Snap Servers connect directly to a network and can be
easily and seamlessly integrated with other network devices. To install a
Snap Server, a user simply connects the appliance to a network and a power
source and then turns on the appliance. The entire installation process
should take less than five minutes and does not require an information
technology professional. The Snap OS includes a file system that can
simultaneously function in a variety of operating environments, including
Apple MacOS, Linux, Microsoft Windows, Novell Netware and UNIX. The Snap
hardware includes motherboards with standard components, hard disk drives,
memory and processors. The Snap Server 1000 features 15GB or 30 GB of
storage capacity, one disk drive, and a 3.5 pound desktop or portable form
factor. The Snap Server 2000 features 60 GB of storage capacity, two disk
drives, desktop form factor, and RAID 0, 1. The Snap Server 4100 features
120 GB or 240 GB of storage capacity, four disk drives, 1U rack form
factor, and RAID 0, 1, 5.
. LANvault(TM) tape backup appliance. LANvault is a backup appliance with a
DLTtape library, a central management console and a customer service Web
portal. This product is intended to meet the requirements for remote site
backup and is designed as a workgroup backup solution appliance preloaded
with industry-standard backup software for ease of installation and use.
. Solid state storage systems. DSSG offers two families of solid state
storage systems--the Rushmore(TM) Ultra series and the Rushmore eSystem
Accelerators. The Rushmore Ultra Solid State Disks are available in
capacities ranging from 268MB to 3.2GB and have data access times of less
than 50 microseconds, 100 to 200 times faster than magnetic hard disk
drives.
33
<PAGE>
The Rushmore eSystem Accelerator is a comprehensive set of hardware, tools,
services and consulting bundled into one package. With capacities ranging
from 536MB to 3.2GB, the Rushmore eSystem Accelerator delivers data access
times of less than 25 microseconds, more than 18,000 accesses to
information per second for time-critical applications.
Results of Operations
Revenue. Revenue for DSSG in the three and six months ended October 1, 2000 was
$362 million and $728 million, respectively, compared to $357 million and $688
million, respectively, for the corresponding periods in fiscal year 2000. The
increase in revenue reflected increased sales of DLTtape libraries and Snap
Servers, and increased DLTtape media royalties. Sales of tape libraries reached
a record high in the second quarter of fiscal year 2001. Sales of Snap Server
network attached storage appliances also reached a record high without
comparable sales in the prior year period as DSSG's sales of Snap Servers
followed the acquisition of Meridian in September 1999. The increase in units of
DLTtape media cartridges sold 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 that remain in use. The increase in DLTtape media royalties
reflected an increase in the sales of DLTtape media cartridges by licensed media
manufacturers for which DSSG earns a royalty fee. Revenue from sales of DLTtape
drives declined. The decrease in DLTtape drive revenue reflected an increase in
shipments, offset by a decline in average unit prices due to competitive
pricing.
The table below summarizes the components of DSSG's revenue in the three months
and six months ended October 1, 2000 and September 26, 1999, respectively:
<TABLE>
<CAPTION>
(in millions) Three Months Ended Six Months Ended
--------------------------- --------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
DLT drives $199 $219 $411 $438
DLT media 34 36 62 64
DLT royalty 50 45 103 84
Storage systems 109 82 209 149
Intra-group
elimination* (30) (25) (57) (47)
---- ---- ---- ----
Revenue $362 $357 $728 $688
==== ==== ==== ====
</TABLE>
*Represents intra-group sales of DLTtape drives for incorporation into DSSG's
tape libraries.
Sales to the top five customers in the three and six months ended October 1,
2000 represented 46% and 47% of revenue, respectively, compared to 47% and 48%
of revenue, respectively, for the corresponding periods in fiscal year 2000.
Sales to Compaq were 17% and 18% of revenue, in the three and six months ended
October 1, 2000, respectively, compared to 18% and 20% of revenue, respectively,
in the corresponding periods in fiscal year 2000. Sales to Hewlett-Packard were
13%
34
<PAGE>
and 12% of revenue in the three and six months ended October 1, 2000,
respectively, compared to 16% and 15% of revenue, respectively, in the
corresponding periods in fiscal year 2000.
Sales to computer equipment manufacturers and distribution channel customers
were 59% and 17% of revenue, respectively, in the three months ended October 1,
2000, compared to 62% and 18% of revenue, respectively, in the three months
ended September 26, 1999. For the six months ended October 1, 2000, computer
manufacturer and distribution channel sales were 61% and 16% of revenue,
respectively, compared to 65% and 15% of revenue, respectively, in the
corresponding period of fiscal year 2000. The remaining revenue in the three
and six months ended October 1, 2000 represented media royalty revenue, sales to
value-added resellers and direct sales 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 October 1,
2000, was 43.6%, compared to 47.7% in the three months ended September 26, 1999.
The gross margin rate for the first six months of fiscal year 2001 was 43.6%
compared to 46.8% for the corresponding period in fiscal year 2000. The decrease
reflected lower DLTtape drive margins as a result of price declines, partially
offset by an increase in the proportion of overall revenue represented by
DLTtape media royalty revenue.
Research and Development Expenses. Research and development expenses in the
three and six months ended October 1, 2000, were $32 million, or 8.8% of
revenue, and $68 million, or 9.3% of revenue, respectively, compared to $30
million, or 8.5% of revenue, and $58 million, or 8.5% of revenue, respectively,
in the corresponding periods of fiscal year 2000. The increase in research and
development expenses reflected the inclusion of Snap Appliances expenses, which
were not comparatively included in the prior year periods as the acquisition
occurred on September 10, 1999.
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended October 1, 2000, were $37 million, or 10.2% of revenue, and $76
million, or 10.4% of revenue, respectively, compared to $27 million, or 7.5% of
revenue, and $52 million, or 7.6% of revenue, respectively, in the corresponding
periods of fiscal year 2000. The increase in sales and marketing expenses
reflected the inclusion of Snap Appliances expenses and an increase in sales and
marketing costs associated with the expansion of ATL's infrastructure. Spending
increased as DSSG continued to build both category awareness for NAS
applications and brand awareness for the Snap! Server line.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended October 1, 2000, were $19 million, or 5.3% of
revenue, and $37 million, or 5.1% of revenue, respectively, compared to $15
million, or 4.3% of revenue, and $30 million, or 4.3% of revenue, respectively,
in the corresponding periods of fiscal year 2000. The increase in general and
administrative expenses reflected the inclusion of Snap Appliances expenses,
which were not comparatively included in the prior year periods as the
acquisition occurred on September 10, 1999, and increased expenses associate
with DLTtape libraries.
Purchased In-process Research and Development Expense. DSSG expensed purchased
in-process research and development of $37 million, as a result of the
Meridian acquisition in the second quarter ended September 26, 1999.
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<PAGE>
Special Charge. During the fourth quarter of fiscal year 2000, DSSG recorded a
special charge of $40.1 million. The charge was primarily focused on DSSG's
DLTtape Division and reflected DSSG's strategy to align its DLTtape drive
operations with market conditions. These conditions include slower growth in
the mid-range server market and increasing centralization of server backup
through automation solutions, both of which have resulted in relatively flat
DLTtape drive shipments. The special charge included a reduction of overhead
expenses throughout the DLTtape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million
for severance and benefits for terminated employees, $3.2 million for fixed
asset write-offs, primarily related to the transfer of manufacturing to
Penang, Malaysia and $1.9 million in other costs associated with the plan.
DSSG is proceeding according to plan and expects to realize annual cost savings
from the plan of approximately $40 million beginning upon full implementation of
the plan at the end of fiscal year 2001. Approximately $30 million of the
savings are expected in cost of revenue as a result of reduced manufacturing
costs with the remaining amount in operating expenses, primarily research and
development, as a result of ending research on certain optical-based storage
solutions. As compared to fiscal year 2000, DSSG expects operating expenses to
increase because of increased investments in storage systems products and
marketing in fiscal year 2001 and as a result of including the Snap Appliances'
operations for a full year following the acquisition of Meridian in September
1999. These expectations are forward-looking statements and actual results may
differ.
Interest and Other Income/Expense. Net interest and other income/expense for the
three and six months ended October 1, 2000 was $0.7 million expense and $1.1
million income, respectively, compared to $1.1 million expense and $0.5 million
income, respectively, for the corresponding periods of fiscal year 2000. The
lower net expense for the three month period, and the higher net income for the
six month period reflected increased interest income as a result of higher
average cash balances.
Income Taxes. DSSG's effective tax rate for the three and six months ended
October 1, 2000 and September 26, 1999 was 36% and 40%, respectively. The
decrease in the fiscal year 2001 effective tax rate reflects an increased
percentage of foreign earnings taxed at less than the U.S. rate.
Liquidity and Capital Resources
DSSG cash, cash equivalents and marketable securities were $320 million at
October 1, 2000 compared to $339 million at March 31, 2000. DSSG used cash in
the six months ended October 1, 2000 to purchase $146 million of treasury stock,
as discussed below. Other uses of cash included approximately $24 million for
investments in property and equipment. DSSG generated cash from operations of
$146 million, primarily reflecting net income, increases in income taxes payable
and accounts payable, partially offset by increases in other assets and accounts
receivable. Other sources of cash included $15 million from the issuance of
common stock.
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stocks in open market or private
transactions. Of the total
36
<PAGE>
repurchase authorization, $600 million was authorized for repurchase of either
Quantum, DSSG or HDDG common stock. An additional $100 million was authorized
for repurchase of HDDG common stock. Under these authorizations, as of October
1, 2000, Quantum had repurchased a total of 3.9 million shares of Quantum common
stock, 29.2 million shares of DSSG common stock and 13.5 million shares of HDDG
common stock for a combined total of $566 million. During the first six months
of fiscal year 2001, Quantum repurchased 13.5 million shares of DSSG common
stock and 10 million shares of HDDG common stock for a combined total of $241
million.
In April 2000, Quantum entered into two new unsecured senior credit facilities,
each providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At Quantum's option, borrowings under the
revolving credit lines bear interest at either the London interbank offered rate
or a base rate, plus a margin determined by a leverage ratio with option periods
of one to six months. At October 1, 2000, there were no outstanding balances
drawn on these lines.
DSSG expects to spend approximately $60 million in fiscal year 2001 for capital
equipment and leasehold improvements. These capital expenditures will support
the introduction and manufacturing of Super DLTtape products; manufacturing
DLTtape drives in its new location, Penang, Malaysia; and DSSG's general
infrastructure.
DSSG believes that its existing capital resources, including the credit
facilities 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 DSSG's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt or
equity securities. There can be no assurance that such financing would be
available on terms favorable to Quantum, if at all.
Trends and Uncertainties Relating to the DLT & Storage Systems Group
Holders of DSSG stock remain stockholders of Quantum Corporation, which, prior
to the completion of the merger of HDDG and Maxtor, includes common stock of
HDDG, 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 DSSG stock and 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.
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
37
<PAGE>
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.
If the contemplated combination of the HDDG business with Maxtor is not
successfully completed, this could have a negative impact on Quantum's results
of operations.
Though Quantum has publicly announced that it currently intends to combine its
HDDG business with Maxtor, the transaction remains subject to the approval of
Maxtor and Quantum stockholders, expiration or termination of the applicable
Hart-Scott-Rodino waiting periods, approval by the European regulatory
authorities, and other customary conditions. If the transaction is not
consummated, Quantum's results of operations could be negatively impacted due
to, among other things, market, customer and employee perception of the
terminated transaction.
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 Storage
Technology Corporation. These competitors are aggressively trying to develop
new tape drive technologies to compete more successfully with products based on
DLTtape technology. Hewlett-Packard, IBM Corporation 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:
. It will introduce any of these new products in the time frame DSSG currently
forecasts;
38
<PAGE>
. It will not experience technical or other difficulties that could prevent or
delay the introduction of these new products;
. Its new products will achieve market acceptance;
. Its new products will be successfully or timely qualified with DSSG's
customers by meeting customer performance and quality specifications. A
successful and timely customer qualification must occur before customers will
place large product orders; or
. It will achieve high volume production of these new products in a timely
manner, if at all.
These risks are magnified because DSSG expects that technological changes,
changes in customer requirements and increasing competition could result in
declining sales and gross margins on its existing products.
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 an adequate number of 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 main supplier of tape heads is located in China. 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. As a result, you should not use
DSSG's past quarterly operating results to predict future performance.
Quarterly operating results could be adversely affected by:
. An inadequate supply of DLTtape media cartridges;
. Customers canceling, deferring or rescheduling significant orders as a result
of excess inventory levels or other factors;
. Declines in network server demand;
39
<PAGE>
. Failure to complete shipments in the last month of a quarter during which a
substantial portion of DSSG's products are typically shipped; or
. Increased competition.
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments.
DSSG's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and DSSG's relationships with its
customers are terminable at will. The loss of, or a significant change in
demand from, one or more key customers could materially adversely impact DSSG's
operating results.
Unpredictable end-user demand, 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 determines the pricing and number of units of DLTtape media cartridges
sold by it. In addition, other companies may begin to sell DLTtape media
cartridges under license agreements. As a result, DSSG's royalty revenue will
vary depending upon the level of sales and prices set by Fuji, Maxell and
potentially other licensees. 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.
The HDDG merger could result in substantial compensation charges to Quantum
In connection with the merger of HDDG and Maxtor Corporation, DSSG intends to
issue restricted stock to Quantum employees that become employees of the
combined HDDG/Maxtor company, in exchange for the loss of unvested DSSG stock
options held by such employees. Quantum is expected to incur compensation
charges. As a result the historical financial information for Quantum's DSSG
business may not be representative of what its future results will be. Quantum
is currently not able to quantify these compensation charges to be incurred.
The November 8, 2000 DLTtape business plan could result in charges to DSSG.
The plan of the DLTtape business involves the relocation of more than 100
employees from the Massachusetts to Colorado facility and the creation of a new
Advanced Technology Development Lab in Massachusetts. There will be costs
associated with these activities which have not yet been quantified.
Third party infringement claims could result in substantial liability and
significant costs.
40
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 Quantum's Annual Report on Form
10-K for the year ended March 31, 2000.
In addition, Quantum's operating results are expected to be affected by charges
to be incurred in connection with the merger of HDDG and Maxtor and the November
8, 2000 DLTtape business plan. See "Trends and Uncertainties Relating to the
DLT & Storage System Group."
41
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $823,667 $ 768,214 $1,687,360 $1,520,705
Cost of revenue - on net sales 756,452 745,989 1,499,505 1,470,211
Cost of revenue - special charge (benefit) (15,825) 57,068 (15,825) 57,068
-------- --------- ---------- ----------
Gross profit (loss) 83,040 (34,843) 203,680 (6,574)
Operating expenses:
Research and development 59,910 61,973 118,160 124,681
Sales and marketing 24,171 28,860 51,887 56,691
General and administrative 16,356 15,332 32,632 30,077
Special charge (benefit) (90) 2,338 (90) 2,338
-------- --------- ---------- ----------
100,347 108,503 202,589 213,787
Income (loss) from operations (17,307) (143,346) 1,091 (220,361)
Other income (expense):
Interest income and other, net 6,998 3,423 15,053 9,387
Interest expense (2,443) (2,406) (4,675) (4,770)
-------- --------- ---------- ----------
4,555 1,017 10,378 4,617
Income (loss) before income taxes (12,752) (142,329) 11,469 (215,744)
Income tax provision (benefit) (4,081) (58,642) 3,670 (88,873)
-------- --------- ---------- ----------
Net income (loss ) $ (8,671) $ (83,687) $ 7,799 $ (126,871)
======== ========= ========== ==========
Net income (loss) per share (1) :
Basic $(0.11) $ (1.01) $0.10 $ (1.53)
Diluted $(0.11) $ (1.01) $0.09 $ (1.53)
Weighted average common shares (1) :
Basic 77,336 82,883 79,390 83,107
Diluted 77,336 82,883 85,533 83,107
Net loss for the period from
August 4, 1999 to September 26, 1999 $ (49,650) $ (49,650)
========= ==========
Net loss per share:
Basic $ (0.60) $ (0.60)
Diluted $ (0.60) $ (0.60)
Weighted average common shares:
Basic 82,883 82,883
Diluted 82,883 82,883
</TABLE>
(1) Basic and diluted net income (loss) per share and weighted average common
shares for the three and six months ended September 26, 1999 are pro forma and
assume the recapitalization occurred at the beginning of fiscal year 2000.
See accompanying notes to condensed combined financial statements.
42
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 1, March 31,
2000 2000
---------- ----------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 475,067 $ 581,542
Marketable securities 16,814 30,048
Accounts receivable, net of allowance for
doubtful accounts of $18,732 and $19,618 380,432 395,118
Inventories 140,269 122,347
Due from the DLT & Storage Systems group - 30,100
Deferred taxes 84,008 78,713
Other current assets 57,960 58,356
---------- ----------
Total current assets 1,154,550 1,296,224
Property and equipment, net of accumulated
depreciation of $221,462 and $218,674 147,646 158,548
Intangible assets, net 274 1,915
Other assets 36,100 21,361
---------- ----------
$1,338,570 $1,478,048
========== ==========
Liabilities and Group Equity
----------------------------
Current liabilities:
Accounts payable $ 307,786 $ 375,614
Accrued warranty 41,125 46,967
Accrued compensation 39,480 54,073
Income taxes payable 25,222 44,284
Accrued special charge 5,746 22,409
Current portion of long-term debt 392 344
Other accrued liabilities 147,867 77,596
---------- ----------
Total current liabilities 567,618 621,287
Deferred taxes 40,525 41,758
Long-term debt 12,412 12,613
Convertible subordinated debt 95,833 95,833
Group equity 622,182 706,557
---------- ----------
$1,338,570 $1,478,048
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
43
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 1, September 26,
2000 1999
---------- -------------
(unaudited)
<S> <C> <C>
Net income (loss) $ 7,799 $(126,871)
Adjustments to reconcile net income (loss) to net cash used in
operations:
Special charge - 58,385
Depreciation 25,463 33,119
Amortization 2,096 1,956
Deferred income taxes (1,233) 512
Compensation related to stock plans 3,267 544
Changes in assets and liabilities:
Accounts receivable 14,686 25,040
Inventories (17,922) (3,608)
Accounts payable (67,828) (49,024)
Income taxes payable (19,062) (7,407)
Accrued warranty (5,842) 5,563
Other assets and liabilities (6,942) (15,601)
--------- -------------
Net cash used in operating activities (65,518) (77,392)
--------- -------------
Cash flows from investing activities:
Investment in equity securities (14,010) -
Purchases of marketable securities - (33,367)
Maturities of marketable securities - 33,314
Proceeds from disposition of property & equipment 2,831 -
Investment in property and equipment (14,093) (30,125)
--------- -------------
Net cash used in investing activities (25,272) (30,178)
--------- -------------
Cash flows from financing activities:
Proceeds from long-term credit facilities - 3,333
Principal payments on long-term credit facilities (153) (6,167)
Inter-group proceeds for common stock issued - 2,835
Purchases of treasury stock (94,597) (1,558)
Proceeds from factoring 70,000 -
Proceeds from issuance of common stock, net 9,065 5,794
--------- -------------
Net cash provided by (used in) financing activities (15,685) 4,237
--------- -------------
Decrease in cash and cash equivalents (106,475) (103,333)
Cash and cash equivalents at beginning of period 581,542 499,725
--------- -------------
Cash and cash equivalents at end of period $ 475,067 $ 396,392
========= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,539 $ 4,361
Income taxes, net of (refunds) $ (5,861) $ 14,475
</TABLE>
See accompanying notes to condensed combined financial statements.
44
<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. Intergroup transactions and
balances are not eliminated in the separate financial statements of HDDG or
DSSG.
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, 2000 has been
derived from the audited financial statements of Quantum Corporation included in
the Annual Report on Form 10-K 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.
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<PAGE>
2. Securitized Assets
HDDG has an asset securitization program with Capital Factors Inc., under which
we sell them our eligible accounts receivable, on a with recourse basis. At
October 1, 2000, $70 million of our accounts receivable were securitized under
the program. Given the with recourse nature of the arrangement, the securitized
accounts receivable are included within the accounts receivable balance, with
the corresponding credit being included in other liabilities.
3. Inventories
Inventories consisted of the following:
(In thousands)
<TABLE>
<CAPTION>
October 1, March 31,
2000 2000
----------- ---------
<S> <C> <C>
Materials and purchased parts $ 4,008 $ 7,387
Work in process 4,222 5,299
Finished goods 132,039 109,661
-------- --------
$140,269 $122,347
======== ========
</TABLE>
4. Net Income (Loss) Per Share
As a result of the recapitalization, net income (loss) per share for HDDG has
been calculated based on the group's net income (loss) subsequent to August 3,
1999. It was not calculated on a group basis for periods prior to the
recapitalization because HDDG stock was not part of Quantum's capital structure
at that time.
The following table sets forth the computation of basic and diluted net income
(loss) per share for HDDG:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Period from Six Months
Ended August 4, 1999 to Ended
October 1, September 26, October 1,
2000 1999 2000
-------------- ------------------- ------------
<S> <C> <C> <C>
Numerator:
Numerator for diluted net income (loss)
per share - income (loss) available to
common stockholders $(8,671) $(49,650) $ 7,799
============== =================== ============
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 77,336 82,883 79,390
Effect of dilutive securities:
Outstanding options - - 6,143
-------------- ------------------- ------------
Denominator for diluted net income
(loss) per share - adjusted weighted
average shares 77,336 82,883 85,533
============== =================== ============
Basic net income (loss) per share $( 0.11) $ (0.60) $ 0.10
============== =================== ============
Diluted net income (loss) per share $( 0.11) $ (0.60) $ 0.09
============== =================== ============
</TABLE>
46
<PAGE>
The computation of diluted net income (loss) per share for the three and six
months ended October 1, 2000, and for the period August 4, 1999 through
September 26, 1999, 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 18,723,101 and 15,234,101 shares of HDDG common stock were
outstanding at October 1, 2000 and September 26, 1999, respectively. However,
the corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for HDDG for the three months ended
October 1, 2000, and the period August 4, 1999 through September 26, 1999,
because the effect would have been antidilutive.
Options to purchase 7,360,119 shares of HDDG common stock were outstanding for
the six months ended October 1, 2000, but were not included in the computation
of diluted net income per share because the options' exercise price was greater
than the average market price of the common stock and, therefore, the effect
would have been antidilutive.
5. Common Stock Repurchase
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of its common stocks in open market or private transactions.
Of the total repurchase authorization, $600 million was authorized for
repurchase of either Quantum, DSSG or HDDG common stock. An additional $100
million was authorized for repurchase of HDDG common stock. Under these
authorizations, as of October 1, 2000, Quantum had repurchased a total of 3.9
million shares of Quantum common stock, 29.2 million shares of DSSG common stock
and 13.5 million shares of HDDG common stock for a combined total of $566
million. During the first six months of fiscal year 2001, Quantum repurchased
13.5 million shares of DSSG common stock and 10 million shares of HDDG common
stock for a combined total of $241 million.
6. Credit Line
In April 2000, Quantum entered into two new unsecured senior credit facilities,
each providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At Quantum's option, borrowings under the
revolving credit lines bear interest at either the London interbank offered rate
or a base rate, plus a margin determined by a leverage ratio with option periods
of one to six months. At October 1, 2000, there were no outstanding balances
drawn on these lines.
7. 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. In October, 1999 the case was
transferred to a federal district court in New
47
<PAGE>
Orleans, Louisiana, where it has been joined with suits brought against Papst
by Hewlett-Packard, Maxtor Corporation and Minebea Company, Ltd. for the
purposes of coordinated discovery under multi-district litigation rules.
Hewlett-Packard settled its dispute in April, 2000 with Papst and has
withdrawn from the litigation. To date, discovery has not begun to any
significant extent. Quantum does not believe that the transfer will affect the
final disposition of this matter in a significant way. 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. For example, in fiscal year 2000, Discovision
Associates brought patents they hold to Quantum's attention. 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.
8. Special Charge
During the second quarter of fiscal year 2000, 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 streamlining 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.
The special charge consisted of $26.4 million related to facilities costs,
$13.2 million in asset write-offs related to streamlining the global logistics
model and changes 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 by the end of the third quarter of fiscal year 2001.
Subsequent to the end of the second quarter fiscal year 2000, HDDG revised its
estimate of costs required to implement the restructuring plan. HDDG estimated
that severance and benefits, inventory and other costs, which included the
disposition of additional capital assets, would be more than previously
estimated as a result of the planned changes in the customer service strategy.
HDDG also estimated that costs associated with vacating leased facilities would
be less than previously estimated as a result of disposing of a major facility
earlier than previously expected. Accordingly, HDDG reallocated amounts between
these categories during the second half of fiscal year 2000.
In the second quarter of fiscal year 2001, HDDG reversed $15.9 million as a
special charge benefit on the income statement. This reversal was primarily due
to negotiated lease cancellations and reduced severance and benefits due to the
redeployment of certain employees.
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<PAGE>
In connection with the charge, HDDG currently expects a workforce reduction of
approximately 513 employees, down from the original expectation of 600
employees. In addition, approximately 100 open 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. As of October 1, 2000,
481 employees have been terminated. The remaining employees will be terminated
by the end of the third quarter of fiscal year 2001.
As of October 1, 2000, HDDG had incurred $9 million in cash expenditures
associated with employee severance and benefits, facilities and other costs.
HDDG expects to incur additional cash expenditures associated with the plan of
approximately $6 million.
The following table summarizes activity related to the special charge at October
1, 2000.
<TABLE>
<CAPTION>
(In thousands) Severance
And Facilities Other
Benefits Costs Inventory Costs Total
-------- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Special charge provision $ 7,833 $26,359 $ 13,214 $12,000 $ 59,406
Cash Payments (5,963) (1,559) - (1,883) (9,405)
Non-cash charges - (7,296) (15,588) (5,502) (28,386)
Adjustments 1,166 (7,852) 2,374 4,312 -
Special charge benefit (2,284) (7,787) - (5,798) (15,869)
------- ------- -------- ------- --------
Balance at October 1, 2000 $ 752 $ 1,865 $ - $ 3,129 $ 5,746
======= ======= ======== ======= ========
</TABLE>
9. Comprehensive Income
Accumulated other comprehensive income included in group equity on the condensed
combined balance sheets of the Hard Disk Drive group consists of unrealized
gains on available for sale investments and foreign currency translation
adjustments. Total comprehensive income for the three months and six months
ended October 1, 2000 and September 26, 1999 is presented in the following
table:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
---------------------------- -----------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (8,671) $(83,687) $ 7,799 $(126,871)
Other comprehensive income -
Change in unrealized gain on
investments (8,135) -- (7,940) --
Foreign currency translation
adjustments (1,739) 1,693 (1,969) 773
--------- -------- -------- ---------
Comprehensive income $(18,545) $(81,994) $ (2,110) $(126,098)
========= ======== ======== =========
</TABLE>
10. Business Units
49
<PAGE>
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.
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.
Results for HDDG's business units for the three months and six months ended
October 1, 2000 and September 26, 1999 are presented in the following table:
<TABLE>
<CAPTION>
(In millions) Three Months Ended Six Months Ended
---------------------------- -----------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Business unit:
Desktop
Revenue $656 $ 661 $1,330 $1,298
Unit operating loss (35) (133) (25) (194)
High-end
Revenue 168 107 357 222
Unit operating income (loss) 18 (10) 26 (26)
</TABLE>
<TABLE>
<CAPTION>
(In millions) Three Months Ended Six Months Ended
---------------------------- -----------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Loss reconciliation:
Total unit operating income (loss) $(17) $(143) $ 1 $(220)
Unallocated amounts:
Interest and other income 4 1 10 4
---- ----- --- -----
Income (loss) before income taxes $(13) $(142) $11 $(216)
==== ===== === =====
</TABLE>
11. Subsequent Event
On October 3, 2000 Quantum entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDDG in an all-stock transaction. The merger
agreement envisages that HDDG stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDDG common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies, is
expected be completed in early calendar 2001. The transaction is expected to be
tax-free to Quantum stockholders. This transaction is subject to stockholders
and regulatory approval. These expectations are forward-looking statements and
actual results may differ.
50
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Hard Disk Drive Group
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 are
phrased in the future tense or 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 which requires economy and
reliability and the high-end market, which requires faster and higher capacity
disk drives--as well as the emerging market for hard disk drives specially
designed for consumer electronics devices such as personal video recorders,
personal audio recorders, cable and set-top boxes, Internet appliances and
digital video editing. HDDG has been a leading volume supplier of hard disk
drives for the desktop market for each of the past seven years.
HDDG designs desktop hard disk drives to meet the storage requirements of entry-
level to high-performance desktop PCs in home and business environments. HDDG
also designs high-end hard disk drives to store data on large computing systems
such as network servers. These high-end hard disk drives are generally used for:
. dedicated sites that store large volumes of data;
. network servers such as those used for Internet and intranet services,
online transaction processing and enterprise wide applications;
. high-speed computers used for specialized engineering design software; and
. computer systems incorporating a large number of shared hard disk drives.
HDDG also pioneered hard disk drive applications for the developing consumer
electronics market. These hard disk drive applications utilize Quantum
QuickView(TM)--HDDG's hard disk drive technology designed especially for
consumer electronics. Quantum QuickView technology makes it possible to
simultaneously record and play back audio and video content and to instantly and
inexpensively access large amounts of audio and video content--capabilities that
are not as well suited to competing technologies such as video tape and optical
media.
51
<PAGE>
On October 3, 2000, the Company entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDDG in an all-stock transaction. The merger
agreement envisages that HDDG stockholders will receive 1.52 shares of Maxtor
common stock for every share of HDDG common stock they own. The transaction,
which was unanimously approved by the Boards of Directors of both companies,
is expected to be completed in early calendar 2001. The transaction is
expected to be tax-free to Quantum stockholders. This transaction is subject
to stockholders and regulatory approval. These expectations are forward-
looking statements and actual results may differ.
Products
Desktop products. HDDG offers two families of desktop hard disk drives--the
Quantum Fireball(TM) 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, Shock
Protection System II and Data Protection SystemTM with its desktop products.
These features substantially reduce failure rates and provide increased
reliability and performance. Shock Protection System II 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. HDDG has also incorporated feature enhancements of the
Quiet Drive Technology into recently introduced Quantum desktop drives. This
technology has been pioneered through a combination of proprietary design
innovations and unique drive features that enable Quantum to develop drives that
emit dramatically reduced levels of noise. It was first introduced over a year
ago in Quantum QuickView drives targeted for the noise-sensitive consumer
electronics market and has continued to be refined with technology and feature
enhancements.
High-end products. HDDG also offers a broad line of high-end 3.5-inch hard disk
drives--the Quantum Atlas(TM) and Quantum Atlas 10K families. The Quantum Atlas
families offer 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, Shock Protection System II, Data
Protection System and Quiet Drive Technology with its high-end products, and has
incorporated the Shock Protection System III into its recently introduced Atlas
10K III. Shock Protection System III is a further enhancement to Shock
Protection I & II, guarding against one of the leading causes of hard disk drive
failure - mistreatment during handling and integration.
52
<PAGE>
The table below sets forth key performance characteristics for HDDG's current
products:
<TABLE>
<CAPTION>
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
-------- ---- ---- ----- --------
<S> <C> <C> <C> <C>
Fireball lct 10 10.3 5.1 to 30.0 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II, Data Protection System and Quiet Drive
Technology
Fireball lct 15 15.0 7.5 to 30.0 4,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II, Data Protection System and Quiet Drive
Technology
Fireball lct 20 20.4 10.0 to 40.0 4,500 Desktop PCs--Value, with Ultra ATA/100 interface, Shock
Protection System II, Data Protection System and Quiet Drive
Technology
Fireball Plus LM 10.3 10.2 to 30.0 7,200 Desktop PCs--Performance, with Ultra ATA/66 interface,
Shock Protection System and Data Protection System
Fireball Plus AS 20.0 10.2 to 60.0 7,200 Desktop PCs--Performance, with Ultra ATA/100 interface,
Shock Protection System II, Data Protection System and Quiet
Drive Technology
Atlas V 9.1 9.1 to 36.7 7,200 Servers, Workstations and Storage Subsystems, with Ultra
160 SCSI interface, Shock Protection System II and
Data Protection System
Atlas 10K II 7.3 9.2 to 73.4 10,000 Enterprise Servers, Workstations and Storage Subsystems, with
Ultra 160 SCSI interface, Shock Protection System II, Data
Protection System and Quiet Drive Technology
</TABLE>
Results of Operations
Revenue. Revenue in the three and six months ended October 1, 2000 was $824
million and $1.687 billion, respectively, compared to $768 million and $1.521
billion, respectively, for the corresponding periods in fiscal year 2000. The
increase in revenue for the three and six month periods primarily reflected
increased revenue from sales of high-end hard disk drives. The increase in
revenue in the six month period also reflected increased revenue from sales of
desktop hard disk drives.
Desktop hard disk drive revenue in the three and six months ended October 1,
2000 was $656 million and $1.331 billion, respectively, compared to $661 million
and $1.298 billion, respectively, for the corresponding periods in fiscal year
2000. Desktop hard disk drive shipments reached a record high in the second
quarter of fiscal year 2001 reflecting strong demand in the desktop market.
However, intense pricing pressures resulted in lower average unit prices,
resulting in decreased revenue in the three month period and a moderate increase
in revenue in the six month period.
53
<PAGE>
High-end hard disk drive revenue in the three and six months ended October 1,
2000 was $168 million and $357 million, respectively, compared to $107 million
and $222 million, respectively, for the corresponding periods in fiscal year
2000. The increase in revenue reflected increased shipments as a result of
strong demand, particularly from computer equipment manufacturers, as HDDG
transitioned to new high performance products, as well as a mix shift toward
higher capacity products which carry higher average unit prices.
Sales to the top five customers in the three and six months ended October 1,
2000 represented 52% and 50% of revenue, respectively, compared to 51% and 49%
of revenue, respectively, in the corresponding periods in fiscal year 2000.
These amounts reflected a retroactive combination of the sales to Ingram Micro
and Electronic Resources as a result of their merger in July 1999. Sales to
Dell Computer were 14% and 13% of revenue in the three and six months ended
October 1, 2000, respectively, compared to 10% and less than 10% of revenue in
the three and six months ended September 26, 1999, respectively. Sales to
Compaq were 13% and 11% of revenue in the three and six months ended October 1,
2000, respectively, compared to less than 10% of revenue in the corresponding
periods of fiscal year 2000. Sales to Ingram Micro were less than 10% of
revenue in the three and six months ended October 1, 2000, compared to 13% and
less than 10% of revenue in the three and six months ended September 26, 1999,
respectively, including sales to Electronic Resources. Sales to Hewlett-Packard
were 11% and less than 10% of revenue in the three and six months ended October
1, 2000, respectively, compared to 10% and 12% of revenue in the three and six
months ended September 26, 1999, respectively.
Sales to computer equipment manufacturers and distribution channel customers
were 67% and 33% of revenue, respectively, in the three months ended October 1,
2000, compared to 57% and 43% of revenue, respectively, in the three months
ended September 26, 1999. For the six months ended October 1, 2000, computer
equipment manufacturers and distribution channel sales were 65% and 35% of
revenue, respectively, compared to 56% and 44% of revenue, respectively, for the
corresponding period of fiscal year 2000.
Gross Margin Rate. The gross margin rate in the three months ended October 1,
2000 increased to 10.1% from -4.5% in the three months ended September 26, 1999.
The gross margin rate for the first six months of fiscal year 2001 was 12.1%,
compared to -0.4% in the corresponding period of fiscal year 2000. The gross
margin rate in the three and six month periods of fiscal year 2001 reflected the
impact of a $15.8 million special charge benefit. The benefit was primarily
due to negotiated lease cancellations and reduced severance and benefits due to
the redeployment of employees. The gross margin excluding the impact of the
benefit was 8.2% and 11.1% in the three and six month periods ended October 1,
2000. 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 related to 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 gross margin rate excluding the impact
of the charge was 2.9% and 3.3% in the three and six month periods ended
September 26, 1999.
The desktop gross margin rate for the three and six months ended October 1,
2000 was 5.4% and 8.4%, respectively, compared to -8.6% and -3.7% for the
corresponding periods in fiscal year 2000. Excluding the desktop portion of
the special charge benefit of $15.5 million in fiscal year 2001, the gross
margin rate was 3.0% and 7.2% for the three and six month periods ended
October 1, 2000. Excluding the desktop portion of the special charge of $51.4
million in fiscal year 2000, 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 benefit and charge, the increase in gross margin rate reflected the
transition to new lower cost, higher margin products in an environment
characterized by continued competitive pricing pressures.
54
<PAGE>
The high-end gross margin rate for the three and six months ended October 1,
2000 was 28.4% and 25.9%, respectively, compared to 20.6% and 18.5% for the
corresponding periods in fiscal year 2000. Excluding the high-end portion of
the special charge benefit of $0.3 million in fiscal year 2001, the gross
margin rate was 28.2% and 25.8% in the three and six month periods ended
October 1, 2000. Excluding the high-end portion of the special charge of $5.7
million in fiscal year 2000, the gross margin rate was 25.9% and 21.1% in the
three and six month periods ended September 26, 1999. Excluding the impact of
the benefit and charge, the increase in the gross margin rate reflected higher
sales volumes, the transaction to new high performance products and the mix
shift towards higher capacity, higher margin products.
Research and Development Expenses. Research and development expenses in the
three and six months ended October 1, 2000, were $60 million, or 7.3% of
revenue, and $118 million, or 7% of revenue, respectively, compared to $62
million, or 8.1% of revenue, and $125 million, or 8.2% of revenue, respectively,
in the corresponding periods of fiscal year 2000. The decrease in research and
development expenses for the three and six month periods reflected cost
reductions associated with the special charge taken in the second quarter of
fiscal year 2000. We expect the amount of research and development expenses to
increase in the third quarter of fiscal year 2001, primarily as a result of next
generation drive pre-production builds.
Sales and Marketing Expenses. Sales and marketing expenses in the three and six
months ended October 1, 2000, were $24 million, or 2.9% of revenue, and $52
million, or 3.1% of revenue, respectively, compared to $29 million, or 3.8% of
revenue, and $57 million, or 3.7% of revenue, respectively, in the corresponding
periods of fiscal year 2000. The decrease in sales and marketing expenses for
the three and six month periods primarily reflected decreased advertising.
General and Administrative Expenses. General and administrative expenses in the
three and six months ended October 1, 2000, were $16 million, or 2% of revenue,
and $33 million, or 1.9% of revenue, respectively, compared to $15 million, or
2% of revenue, and $30 million, or 2% of revenue, respectively, in the
corresponding periods of fiscal year 2000. The increase in general and
administrative expenses for the three and six month periods reflected an
increase in human resource spending in support of change management, process
reengineering and retention.
Special Charge. During the second quarter of fiscal year 2000, 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 streamlining HDDG's
logistics model in order to create a faster and more flexible fulfillment
system, changes in customer service strategy and consolidation of certain
product development programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to streamlining the global logistics model
and changes 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.
55
<PAGE>
HDDG is proceeding according to plan and expects to realize more than $100
million in cost savings per year, beginning in fiscal year 2001. The majority
of the savings are expected in cost of revenue as a result of a more efficient
distribution system and reduced customer service costs, with the remaining
savings in research and development, as a result of the consolidation of product
development programs. As compared to fiscal year 2000, HDDG expects operating
expenses to be relatively flat in fiscal year 2001, with increased investments
in disk drive and other storage products, primarily reflected in research and
development, offsetting the operating cost savings resulting from the special
charge. These expectations are forward-looking statements and actual results may
differ.
In the second quarter of fiscal year 2001, HDDG reversed $15.9 million as a
special charge benefit on the incomes statement. This reversal was primarily due
to negotiated lease cancellations and reduced severance and benefits due to
attrition and redeployment of certain employees. In addition, fixed assets that
were intended to be written-off are now being utilized elsewhere in the
organization as a result of technology and product roadmap plans.
Interest and Other Income/Expense. Net interest and other income for the three
and six months ended October 1, 2000 were $4.6 million and $10.4 million,
respectively, compared to net interest and other income of $1 million and $4.6
million, respectively, for the corresponding periods of fiscal year 2000. The
increase reflected increased interest income as a result of a higher average
cash balance and an increase in gain on currency translation.
Income Taxes. HDDG recorded a tax benefit of approximately $4 million and a tax
provision of approximately $4 million for the three and six months ended October
1, 2000, respectively, for effective benefit and provision rates of 32%, as
compared to an effective benefit rate of 41% for the corresponding periods in
fiscal year 2000. The difference in rates is primarily attributable to pre-tax
profits in the current year compared to pre-tax losses in the prior year.
Liquidity and Capital Resources Cash, cash equivalents and marketable securities
were $492 million at October 1, 2000 compared to $612 million at March 31, 2000.
HDDG used cash in the six months ended October 1, 2000 to purchase $95 million
of treasury stock, as discussed below. Other uses of cash included
approximately $14 million for investments in property and equipment and $14
million in equity securities. Cash used in operating activities was $66
million, primarily reflecting net income of $8 million and a decrease in
accounts receivable, offset by decreases in accounts payable, income taxes
payable and an increase in inventories. Other sources of cash were $79 million
in proceeds from factoring and the issuance of common stock.
HDDG has an asset securitization program with Capital Factors Inc, under which
we sell our eligible accounts receivable on a with recourse basis. At October 1,
2000, $70 million of accounts receivable were securitized under the program and
included in our accounts receivable balance, the related credit was recorded as
other liabilities.
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of its common stocks in open market or private transactions.
Of the total repurchase authorization, $600 million was authorized for
repurchase of either Quantum, DSSG or HDDG common stock. An additional $100
million was authorized for repurchase of HDDG common stock. Under these
authorizations, as of October 1, 2000, Quantum had repurchased a total of 3.9
million shares of Quantum common stock, 29.2 million shares of DSSG common stock
and 13.5 million shares of HDDG common stock for a combined total of $566
million. During the first six
56
<PAGE>
months of fiscal year 2001, Quantum repurchased 13.5 million shares of DSSG
common stock and 10 million shares of HDDG common stock for a combined total of
$241 million.
In April 2000, Quantum entered into two new unsecured senior credit facilities,
each providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At Quantum's option, borrowings under the
revolving credit lines bear interest at either the London interbank offered rate
or a base rate, plus a margin determined by a leverage ratio with option periods
of one to six months. At October 1, 2000, there were no outstanding balances
drawn on these lines.
HDDG expects to spend approximately $38 million in fiscal year 2001 for capital
equipment and leasehold improvements. These capital expenditures will support
the development and introduction of new disk drive products.
HDDG believes that its existing capital resources, including the credit
facilities 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 HDDG's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt or
equity securities. There can be no assurance that such financing would be
available on terms favorable to Quantum, if at all.
Trends and Uncertainties Relating to the Hard Disk Drive Group
Holders of HDDG stock remain stockholders of Quantum Corporation, which , prior
to the completion of the merger of HDDG and Maxtor, includes common stock of
DSSG, and, therefore, financial effects on DSSG could adversely affect HDDG.
Holders of HDDG stock and DSSG stock are stockholders of a single company. HDDG
and DSSG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of 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.
If the contemplated combination of the HDDG business with Maxtor is not
successfully completed, this could have a negative impact on Quantum's results
of operations.
Though Quantum has publicly announced that it currently intends to combine its
HDDG business with Maxtor, the transaction remains subject to the approval of
Maxtor and Quantum stockholders, expiration or termination of the applicable
Hart-Scott-Rodino waiting periods, approval by the European regulatory
authorities, and other customary conditions. If the transaction is not
consummated, Quantum's results of operations could be negatively impacted due
to, among other things, market, customer and employee perception of the
terminated transaction.
57
<PAGE>
HDDG's operating results depend on new product introductions, which may not be
successful
To compete effectively, HDDG must frequently introduce new hard disk drives.
HDDG cannot assure you that:
. it will successfully or timely develop or market any new hard disk drives
in response to technological changes or evolving industry standards;
. it will not experience technical or other difficulties that could delay or
prevent the successful development, introduction or marketing of new hard
disk drives;
. it will successfully qualify new hard disk drives, particularly high-end
disk drives, with HDDG's customers by meeting customer performance and
quality specifications. A successful and timely customer qualification must
occur before customers will place large product orders;
. it will quickly achieve high volume production of new hard disk drives; or
. its new products will achieve market acceptance.
These risks are magnified because HDDG expects technological changes, short
product life cycles and intense competitive pressures to result in declining
sales and gross margins on its current generation products.
HDDG's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
HDDG's quarterly operating results have fluctuated significantly in the past and
may fluctuate significantly in the future. As a result, you should not use
HDDG's past quarterly operating results to predict future performance. Quarterly
operating results could be adversely affected by:
. the ability of MKE, HDDG's exclusive manufacturer, to quickly achieve high
volume production of HDDG's hard disk drives;
. customers canceling, deferring or rescheduling significant orders;
. returns by customers of unsold hard disk drives for credit;
. decline in PC demand; or
. failure to complete shipments in the last month of a quarter during which a
substantial portion of HDDG's products are typically shipped.
HDDG's prices and margins are subject to declines due to unpredictable end-user
demand and oversupply of hard disk drives
58
<PAGE>
End-user demand for the computer systems that 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
the second quarter of fiscal year 2001, as a result of oversupply in the desktop
hard disk drive market, aggressive pricing and corresponding margin reductions
materially adversely impacted HDDG's operating results.
Growth of the lower priced PC markets is putting downward pressure on HDDG's
desktop hard disk drive prices
The growth of the lower priced PC market has led to a shift toward lower priced
desktop hard disk drives. HDDG expects the trend toward lower prices on hard
disk drives to continue. If HDDG is unable to lower the cost of its desktop
hard disk drives accordingly, operating results could be materially adversely
affected.
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
Technologies, Inc. and Western Digital Corporation. The desktop hard disk drive
market is characterized by more competitiveness than that seen in the computer
industry in general. HDDG's operating results and competitive position could be
negatively impacted by the introduction of competitive products with higher
performance, higher reliability and/or lower cost than HDDG's products. For
example, in the first half of fiscal year 2000, certain competitors reduced
prices for their products significantly. As a result, HDDG's operating results
were materially adversely affected.
In the high-end hard disk drive market, HDDG's primary competitors are Fujitsu,
Hitachi, IBM and Seagate. Currently, Seagate and IBM have the largest market
share for high-end hard disk drives.
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 MKE for the manufacture of all hard disk drives, adverse
material developments in this critical manufacturing relationship would
adversely affect HDDG's operating results
HDDG's relationship with MKE is critical to the Hard Disk Drive group's
operating results and overall business performance. HDDG's dependence on MKE
includes the following principal risks:
59
<PAGE>
. Quality and Delivery. HDDG relies on MKE 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 MKE to satisfy these requirements could have
a material adverse impact on HDDG's operating results.
. Purchase Forecasts. MKE'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 MKE's production schedule could lead to
inventory shortages or surpluses.
. Pricing. HDDG negotiates pricing arrangements with MKE on a quarterly
basis. Any failure to reach competitive pricing arrangements would have a
material adverse impact on HDDG's operating results.
. Capital Commitment. HDDG's future growth will require that MKE continue to
devote substantial financial resources to property, plant and equipment to
support the manufacture of HDDG's products.
. Manufacturing Capacity. If MKE is unable or unwilling to meet HDDG's
manufacturing requirements, an alternative manufacturing source may not be
available in the near term.
MKE 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
MKE 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. MKE 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 in the future. If MKE 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. In fiscal year 2000,
Discovision
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Associates brought some of its patents to HDDG's attention. Adverse resolution
of the Papst 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
MKE generally purchases manufacturing components at prices denominated in U.S.
dollars. However, significant increases in currency exchange rates against the
U.S. dollar could increase MKE's manufacturing costs and could result in higher
product prices and/or declining margins for HDDG's products.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 Quantum's Annual Report on Form
10-K for the year ended March 31, 2000.
HDDG is exposed to equity price risk on its investment in TiVo, Inc. common
stock. HDDG does not attempt to reduce or eliminate its market exposure on this
security. HDDG entered into a strategic alliance with TiVo in fiscal year 1999
to supply hard disk drives utilizing Quantum's QuickView technology for
integration into TiVo's Personal Video Recorder. At October 1, 2000, the fair
market value of HDDG's investment was approximately $17 million. As TiVo is a
relatively new company and has introduced a new product in the consumer
electronics market, HDDG does not believe it is possible to reasonably estimate
any future price movement of TiVo common stock.
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QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
The information contained in Note 7 of the Notes to Condensed Consolidated
Financial Statements and Note 6 of the Notes to Condensed Combined Financial
Statements of the Hard Disk Drive group is incorporated into this Part II, Item
1 by reference.
Item 2. Changes in securities - Not Applicable
Item 3. Defaults upon senior securities - Not Applicable
Item 4. Submission of matters to a vote of security holders
The 2000 Annual Meeting of Stockholders was held on August 22, 2000 to consider
and vote on proposals to elect management's candidates for the Board of
Directors, to ratify the appointment of Ernst & Young LLP as Quantum's
independent auditors for the fiscal year ending March 31, 2001 and to approve
and ratify the adoption of the Annual Incentive Plan for Quantum's Chief
Executive Officer.
The stockholders elected each of management's candidates for the Board of
Directors. The votes were as follows:
For Withheld Authority
--- ------------------
Stephen M. Berkley 205,410,227 3,528,222
David A. Brown 205,399,774 3,538,675
Michael A. Brown 205,171,245 3,767,204
Robert J. Casale 207,085,109 1,853,340
Edward M. Esber, Jr. 207,078,203 1,860,246
Gregory W. Slayton 207,074,526 1,863,923
The stockholders ratified the appointment of Ernst & Young LLP as Quantum's
independent auditors for the fiscal year ending March 31, 2001. The number of
votes "For" were 208,275,564; the number of votes "Against" were 385,379; the
number of votes "Abstain" were 277,506.
The stockholders also approved and ratified the adoption of the Annual Incentive
Plan for Quantum's Chief Executive Officer. The number of votes "For" were
197,787,584; the number of votes "Against" were 9,450,553; and the number of
votes "Abstain" were 1,700,312.
Item 5. Other information - Not Applicable
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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.
-------------------
On October 13, 2000, Quantum filed a Form 8-K reporting that the Company entered
into a definitive agreement with Maxtor Corporation to combine Maxtor and HDDG
in an all-stock transaction. The merger agreement envisages that HDDG's
stockholders will receive 1.52 shares of Maxtor common stock for every share of
HDDG common stock they own. The transaction, which was unanimously approved by
the Boards of Directors of both companies, is expected to be completed in early
calendar 2001.
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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 14, 2000 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
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QUANTUM CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.1 AMENDED AND RESTATED PARTICIPATION AGREEMENT, dated July 12, 2000,
among Registrant, as Lessee, Selco Service Corporation, as Lessor and
as a Participant, The Bank of Nova Scotia, Keybank National
Association and Union Bank of California, N.A., as Participants, and
The Bank of Nova Scotia, as Agent
10.2 AMENDED AND RESTATED MASTER LEASE, dated July 12, 2000, between Selco
Service Corporation, as the Lessor and Registrant, as the Lessee
27.1 Financial Data Schedule
