<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
____________________
Commission File Number 0-12390
QUANTUM CORPORATION
Incorporated Pursuant to the Laws of the State of Delaware
____________________
IRS Employer Identification Number 94-2665054
500 McCarthy Blvd., Milpitas, California 95035
(408) 894-4000
____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of the close of business on January 23, 2000, Quantum Corporation had
160,599,674 shares of DLT & Storage Systems group common stock outstanding and
84,389,389 shares of Hard Disk Drive group common stock outstanding.
<PAGE>
QUANTUM CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Quantum Corporation - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Quantum Corporation DLT & Storage Systems Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 22
Condensed Combined Balance Sheets 23
Condensed Combined Statements of Cash Flows 24
Notes to Condensed Combined Financial Statements 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 29
Quantum Corporation Hard Disk Drive Group - Condensed Combined
Financial Statements
Condensed Combined Statements of Operations 38
Condensed Combined Balance Sheets 39
Condensed Combined Statements of Cash Flows 40
Notes to Condensed Combined Financial Statements 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations 47
PART II - OTHER INFORMATION 58
SIGNATURE 59
2
<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 Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $1,253,555 $1,325,581 $3,461,914 $3,593,315
Cost of revenue - on net sales 985,132 1,086,492 2,821,167 2,995,964
Cost of revenue - special charge - - 57,068 -
---------- ---------- ---------- ----------
Gross profit 268,423 239,089 583,679 597,351
Operating expenses:
Research and development 86,334 87,921 269,220 254,859
Sales and marketing 56,050 51,142 164,730 134,866
General and administrative 35,553 22,380 95,267 61,275
Purchased in-process research
and development - 89,000 37,000 89,000
Special charge - - 2,338 -
---------- ---------- ---------- ----------
177,937 250,443 568,555 540,000
Income (loss) from operations 90,486 (11,354) 15,124 57,351
Other income (expense):
Interest income and other, net 9,952 5,126 29,509 19,962
Interest expense (7,074) (6,909) (21,500) (20,136)
Loss from investee - (100,700) - (142,050)
---------- ---------- ---------- ----------
2,878 (102,483) 8,009 (142,224)
Income (loss) before income taxes 93,364 (113,837) 23,133 (84,873)
Income tax provision (benefit) 37,468 (7,286) 21,609 1,403
---------- ---------- ---------- ----------
Net income (loss) $ 55,896 $ (106,551) $ 1,524 $ (86,276)
========== ========== ========== ==========
DLT & Storage Systems group:
Net income (loss) $ 50,790 $ (30,584) $ 123,315 $ 65,124
========== ========== ========== ==========
Net income (loss) per share:
Basic $0.31 $(0.18) $0.75 $0.41
Diluted $0.30 $(0.18) $0.72 $0.39
Weighted average common shares:
Basic 163,072 165,820 165,037 158,687
Diluted 168,082 165,820 171,380 165,281
Hard Disk Drive group:
Net income (loss) $ 5,150 $ (75,968) $ (121,721) $ (151,400)
========== ========== ========== ==========
Net income (loss) per share:
Basic $0.06 $(0.92) $(1.47) $(1.91)
Diluted $0.06 $(0.92) $(1.47) $(1.91)
Weighted average common shares:
Basic 82,915 82,910 83,043 79,344
Diluted 86,004 82,910 83,043 79,344
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 26, March 31,
1999 1999
------------ ----------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 734,175 $ 772,368
Marketable securities 16,601 24,426
Accounts receivable, net of allowance for
doubtful accounts of $23,144 and $12,130 636,554 646,557
Inventories 195,218 271,986
Deferred taxes 95,998 107,701
Other current assets 167,361 104,835
---------- ----------
Total current assets 1,845,907 1,927,873
Property and equipment, net of accumulated
depreciation of $283,286 and $291,617 233,360 271,928
Intangible assets, net 287,377 225,567
Other assets 47,207 58,228
---------- ----------
$2,413,851 $2,483,596
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 386,269 $ 406,369
Accrued warranty 101,094 76,905
Accrued compensation 71,388 73,605
Income taxes payable 30,397 33,411
Current portion of long-term debt 1,099 1,024
Other accrued liabilities 125,617 90,691
---------- ----------
Total current liabilities 715,864 682,005
Deferred taxes 82,260 67,340
Long-term debt 38,127 56,961
Convertible subordinated debt 287,500 287,500
Stockholders' equity:
Common stocks 948,693 886,434
Retained earnings 505,730 504,206
Accumulated other comprehensive income (loss) 17,315 (850)
Treasury stock, at cost (181,638) -
---------- ----------
Total stockholders' equity 1,290,100 1,389,790
---------- ----------
$2,413,851 $2,483,596
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 26, December 27,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,524 $ (86,276)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Special charge 33,779 -
Purchased in-process research and development 37,000 89,000
Depreciation 73,651 69,107
Amortization 23,268 13,812
Loss from investee - 124,809
Deferred income taxes 391 438
Compensation related to stock plans 2,356 4,064
Changes in assets and liabilities:
Accounts receivable 10,367 73,690
Inventories 77,909 55,993
Accounts payable (22,215) (40,506)
Income taxes payable (3,014) (12,118)
Accrued warranty 23,604 (408)
Other assets and liabilities 6,786 63,973
--------- ---------
Net cash provided by operating activities 265,406 355,578
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (37,890) (68,360)
Maturities of marketable securities 55,831 115,508
Acquisition of intangible assets (2,500) -
Investment in property and equipment (66,155) (88,571)
Proceeds from disposition of property and equipment - 139
--------- ---------
Net cash used in investing activities (50,714) (41,284)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities 10,000 33,545
Principal payments on long-term credit facilities (28,759) (26,848)
Purchases of treasury stock (265,877) (305,287)
Proceeds from issuance of common stock, net 31,751 25,157
--------- ---------
Net cash used in financing activities (252,885) (273,433)
--------- ---------
Increase (decrease) in cash and cash equivalents (38,193) 40,861
Cash and cash equivalents at beginning of period 772,368 642,150
--------- ---------
Cash and cash equivalents at end of period $ 734,175 $ 683,011
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 14,535 $ 14,489
Income taxes, net of (refunds) $ 27,145 $ (1,246)
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.
5
<PAGE>
QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Quantum Corporation ("Quantum" or the "Company") and its
majority owned subsidiaries. All material intercompany balances and transactions
have been eliminated. The interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
shown. The results of operations for such periods are not necessarily indicative
of the results expected for the full fiscal year. The condensed consolidated
balance sheet as of March 31, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements should be read in
conjunction with the audited financial statements of Quantum Corporation for the
fiscal year ended March 31, 1999 included in its Annual Report on Form 10-K and
Registration Statement on Form S-4 (SEC File No. 333-75153) filed with the
Securities and Exchange Commission.
2. Recapitalization
On July 23, 1999, the Company's stockholders approved a tracking stock proposal.
As a result, Quantum's Certificate of Incorporation has been amended and
restated (the "Restated Certificate of Incorporation"), effective as of the
close of business on August 3, 1999, designating two new classes of Quantum
Corporation common stock, DLT & Storage Systems group ("DSSG") common stock,
$.01 par value per share and Hard Disk Drive group ("HDDG") common stock, $.01
par value per share. On August 3, 1999, each authorized share of Quantum common
stock, $.01 par value per share, was exchanged for one share of DSSG stock and
one-half share of HDDG stock. These two securities are intended to track
separately the performance of the DLT & Storage Systems group and the Hard Disk
Drive group.
3. Inventories
Inventories consisted of the following:
(In thousands)
December 26, March 31,
1999 1999
------------ ---------
Materials and purchased parts $ 46,354 $ 62,342
Work in process 39,953 27,531
Finished goods 108,911 182,113
-------- --------
$195,218 $271,986
======== ========
6
<PAGE>
4. Net income (loss) per share
As a result of the recapitalization, the Company has two tracking stocks, DSSG
common stock and HDDG common stock, that are intended to reflect the performance
of Quantum's two business groups. Accordingly, the net income (loss) per share
for each group presented below has been calculated in accordance with the
Restated Certificate of Incorporation.
The following table sets forth the computation of basic and diluted net income
(loss) per share for DSSG:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net
income (loss) per share - income (loss)
available to common stockholders $ 50,790 $(30,584) $123,315 $ 65,124
============ =========== ============ ===========
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 163,072 165,820 165,037 158,687
Effect of dilutive securities:
Outstanding options 5,010 - 6,343 6,594
------------ ----------- ------------ -----------
Denominator for diluted net income
(loss) per share - adjusted weighted
average shares 168,082 165,820 171,380 165,281
============ =========== ============ ===========
Basic net income (loss) per share $ 0.31 $ (0.18) $ 0.75 $ 0.41
============ =========== ============ ===========
Diluted net income (loss) per share $ 0.30 $ (0.18) $ 0.72 $ 0.39
============ =========== ============ ===========
</TABLE>
The computation of diluted net income (loss) per share for the three and nine
months ended December 26, 1999 and December 27, 1998 excluded the effect of the
7% convertible subordinated notes issued in July 1997, which are convertible
into 6,206,152 shares of DSSG common stock, or 21.587 shares per $1,000 note,
because the effect would have been antidilutive.
Options to purchase 22,540,250 shares of DSSG common stock were outstanding at
December 27, 1998. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
the three months ended December 27, 1998 because the effect would have been
antidilutive.
7
<PAGE>
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 Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net
income (loss) per share - income (loss)
available to common stockholders $ 5,150 $(75,968) $(121,721) $(151,400)
============ =========== ============ ===========
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 82,915 82,910 83,043 79,344
Effect of dilutive securities:
Outstanding options 3,089 - - -
------------ ----------- ------------ -----------
Denominator for diluted net income (loss)
per share - adjusted weighted
average shares 86,004 82,910 83,043 79,344
============ =========== ============ ===========
Basic net income (loss) per share $ 0.06 $ (0.92) $ (1.47) $ (1.91)
============ =========== ============ ===========
Diluted net income (loss) per share $ 0.06 $ (0.92) $ (1.47) $ (1.91)
============ =========== ============ ===========
</TABLE>
The computation of diluted net income (loss) per share for the three and nine
months ended December 26, 1999 and December 27, 1998 excluded the effect of the
7% convertible subordinated notes issued in July 1997, which are convertible
into 3,103,076 shares of HDDG common stock, or 10.793 shares per $1,000 note,
because the effect would have been antidilutive.
Options to purchase 14,164,881 and 11,270,125 shares of HDDG common stock were
outstanding at December 26, 1999 and December 27, 1998, respectively. However,
the corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for the nine months ended December 26,
1999, and the three and nine months ended December 27, 1998, because the effect
would have been antidilutive.
5. Stockholders' Equity
In September 1999, the Company issued 4.1 million DSSG shares and 2 million HDDG
shares to the stockholders of Meridian Data, Inc. ("Meridian") to complete the
acquisition of Meridian. Substantially all of the shares the Company issued to
complete the acquisition were DSSG and HDDG shares held as treasury stock. The
difference between the cost of the treasury stock and the value at which the
shares were reissued resulted in a $3.5 million addition to paid-in-capital in
the second quarter of fiscal year 2000. For additional information regarding the
Meridian acquisition, refer to Note 7 of the Notes to Condensed Consolidated
Financial Statements.
In May 1999, the Board of Directors authorized the Company to repurchase a
combined total of up to $200 million of Quantum's common stocks through the open
market from time to time. In October 1999, the Board of Directors authorized an
increase in the Company's stock repurchase program to a combined total of up
to $600 million. The increased authorization allows the
8
<PAGE>
Company to repurchase Quantum's common stocks through the open market or through
other mechanisms, including negotiated off market transactions. During the nine
months ended December 26, 1999, the Company repurchased 14 million shares of
DSSG common stock and 5.2 million shares of HDDG common stock for a combined
total of $266 million.
6. Litigation
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied many of these patents before and, of the patents it has
studied, believes that defenses of patent invalidity and non-infringement can be
asserted. However, 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. Recently, on Papst's motion,
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 and Minebea Company, Ltd. for the purposes of coordinated discovery
under multi-district litigation rules. The Company 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, both Cambrian Consultants and
Discovision Associates have 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.
7. Business Combination
On September 10, 1999, the Company's DLT & Storage Systems group completed the
acquisition of Meridian. Meridian is a developer and manufacturer of network
attached storage solutions utilizing both conventional hard disk drive and
optical disk technologies for the PC local area network environment. The
acquisition has been accounted for as a purchase at a total cost of $115
million. The acquisition was completed with the issuance of 4.1 million shares
of DSSG common stock and 2 million shares of HDDG common stock valued at $74
million and $18 million, respectively, on the date of acquisition in exchange
for all outstanding shares of Meridian; the conversion of outstanding Meridian
stock options into options to purchase 630,000 shares of DSSG common stock and
315,000 shares of HDDG common stock valued at $8 million and $2 million,
respectively; and the assumption of Meridian liabilities and other acquisition
costs of approximately $13 million. At the date of acquisition, Meridian had $11
million of cash and marketable securities and a net operating loss carryforward
for U.S. federal income tax purposes of approximately $46 million. Meridian's
results of operations are included in the financial statements from the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the
9
<PAGE>
date of acquisition. Pro forma results of operations have not been presented
because the effect of the acquisition was not material to the Company's
financial position or results of operations.
The excess of the purchase price over the fair value of the net tangible assets
acquired has been allocated to the following identifiable intangible assets:
goodwill, trademarks, workforce in place, developed technology and in-process
research and development. As of the acquisition date, technological feasibility
of the in-process technology has not been established and the technology has no
alternative future use. Therefore, the Company expensed $37 million of the
purchase price as in-process research and development in the second quarter of
fiscal year 2000. The remaining identifiable intangible assets, valued at $81
million, will be amortized on a straight-line basis over periods ranging from
five to ten years.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects, and
discounting the net cash flows back to their present value using a discount rate
of 21%, which represents a premium to the Company's cost of capital. The
expected revenue assumes an average compound annual revenue growth rate of 64%
during calendar years 2000 through 2007. Expected total revenue from the
purchased in-process projects peak in calendar year 2005 and then begin to
decline as other new products are expected to be introduced. These projections
are based on management's estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions. If products
are not successfully developed, the Company may not realize the value assigned
to the in-process research and development projects. In addition, the value of
the other acquired intangible assets may also become impaired.
8. Special Charge
During the second quarter of fiscal year 2000, the Company's Hard Disk Drive
group recorded a special charge of $59.4 million. The charge reflected HDDG's
strategy to modify the hard disk drive business to more closely align product
development and the business' operating model with the requirements of the
rapidly growing low-cost PC market. The special charge was associated primarily
with the streamlining of HDDG's logistics model in order to create a faster and
more flexible fulfillment system, changes in the customer service strategy and
consolidation of certain product development programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. HDDG expects that the affected facilities will be
vacated by the end of the second quarter of fiscal year 2001.
10
<PAGE>
In connection with the charge, HDDG currently expects a workforce reduction of
approximately 600 employees. In addition, approximately 100 open requisitions
and budgeted positions have been eliminated. The reduction in force primarily
affects employees at HDDG's drive configuration centers and warehouses in
Milpitas, California and Dundalk, Ireland and employees within the desktop drive
business. Approximately 160 of the 600 employees had been terminated as of
December 26, 1999. HDDG anticipates that the remaining employees will be
terminated by the end of the second quarter of fiscal year 2001.
During the quarter ended December 26, 1999, HDDG revised its estimate of costs
required to implement the restructuring plan. HDDG currently estimates that
severance and benefits and other costs, which include the disposition of
additional capital assets, will be more than previously estimated as a result of
the planned changes in the customer service strategy. HDDG also estimates that
costs associated with vacating leased facilities will be less than previously
estimated as a result of vacating a major facility earlier than previously
expected. Accordingly, HDDG has reallocated amounts between these categories.
As of December 26, 1999, HDDG had incurred $5 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 $20 million.
The following table summarizes activity related to the special charge at
December 26, 1999:
<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 (2,923) (944) - (1,495) (5,362)
Non-cash charges - (9,532) (13,214) (9,742) (32,488)
Adjustments 1,070 (7,159) - 6,089 -
-------- ---------- --------- ----------- ----------
Balance at December 26,1999 $ 5,980 $ 8,724 $ - $ 6,852 $ 21,556
======== ========== ========= =========== ==========
</TABLE>
9. Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) on the condensed consolidated
balance sheets consists of unrealized gains on available for sale investments
and foreign currency translation adjustments. Total comprehensive income (loss),
net of tax, for the three and nine months ended December 26, 1999 and December
27, 1998, is presented in the following table:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 55,896 $ (106,551) $ 1,524 $ (86,276)
Other comprehensive income -
Change in unrealized gain on
investments, net 17,568 - 17,568 -
Foreign currency translation
adjustments (176) 2,055 597 2,238
----------- ------------ ----------- ------------
Comprehensive income (loss) $ 73,288 $ (104,496) $ 19,689 $ (84,038)
=========== ============ =========== ============
</TABLE>
11
<PAGE>
10. Business Segment Information
Quantum Corporation's reportable segments are its two business groups, the Hard
Disk Drive group and the DLT & Storage Systems group, as further described in
their separate financial statements. The Hard Disk Drive group consists of
desktop and high-end hard disk drives. The DLT & Storage Systems group consists
of DLTtape/TM/ drives and media, autoloaders and libraries, network attached
storage systems and solid state storage systems. The Company directly markets
its products to computer manufacturers and through a broad range of
distributors, resellers, and systems integrators.
The Company evaluates segment performance based on net profit or loss not
including non-recurring gains or losses. Segment assets include those items that
can be specifically identified with or reasonably allocated to a particular
segment. Results for the Company's reportable segments for the three and nine
months ended December 26, 1999 and December 27, 1998 are presented in the
following tables:
<TABLE>
<CAPTION>
(In millions)
Three Months Ended
December 26, 1999 December 27, 1998
------------------------------ ------------------------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $ 888 $ 366 $1,254 $ 959 $366 $1,326
customers
Intersegment revenues 1 - 1 - - -
Segment profit (loss) 5 51 56 (76) (31) (107)
<CAPTION>
(In millions)
Nine Months Ended
December 26, 1999 December 27, 1998
------------------------------ ------------------------------
HDDG DSSG Total HDDG DSSG Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue from external $2,409 $1,054 $3,462 $2,681 $913 $3,593
customers
Intersegment revenues 1 - 1 - - -
Segment profit (loss) (122) 123 2 (151) 65 (86)
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually contain
the words "estimate," "anticipate," "expect," or similar expressions. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties. These uncertainties could
cause actual results to differ materially from those expected for the reasons
set forth under Trends and Uncertainties relating to the DLT & Storage Systems
group and Trends and Uncertainties relating to the Hard Disk Drive group.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Business Description
Quantum operates its business through two separate business groups: the DLT &
Storage Systems group ("DSSG") and the Hard Disk Drive group ("HDDG") as
described in their respective sections of this report.
Results of Operations
Revenue. Revenue in the three and nine months ended December 26, 1999 was
$1.254 billion and $3.462 billion, respectively, compared to $1.326 billion and
$3.593 billion, respectively, for the corresponding periods in fiscal year 1999.
The decrease in revenue in the three and nine months ended December 26, 1999
reflected decreased revenue from sales of desktop hard disk drives, partially
offset by increased revenue from sales of storage systems and DLTtape media
royalties, both reaching record highs in the three and nine month periods.
While shipments of desktop hard disk drives increased in the three and nine
month periods, lower average unit prices resulted in reduced desktop hard disk
drive revenue. Desktop shipments reached a record high in the third quarter of
fiscal year 2000 reflecting increased demand, particularly from computer
equipment manufacturers, and a strong desktop PC market. The strong market
conditions resulted in some easing of the intense competitive pricing pressures
of prior quarters. Shipments of high-end hard disk drives also increased in the
three and nine month periods, reaching a record high in the third quarter of
fiscal year 2000 as HDDG completed a transition to new high-end products.
However, continued pricing pressures in the high-end market resulted in lower
average unit prices. Consequently, revenue increased only moderately in the
three month comparative period and decreased in the nine month comparative
period.
The increase in storage systems revenue reflected an increase in shipments of
tape libraries and the acquisition of ATL Products, Inc. in September 1998, and
shipments of network attached storage systems following the acquisition of
Meridian Data, Inc. in September 1999. The increase in DLTtape media royalties
reflected an increase in sales of DLTtape media cartridges at licensed media
manufacturers for which DSSG earns a royalty fee. The overall increase in sales
of DLTtape media cartridges reflected sales of cartridges for use in both new
DLTtape drives and to meet the
13
<PAGE>
ongoing new media needs of the installed base of DLTtape drives. The nine month
period also reflected increased revenue from sales of DLTtape drives as a result
of increased shipments, partially offset by a decline in the average unit price.
Sales to our top five customers in the three and nine months ended December 26,
1999 represented 48% and 47% of revenue, respectively, compared to 44% and 46%
of revenue, respectively, for the corresponding periods in fiscal year 1999.
These amounts reflected a retroactive combination of sales to Compaq Computer,
Inc. and Digital Equipment Corporation as a result of their merger in June 1998
as well as a retroactive combination of sales to Ingram Micro Inc. and
Electronic Resources Limited as a result of the completion of their merger in
July 1999. Sales to Compaq were 13% and 12% of revenue in the three and nine
months ended December 26, 1999, respectively, compared to 14% and 15% of
revenue, respectively, for the corresponding periods in fiscal year 1999,
including sales to Digital Equipment. Sales to Hewlett-Packard Company were 11%
and 12% of revenue in the three and nine months ended December 26, 1999,
respectively, compared to 12% and 14% of revenue, respectively, in the
corresponding periods in fiscal year 1999.
Sales to computer equipment manufacturers and distribution channel customers
were 65% and 29% of revenue in the three months ended December 26, 1999,
respectively, compared to 62% and 34% in the three months ended December 27,
1998. For the nine months ended December 26, 1999, computer equipment
manufacturer and distribution channel sales were 61% and 33% of revenue,
compared to 64% and 34% of revenue for the corresponding period in fiscal year
1999. The remaining revenue in the three and nine months ended December 26, 1999
and December 27, 1998 represented media royalty revenue and sales to value added
resellers.
Gross Margin Rate. The gross margin rate in the three months ended December 26,
1999 increased to 21.4% from 18.0% in the three months ended December 27, 1998.
The gross margin rate for the first nine months of fiscal year 2000 was 16.9%,
compared to 16.6% in the corresponding period in fiscal year 1999.
The gross margin rate in the nine month period of fiscal year 2000 reflected the
impact of a $57.1 million special charge as discussed below. The gross margin
rate excluding the impact of the charge was 18.5% in the nine-month period ended
December 26, 1999.
Excluding the impact of the special charge, the increase in the gross margin
rate in the three and nine month periods reflected increased revenue from
storage systems and DLTtape media royalties, which have significantly higher
margins than our hard disk drive products. The increase also reflected higher
margins earned on high-end hard disk drives. This was partially offset by the
decline in gross margins earned on desktop hard disk drives in the nine month
period, and the decline in gross margins earned on DLTtape drives in the three
and nine month periods, reflecting lower average unit prices on both. The
increase in the gross margin rate in the three month period also reflected
higher margins earned on desktop hard disk drives reflecting the transition to
new lower cost, higher margin products, cost reductions associated with the
special charge, and the strong desktop PC market.
Research and Development Expenses. Research and development expenses in the
three and nine months ended December 26, 1999, were $86 million, or 6.9% of
revenue, and $269 million, or 7.8%
14
<PAGE>
of revenue, respectively, compared to $88 million, or 6.6% of revenue, and $255
million, or 7.1% of revenue, respectively, in the corresponding periods of
fiscal year 1999. The decrease in research and development expenses in the three
month period reflected expense reductions in HDDG resulting from modifications
to the hard disk drive business associated with the special charge taken in the
second quarter of fiscal year 2000. The increase in the nine month period
reflected the inclusion of ATL's expenses which were not included in the first
two quarters of fiscal year 1999, as the acquisition occurred on September 28,
1998, the inclusion of Meridian's expenses which were not included in the prior
year periods, as the acquisition occurred on September 10, 1999, and higher
research and development expenses related to new tape drive products and other
new information storage products, including Super DLTtape technology.
Sales and Marketing Expenses. Sales and marketing expenses in the three and nine
months ended December 26, 1999, were $56 million, or 4.5% of revenue, and $165
million, or 4.8% of revenue, respectively, compared to $51 million, or 3.9% of
revenue, and $135 million, or 3.8% of revenue, respectively, in the
corresponding periods of fiscal year 1999. The increase in sales and marketing
expenses reflected the inclusion of Meridian's expenses and an increase in
marketing and advertising costs associated with DLTtape products, partially
offset by a decrease in advertising costs for HDDG products and lower
commissions as a result of the reduced level of HDDG revenue. The increase in
the nine month period also reflected the inclusion of ATL's expenses.
General and Administrative Expenses. General and administrative expenses in the
three and nine months ended December 26, 1999 were $36 million, or 2.8% of
revenue, and $95 million, or 2.8% of revenue, respectively, compared to $22
million, or 1.7% of revenue, and $61 million, or 1.7% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in general and
administrative expenses reflected the inclusion of Meridian's expenses, the
amortization of intangible assets, particularly goodwill, and an increase in the
provision for bad debt due to the bankruptcy of a distributor in the third
quarter of fiscal year 2000. The increase in the nine month period also
reflected the inclusion of ATL's expenses.
Purchased In-process Research and Development Expense. The Company expensed
purchased in-process research and development costs of $37 million as a result
of the Meridian acquisition in the second quarter of fiscal year 2000, and $89
million as a result of the acquisition of ATL in the third quarter of fiscal
year 1999. For additional information regarding the Meridian acquisition and the
costs associated with in-process research and development, refer to Note 7 of
the Notes to Condensed Consolidated Financial Statements.
Special Charge. During the second quarter of fiscal year 2000, the Company's
Hard Disk Drive group recorded a special charge of $59.4 million, of which $57.1
million is included in cost of sales and $2.3 million is included in operating
expenses. The charge reflected HDDG's strategy to modify the hard disk drive
business to more closely align product development and the business's operating
model with the requirements of the rapidly growing low-cost PC market. The
special charge was associated primarily with the streamlining of HDDG's
logistics model in order to create a faster and more flexible fulfillment
system, changes in the customer service strategy and consolidation of certain
product development programs. Upon full implementation of the plan,
15
<PAGE>
HDDG expects to realize more than $100 million in cost savings per year,
beginning in fiscal year 2001.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
During the quarter ended December 26, 1999, HDDG revised its estimate of costs
required to implement the restructuring plan. HDDG currently estimates that
severance and benefits and other costs, which include the disposition of
additional capital assets, will be more than previously estimated as a result of
the planned changes in the customer service strategy. HDDG also estimates that
costs associated with vacating leased facilities will be less than previously
estimated as a result of vacating a major facility earlier than previously
expected. Accordingly, HDDG has reallocated amounts between these categories.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and nine months ended December 26, 1999 was $2.9 million and $8.0
million income, respectively, compared to $1.8 million and $0.2 million expense,
respectively, in the corresponding periods of fiscal year 1999. The income for
the three and nine month periods reflected increased interest income and a $2.6
million gain on the sale of an equity investment recognized in the first quarter
of fiscal year 2000.
Loss from Investee. The loss from investee reflected our 49% share in the
operating losses of our recording heads joint venture with Matsushita-Kotobuki
Electronics Industries, Ltd., which was dissolved in the third quarter of fiscal
year 1999. Our share of the loss in the joint venture for the three and nine
months ended December 27 1998, was $100.7 million and $142.1 million,
respectively.
Income Taxes. No tax benefit was recognizable for the charges for purchased in-
process research and development related to the acquisition of Meridian in the
second quarter of fiscal year 2000 and the acquisition of ATL in the third
quarter of fiscal year 1999. The Company recorded a provision for income taxes
of $37.5 million and $21.6 million for the three and nine months ended December
26, 1999, for effective tax rates of 40% and 36%, respectively, compared to
effective benefit rates of 33% before special charges for the corresponding
periods in fiscal year 1999. The fiscal year 2000 effective tax rate as compared
to the fiscal year 1999 effective benefit rate reflects the effect of a smaller
percentage of HDDG losses as compared to DSSG income.
16
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $751 million at December
26, 1999 compared to $797 million at March 31, 1999. During the nine months
ended December 26, 1999, the Company used cash to purchase $266 million of
treasury stock, as discussed below. Other uses of cash were a reduction in
accounts payable, investment in property and equipment, and the pay off of ATL's
line of credit. Sources of cash were a reduction in inventories and the issuance
of common stock.
In September 1999, the Company issued 4.1 million DSSG shares and 2 million HDDG
shares to the stockholders of Meridian to complete the acquisition of Meridian.
Substantially all of the shares the Company issued to complete the acquisition
were DSSG and HDDG shares held as treasury stock. The difference between the
cost of the treasury stock and the value at which the shares were reissued
resulted in a $3.5 million addition to paid-in-capital in the second quarter of
fiscal year 2000. For additional information regarding the Meridian acquisition,
refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.
In May 1999, the Board of Directors authorized the Company to repurchase a
combined total of up to $200 million of Quantum's common stocks through the open
market from time to time. In October 1999, the Board of Directors authorized an
increase in the Company's stock repurchase program to a combined total of up to
$600 million. The increased authorization allows the Company to repurchase
Quantum's common stocks through the open market or through other mechanisms,
including negotiated off market transactions. During the nine months ended
December 26, 1999, the Company repurchased 14 million shares of DSSG common
stock and 5.2 million shares of HDDG common stock for a combined total of $266
million.
In December 1998, ATL entered into a senior credit facility that provides a $35
million revolving credit line to ATL. The revolving credit line is co-terminous
with our $500 million revolving credit line, expiring in June 2000. As amended,
at the option of ATL, borrowings under the revolving credit line bear interest
at either the London interbank offered rate plus a margin determined by our
total funded debt ratio, or at a base rate, with option periods of two weeks to
six months. At December 26, 1999, there was no outstanding balance drawn on this
line.
In June 1997, the Company entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At our
option, borrowings under the revolving credit line bear interest at either the
London interbank offered rate plus a margin determined by our total funded debt
ratio, or at a base rate, with option periods of one to six months. At December
26, 1999, there was no outstanding balance drawn on this line.
We expect to spend approximately $105 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the disk drive and tape drive businesses, research and development, and general
corporate operations.
We believe that existing capital resources, including the credit facility and
any cash generated from operations, will be sufficient to meet all currently
planned expenditures and sustain operations for the next 12 months. However,
this belief assumes that operating results and cash flow from operations will
meet our expectations.
In 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.
17
<PAGE>
In fiscal year 1999, the Company entered into a strategic alliance with TiVo,
Inc., to supply hard disk drives utilizing Quantum's QuickView/TM/ technology
for integration into TiVo's Personal Video Recorder. As part of the agreement,
the Company received warrants to purchase approximately 875,000 shares of TiVo
common stock. On September 30, 1999, subsequent to the end of the Company's
fiscal second quarter, the Company exercised its warrants immediately prior to
TiVo's initial public offering. The Company is not allowed to sell TiVo common
stock for a six month period following the initial public offering and is
accounting for its investment as an available for sale security. As there are
currently restrictions upon the sale of this security, the Company has
classified its investment as part of other current assets. The fair market
value of this investment at December 26, 1999, was approximately $29 million.
Year 2000
The year 2000 computer issue refers to the possibility that computer systems may
not be able to distinguish the year 2000 from the year 1900. Two other date-
related issues may contribute to the year 2000 problem: (1) certain systems have
associated special values with date fields (for example, 9/9/99), and (2) these
same systems may fail to recognize that year 2000 is a leap year. Because of the
pervasive use and dependency on computer technology in all facets of modern
commerce, year 2000 issues present a potentially vast risk to companies,
including us. For example, there are potential disruptions or failures of our
products and operations and of the products and operations of our suppliers,
customers and service providers. Because year 2000 issues can impact us
indirectly through our suppliers, service providers and customers, an assessment
and prediction of the impact of year 2000 issues from external parties on our
company is difficult.
In addressing the year 2000 issues and risks, we have focused our efforts on our
enterprise-wide and departmental operations, products, critical suppliers
(including service providers) and key customers. Within Quantum, these efforts
were intended to encompass all major categories of computer systems and
operating equipment used by us, including those utilized in manufacturing,
research and development, sales, finance and human resources. To ensure year
2000 compliance for all of our systems, we adopted an approach based on the U.S.
General Accounting Office Year 2000 Assessment Guide. The approach utilizes a
multi-phased model, with major phases consisting of inventory, assessment,
resolution, testing and certification:
. In the inventory phase we listed and reviewed for criticality and risk all
hardware, software, equipment, infrastructure, and desktop tools and
applications.
. In the assessment phase, we determined whether to convert, replace or
eliminate the impacted system or application.
. In the resolution phase, we developed and carried out formal plans.
. Under stringent procedures in the testing phase, we validated the system and
application on its functionality to perform seamlessly in the year 2000.
. In the certification phase, we documented and verified all test results.
18
<PAGE>
Within each of the major categories of computer systems and operating equipment,
we prioritized our year 2000 issues and risks on three levels:
. The critical level reflects short-term failure which would have a severe
impact on our business operations and result in significant downtime or a
manual effort to perform the required functions. Without this system or
application, our business could not function.
. Key level applications or systems, although required by us, are not
mandatory for business survival. We do not expect the failure of key level
applications to cause significant disruption to our operations. We can defer
the work or devise manual back-up procedures to handle the interim needs.
. Active level applications, although currently in use, are not required for
our normal operations. We do not expect their failure to result in any
disruption to our business.
Within Quantum, we have determined that all internal systems and products are
year 2000 compliant. We have assessed, remedied and certified all critical, key
and active areas of our own operations, which include information technology,
operating equipment with embedded chips or software and products. In addition,
we have completed the assessment, resolution, testing, and certification of
critical and key third parties. However, our failure to complete critical
corrective actions or implement viable contingency plans in a timely manner for
as yet unidentified year 2000 related issues could have a material adverse
effect on our business, financial condition and operating results.
As indicated above, our risk assessment included understanding the year 2000
readiness of our suppliers. Our risk assessment process associated with
suppliers includes soliciting and analyzing responses to questionnaires
distributed to these suppliers, as well as onsite interviews with certain
critical suppliers. Critical suppliers include a number of suppliers with
operations in China, India and Mexico that are our sole source of certain
components for tape drives. We have received 100% of responses from an initial
survey sent to suppliers and have received 100% of responses from a second
follow-up survey sent to those identified as critical suppliers. To further
assess year 2000 readiness, we have conducted on-site visits of our most
critical suppliers.
The year 2000 readiness of Matsushita-Kotobuki, our hard disk drive
manufacturing partner, is of particular importance. Matsushita-Kotobuki
implemented a year 2000 compliance project plan in April 1998, similar in
content and structure to that employed by us. We have been informed that all of
Matsushita-Kotobuki's critical processes, applications and hardware have been
tested and certified for year 2000 compliance. Also, we understand that all key
and active processes, applications and hardware are certified as year 2000
compliant. We have performed limited on-site evaluations of Matsushita-Kotobuki
operations in Japan, Singapore and Ireland. Additionally, we continue to be in
close contact with Matsushita-Kotobuki and we understand that they will keep us
updated of any new developments concerning any year 2000 issues. Our reliance
on Matsushita-Kotobuki and other critical suppliers, and therefore, on the
proper functioning of their information systems and software, means that any
failure by these critical suppliers to address year 2000 issues could have a
material adverse impact on our business, financial condition and results of
operations. Based on the level of risk assessed of critical suppliers, we have
developed contingency plans. However, we do not currently anticipate any
significant disruption of service from these critical
19
<PAGE>
suppliers. As of February 2000, we understand that Matsushita-Kotobuki and other
critical suppliers have not experienced any major disruptions to their
businesses related to year 2000 issues.
We have also worked closely with key customers to evaluate their readiness for
year 2000. The ability of customers to deal with year 2000 issues may affect
their operations and their ability to order and pay for products. As of February
2000, we understand that key customers have not experienced any major
disruptions to their businesses related to year 2000 issues, nor have customer
order patterns disrupted our normal course of business.
We believe that third party factors, rather than our internal systems and
applications, would be the cause of our most reasonably likely worst case
scenario. For example, since we deal extensively with third parties to
manufacture and transport products and services, a failure of third party
systems could result in a disruption of service, which may result in delays in
shipments of our products. For internal systems, we have developed workarounds,
which involve providing manual or other automated processes in lieu of normal
procedures.
Our products are inherently year 2000 compliant with the possible exception of
certain Meridian products manufactured or released before December 31, 1997.
These Meridian products are no longer supported by Quantum. Our families of disk
drive products have no internal date clocks, and therefore are not impacted by
the year 2000 problem. Our DLTtape drives use a four-character string to
describe the year and are not affected by the year 2000 problem. Additionally,
we do not need to make any modifications to any disk or tape drive's internal
firmware to accommodate the transition to the year 2000. We consider a disk
drive or tape product to be year 2000 compliant when used in accordance with our
product information. That product will not generate an error in data related to
the year change from December 31, 1999 to January 1, 2000. Furthermore, year
2000 compliant products will correctly handle leap years, including leap years
beginning January 1, 2000 and thereafter. However, the assessment of whether a
complete computer system operates correctly depends on factors such as the
operating system, basic input/output systems, software and components, which
companies other than Quantum provide.
Costs incurred to date in addressing the year 2000 issue have been approximately
$11 million, with $7.3 million and $3.7 million of this cost in the Hard Disk
Drive group and the DLT & Storage Systems group, respectively. We currently
expect that the total cost of addressing the year 2000 issue, including both
incremental spending and redeployed resources, will not exceed $12 million, with
$7.6 million and $4.4 million of this cost in the Hard Disk Drive group and the
DLT & Storage Systems group, respectively. However, as the year 2000 progresses,
we may use third-party vendors or service providers as necessary to address
issues as yet unknown. The use of these third-party vendors or service providers
may increase our expected costs. We have not deferred any significant system
projects due to the year 2000 program. As our vigilant activities continue,
these costs may change. In addition, our total cost estimate does not include
potential costs related to any customer or other claims resulting from our
failure to adequately correct past or future year 2000 issues.
As of February 2000, there were no reportable year 2000 computer issues in our
systems, applications, processes or supply chains and we resumed normal business
activities on schedule in January 2000. While this primary event horizon was
successfully managed, we continue to maintain our vigilance as the year 2000
progresses. We do not expect any significant disruption to our operations or
operating results as a result of year 2000 issues; however, the extent to which
such issues may affect us is uncertain. We cannot assure you that we will be
able to assess, identify and correct
20
<PAGE>
as yet unknown year 2000 issues in a timely or successful manner. We also cannot
assure you that our suppliers, service providers, customers or other third
parties will remain free of year 2000 problems.
The foregoing statements regarding our year 2000 results and our expectations
for resolving as yet unknown problems, and the costs associated therewith are
forward-looking statements and actual results could vary. The severity of the
problems to be resolved within Quantum, their affect on our suppliers and
service providers, and the costs associated with third party consultants and
software necessary to address these unknown issues could affect our success in
addressing such issues.
Euro Impact
We believe that the adoption of a single currency, the Euro, by eleven European
countries will not materially affect our business, information systems or
consolidated financial position, operating results or cash flows.
Market Risk Disclosures
For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended March 31, 1999.
The Company is exposed to equity price risk on its investment in TiVo, Inc.
common stock. 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 December 26, 1999, the
fair market value of the Company's investment was approximately $29 million. As
TiVo is a relatively new company and has recently 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.
21
<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 Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Product revenue $316,959 $330,634 $ 920,340 $827,938
Royalty revenue 48,821 35,861 133,282 84,717
-------- -------- ---------- --------
Total revenue 365,780 366,495 1,053,622 912,655
Cost of revenue 201,692 205,194 567,678 506,005
-------- -------- ---------- --------
Gross profit 164,088 161,301 485,944 406,650
Operating expenses:
Research and development 31,322 28,155 89,527 72,085
Sales and marketing 30,821 21,715 82,810 49,348
General and administrative 16,376 11,140 46,013 24,851
Purchased in-process research
and development - 89,000 37,000 89,000
-------- -------- ---------- --------
78,519 150,010 255,350 235,284
Income from operations 85,569 11,291 230,594 171,366
Other income (expense):
Interest income and other, net 3,797 1,741 13,967 9,931
Interest expense (4,716) (4,671) (14,372) (13,424)
-------- -------- ---------- --------
(919) (2,930) (405) (3,493)
Income before income taxes 84,650 8,361 230,189 167,873
Income tax provision 33,860 38,945 106,874 102,749
-------- -------- ---------- --------
Net income (loss) $ 50,790 $(30,584) $ 123,315 $ 65,124
======== ======== ========== ========
Net income (loss) per share:
Basic $0.31 $(0.18) $0.75 $0.41
Diluted $0.30 $(0.18) $0.72 $0.39
Weighted average common shares:
Basic 163,072 165,820 165,037 158,687
Diluted 168,082 165,820 171,380 165,281
</TABLE>
See accompanying notes to condensed combined financial statements.
22
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 26, March 31,
1999 1999
------------- ----------
<S> <C> <C>
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 281,540 $ 272,643
Marketable securities 6,875 -
Accounts receivable, net of
allowance for doubtful accounts
of $3,115 and $2,507 226,246 254,228
Inventories 102,223 124,462
Deferred taxes 35,701 35,594
Other current assets 42,808 8,434
---------- ----------
Total current assets 695,393 695,361
Property and equipment, net of
accumulated depreciation of $74,746
and $54,630 81,884 73,122
Intangible assets, net 284,641 220,368
Other assets 14,360 24,792
---------- ----------
$1,076,278 $1,013,643
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 86,941 $ 64,025
Accrued warranty 51,877 37,988
Accrued compensation 34,673 22,557
Current portion of long-term debt 733 683
Other accrued liabilities 34,391 32,850
---------- ----------
Total current liabilities 208,615 158,103
Deferred taxes 41,875 27,355
Long-term debt 25,418 37,974
Convertible subordinated debt 191,667 191,667
Group equity 608,703 598,544
---------- ----------
$1,076,278 $1,013,643
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
23
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 26, December 27,
1999 1998
------------- ------------------
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 123,315 $ 65,124
Adjustments to reconcile net
income to net cash provided by
operations:
Purchased in-process research
and development 37,000 89,000
Depreciation 24,812 19,118
Amortization 20,334 10,302
Deferred income taxes (107) (2,042)
Compensation related to stock
plans 1,593 2,709
Changes in assets and
liabilities:
Accounts receivable 28,346 (94,821)
Inventories 23,380 (10,469)
Accounts payable 20,801 31,367
Accrued warranty 13,304 (9,458)
Other assets and liabilities (20,797) 40,786
--------- ---------
Net cash provided by operating
activities 271,981 141,616
--------- ---------
Cash flows from investing activities:
Purchases of marketable
securities (4,523) -
Maturities of marketable
securities 7,764 -
Acquisition of intangible assets (2,500) -
Investment in property and
equipment (26,812) (25,093)
--------- ---------
Net cash used in investing
activities (26,071) (25,093)
--------- ---------
Cash flows from financing
activities:
Proceeds from long-term credit
facilities 6,667 25,212
Principal payments on long-term
credit facilities (19,173) (26,617)
Inter-group payment for common
stock issued (2,835) (15,118)
Purchases of treasury stock (246,187) (305,287)
Proceeds from issuance of common
stock, net 24,515 16,771
--------- ---------
Net cash used in financing
activities (237,013) (305,039)
--------- ---------
Increase (decrease) in cash and
cash equivalents 8,897 (188,516)
Cash and cash equivalents at
beginning of period 272,643 388,910
--------- ---------
Cash and cash equivalents at end of
period $ 281,540 $ 200,394
========= =========
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 9,656 $ 9,659
Income taxes, net of (refunds) $ 7,367 $ (21,289)
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.
24
<PAGE>
QUANTUM CORPORATION
DLT & STORAGE SYSTEMS GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed combined financial statements of the DLT &
Storage Systems group ("DSSG"), together with the condensed combined financial
statements of the Hard Disk Drive group ("HDDG") include all of the accounts in
the condensed consolidated financial statements of Quantum. The separate group
condensed combined financial statements give effect to the accounting policies
applicable with the implementation of the tracking stock proposal. The separate
DSSG and HDDG financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include (i) the historical balance
sheets, results of operations, and cash flows of businesses that comprise each
of the groups, with all significant intragroup transactions and balances
eliminated, (ii) in the case of DSSG's financial statements, corporate assets
and liabilities of Quantum and related transactions identified with DSSG,
including allocated portions of Quantum's debt and selling, general and
administrative costs, and (iii) in the case of HDDG's financial statements,
corporate assets and liabilities of Quantum and related transactions identified
with HDDG, including allocated portions of Quantum's debt and selling, general
and administrative costs. 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, 1999
has been derived from the audited financial statements included in the
Registration Statement on Form S-4 (SEC File No. 333-75153) filed with the
Securities and Exchange Commission, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
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2. Inventories
Inventories consisted of the following:
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
December 26, March 31,
1999 1999
-------- --------
Materials and purchased parts $ 42,871 $ 60,138
Work in process 33,500 22,154
Finished goods 25,852 42,170
-------- --------
$102,223 $124,462
======== ========
</TABLE>
3. Net income per share
On July 23, 1999, Quantum's stockholders approved the tracking stock proposal
and Quantum implemented the tracking stock proposal on August 3, 1999.
Accordingly, the net income per share for the periods presented below have been
calculated in accordance with the Restated Certificate of Incorporation.
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net
income (loss) per share - income
(loss) available to common
stockholders $ 50,790 $(30,584) $123,315 $ 65,124
========== =========== =========== ===========
Denominator:
Denominator for basic net income
(loss) per share - weighted average
shares 163,072 165,820 165,037 158,687
Effect of dilutive securities:
Outstanding options 5,010 - 6,343 6,594
---------- ---------- ---------- ----------
Denominator for diluted net income
(loss) per share - adjusted
weighted average shares 168,082 165,820 171,380 165,281
========== ========== ========== ==========
Basic net income (loss) per share $ 0.31 $ (0.18) $ 0.75 $ 0.41
========== ========== ========== ==========
Diluted net income (loss) per share $ 0.30 $ (0.18) $ 0.72 $ 0.39
========== ========== ========== ==========
</TABLE>
The computation of diluted net income (loss) per share for the three and nine
months ended December 26, 1999 and December 27, 1998 excluded the effect of the
7% convertible subordinated notes issued in July 1997, which are convertible
into 6,206,152 shares of DSSG common stock, or 21.587 shares per $1,000 note,
because the effect would have been antidilutive.
Options to purchase 22,540,250 shares of DSSG common stock were outstanding at
December 27, 1998. However, the corresponding weighted average outstanding
options were not included in the
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computation of diluted net loss per share for the three months ended December
27, 1998 because the effect would have been antidilutive.
4. Group Equity
In September 1999, Quantum's DLT & Storage Systems group issued 4.1 million DSSG
shares and 1.9 million HDDG shares it had acquired (and HDDG issued 0.1 million
HDDG shares) to the stockholders of Meridian Data, Inc. ("Meridian") to complete
the acquisition of Meridian. Substantially all of the shares DSSG issued to
complete the acquisition were DSSG and HDDG shares held as treasury stock. The
difference between the cost of the treasury stock and the value at which the
shares were reissued resulted in a $3.5 million addition to paid-in-capital in
the second quarter of fiscal year 2000. For additional information regarding the
Meridian acquisition, refer to Note 5 of the Notes to Condensed Combined
Financial Statements.
In May 1999, the Board of Directors authorized Quantum to repurchase a combined
total of up to $200 million of Quantum's common stocks through the open market
from time to time. In October 1999, the Board of Directors authorized an
increase in Quantum's stock repurchase program to a combined total of up to $600
million. The increased authorization allows Quantum to repurchase its common
stocks through the open market or through other mechanisms, including negotiated
off market transactions. During the nine months ended December 26, 1999, DSSG
repurchased 14 million shares of DSSG common stock and acquired 1.9 million
shares of HDDG common stock for $246 million, and HDDG repurchased 3.3 million
shares of HDDG common stock for $20 million.
5. Business Combination
On September 10, 1999, Quantum's DLT & Storage Systems group completed the
acquisition of Meridian. Meridian is a developer and manufacturer of network
attached storage solutions utilizing both conventional hard disk drive and
optical disk technologies for the PC local area network environment. The
acquisition has been accounted for as a purchase at a total cost of $115
million. The acquisition was completed with the issuance of 4.1 million shares
of DSSG common stock and 2 million shares of HDDG common stock valued at $74
million and $18 million, respectively, on the date of acquisition in exchange
for all outstanding shares of Meridian; the conversion of outstanding Meridian
stock options into options to purchase 630,000 shares of DSSG common stock and
315,000 shares of HDDG common stock valued at $8 million and $2 million,
respectively; and the assumption of Meridian liabilities and other acquisition
costs of approximately $13 million. At the date of acquisition, Meridian had $11
million of cash and marketable securities and a net operating loss carryforward
for U.S. federal income tax purposes of approximately $46 million. Meridian's
results of operations are included in the financial statements from the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the date of acquisition. Pro forma results of operations
have not been presented because the effect of the acquisition was not material
to DSSG's financial position or results of operations.
The excess of the purchase price over the fair value of the net tangible assets
acquired has been allocated to the following identifiable intangible assets:
goodwill, trademarks, workforce in place, developed technology and in-process
research and development. As of the acquisition date,
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technological feasibility of the in-process technology has not been established
and the technology has no alternative future use. Therefore, DSSG expensed $37
million of the purchase price as in-process research and development in the
second quarter of fiscal year 2000. The remaining identifiable intangible
assets, valued at $81 million, will be amortized on a straight-line basis over
periods ranging from five to ten years.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects, and
discounting the net cash flows back to their present value using a discount rate
of 21%, which represents a premium to Quantum's cost of capital. The expected
revenue assumes an average compound annual revenue growth rate of 64% during
calendar years 2000 through 2007. Expected total revenue from the purchased in-
process projects peak in calendar year 2005 and then begin to decline as other
new products are expected to be introduced. These projections are based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions. If products are not
successfully developed, DSSG may not realize the value assigned to the in-
process research and development projects. In addition, the value of the other
acquired intangible assets may also become impaired.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually contain the
words "estimate," "anticipate," "expect," or similar expressions. All forward-
looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties. These uncertainties could
cause actual results to differ materially from those expected for the reasons
set forth under Trends and Uncertainties relating to the DLT & Storage Systems
group. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
Business Overview
The DLT & Storage Systems group ("DSSG") designs, develops, manufactures,
licenses and markets DLTtape drives, DLTtape media cartridges and storage
systems. DSSG's storage systems consist of DLTtape libraries, solid state
storage systems, network attached storage servers and a new category of local
area network storage appliance which incorporates a DLTtape library.
DLTtape products are used to back up large amounts of data stored on network
servers. Digital Linear Tape, or DLTtape, is DSSG's half-inch tape technology
that is the de facto industry standard for data back-up in the mid-range network
server market. DSSG's DLTtape media cartridges are manufactured by licensed
third party manufacturers.
DSSG's tape libraries serve the entire tape library data storage market from
desktop computers to enterprise class computers. DSSG's local area network
storage appliance which incorporates a DLTtape library is designed for remote
site back-up that provides central management and Web based customer service.
With the acquisition of Meridian Data, Inc. in September, 1999, DSSG has become
a leader in the rapidly emerging market for network attached storage appliances
with products which incorporate hard disk drives and an operating system
designed to meet the requirements of entry and workgroup level computing
environments where multiple computer users access shared data files over a local
area network.
Prior to 1998, DSSG's DLTtape media cartridge revenue was derived from direct
sales. Beginning in 1998, DSSG's licensed third party DLTtape media
manufacturers also began selling DLTtape media cartridges. DSSG receives a
royalty fee on DLTtape media cartridges sold by its licensees which, while
resulting in lower revenue than DLTtape media sold directly by DSSG, generates
comparable income from operations. DSSG prefers to have a substantial portion of
DLTtape media cartridge sales occur through its license model because this
minimizes DSSG's operational risks and expenses and provides an efficient
distribution channel. Currently, approximately 80% of media sales occur
through this license model. DSSG believes that the large installed base of
DLTtape drives and its licensing of DLTtape media cartridges give DSSG a unique
competitive advantage.
DSSG has experienced relatively flat shipments for its DLTtape drives and is
preparing for this trend to continue. DSSG is considering a variety of measures
that could include reducing product cost, reducing overhead expenses and
accelerating plans for a low cost manufacturing strategy.
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Products
The DLT & Storage Systems group's products include:
DLT:
----
. DLTtape drives. DSSG offers three tape drive products--the DLT8000, the
DLT7000 and the DLT4000. The DLT8000 provides a combination of 40 gigabytes
("GB") of native capacity (80GB compressed) and a sustained data transfer
rate of 6 megabytes ("MB") per second (12MB compressed). The DLT7000
provides a combination of 35GB of native capacity (70GB compressed) and a
sustained data transfer rate of 5MB per second (10MB compressed). The
DLT4000 provides a combination of 20GB of native capacity (40GB compressed)
and a sustained data transfer rate of 1.5MB per second (3MB compressed).
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges are designed and formulated specifically for use with DLTtape
drives. The capacity of a DLTtape media cartridge is up to 40GB (80GB
compressed). DSSG's half-inch tape cartridges take advantage of shorter
wavelength recording schemes to 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.
Storage Systems:
----------------
. Tape libraries. DSSG offers a broad line of automated DLTtape libraries
that support a wide range of back-up and archival needs from workgroup
servers to enterprise-class servers. DSSG's tape libraries range from its
tape autoloaders which accommodate a single DLTtape drive and up to 280GB
of storage capacity to the P3000 series library which features Prism
Library Architecture/TM/ and can be configured in multiple units to scale
up to 11.4 Terabytes of storage capacity. In addition, DSSG offers
WebAdmin/TM/, the industry's first Internet browser-based tape library
management system, allowing system administrators to monitor widely
distributed storage systems at remote locations with point-and-click ease.
. Solid state storage systems. DSSG offers a family of solid state storage
systems that are available in capacities ranging from 268MB to 3.2GB and
have data access times 100 to 200 times faster than magnetic hard disk
drives. Solid state storage systems store data on memory chips which enable
significantly faster data access times than magnetic disks used in standard
hard disk drives.
. Network attached storage systems. DSSG's Snap! Server family of network
attached storage appliances offers options for 10GB, 20GB and 40GB of
network storage. These products provide the ease of plug-and-play features
and can be directly attached to workgroup-level networks, providing instant
additional network storage capacity. No special configurations are needed
for ordinary use and advanced configuration options enable added value
features.
. LANvault/TM/ tape backup appliance. DSSG recently announced the
introduction of LANvault, a product that incorporates a backup appliance
with a DLTtape library, a central management console and a customer service
Web portal. This product is intended to meet the requirements for remote
site backup and is designed as a plug-and-play appliance preloaded with
industry-standard backup software for ease of installation and use.
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Results of Operations
Revenue. Revenue in the three and nine months ended December 26, 1999 was $366
million and $1.054 billion, respectively, compared to $366 million and $913
million, respectively, for the corresponding periods in fiscal year 1999.
Revenue in the three month period reflected increased revenue from sales of
storage systems and increased DLTtape media royalties, offset by lower revenue
from sales of DLTtape drives. The increase in revenue in the nine month period
reflected increased revenue from sales of DLTtape drives, storage systems and
increased DLTtape media royalties. Revenue from storage systems and DLTtape
media royalties reached record highs in the three and nine month periods. The
increase in storage systems revenue reflected an increase in shipments of tape
libraries and the acquisition of ATL Products, Inc. in September 1998, and
shipments of network attached storage systems following the acquisition of
Meridian Data, Inc. in September 1999. The increase in DLTtape media royalties
reflected an increase in sales of DLTtape media cartridges at licensed media
manufacturers for which DSSG earns a royalty fee. The overall increase in sales
of DLTtape media cartridges reflected 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. The decrease in revenue from sales of DLTtape drives in the
three month period reflected a decline in shipments and a decline in the average
unit price, while the increase in DLTtape drive revenue in the nine month period
reflected an increase in shipments, partially offset by a decline in the average
unit price.
The table below summarizes the components of DSSG's revenue in the three and
nine months ended December 26, 1999 and December 27, 1998:
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
DLT drives $ 215 $ 254 $ 654 $ 604
DLT media 42 41 105 154
DLT royalty 49 36 133 85
Storage systems 82 54 231 89
Intra-group
elimination* (22) (19) (69) (19)
----- ----- ------ -----
Revenue $ 366 $ 366 $1,054 $ 913
===== ===== ====== =====
</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 nine months ended December 26,
1999 represented 49% and 48% of revenue, respectively, compared to 53% and 54%
of revenue, respectively, for the corresponding periods in fiscal year 1999.
These amounts reflected a retroactive combination of sales to Compaq and Digital
Equipment as a result of their merger in June 1998. Sales to Compaq were 22%
and 21% of revenue in the three and nine months ended December 26, 1999,
respectively, compared to 25% and 26% of revenue, respectively, in the
corresponding periods in fiscal year 1999, including sales to Digital Equipment.
Sales to Hewlett Packard were less than 10% and 13% of revenue in the three and
nine months ended December 26, 1999, respectively, compared to 13% of revenue in
the corresponding periods in fiscal year 1999.
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Sales to computer equipment manufacturers and distribution channel customers
were 62% and 17% of revenue in the three months ended December 26, 1999,
respectively, compared to 68% and 16% of revenue in the three months ended
December 27, 1998. For the nine months ended December 26, 1999, computer
equipment manufacturer and distribution channel sales were 64% and 16% of
revenue, compared to 74% and 17% of revenue in the corresponding period of
fiscal year 1999. The remaining revenue in the three and nine months ended
December 26, 1999 and December 27, 1998 represented media royalty revenue and
sales to value-added resellers.
Gross Margin Rate. The gross margin rate in the three months ended December 26,
1999, was 44.9%, compared to 44.0% in the three months ended December 27, 1998.
The gross margin rate for the first nine months of fiscal year 2000 was 46.1%
compared to 44.6% for the corresponding period of fiscal year 1999. The increase
in the gross margin rate reflected an increase in the proportion of overall
revenue represented by DLTtape media royalty revenue partially offset by a
decline in the gross margin rate earned on DLTtape drives.
Research and Development Expenses. Research and development expenses in the
three and nine months ended December 26, 1999, were $31 million, or 8.6% of
revenue, and $90 million, or 8.5% of revenue, respectively, compared to $28
million, or 7.7% of revenue, and $72 million, or 7.9% of revenue, respectively,
in the corresponding periods in fiscal year 1999. The increase in research and
development expenses reflected the inclusion of Meridian's expenses which were
not included in the prior year periods as the acquisition occurred on September
10, 1999, and higher research and development expenses related to new tape drive
products and other new information storage products, including Super DLTtape
technology. The increase in the nine month period also reflected the inclusion
of ATL's expenses which were not included in the first two quarters of fiscal
year 1999 as the acquisition occurred on September 28, 1998.
Sales and Marketing Expenses. Sales and marketing expenses in the three and
nine months ended December 26, 1999, were $31 million, or 8.4% of revenue, and
$83 million, or 7.9% of revenue, respectively, compared to $22 million, or 5.9%
of revenue, and $49 million, or 5.4% of revenue, respectively, in the
corresponding periods in fiscal year 1999. The increase in sales and marketing
expenses reflected the inclusion of Meridian's expenses and an increase in
marketing and advertising costs associated with DLTtape products. The increase
in the nine month period also reflected the inclusion of ATL's expenses.
General and Administrative Expenses. General and administrative expenses in the
three and nine months ended December 26, 1999, were $16 million, or 4.5% of
revenue, and $46 million, or 4.4% of revenue, respectively, compared to $11
million, or 3.0% of revenue, and $25 million, or 2.7% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in general and
administrative expenses reflected the inclusion of Meridian's expenses, the
amortization of
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intangible assets, particularly goodwill, and the expansion of DSSG's
infrastructure. The increase in the nine month period also reflected the
inclusion of ATL's expenses.
Purchased In-process Research and Development Expense. DSSG expensed purchased
in-process research and development costs of $37 million as a result of the
Meridian acquisition in the second quarter of fiscal year 2000, and $89 million
as a result of the acquisition of ATL in the third quarter of fiscal year 1999.
For additional information regarding the Meridian acquisition and the costs
associated with in-process research and development, refer to Note 5 of the
Notes to Condensed Combined Financial Statements.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and nine months ended December 26, 1999 was $0.9 million expense and
$0.4 million expense, respectively, compared to $2.9 million expense and $3.5
million expense, respectively, in the corresponding periods of fiscal year 1999.
The decrease in expense for the three and nine month periods reflected increased
interest income and a $2.6 million gain on the sale of an equity investment
recognized in the first quarter of fiscal year 2000.
Income Taxes. No tax benefit was recognizable for the charges for purchased in-
process research and development related to the acquisition of Meridian in the
second quarter of fiscal year 2000 and the acquisition of ATL in the third
quarter of fiscal year 1999. DSSG's effective tax rate, excluding charges, for
the three and nine months ended December 26, 1999, and December 27, 1998, was
40%.
Liquidity and Capital Resources
Operating Activities. DSSG generated cash from operations of $272 million in
the nine months ended December 26, 1999 compared to $142 million in the nine
months ended December 27, 1998. The increase primarily reflected collection of
accounts receivable and a reduction in inventories.
Investing Activities. Investments in the nine months ended December 26, 1999
were $26 million, consisting primarily of investments in property and equipment.
Investments in the nine months ended December 27, 1998 totaled $25 million.
Financing Activities. At December 26, 1999, and March 31, 1999, Quantum's debt
allocated to DSSG was $218 million and $230 million, respectively. Debt
allocated to DSSG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At
December 26, 1999, Quantum had total debt of $327 million with an average
interest rate of 8.5%. In the nine months ended December 26, 1999, DSSG used
cash to purchase $246 million of treasury stock, as discussed below, and to pay
off ATL's line of credit.
In September 1999, Quantum's DLT & Storage Systems group issued 4.1 million DSSG
shares and 1.9 million HDDG shares it had acquired (and HDDG issued 0.1 million
HDDG shares) to the stockholders of Meridian to complete the acquisition of
Meridian. Substantially all of the shares DSSG issued to complete the
acquisition were DSSG and HDDG shares held as treasury stock. The difference
between the cost of the treasury stock and the value at which the shares were
reissued
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resulted in a $3.5 million addition to paid-in-capital in the second quarter of
fiscal year 2000. For additional information regarding the Meridian acquisition,
refer to Note 5 of the Notes to Condensed Combined Financial Statements.
In May 1999, the Board of Directors authorized Quantum to repurchase a combined
total of up to $200 million of Quantum's common stocks through the open market
from time to time. In October 1999, the Board of Directors authorized an
increase in Quantum's stock repurchase program to a combined total of up to $600
million. The increased authorization allows Quantum to repurchase its common
stocks through the open market or through other mechanisms, including negotiated
off market transactions. During the nine months ended December 26, 1999, DSSG
repurchased 14 million shares of DSSG common stock and acquired 1.9 million
shares of HDDG common stock for $246 million, and HDDG repurchased 3.3 million
shares of HDDG common stock for $20 million.
In December 1998, ATL entered into a senior credit facility that provides a $35
million revolving credit line to ATL. The revolving credit line is co-terminous
with Quantum's $500 million revolving credit line, expiring in June 2000. As
amended, at the option of ATL, borrowings under the revolving credit line bear
interest at either London interbank offered rate plus a margin determined by
Quantum's total funded debt ratio, or at a base rate, with option periods of two
weeks to six months. At December 26, 1999, there was no outstanding balance
drawn on this line.
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either London interbank offered rate plus a margin determined by our total
funded debt ratio, or at a base rate, with option periods of one to six months.
At December 26, 1999, there was no outstanding balance drawn on this line.
DSSG expects to spend approximately $45 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the DLTtape product line, production of Super DLTtape products and DSSG's
general infrastructure.
DSSG expects its cash flow from operations, together with available financing
sources, will be sufficient to meet all currently planned expenditures and
sustain operations for the next 12 months. However, this belief assumes that
operating results and cash flow from operations will meet our expectations.
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 one company and, therefore,
financial effects on HDDG could adversely affect DSSG
Holders of DSSG stock and HDDG stock are stockholders of a single company. DSSG
and HDDG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of its businesses, assets and liabilities. The issuance of the DSSG stock and
the HDDG stock and the allocation of assets and liabilities and stockholders'
equity between DSSG and HDDG did not result in a distribution or spin-off to
stockholders of any Quantum assets or liabilities and did not affect ownership
of our assets or responsibility for our liabilities or those of our
subsidiaries. The assets we attribute to one group could be subject to the
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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.
Competition may increase in the tape drive market as a result of large
competitors introducing tape drive products based on new technology standards
DSSG competes with companies that develop, manufacture, market and sell tape
drive products. DSSG's principal competitors include Exabyte Corporation,
Hewlett-Packard, Seagate Technology, Inc., Sony Corporation and StorageTek.
These competitors are aggressively trying to develop new tape drive technologies
that compete more successfully with DLTtape technology. Hewlett-Packard, IBM and
Seagate have formed a consortium to develop new linear tape drive products. DSSG
expects products based on this developing technology standard to target the
high-capacity data back-up market and to compete with DSSG's products based on
Super DLTtape technology. Such competition could have a material adverse impact
on DSSG's operating results.
DSSG's operating results depend on new product introductions which may not be
successful
To compete effectively, DSSG must improve existing products and introduce new
products, such as products based on Super DLTtape technology and network
attached storage appliances. DSSG cannot assure you that:
. it will introduce any of these new products in the time frame DSSG
currently forecasts;
. it will not experience technical or other difficulties that could prevent
or delay the introduction of these new products;
. its new products will achieve market acceptance;
. its new products will be successfully or timely qualified with DSSG's
customers by meeting customer performance and quality specifications. A
successful and timely customer qualification must occur before customers
will place large product orders; or
. it will achieve high volume production of these new products in a timely
manner, if at all.
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This risk is magnified because DSSG expects technological changes, changes in
customer requirements and increasing competition could result in declining sales
and gross margins on its existing products.
Reliance on a limited number of third-party suppliers could result in
significantly increased costs and delays in the event these suppliers experience
shortages or quality problems
DSSG depends on a limited number of suppliers for components and sub-assemblies,
including recording heads, media cartridges and integrated circuits, all of
which are essential to the manufacture of DLTtape drives and tape libraries.
DSSG currently purchases the DLTtape media cartridges it sells primarily from
Fuji Photo Film Co., Ltd. and Hitachi Maxell, Ltd. DSSG cannot assure you that
Fuji or Maxell will continue to supply adequate high quality media cartridges in
the future. If component shortages occur, or if DSSG experiences quality
problems with component suppliers, shipments of products could be significantly
delayed and/or costs significantly increased. In addition, DSSG qualifies only a
single source for many components and sub-assemblies, which magnifies the risk
of future shortages.
DSSG's sole supplier of tape heads is located in China and political
instability, trade restrictions or currency fluctuations in China could have an
adverse impact on DSSG's operating results.
DSSG's sole supplier of tape heads is located in China and political
instability, trade restrictions, changes in tariff or freight rates or currency
fluctuations in China could result in increased costs, delays in shipment and
could have an adverse impact on DSSG's operating results.
DSSG's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
DSSG's quarterly operating results have fluctuated significantly in the past and
could fluctuate significantly in the future. Quarterly operating results could
be adversely affected by:
. 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;
. 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.
36
<PAGE>
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments
DSSG's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and DSSG's relationships with its
customers are terminable at will. The loss of, or a significant change in demand
from, one or more key customers could materially adversely impact DSSG's
operating results.
Unpredictable end-user demand may cause excess inventories which could result in
inventory write-downs or losses or insufficient inventories which could have an
adverse impact on DSSG's customer relationships
Unpredictable end-user demand, combined with the computer equipment manufacturer
trend toward carrying minimal inventory levels, increases the risk that DSSG
will manufacture and custom configure too much or too little inventory for
particular customers. Significant excess inventory could result in inventory
write-downs and losses while inventory shortages could adversely impact DSSG's
relationship with its customers, either of which could adversely impact DSSG's
operating results.
DSSG does not control licensee pricing or licensee sales of DLTtape media
cartridges and as a result DSSG's royalty revenue may decline
DSSG receives a royalty fee based on sales of DLTtape media cartridges by Fuji
and Maxell. Under DSSG's license agreements with Fuji and Maxell, each of the
licensees determine the pricing and number of units of DLTtape media cartridges
sold by it. 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.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege DSSG's infringement of and need for a
license under their patented or other proprietary technology. Adverse resolution
of any third party infringement claim could subject DSSG to substantial
liabilities and require it to refrain from manufacturing and selling certain
products. In addition, the costs incurred in intellectual property litigation
can be substantial, regardless of the outcome.
37
<PAGE>
Item 1. Financial Statements
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $889,024 $ 959,086 $2,409,729 $2,680,660
Cost of revenue - on net sales 784,645 881,298 2,254,856 2,489,959
Cost of revenue - special charge - - 57,068 -
-------- --------- ---------- ----------
Gross profit 104,379 77,788 97,805 190,701
Operating expenses:
Research and development 55,012 59,766 179,693 182,774
Sales and marketing 25,229 29,427 81,920 85,518
General and administrative 19,177 13,538 49,254 38,722
Special charge - - 2,338 -
-------- --------- ---------- ----------
99,418 102,731 313,205 307,014
Income (loss) from operations 4,961 (24,943) (215,400) (116,313)
Other income (expense):
Interest income and other, net 6,154 5,683 15,541 12,329
Interest expense (2,357) (2,238) (7,127) (6,712)
Loss from investee - (100,700) - (142,050)
-------- --------- ---------- ----------
3,797 (97,255) 8,414 (136,433)
Income (loss) before income taxes 8,758 (122,198) (206,986) (252,746)
Income tax provision (benefit) 3,608 (46,230) (85,265) (101,346)
-------- --------- ---------- ----------
Net income (loss) $ 5,150 $ (75,968) $ (121,721) $ (151,400)
======== ========= ========== ==========
Net income (loss) per share:
Basic $0.06 $(0.92) $(1.47) $(1.91)
Diluted $0.06 $(0.92) $(1.47) $(1.91)
Weighted average common shares:
Basic 82,915 82,910 83,043 79,344
Diluted 86,004 82,910 83,043 79,344
</TABLE>
See accompanying notes to condensed combined financial statements.
38
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 26, March 31,
1999 1999
------------- ----------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 452,635 $ 499,725
Marketable securities 9,726 24,426
Accounts receivable, net of allowance
for doubtful accounts of $20,029 and $9,623 410,308 392,329
Inventories 93,065 147,524
Deferred taxes 60,297 72,107
Other current assets 126,023 96,401
---------- ----------
Total current assets 1,152,054 1,232,512
Property and equipment, net of accumulated
depreciation of $208,540 and $236,987 151,476 198,806
Intangible assets, net 2,736 5,199
Other assets 32,847 33,436
---------- ----------
$1,339,113 $1,469,953
========== ==========
Liabilities and Group Equity
- ----------------------------
Current liabilities:
Accounts payable $ 299,328 $ 342,344
Accrued warranty 49,217 38,917
Accrued compensation 36,715 51,048
Income taxes payable 30,397 33,411
Current portion of long-term debt 366 341
Other accrued liabilities 92,696 57,841
---------- ----------
Total current liabilities 508,719 523,902
Deferred taxes 40,385 39,985
Long-term debt 12,709 18,987
Convertible subordinated debt 95,833 95,833
Group equity 681,467 791,246
---------- ----------
$1,339,113 $1,469,953
========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
39
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 26, December 27,
1999 1998
------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(121,721) $(151,400)
Adjustments to reconcile net loss to net
cash provided by (used in) operations:
Special charge 33,779 -
Loss from investee - 124,809
Depreciation 48,839 49,989
Amortization 2,934 3,510
Deferred income taxes 498 2,480
Compensation related to stock plans 763 1,355
Changes in assets and liabilities:
Accounts receivable (17,979) 168,511
Inventories 54,459 66,462
Accounts payable (43,016) (71,873)
Income taxes payable (3,014) (12,118)
Accrued warranty 10,300 9,050
Other assets and liabilities 27,583 23,187
--------- ---------
Net cash provided by (used in) operating activities (6,575) 213,962
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (33,367) (68,360)
Maturities of marketable securities 48,067 115,508
Investment in property and equipment (39,343) (63,478)
Proceeds from disposition of property
and equipment - 139
--------- ---------
Net cash used in investing activities (24,643) (16,191)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities 3,333 8,333
Principal payments on long-term credit facilities (9,586) (231)
Inter-group proceeds for common stock issued 2,835 15,118
Purchases of treasury stock (19,690) -
Proceeds from issuance of common stock, net 7,236 8,386
--------- ---------
Net cash provided by (used in) financing activities (15,872) 31,606
--------- ---------
Increase (decrease) in cash and cash equivalents (47,090) 229,377
Cash and cash equivalents at beginning of period 499,725 253,240
--------- ---------
Cash and cash equivalents at end of period $ 452,635 $ 482,617
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,879 $ 4,830
Income taxes $ 19,778 $ 20,043
</TABLE>
See accompanying notes to condensed combined financial statements.
40
<PAGE>
QUANTUM CORPORATION
HARD DISK DRIVE GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited condensed combined financial statements of the Hard
Disk Drive group ("HDDG"), together with the condensed combined financial
statements of the DLT & Storage Systems group ("DSSG") include all of the
accounts in the condensed consolidated financial statements of Quantum. The
separate group condensed combined financial statements give effect to the
accounting policies applicable with the implementation of the tracking stock
proposal. The separate HDDG and DSSG financial statements have been prepared on
a basis that management believes to be reasonable and appropriate and include
(i) the historical balance sheets, results of operations, and cash flows of
businesses that comprise each of the groups, with all significant intragroup
transactions and balances eliminated, (ii) in the case of HDDG's financial
statements, corporate assets and liabilities of Quantum and related transactions
identified with HDDG, including allocated portions of Quantum's debt and
selling, general and administrative costs, and (iii) in the case of DSSG's
financial statements, corporate assets and liabilities of Quantum and related
transactions identified with DSSG, including allocated portions of Quantum's
debt and selling, general and administrative costs. 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, 1999 has been
derived from the audited financial statements included in the Registration
Statement on Form S-4 (SEC File No. 333-75153) filed with the Securities and
Exchange Commission, but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
These interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
2. Inventories
Inventories consisted of the following:
(In thousands)
December 26, March 31,
1999 1999
------- --------
Materials and purchased parts $ 3,483 $ 2,204
Work in process 6,453 5,377
Finished goods 83,129 139,943
------- --------
$93,065 $147,524
======= ========
</TABLE>
3. Net income (loss) per share
On July 23, 1999, Quantum's stockholders approved the tracking stock proposal
and Quantum implemented the tracking stock proposal on August 3, 1999.
Accordingly, the net loss per share for the periods presented below have been
calculated in accordance with the Restated Certificate of Incorporation.
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net
income (loss) per share - income
(loss) available to common stockholders $ 5,150 $(75,968) $(121,721) $(151,400)
------- -------- --------- ---------
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 82,915 82,910 83,043 79,344
Effect of dilutive securities:
Outstanding options 3,089 - - -
------- -------- --------- ---------
Denominator for diluted net income
(loss) per share - adjusted weighted
average shares 86,004 82,910 83,043 79,344
------- -------- --------- ---------
Basic net income (loss) per share $ 0.06 $ (0.92) $ (1.47) $ (1.91)
------- -------- --------- ---------
Diluted net income (loss) per share $ 0.06 $ (0.92) $ (1.47) $ (1.91)
------- -------- --------- ---------
</TABLE>
The computation of diluted net income (loss) per share for the three and nine
months ended December 26, 1999 and December 27, 1998 excluded the effect of the
7% convertible subordinated notes issued in July 1997, which are convertible
into 3,103,076 shares of HDDG common stock, or 10.793 shares per $1,000 note,
because the effect would have been antidilutive.
42
<PAGE>
Options to purchase 14,164,881 and 11,270,125 shares of HDDG common stock were
outstanding at December 26, 1999 and December 27, 1998, respectively. However,
the corresponding weighted average outstanding options were not included in the
computation of diluted net loss per share for the nine months ended December 26,
1999, and the three and nine months ended December 27, 1998, because the effect
would have been antidilutive.
4. Group Equity
In May 1999, the Board of Directors authorized Quantum to repurchase a combined
total of up to $200 million of Quantum's common stocks through the open market
from time to time. In October 1999, the Board of Directors authorized an
increase in Quantum's stock repurchase program to a combined total of up to $600
million. The increased authorization allows Quantum to repurchase its common
stocks through the open market or through other mechanisms, including negotiated
off market transactions. During the nine months ended December 26, 1999, DSSG
repurchased 14 million shares of DSSG common stock and acquired 1.9 million
shares of HDDG common stock for $246 million, and HDDG repurchased 3.3 million
shares of HDDG common stock for $20 million.
5. Litigation
On August 7, 1998, Quantum was named as one of several defendants in a patent
infringement lawsuit filed in the U.S. District Court for the Northern District
of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH, owns at
least 24 U.S. patents which it asserts that Quantum has infringed. Quantum has
studied many of these patents before and, of the patents it has studied,
believes that defenses of patent invalidity and non-infringement can be
asserted. However, Quantum has not completed a full study of all the patents
asserted by Papst and there can be no assurance that Quantum has not infringed
these or other patents owned by Papst. Recently, on Papst's motion, 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 and Minebea
Company, Ltd. for the purposes of coordinated discovery under multi-district
litigation rules. 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, both Cambrian Consultants and
Discovision Associates have 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.
6. 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
43
<PAGE>
growing low-cost PC market. The special charge was associated primarily with the
streamlining of HDDG's logistics model in order to create a faster and more
flexible fulfillment system, changes in the customer service strategy and
consolidation of certain product development programs.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. HDDG expects that the affected facilities will be
vacated by the end of the second quarter of fiscal year 2001.
In connection with the charge, HDDG currently expects a workforce reduction of
approximately 600 employees. In addition, approximately 100 open requisitions
and budgeted positions have been eliminated. The reduction in force primarily
affects employees at HDDG's drive configuration centers and warehouses in
Milpitas, California and Dundalk, Ireland and employees within the desktop drive
business. Approximately 160 of the 600 employees had been terminated as of
December 26, 1999. HDDG anticipates that the remaining employees will be
terminated by the end of the second quarter of fiscal year 2001.
During the quarter ended December 26, 1999, HDDG revised its estimate of costs
required to implement the restructuring plan. HDDG currently estimates that
severance and benefits and other costs, which include the disposition of
additional capital assets, will be more than previously estimated as a result of
the planned changes in the customer service strategy. HDDG also estimates that
costs associated with vacating leased facilities will be less than previously
estimated as a result of vacating a major facility earlier than previously
expected. Accordingly, HDDG has reallocated amounts between these categories.
As of December 26, 1999, HDDG had incurred $5 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 $20 million.
The following table summarizes activity related to the special charge at
December 26, 1999:
<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 (2,923) (944) - (1,495) (5,362)
Non-cash charges - (9,532) (13,214) (9,742) (32,488)
Adjustments 1,070 (7,159) - 6,089 -
------- -------- ------- -------- --------
Balance at December 26, 1999 $ 5,980 $ 8,724 $ - $ 6,852 $ 21,556
======= ========= ======= ======== ========
</TABLE>
44
<PAGE>
7. Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) 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 (loss), net of tax, for the
three and nine months ended December 26, 1999 and December 27, 1998, is
presented in the following table:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,150 $(75,968) $(121,721) $(151,400)
Other comprehensive income -
Change in unrealized gain on
investments, net 17,568 - 17,568 -
Foreign currency translation
adjustments (176) 2,055 597 2,238
------- -------- --------- ---------
Comprehensive income (loss) $22,542 $(73,913) $(103,556) $(149,162)
======= ======== ========= =========
</TABLE>
8. Business Units
The Hard Disk Drive group currently has two primary product lines, desktop hard
disk drives and high-end hard disk drives. HDDG has two separate business units
that support these two product lines. In addition, HDDG participated in the
manufacture of recording heads through its 49% equity interest in a recording
heads joint venture with Matsushita-Kotobuki Electronics, Ltd., from May 16,
1997 through October 28, 1998 when the joint venture was dissolved.
The desktop business unit designs, develops and markets desktop hard disk drives
designed to meet the storage requirements of entry-level to high-end desktop
personal computers in home and business environments. The high-end business unit
designs, develops and markets high-end hard disk drives designed to meet the
storage requirements of network servers, workstations and storage subsystems. In
the future, the two HDDG business units may become a single business unit as
their markets begin to converge and be reported on a combined basis.
45
<PAGE>
Results for HDDG's business units for the three and nine months ended December
26, 1999 and December 27, 1998 are presented in the following table:
<TABLE>
<CAPTION>
(In millions) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Business unit:
Desktop
Revenue $ 754 $ 830 $2,052 $2,294
Unit operating income (loss) 13 (6) (182) (54)
High-end
Revenue 135 129 357 386
Unit operating loss (8) (19) (33) (62)
Recording heads
Loss from investee - (101) - (142)
(In millions) Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Loss reconciliation:
Total unit operating income (loss) $ 5 $ (25) $ (215) $ (116)
Loss from investee - (101) - (142)
Unallocated amounts:
Interest and other income/(expense) 4 3 8 5
----- ----- ------ ------
Income (loss) before income taxes $ 9 $(122) $ (207) $ (253)
===== ===== ====== ======
</TABLE>
46
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually contain
the words "estimate," "anticipate," "expect," or similar expressions. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties. These uncertainties could
cause actual results to differ materially from those expected for the reasons
set forth under Trends and Uncertainties relating to the Hard Disk Drive group.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Business Overview
The Hard Disk Drive group ("HDDG") designs, develops and markets a diversified
product portfolio of hard disk drives featuring leading-edge technology. HDDG's
hard disk drives are designed for the desktop market and the high-end market
which requires faster and higher capacity disk drives--as well as the emerging
market for hard disk drives specially designed for consumer electronics
applications such as new TV recording devices. HDDG has been the leading volume
supplier of hard disk drives for the desktop market for each of the past seven
years. According to Dataquest, HDDG's market share in the desktop market has
grown from 3% in 1990 to an industry leading 22% in 1999.
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 designs hard disk drives for the developing consumer electronics
market. These hard disk drives utilize Quantum QuickView--HDDG's hard disk drive
technology designed for consumer electronics. The use of hard disk drive
technology makes it possible to simultaneously record and playback video content
and to rapidly and inexpensively access large amounts of video content--
capabilities that are not as well suited to competing technologies such as video
tape and digital video disk.
47
<PAGE>
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 System/TM/, Shock
Protection System II and Data Protection System/TM/ 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 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 and Quantum Atlas 10K families. The Quantum Atlas
family offers high-capacity hard disk drives for high performance storage-
intensive applications such as enterprise servers and storage subsystems. HDDG
also offers the Shock Protection System and Data Protection System with its
high-end products.
48
<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
- -------- -------- -------- ---------- --------
<C> <C> <C> <C> <S>
Fireball CX 6.8 6.4 to 20.4 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System and Data Protection System
Fireball lct 08 8.7 4.3 to 26.0 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II and Data Protection System
Fireball lct 10 10.3 5.0 to 30.0 5,400 Desktop PCs--Value, with Ultra ATA/66 interface, Shock
Protection System II and Data Protection System
Fireball Plus KX 6.8 6.8 to 27.3 7,200 Desktop PCs--Performance, with Ultra ATA/66 interface,
Shock Protection System and Data Protection System
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
Atlas IV 4.5 9.1 to 36.4 7,200 Servers, Workstations and Storage Subsystems, with
Ultra 160/m SCSI interface, Shock Protection System
Atlas V 9.1 9.1 to 36.7 7,200 Servers, Workstations and Storage Subsystems, with
Ultra 160/m SCSI interface, Shock Protection System
II and Data Protection System
Atlas 10K 3.0 9.1 to 36.4 10,000 Enterprise Servers and Storage Subsystems, with Ultra
160/m SCSI interface or Fibre Channel optional
interface, 3-inch media, Shock Protection System
Atlas 10K II 4.5 9.2 to 73.4 10,000 Enterprise Servers and Storage Subsystems, with Ultra
160/m SCSI interface or Fibre Channel optional interface,
3-inch Media, Shock Protection System II and Data
Protection System
</TABLE>
Results of Operations
Revenue. Revenue in the three and nine months ended December 26, 1999 was $889
million and $2.410 billion, respectively, compared to $959 million and $2.681
billion, respectively, for the corresponding periods in fiscal year 1999. The
decrease in revenue reflected lower revenue from sales of desktop hard disk
drives.
. Desktop hard disk drive revenue in the three and nine months ended
December 26, 1999 was $754 million and $2.052 billion, respectively,
compared to $830 million and $2.294 billion, respectively, for the
corresponding periods in fiscal year 1999. While shipments of desktop
hard disk drives increased in the three and nine month periods, lower
average unit prices resulted in reduced desktop hard disk drive revenue.
Desktop shipments reached a record high in the third quarter of fiscal
year 2000 reflecting increased demand, particularly from computer
equipment manufacturers, and a strong desktop PC market. The strong
market conditions resulted in some easing of the intense competitive
pricing pressures of prior quarters.
. High-end hard disk drive revenue for the three and nine months ended
December 26, 1999 was $135 million and $357 million, respectively,
compared to $129 million and $386 million, respectively, for the
corresponding periods in fiscal year 1999. Shipments of high-end hard
disk drives increased in the three and nine month periods, reaching a
49
<PAGE>
record high in the third quarter of fiscal year 2000 as HDDG completed a
transition to new high-end products. However, continued pricing pressures
in the high-end market resulted in lower average unit prices, limiting
the revenue increase in the three month comparative period and resulting
in reduced revenue in the nine month comparative period.
Sales to the top five customers in the three and nine months ended December 26,
1999 represented 51% and 50% of revenue, respectively, compared to 45% and 48%
of revenue, respectively, for the corresponding periods in fiscal year 1999.
These amounts reflected a retroactive combination of sales to Compaq and Digital
Equipment as a result of their merger in June 1998 as well as a retroactive
combination of sales to Ingram Micro and Electronic Resources as a result of the
completion of their merger in July 1999. Sales to Hewlett-Packard were 12% of
revenue in the three and nine months ended December 26, 1999 compared to 11% and
14% of revenue, respectively, for the corresponding periods in fiscal year 1999.
Sales to Dell Computer were 12% of revenue in the three months ended December
26, 1999 and were less than 10% of revenue in the nine months ended December 26,
1999 and the corresponding periods in fiscal year 1999. Sales to Ingram Micro
were 12% and 13% of revenue in the three and nine months ended December 26,
1999, respectively, and were less than 10% of revenue for the corresponding
periods in fiscal year 1999, including sales to Electronic Resources.
Sales to computer equipment manufacturers and distribution channel customers
were 66% and 34% of revenue in the three months ended December 26, 1999,
respectively, compared to 60% and 40% of revenue in the three months ended
December 27, 1998. For the nine months ended December 26, 1999, computer
equipment manufacturers and distribution channel sales were 60% and 40% of
revenue, compared to 61% and 39% for the corresponding period of fiscal year
1999.
Gross Margin Rate. The gross margin rate in the three months ended December 26,
1999 increased to 11.7% from 8.1% in the three months ended December 27, 1998.
The gross margin rate for the first nine months of fiscal year 2000 was 4.1%,
compared to 7.1% in the corresponding period in fiscal year 1999. The gross
margin rate in the nine-month period of fiscal year 2000 reflected the impact of
a $57.1 million special charge as discussed below. The gross margin rate
excluding the impact of the charge was 6.4% in the nine-month period ended
December 26, 1999.
. The desktop gross margin rate for the three and nine months ended
December 26, 1999 was 10.5% and 1.5%, respectively, compared to 7.6% and
6.6% for the corresponding periods in fiscal year 1999. Excluding the
desktop portion of the special charge of $51.4 million, the gross margin
rate was 4.0% for the nine-month period ended December 26, 1999. The
increase in the gross margin rate for the three-month period ended
December 26, 1999 reflected the transition to new lower cost, higher
margin products, cost reductions associated with the special charge, and
the strong desktop PC market. Excluding the impact of the special charge,
the decrease in the gross margin rate for the nine-month period ended
December 26, 1999 reflected the intense competitive pricing pressures in
the desktop market, particularly in the first two quarters of fiscal year
2000.
. The high-end gross margin rate for the three and nine months ended
December 26, 1999 was 18.8% and 18.6%, respectively, compared to 11.7%
and 10.4% for the corresponding periods in fiscal year 1999. Excluding
the high-end portion of the special
50
<PAGE>
charge of $5.7 million, the gross margin rate was 20.2% in the nine-month
period ended December 26, 1999. The increase in gross margins reflected
the transition to new, higher margin products.
Research and Development Expenses. Research and development expenses in the
three and nine months ended December 26, 1999, were $55 million, or 6.2% of
revenue, and $180 million, or 7.5% of revenue, respectively, compared to $60
million, or 6.2% of revenue, and $183 million, or 6.8% of revenue, respectively,
in the corresponding periods in fiscal year 1999. The decrease in research and
development expenses reflected expense reductions resulting from modifications
to 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
nine months ended December 26, 1999, were $25 million, or 2.8% of revenue, and
$82 million, or 3.4% of revenue, respectively, compared to $29 million, or 3.1%
of revenue, and $86 million, or 3.2% of revenue, respectively, in the
corresponding periods of fiscal year 1999. The decrease in sales and marketing
expenses reflected reduced advertising costs and lower commissions as the result
of the reduced level of revenue.
General and Administrative Expenses. General and administrative expenses in the
three and nine months ended December 26, 1999, were $19 million, or 2.2% of
revenue, and $49 million, or 2.0% of revenue, respectively, compared to $14
million, or 1.4% of revenue, and $39 million, or 1.4% of revenue, respectively,
in the corresponding periods of fiscal year 1999. The increase in general and
administrative expenses reflected an increase in the provision for bad debt due
to the bankruptcy of a distributor in the third quarter of fiscal year 2000 and
implementation of a new quality program at the beginning of fiscal year 2000.
Special Charge. During the second quarter of fiscal year 2000, HDDG recorded a
special charge of $59.4 million, of which $57.1 million is included in cost of
sales and $2.3 million is included in operating expenses. The charge reflected
HDDG's strategy to modify the hard disk drive business to more closely align
product development and the business's operating model with the requirements of
the rapidly growing low-cost PC market. The special charge was associated
primarily with the streamlining of HDDG's logistics model in order to create a
faster and more flexible fulfillment system, changes in the customer service
strategy and consolidation of certain product development programs. Upon full
implementation of the plan, HDDG expects to realize more than $100 million in
cost savings per year, beginning in fiscal year 2001.
The special charge consisted of $26.4 million related to facilities costs, $13.2
million in asset write-offs related to the streamlining of the global logistics
model and change in customer service strategy, $7.8 million in severance and
benefits for terminated employees, and approximately $12 million in other costs
associated with the plan.
During the quarter ended December 26, 1999, HDDG revised its estimate of costs
required to implement the restructuring plan. HDDG currently estimates that
severance and benefits and other costs, which include the disposition of
additional capital assets, will be more than previously estimated as a result of
the planned changes in the customer service strategy. HDDG also estimates that
costs associated with vacating leased facilities will be less than
51
<PAGE>
previously estimated as a result of vacating a major facility earlier than
previously expected. Accordingly, HDDG has reallocated amounts between these
categories.
Interest and Other Income/Expense. Net interest and other income and expense in
the three and nine months ended December 26, 1999 was $3.8 million and $8.4
million income, respectively, compared to $3.4 million and $5.6 million income,
respectively, in the corresponding periods of fiscal year 1999. The increase in
income for the three month period reflected foreign exchange gains while the
increase for the nine month period reflected higher interest income.
Loss from Investee. The loss from investee reflected HDDG's 49% equity share in
the operating losses of its recording heads joint venture with Matsushita-
Kotobuki, which was dissolved in the third quarter of fiscal year 1999. HDDG's
share of the loss in the joint venture for the three and nine months ended
December 27, 1998 was $100.7 million and $142.1 million, respectively.
Income Taxes. HDDG recorded a tax provision of $3.6 million and a tax benefit of
$85.3 million for the three and nine months ended December 26, 1999, for an
effective tax rate of 41%, as compared to effective rates of 38% and 40% for the
corresponding periods in fiscal year 1999. The increased benefit for the nine
month period is primarily attributable to increased state tax benefits.
Liquidity and Capital Resources
Operating Activities. HDDG used cash of $7 million in operating activities in
the nine months ended December 26, 1999. HDDG generated cash from operations of
$214 million in the nine months ended December 27, 1998. The use of cash
primarily reflected reduced collections of accounts receivable compared to the
prior year period, as a result of the reduced level of revenue in the nine month
period of fiscal year 2000, and a reduction in accounts payable.
Investing Activities. Investments in the nine months ended December 26, 1999
were $25 million, which consisted primarily of investments in property and
equipment. Investments in the nine months ended December 27, 1998 totaled $16
million.
Financing Activities. At December 26, 1999, and March 31, 1999, Quantum's debt
allocated to HDDG was $109 million and $115 million, respectively. Debt
allocated to HDDG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At
December 26, 1999, Quantum had total debt of $327 million with an average
interest rate of 8.5%. As discussed below, in the nine months ended December
26, 1999, HDDG used cash to purchase $20 million of treasury stock.
In May 1999, the Board of Directors authorized Quantum to repurchase a combined
total of up to $200 million of Quantum's common stocks through the open market
from time to time. In October 1999, the Board of Directors authorized an
increase in Quantum's stock repurchase program to a combined total of up to $600
million. The increased authorization allows Quantum to repurchase it's common
stocks through the open market or through other mechanisms, including negotiated
off market transactions. During the nine months ended December 26, 1999, DSSG
repurchased 14
52
<PAGE>
million shares of DSSG common stock and acquired 1.9 million shares of HDDG
common stock for $246 million, and HDDG repurchased 3.3 million shares of HDDG
common stock for $20 million.
In December 1998, ATL entered into a senior credit facility that provides a $35
million revolving credit line to ATL. The revolving credit line is co-terminous
with Quantum's $500 million revolving credit line, expiring in June 2000. As
amended, at the option of ATL, borrowings under the revolving credit line bear
interest at either London interbank offered rate plus a margin determined by
Quantum's total funded debt ratio, or at a base rate, with option periods of two
weeks to six months. At December 26, 1999, there was no outstanding balance
drawn on this line.
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either London interbank offered rate plus a margin determined by our total
funded debt ratio, or at a base rate, with option periods of one to six months.
At December 26, 1999, there was no outstanding balance drawn on this line.
HDDG expects to spend approximately $60 million in fiscal year 2000 for capital
equipment and leasehold improvements. These capital expenditures will support
the development and introduction of new disk drive products.
HDDG expects its cash flow from operations, together with available financing
sources, will be sufficient to meet all currently planned expenditures and
sustain operations for the next 12 months. However, this belief assumes that
operating results and cash flow from operations will meet HDDG's expectations.
In 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.
In fiscal year 1999, Quantum entered into a strategic alliance with TiVo, Inc.,
to supply hard disk drives utilizing Quantum's QuickView technology for
integration into TiVo's Personal Video Recorder. As part of the agreement,
Quantum received warrants to purchase approximately 875,000 shares of TiVo
common stock. On September 30, 1999, subsequent to the end of Quantum's fiscal
second quarter, Quantum exercised its warrants immediately prior to TiVo's
initial public offering. Quantum is not allowed to sell TiVo common stock for a
six month period following the initial public offering and is accounting for its
investment as an available for sale security. As there are currently
restrictions upon the sale of this security, Quantum's Hard Disk Drive group has
classified its investment as part of other current assets. The fair market
value of this investment at December 26, 1999, was approximately $29 million.
Trends and Uncertainties Relating to the Hard Disk Drive Group
Holders of HDDG stock remain stockholders of one company and, therefore,
financial effects on DSSG could adversely affect HDDG
Holders of HDDG stock and DSSG stock are stockholders of a single company. HDDG
and DSSG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of 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
53
<PAGE>
liabilities or those of our subsidiaries. The assets we attribute to one group
could be subject to the liabilities of the other group, whether such liabilities
arise from lawsuits, contracts or indebtedness that we attribute to the other
group. If we are unable to satisfy one group's liabilities out of the assets we
attribute to it, we may be required to satisfy those liabilities with assets we
attribute to the other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
tracking stock relating to the other group. In addition, net losses of either
group and dividends and distributions on, or repurchases of, either class of
tracking stock or repurchases of preferred stock at a price per share greater
than par value will reduce the funds we can pay on each class of tracking stock
under Delaware law. For these reasons, you should read our consolidated
financial information with the financial information we provide for each group.
HDDG's operating results depend on new product introductions which may not be
successful
To compete effectively, HDDG must frequently introduce new hard disk drives.
HDDG cannot assure you that:
. 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:
54
<PAGE>
. the ability of Matsushita-Kotobuki, HDDG's exclusive manufacturer, to
quickly achieve high volume production of HDDG's hard disk drives;
. customers canceling, deferring or rescheduling significant orders;
. returns by customers of unsold hard disk drives for credit;
. decline in PC demand; or
. failure to complete shipments in the last month of a quarter during which a
substantial portion of HDDG's products are typically shipped.
HDDG's prices and margins are subject to declines due to unpredictable end-user
demand and oversupply of hard disk drives
End-user demand for the computer systems which contain HDDG's hard disk drives
has historically been subject to rapid and unpredictable fluctuations. As a
result, the hard disk drive market tends to experience periods of excess
capacity which typically lead to intense price competition. If intense price
competition occurs, HDDG may be forced to lower prices sooner and more than
expected and transition to new products sooner than expected. For example, in
fiscal year 1999 and the second half of fiscal year 1998, as a result of excess
inventory in the desktop hard disk drive market, aggressive pricing and
corresponding margin reductions materially adversely impacted HDDG's operating
results. HDDG experienced similar conditions in the high-end hard disk drive
market during most of fiscal years 1998 and 1999.
Growth of the lower priced PC markets is putting downward pressure on HDDG's
desktop hard disk drive prices and margins
The growth of the lower priced PC market has led to a shift toward lower priced
desktop hard disk drives, and to significantly reduced gross margins. HDDG
expects the trend toward lower prices on hard disk drives to continue. If HDDG
is unable to lower the cost of its desktop hard disk drives accordingly, gross
margins will continue to decrease.
Intense competition in the desktop and high-end hard disk drive market could
adversely impact HDDG's operating results
In the desktop hard disk drive market, HDDG's primary competitors are Fujitsu
Limited, IBM, Maxtor Corporation, Samsung Electronics Co., Ltd., Seagate and
Western Digital Corporation. The desktop hard disk drive market is characterized
by more competitiveness than that seen in the computer industry in general.
HDDG's operating results and competitive position could be negatively impacted
by the introduction of competitive products with higher performance, higher
reliability and/or lower cost than HDDG's products. For example, in the first
half of fiscal year 2000, certain competitors reduced prices for their products
significantly. As a result, HDDG's operating results were materially adversely
impacted.
55
<PAGE>
In the high-end hard disk drive market, HDDG's primary competitors are Fujitsu,
Hitachi, IBM, Seagate and Western Digital. Currently, Seagate and IBM have the
largest market share for high-end hard disk drives. Intense technology and
pricing competition has led to losses on HDDG's high-end hard disk drive
products over the past 11 quarters.
A majority of sales come from a few customers that have no minimum or long-term
purchase commitments
HDDG's sales are concentrated with a few customers. Customers are not obligated
to purchase any minimum product volume and HDDG's customer relationships are
terminable at will. The loss of, or a significant change in demand from, one or
more key HDDG customers could have a material adverse impact on HDDG's operating
results.
Because HDDG depends on Matsushita-Kotobuki for the manufacture of all hard disk
drives, adverse material developments in this critical manufacturing
relationship would adversely impact HDDG's operating results
HDDG's relationship with Matsushita-Kotobuki is critical to the Hard Disk Drive
group's operating results and overall business performance. HDDG's dependence
on Matsushita-Kotobuki includes the following principal risks:
. Quality and Delivery. HDDG relies on Matsushita-Kotobuki to quickly
achieve volume production of new hard disk drives at a competitive cost, to
meet HDDG's stringent quality requirements and to respond quickly to
changing product delivery schedules. Failure of Matsushita-Kotobuki to
satisfy these requirements could have a material adverse impact on HDDG's
operating results.
. Purchase Forecasts. Matsushita-Kotobuki's production schedule is based on
HDDG's forecasts of its purchase requirements, and HDDG has limited rights
to modify short-term purchase orders. The failure of HDDG to accurately
forecast its requirements or successfully adjust Matsushita-Kotobuki's
production schedule could lead to inventory shortages or surpluses.
. Pricing. HDDG negotiates pricing arrangements with Matsushita-Kotobuki on
a quarterly basis. Any failure to reach competitive pricing arrangements
would have a material adverse impact on HDDG's operating results.
. Capital Commitment. HDDG's future growth will require that Matsushita-
Kotobuki continue to devote substantial financial resources to property,
plant and equipment to support the manufacture of HDDG's products.
. Manufacturing Capacity. If Matsushita-Kotobuki is unable or unwilling to
meet HDDG's manufacturing requirements, an alternative manufacturing source
may not be available in the near-term.
56
<PAGE>
Matsushita-Kotobuki depends on a limited number of component and sub-assembly
suppliers and component shortages and quality problems or delays from these
suppliers could result in increased costs and reduced sales
Matsushita-Kotobuki depends on a limited number of qualified suppliers for
components and sub-assemblies, including recording heads, media and integrated
circuits, all of which are essential to the manufacture of HDDG's hard disk
drives. Matsushita-Kotobuki may qualify only a single source for certain
components and sub-assemblies, which can magnify the risk of component
shortages. Component shortages have constrained HDDG's sales growth in the past,
and HDDG believes that it will periodically experience component shortages. If
Matsushita-Kotobuki experiences quality problems with its component suppliers,
HDDG's hard disk drive shipments could be significantly delayed or costs could
be significantly increased.
Unexpected warranty costs could have a material adverse impact on operating
results
HDDG warrants its products against defects for a period of one to five years.
Actual warranty costs could have a material adverse impact on HDDG's operating
results if the actual unit failure rate or unit repair costs are greater than
those for which HDDG established a warranty accrual.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege HDDG's infringement of and need for a
license under their patented or other proprietary technology. For example, in
August 1998 Quantum was named as one of several defendants in a patent
infringement lawsuit. The plaintiff, Papst Licensing GmbH, owns at least 24 U.S.
patents, which it asserts that HDDG has infringed. Recently, both Cambrian
Consultants and Discovision Associates have brought patents to Quantum's
attention. Adverse resolution of the Papst litigation or any other third party
infringement claim could subject HDDG to substantial liabilities and require it
to refrain from manufacturing and selling certain products. HDDG cannot assure
you that licenses to any technology owned by Papst or any other third party
alleging infringement could be obtained on commercially reasonable terms, or at
all. In addition, the costs of litigation could be substantial, regardless of
the outcome.
HDDG's foreign manufacturing costs could be adversely impacted by fluctuations
in currency exchange rates
Matsushita-Kotobuki generally purchases manufacturing components at prices
denominated in U.S. dollars. However, significant increases in currency exchange
rates against the U.S. Dollar could increase Matsushita-Kotobuki's manufacturing
costs and could result in higher product prices and/or declining margins for
HDDG's products.
57
<PAGE>
QUANTUM CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements and
Note 5 of the Notes to Condensed Combined Financial Statements of the Hard Disk
Drive group.
Item 2. Changes in securities - Not Applicable
Item 3. Defaults upon senior securities - Not Applicable
Item 4. Submission of matters to a vote of security holders - Not Applicable
Item 5. Other information - Not Applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits. The exhibits listed on the accompanying index to
-------- exhibits immediately following the signature page are
filed as part of this report.
(b) Reports on Form 8-K.
-------------------
None.
58
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUANTUM CORPORATION
(Registrant)
Date: February 9, 2000 By: /s/ Richard L. Clemmer
----------------------
Richard L. Clemmer
Executive Vice President, Finance
and Chief Financial Officer
59
<PAGE>
QUANTUM CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
10.1 FOURTH AMENDMENT TO CREDIT AGREEMENT, dated November 8, 1999, among
Quantum Corporation, certain financial institutions (collectively,
the "Banks"), Canadian Imperial Bank of Commerce as administrative
agent for the Banks, ABN AMRO Bank, N.V., and CIBC Inc., as co-
arrangers for the Banks, ABN, as syndication agent for the Banks,
Bank of America N.A., as documentation agent for the Banks, and
BankBoston , N.A., The Bank of Nova Scotia, Fleet National Bank and
The Industrial Bank of Japan, Limited, as co-agents for the Banks.
27.1 Financial Data Schedule
Footnotes to
Exhibits Footnote
None
</TABLE>
<PAGE>
EXHIBIT 10.1
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
1. Reference is made to that certain Credit Agreement dated as of
June 6, 1997 (the "Credit Agreement"), as amended by that certain First
----------------
Amendment to Credit Agreement dated as of June 26, 1998, as further amended by
that certain Second Amendment to Credit Agreement dated as of December 18, 1998
and as further amended by that certain Third Amendment to Credit Agreement dated
as of August 31, 1999 by and among Quantum Corporation, a Delaware corporation
(the "Borrower"), each of the financial institutions listed in Schedule I to the
-----------------
Credit Agreement (individually, a "Bank" and, collectively, the "Banks"),
- ---------------- ---- -----
Canadian Imperial Bank of Commerce, as administrative agent for the Banks (in
such capacity, "Administrative Agent"), ABN AMRO Bank, N.V ("ABN"), and CIBC
--------------------
Inc., as co-arrangers for the Banks, ABN, as syndication agent for the Banks,
Bank of America, N.A. (formerly known as Bank of America National Trust and
Savings Association), as documentation agent for the Banks, and BankBoston,
N.A., The Bank of Nova Scotia, Fleet National Bank and The Industrial Bank of
Japan, Limited, as co-agents for the Banks (as amended, the "Credit Agreement").
----------------
2. The Banks executing this Amendment constituting Majority Banks
hereby agree that, subject to the satisfaction of the conditions set forth in
Paragraph 3 below, Subparagraph 5.02(f) of the Credit Agreement is hereby
- ----------- --------------------------------------------
amended by changing clause (iv) thereof to read in its entirety as follows:
-----------
(iv) Borrower may purchase Equity Securities pursuant to stock
repurchase programs, provided that the aggregate payments under such
programs do not exceed (A) during fiscal year 1999, twenty-three
percent (23%) of Tangible Net Worth as determined as of the fiscal
quarter ending March 31, 1998, (B) during fiscal year 2000, twenty
percent (20%) of Tangible Net Worth as determined as of the fiscal
quarter ending June 27, 1999 plus an additional seventy five million
dollars ($75,000,000), and (C) during all other fiscal years until the
Maturity Date, ten percent (10%) of Tangible Net Worth as determined
as of the fiscal quarter immediately preceding the date of
determination;
3. The amendment effected by Paragraph 2 above shall become effective
-----------
as of 8:30 a.m. Pacific Standard Time November 8, 1999 (the "Effective Date"),
--------------
subject to: (1) receipt by Orrick, Herrington & Sutcliffe LLP, counsel to
Administrative Agent, on or prior to the Effective Date, of a duly executed copy
of this Amendment from Borrower and the Banks constituting the Majority Banks;
and (2) receipt by Administrative Agent on behalf of each individual Bank that
executes this Amendment on or prior to the Effective Date of a non refundable
amendment fee payable to each such Bank in the amount of five thousand dollars
($5,000).
4. This Amendment shall be governed by and construed in accordance
with the laws of the State of California without reference to conflicts of law
rules.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Amendment to be
executed as of November 8, 1999.
QUANTUM CORPORATION
By: /s/ Andrew Kryder
--------------------------------------------------
Name: Andrew Kryder
Title: Vice President, Finance & General Counsel
ABN AMRO BANK N.V.
By: /s/ Nanci H. Meyer
--------------------------------------------------
Name: Nanci H. Meyer
Title: Vice President
By: /s/ Robert N. Hartinger
--------------------------------------------------
Name: Robert N. Hartinger
Title: Senior Vice President
BANKBOSTON, N.A.
By: /s/ John B. Desmond
--------------------------------------------------
Name: John B. Desmond
Title: Vice President
BANKBOSTON, N.A.
By: /s/ Thomas W. Davies
--------------------------------------------------
Name: Thomas W. Davies
Title: Senior Vice President
THE BANK OF NOVA SCOTIA
By: /s/ John Quick
--------------------------------------------------
Name: John Quick
Title: Managing Director
2
<PAGE>
BANQUE NATIONALE DE PARIS
By: /s/ Michael D. McCorriston
--------------------------------------------------
Name: Michael D. McCorriston
Title: Vice President
By: /s/ David W. Low
--------------------------------------------------
Name: David W. Low
Title: Vice President & Manager
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Carter Harned
--------------------------------------------------
Name: Carter Harned
Title: CIBC World Markets Corp., AS AGENT
GENERAL ELECTRIC CAPITAL CORPORATION, as a Bank
By: /s/ Gregory Hong
--------------------------------------------------
Name: Gregory Hong
Title: Duly Authorized Signatory
KEYBANK NATIONAL ASSOCIATION, as a Bank
By: /s/ Kevin P. McBride
--------------------------------------------------
Name: Kevin P. McBride
Title: Senior Vice President
MELLON BANK, as a Bank
By: /s/ John N. Cate
--------------------------------------------------
Name: John N. Cate
Title: Vice President
3
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/ Albert Bracht
--------------------------------------------------
Name: Albert Bracht
Title: Senior Vice President
THE MITSUBISHI TRUST AND BANKING CORPORATION
By: /s/ Beatrice E. Kossodo
--------------------------------------------------
Name: Beatrice E. Kossodo
Title: Senior Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Glenn Leyrer
--------------------------------------------------
Name: Glenn Leyrer
Title: Vice President
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION FOR THE QUARTER ENDED DECEMBER 26,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-1999
<PERIOD-END> DEC-26-1999
<CASH> 734,175
<SECURITIES> 16,601
<RECEIVABLES> 659,698
<ALLOWANCES> 23,144
<INVENTORY> 195,218
<CURRENT-ASSETS> 263,359
<PP&E> 516,646
<DEPRECIATION> 283,286
<TOTAL-ASSETS> 2,413,851
<CURRENT-LIABILITIES> 715,864
<BONDS> 325,627
0
0
<COMMON> 948,693
<OTHER-SE> 341,407
<TOTAL-LIABILITY-AND-EQUITY> 2,413,851
<SALES> 3,461,914
<TOTAL-REVENUES> 3,461,914
<CGS> 2,878,235
<TOTAL-COSTS> 2,878,325
<OTHER-EXPENSES> 539,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,499
<INCOME-PRETAX> 23,133
<INCOME-TAX> 21,609
<INCOME-CONTINUING> 1,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,524
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>
DSS GROUP EPS--BASIC 0.75
DSS GROUP EPS--DILUTED 0.72
HDD GROUP EPS--BASIC (1.47)
HDD GROUP EPS--DILUTED (1.47)
</FN>
</TABLE>
