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As filed with the Securities and Exchange Commission on July 14, 1995.
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-12390
QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2665054 500 McCarthy Blvd.
(State or other jurisdiction of (I.R.S. Employer Milpitas, California 95035
incorporation or organization) Identification No.) (408) 894-4000
(Address of principal
executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
6 3/8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
PREFERRED SHARE RIGHTS
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 1, 1995: $554,696,138 based upon the last sale price
reported for such date on the NASDAQ National Market System. For purposes of
this disclosure, shares of Common Stock held by persons who hold more than 5%
of the outstanding shares of Common Stock and shares held by officers and
directors of the Registrant have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
The number of shares outstanding of the Registrant's Common Stock as of May 1,
1995 was 46,235,244.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1995 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part
III of this Form 10-K Report.
TABLE OF CONTENTS
PART I Item 1. Business
Executive Officers
Products
Product Development
Manufacturing
Sales and Marketing
Warranty and Service
Backlog
Competition
Patents and Licenses
Employees
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K:
(a) Documents Filed with Report
(b) Reports on Form 8-K
(c) Exhibits
(d) Financial Statement Schedules
PART I
Item 1.
Business
Quantum Corporation (the "Company" or "Quantum") was incorporated as a
California corporation in February 1980, and reincorporated as a Delaware
corporation in April 1987.
Pursuant to a Stock and Asset Purchase Agreement (the "Agreement") dated July
18, 1994, between Digital Equipment Corporation ("Digital") and Quantum,
Digital agreed to sell to Quantum effective October 3, 1994, tangible assets
consisting principally of inventory, property, plant and equipment, and
certain contract rights and intellectual property of the Disks, Heads and
Tapes Business (the "Business") of the Storage Unit of Digital in exchange for
consideration totaling $350.5 million. Included in the sale were Digital's
interest in Digital Equipment Storage Products (Malaysia) Sdn. Bhd. and its
81% interest in Rocky Mountain Magnetics, Inc. ("RMMI") (See Note 13 in Notes
to Consolidated Financial Statements). Subsequently, RMMI's name was changed
to Quantum Peripherals Colorado, Inc. ("QPC"). The Business acquired was
involved in the design, manufacture and marketing of computer disk drive, tape
drive, tape media, solid state memory device and magnetic recording head
products and optical storage devices and related technology other than CD-ROM.
Quantum Corporation is a leader in designing, manufacturing and marketing mass
storage products, including high-performance, high-quality 3.5-inch and 2.5-
inch hard disk drives. The Company also manufactures solid state disks, tape
drives and PCMCIA-based flash memory cards. Quantum's products meet the
storage requirements of workstations, servers, disk arrays, high-end to entry-
level desktop PCs, notebook and subnotebook systems, minicomputers, and
handheld and palmtop systems. The Company markets its products directly to
major OEMs and through a broad range of distributors, resellers and systems
integrators worldwide.
Executive Officers
The executive officers of the Company, and certain information about them as
of March 31, 1995, are as follows:
Name Age Position with the Company
William J. Miller 49 Chairman and Chief Executive Officer
Michael A. Brown 36 President, Desktop and Portable Storage Group
Robert K. Maeser 55 President, High-Capacity Storage Group
Kenneth Lee 57 Executive Vice President, Technology and
Engineering, Vice President and General Manager and
Recording Heads Group and Chief Technical Officer
William F. Roach 51 Executive Vice President, Worldwide Sales
Joseph T. Rodgers 52 Executive Vice President, Finance, Chief
Financial Officer and Secretary
Deborah E. Barber 55 Vice President, Human Resources
Gina M. Bornino 34 Vice President and General Manager, Specialty
Storage Products Group
Mr. Miller joined the Company as Chief Executive Officer in March 1992 and was
elected Chairman in September 1993. He has been a member of the Board of
Directors since May 1992. He previously served 11 years at Control Data
Corporation, where his last position was Executive Vice President and
President of Information Services. He also served as President and Chief
Executive Officer of Imprimis Technology, formerly a subsidiary of Control
Data Corporation.
Mr. Brown joined the Company's marketing organization in August 1984, was
named Vice President, Marketing, in June 1990, and became Executive Vice
President in February 1992. In August 1993, he was named President of the
Desktop and Portable Storage Group. Prior to June 1990, Mr. Brown held
positions in product and marketing management. Prior to joining the Company,
he served in the marketing organization at Hewlett-Packard Company and
provided management consulting services at Braxton Associates.
Mr. Maeser joined the Company in 1992 as Vice President and General Manager,
High-Capacity Storage Group, and was promoted to President, High-Capacity
Storage Group, in August 1993. Prior to joining the Company, he served as
Executive Vice President, Operations and Development, for the Automated
Wagering Division of Control Data Corporation from September 1991 to July
1992, and as Vice President, Product Line Management and Product Development,
for Seagate Technology from October 1989 to September 1991. Prior to that
time, Mr. Maeser was employed by Control Data Corporation for over 26 years,
last serving as Vice President, Operations, for Imprimis Technology.
Dr. Lee joined the Company in 1989 as Director of Advanced Recording
Technologies and was promoted to Vice President, Engineering, in August 1990.
In August 1993, he was promoted to Executive Vice President, Technology and
Engineering, and Chief Technical Officer. In October 1994, Dr. Lee also
assumed responsibility for the Recording Heads Group. Prior to joining the
Company, he served for five years as Vice President, Product Development, for
Domain Technology, and previously spent 15 years at the IBM Research
Laboratory in San Jose, California, working on advanced magnetic storage
devices.
Mr. Roach joined the Company in September 1989 as Vice President, Sales, and
was promoted to Executive Vice President, Worldwide Sales, in August 1993.
Prior to joining the Company, he spent 12 years in sales at Intel Corporation,
last serving as Worldwide Director, Distribution Sales and Marketing.
Mr. Rodgers joined the Company in December 1980 as its Vice President,
Finance, and was elected Secretary in May 1981 and Treasurer in September 1981
and promoted to Executive Vice President, Finance, in April 1986. Mr. Rodgers
is currently serving as Executive Vice President, Finance, Chief Financial
Officer and Secretary. From July 1979 to December 1980, he served as Vice
President, Finance, of Braegen Corporation, a manufacturer of computer
equipment. He also has more than nine years experience with Price Waterhouse,
last serving as an audit manager.
Ms. Barber joined the Company in October 1992 as Vice President, Human
Resources, Corporate Services, and Business Excellence. Prior to joining the
Company, she served five years at Cray Research as Vice President, Human
Resources. From June 1978 to January 1988, Ms. Barber was employed by
Honeywell, Inc., last serving as Director of Human Resources for the Military
Avionics Division.
Ms. Bornino joined the Company in August 1993 as Vice President, Corporate
Development and Planning. In October 1994, Ms. Bornino assumed responsibility
for the Specialty Storage Products Group as Vice President and General
Manager. Prior to joining the Company, she served as Director of Strategic
Planning for Silicon Graphics, Inc., from July 1992 to August 1993. From
November 1989 to July 1992, Ms. Bornino was employed by MIPS Computer Systems,
Inc., last serving as Director of Engineering. Prior to joining MIPS, she was
a general management consultant with the consulting firm of Arthur D. Little,
Inc., from June 1988 to November 1989.
Products
Quantum's major products are shown below and are described following the
chart.
Average
Capacity No. No. Seek Time
Products (MB) Disks Heads (millisec.) Interface Mfr
3.5-Inch:
Maverick 270 270 1 2 14 Fast ATA/SCSI-2 MKE*
Maverick 540 540 2 4 14 Fast ATA/SCSI-2 MKE
Lightning 365 365 1 2 11 Fast ATA/SCSI-2 MKE
Lightning 540 540 2 3 11 Fast ATA/SCSI-2 MKE
Lightning 730 730 2 4 11 Fast ATA/SCSI-2 MKE
Trailblazer 420 420 1 2 14 Fast ATA-2/SCSI-2 MKE
Trailblazer 850 850 2 4 14 Fast ATA-2/SCSI-2 MKE
Fireball 540 540 1 2 12 Fast ATA-2/SCSI-3 MKE
Fireball 1080 1080 2 4 12 Fast ATA-2/SCSI-3 MKE
3.5-Inch
High Capacity:
Capella VP31110 1,108 2 4 8.5 SCSI-2 Quantum
Capella VP32210 2,216 4 8 8.5 SCSI-2 Quantum
Grand Prix
XP32151 2,150 5 10 8.5 SCSI-3 Quantum
Grand Prix
XP34301 4,300 10 20 8.5 SCSI-3 Quantum
Atlas XP31070 1,075 3 5 8.5 SCSI-2 Quantum
Atlas XP32150 2,150 5 10 8.5 SCSI-2 Quantum
Atlas XP34300 4,300 10 20 8.5 CSI-2 Quantum
Empire 1080 1,080 4 8 9.5 SCSI-3 Quantum
Empire 2100 2,100 6 12 9.5 SCSI-3 Quantum
Average
Capacity No. No. Seek Time
Products (MB) Disks Heads (millisec.) Interface Mfr
2.5-Inch:
Daytona 256 256 2 4 17 Fast ATA/SCSI-2 MKE
Daytona 341 341 3 6 17 Fast ATA/SCSI-2 MKE
Daytona 514 514 4 8 17 Fast ATA/SCSI-2 MKE
Access Transfer
Capacity HeightAvg. Time Rate
Products (GB) (inches) (sec.) MB/sec.) Interface Mfr
Cartridge Tape Drives:
DLT 2000 201 3.2 45 2.51 SCSI-2 Quantum
DLT 4000 401 3.2 68 3.01 SCSI-2 Quantum
Load/Unload
Capacity Dimension No. of Time
Products (GB) (inches) Cartridges (sec.) Interface Mfr
Cartridge Tape Mini-Libraries:
DLT 2500 1001 11.8x16.3x10.5 5 20 SCSI-2 Quantum
DLT 4500 2001 11.8x16.3x10.5 5 20 SCSI-2 Quantum
DLT 2700 1401 10.7x8.9 x27 7 29 SCSI-2 Quantum
DLT 4700 2801 10.7x8.9 x27 7 29 SCSI-2 Quantum
1 With 2:1 data compression
Capacity Form Factor Avg. Access
Products (GB) (inches) Time Interface Mfr
Solid State Disks:
ESP510 107 5.25 <1 ms SCSI-2 Quantum
ESP530 267 5.25 <1 ms SCSI-2 Quantum
ESP540 428 5.25 <1 ms SCSI-2 Quantum
ESP580 856 5.25 <1 ms SCSI-2 Quantum
ESP3013 134 3.5 <100 ms SCSI-2 Quantum
ESP3026 268 3.5 <100 ms SCSI-2 Quantum
ESP5011 118 5.25 <100 ms SCSI-2 Quantum
ESP5047 475 5.25 <100 ms SCSI-2 Quantum
ESP5095 950 5.25 <100 ms SCSI-2 Quantum
Cap.(MB) Avg. Seek
Products Unformatted Height Read/Write Interface Mfr
Solid State Flash Memory Cards:
QCard 1 1 3.3 mm 250ns/25ms PCMCIA Type 1 Quantum
QCard 2 2 3.3 mm 250ns/25ms PCMCIA Type 1 Quantum
QCard 4 4 3.3 mm 250ns/25ms PCMCIA Type 1 Quantum
* Matsushita-Kotobuki Electronics Industries, Ltd., of Japan. See
"Manufacturing."
Quantum Maverick (trademark), Quantum Lightning (trademark), Quantum
Trailblazer (trademark) and Quantum Fireball (trademark) 3.5-Inch Desktop
Products:
Quantum's desktop 3.5-inch hard drives consist of the Quantum Maverick,
Quantum Lightning, Quantum Trailblazer and Quantum Fireball products. These
products are designed to meet the needs of desktop systems.
Quantum Maverick 270/540. Mass production of the Quantum Maverick
products began in May 1994. These drives provide ideal storage solutions for
desktop systems used in home and small business environments. The Quantum
Maverick drives, based on the earlier ProDrive LPS (trademark) Series, have
updated hardware and firmware features, enhanced performance, and high quality
and reliability.
Quantum Lightning 365/540/730. Quantum began mass production of these
products in June 1994. These high-performance disk drives are designed for
mid-range and high-end desktop systems. The drives enhance CD-ROM-equipped
80486, Pentium, and PowerMacintosh systems running powerful operating systems
and complex applications.
Quantum Trailblazer 420/850. Introduced in February 1995, the Quantum
Trailblazer products provide industry-leading storage solutions for entry-
level and mid-range desktop computer systems. The drives feature an innovative
mechanical platform that results in improved acoustics and performance-
enhancing electronics and firmware. New electronics support faster data
transfer rates off the disk.
Quantum Fireball 540/1080. Also announced in February 1995, the Quantum
Fireball hard drives feature leading areal density and innovative technology
for capacity-hungry desktop systems and servers. The products incorporate many
technology advances, including an advanced read channel, enhanced interfaces
to increase data transfer rates and firmware that minimizes command overhead.
Quantum Capella (trademark), Quantum Grand Prix (trademark), Quantum Atlas
(trademark) and Quantum Empire (trademark) 3.5-Inch High-Capacity Products:
Quantum's high-capacity 3.5-inch hard drives include the Quantum
Capella, Quantum Grand Prix, Quantum Atlas and Quantum Empire II products.
These disk drives are Quantum's most technologically advanced products and
meet the demanding needs of high-end desktop systems, workstations, storage
subsystems and servers.
Quantum Capella VP31110/VP32210. Mass production of these products,
which feature 1.1 gigabyte and 2.2 gigabyte capacities, began in March 1995.
The Quantum Capella drives are advanced products that incorporate
magnetoresistive (MR) head technology for improved recording technology. Low
operating acoustics and power make these drives ideal choices for networked
systems, workstations, desktop publishing systems, disk arrays and multimedia
computing systems.
Quantum Grand Prix XP32151/XP34301. Quantum began mass production of
these products in December 1994. The products feature high sustained data
rates and embedded servo technology to provide high performance for advanced
multimedia applications. The drives, offered in capacities of 2.1 gigabyte and
4.3 gigabyte, are designed for high-performance servers, disk arrays,
workstations and other high-end computers.
Quantum Atlas XP31070/XP32150/XP34300. Mass production of the Quantum
Atlas products began in December 1994. The drives, which feature an advanced
architecture and superior cache performance, meet the demanding requirements
of high-performance, high-capacity applications. Systems that can benefit from
the Quantum Atlas family's exceptional performance include disk arrays,
network file servers, workstations and high-performance desktop systems. The
drives are available in capacities of 1.0 gigabyte, 2.1 gigabyte and 4.3
gigabyte.
Quantum Empire 1080/2100. Mass production of the Quantum Empire drives
started in October 1993. The products, designed for workstations, servers and
disk arrays, combine fast sustained data transfer rates with high reliability.
They are ideally suited for storage-intensive applications such as multimedia,
networked databases and graphics. The drives are offered in 1.0 gigabyte and
2.1 gigabyte capacities.
Quantum Daytona (trademark) 2.5-Inch Products:
Quantum Daytona 256/341/514. The Quantum Daytona drives, which began
shipping in volume in February 1994, provide mass storage solutions for
subnotebook and full-featured notebook computers. All three Quantum Daytona
drives bring desktop system performance to notebook computing. Quantum Daytona
drives spin at a rate of 4,500 RPM, feature a typical seek time of 17
milliseconds and transfer data disk-to-buffer at 36 megabits per second.
Quantum DLT (trademark) 0.5-Inch Cartridge Tape Drives
Quantum DLT 2000/4000. The Quantum Digital Linear Tape (DLT) drives
began mass production in December 1993 and were part of the Digital
acquisition. DLT efficiently performs data back-up for mid-range and high-end
computer systems. With advanced linear recording technology and a highly
accurate tape guide system, the drives are ideally suited for mid-range
systems, network servers and high-end workstations and systems. Using data
compression techniques, the tape drives can store up to 40 gigabyte of data in
a single tape cartridge and transfer data at a sustained rate of up to 3.0
megabyte per second.
Quantum DLT (trademark) Tape Mini-Libraries
Quantum DLT 2500/4500/2700/4700. The Quantum DLT series are five- and
seven- cartridge library subsystems designed for high-capacity data backup
applications in the computer systems market. The five- and seven-cartridge
products began volume production in February 1994 and December 1993,
respectively, and were part of the Digital acquisition. At the heart of the
libraries, which are offered in rack-mounted or table-top models, are
Quantum's DLT 2000 and DLT 4000 tape drives. The five-cartridge Quantum DLT
2500/4500 products can store up to 200 gigabyte of data and the seven-
cartridge Quantum DLT 2700/4700 libraries can store a maximum of 280 gigabyte
of data.
Quantum ESP500, ESP3000 and ESP5000 Solid State Disks
Quantum ESP500/3000/5000. Solid state disks (SSDs) significantly improve
the execution speed of applications such as imaging, multimedia, video-on-
demand, on-line transaction processing, material requirements planning and
scientific modeling. In product development environments the products can
substantially shorten time-to-market. Quantum's SSDs fit any standard 3.5- or
5.25-inch storage slot and are used like magnetic disks, however, they achieve
near-instantaneous access times by eliminating the latency associated with
disk rotation and head seek. The Quantum ESP500 SSDs began mass production in
September 1993, and the Quantum ESP3000/5000 products were available in volume
in June 1995. These SSDs were acquired as part of the Digital acquisition.
Quantum QCard (trademark) Flash Memory Cards
Quantum QCard 1/2/4. These products are PCMCIA memory cards offered in
unformatted storage capacities of 1 megabyte, 2 megabyte and 4 megabyte. The
cards, which use non-volatile, solid-state technology, provide convenient mass
storage or extended memory capabilities to mobile computer users.
Product Development
Quantum operates in an industry characterized by rapid technological change
and shortening product life cycles. As a result, the Company's future is
dependent on its ability to develop new products, successfully introduce these
products to the market and ramp production to meet customer demands.
Accordingly, the Company is committed to the timely development of new
products and the continuing evaluation of new technologies. For the three
fiscal years ended March 31, 1995, 1994 and 1993, the Company's research and
development expenses were $169.3 million, $89.8 million and $63.0 million,
respectively. The increase in research and development expenses for the year
ended March 31, 1995, is primarily related to the acquired Businesses and
reflects spending for both the vertically integrated heads business and the
additional high capacity products which tend to be research and development
intensive.
The Company is currently concentrating its product development efforts on
broadening the existing disk and tape drive product lines through the
introduction of new product generations to mitigate the short product life
cycles. In addition, the Company designs and manufactures other mass storage
related technologies, including solid state memory devices, magnetic recording
head products and tape media. The Company expects that sales from new
products, including those products acquired from Digital, will account for a
significant portion of fiscal 1996 revenue and will continue to replace sales
from current products. Accordingly, failure of the Company to successfully
develop and manufacture new products and manage the transition of customers to
these products would adversely affect the Company's results of operations.
Manufacturing
The Company believes that its unique manufacturing strategy is a key to its
success. For production of its high-volume products, Quantum relies on
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), of Japan. MKE is a
substantial manufacturer of hard disk drives and other electronic components
and is a majority-owned subsidiary (57.3%) of Matsushita Electric Industries
Company, Ltd., of Japan. MKE produces hard disk drives for Quantum in Japan,
Singapore and Ireland. MKE's state-of-the-art manufacturing process is highly
automated, employing integrated computer networks and advanced control
systems. During fiscal 1995, approximately 80% of the Company's sales were
derived from products manufactured by MKE, a decline from 90% of fiscal 1994
sales. The decline in MKE products as a percentage of sales is a result of
the increase in consolidated sales due to the products acquired from Digital
and Quantum's manufacturing of those products. Quantum uses its own state-of-
the-art manufacturing facility at its headquarters site in California and at
an acquired site in Colorado to manufacture its higher capacity, more
technically complex products. In the acquisition Quantum acquired
manufacturing plants in Malaysia and Indonesia, where a significant portion of
the disk drive and head assembly manufacturing, respectively, will eventually
take place. Quantum's product design efforts are integrated with the design of
the manufacturing process, enabling the Company to rapidly achieve high-
volume, high-quality production to meet customer requirements.
The Company and MKE purchase components, some of which are made to the
Company's specifications, from outside vendors. Most of the components used
in the Company's products are available from more than one supplier. In the
past, limited availability of certain key components has constrained the
Company's revenue growth. There can be no assurance that similar shortages
will not recur in the future, and the Company's inability to obtain essential
components or to qualify additional sources as necessary, if prolonged, could
have a material adverse effect on the Company's results of operations.
The Company and MKE have had a continuous relationship since 1984. The
Company's master agreement with MKE, which covers the general terms of the
business relationship, was renegotiated during fiscal 1993 for a period of
five years. The current agreement between the Company and MKE gives MKE the
exclusive worldwide right to manufacture, and the Company the exclusive
worldwide right to design and market, certain products as agreed between the
companies. The Company provides MKE with forecasts of its requirements and
places purchase orders approximately three months prior to delivery. The
Company has only a limited right to modify these purchase orders. The
Company's transactions with MKE are denominated in U.S. dollars with prices
for product purchases negotiated periodically, generally on a semiannual
basis. Thus, fluctuations in the exchange rate have no material short term
impact on Quantum's results of operations. However, such fluctuations may
impact future negotiated prices.
In conjunction with the acquisition of the thin film heads business from
Digital, the Company assumed Digital's relationship with Lafe Computer
Magnetics Ltd. ("Lafe") of China and is in the process of negotiating a
manufacturing agreement. In the event Lafe is unable to supply manufacturing
services the Company could experience an interruption in business. The
Company's transactions with Lafe are denominated in U.S. dollars, therefore,
fluctuations in the exchange rate have no material short term impact on
Quantum's results of operations. However, such fluctuations may impact future
negotiated prices.
The Company's current product manufacturing relies on thin film head
technology. Magnetoresistive ("MR") recording head technology is expected to
be the next generation of technology after thin film heads and the Company is
investing in the development of MR head technology through its purchase of the
interest in QPC. There can be no assurance as to the timing of the transition
from thin film heads to MR recording heads.
Sales and Marketing
The Company markets its products directly to major OEMs and distributors
through its worldwide sales force. Sales to major customers, as a percentage
of consolidated sales, for the fiscal years ended 1995, 1994 and 1993 were as
follows:
1995 1994 1993
Compaq Computer, Inc. 16% 10% *
Apple Computer, Inc. 12% 22% 20%
* sales represented less than 10% of consolidated sales for the period
In conjunction with the acquisition, the Company and Digital signed a multi-
year supply agreement providing the Company a substantial percentage of
Digital's internal hard disk drive requirements for its Storageworks
subsystems and core computer systems businesses. Although sales to Digital
for fiscal 1995 represented less than 10% of consolidated sales, Digital
represented 14% of sales during the second half of fiscal 1995, as a result of
the supply agreement. There can be no assurance that Digital's future
requirements for hard disk products will increase or remain at the current
levels. The Company has no other long term supply commitments with these
customers. Any significant decrease in sales to these customers, or the loss
of one or all of these customers, could have a material adverse effect on the
Company's results of operations.
Quantum maintains a European regional headquarters in Neuchatel, Switzerland,
an Asia-Pacific regional headquarters in Singapore, a Japanese headquarters in
Tokyo and sales offices throughout the world. International sales, which
include sales to foreign subsidiaries of United States companies, accounted
for 53% of sales in both fiscal 1995 and 1994, and 48% of sales in fiscal
1993. See also Note 12 in the Notes to Consolidated Financial Statements.
Warranty and Service
Quantum generally warrants its products against defects in design, materials
and workmanship for one to five years. The Company believes its accrual for
warranty liability is adequate. The Company maintains in-house service
facilities for refurbishment or repair of its products in Milpitas,
California, Colorado Springs, Colorado and Penang, Malaysia. In fiscal 1995
the Company established the worldwide repair facility in Penang, Malaysia and
closed the Frankfurt, Germany facility.
Backlog
The Company's six-month order backlog at May 8, 1995, was approximately $820
million compared to approximately $574 million at May 2, 1994. Backlog
increased year-to-year as a result of increased customer demand, primarily for
the Company's new products. Backlog includes only firm orders for which the
customers have released a specific purchase order and specified a delivery
schedule.
Lead time for the release of purchase orders depends upon the scheduling
practices of the individual customer, and the rate of new order bookings
varies from month to month. For this reason, and the possibility of customer
changes in delivery schedules or cancellations of orders, Quantum's backlog as
of any particular date may not be representative of actual sales for any
succeeding period. In addition, it has been the Company's practice to permit
customers to increase or decrease (including canceling) orders for products
with relatively short notice to the Company. The Company believes that this
practice enables customers to improve the management of their inventory,
minimizes the Company's exposure to disputed accounts receivable and improves
the Company's relationships with customers.
Competition
Competition in the hard disk drive industry is intense and is based
principally on time to market, product availability, reliability, performance,
product capacity and price. The Company believes that it competes favorably
in these areas although certain of its competitors have greater financial,
marketing and technological resources.
Quantum faces intense direct competition for its 3.5-inch products from
companies such as Conner Peripherals, Maxtor, Seagate Technology and Western
Digital. The Company expects continued strong competition in the 3.5-inch
form factor in all ranges of capacity and performance. In the 2.5-inch hard
disk drive market, the Company competes primarily with Conner Peripherals,
JVC, Maxtor, Seagate Technology, Toshiba and Western Digital. The Company
also competes indirectly with disk drive divisions of large computer
manufacturers such as Hewlett-Packard and IBM. These companies also have a
presence in the OEM market. Should other major OEMs develop internal disk
drive manufacturing capabilities, the demand for the Company's products would
be reduced.
The Company also competes with companies offering products based on
alternative data storage and retrieval technologies. The Company competes
with Exabyte Corporation in the tape drive and media market. Quantum
currently does not market thin film or MR heads to outside companies.
Technological advances in magnetic, optical or other technologies, or the
development of new technologies, could result in the introduction of
competitive products with superior performance to and substantially lower
prices than the Company's products, which could adversely affect the Company's
results of operations.
Patents and Licenses
Quantum has been granted and/or owns by assignment 332 United States patents,
including patents originally issued to its former subsidiary Plus Development
Corporation, and patents originally issued to Digital Equipment Corporation.
As a general rule, these patents have 17-year terms from the date of issuance.
Quantum also has certain foreign patents and applications relative to certain
of the products and technologies. Although Quantum believes that its patents
and applications have significant value, the rapidly changing technology of
the computer industry makes Quantum's future success dependent primarily upon
the technical competence and creative skills of its personnel rather than on
patent protection. See also "Legal Proceedings."
Several companies and individuals have approached Quantum concerning the need
for a license under patented technology that Quantum has assertedly used, or
is assertedly using, in the manufacture and sale of one or more of Quantum's
products. Quantum conducts ongoing investigations into these assertions and
presently believes that any licenses ultimately determined to be required
could be obtained on commercially reasonable terms. However, there is no
assurance that such licenses are presently obtainable, or if later determined
to be required, could be obtained. See also "Legal Proceedings."
Quantum has a cross-licensing agreement with IBM that commenced on May 10,
1986, and runs until expiration of the last of the licensed IBM patents
(including patents issued and issuing on patent applications filed prior to
January 1, 1991). This agreement enables Quantum to use certain patents owned
by IBM, and it enables IBM to use certain patents owned by Quantum.
Quantum also has a patent cross-licensing agreement with Seagate Technology
that commenced on July 7, 1992, and runs until expiration of the last of the
licensed Seagate patents (including patents issued and issuing on patent
applications filed prior to January 1, 2002). This agreement enables Quantum
to use certain patents owned by Seagate, and it enables Seagate to use certain
patents owned by Quantum.
Quantum also has a patent cross-licensing agreement with Hewlett-Packard that
commenced on September 21, 1993, and runs until expiration of the last of the
licensed Hewlett-Packard patents (including patents issued and issuing on
patent applications which are filed during the five-year period which began on
September 22, 1993). This agreement enables Quantum to use certain patents
owned by Hewlett-Packard, and it enables Hewlett-Packard to use certain
patents owned by Quantum.
Quantum has also entered into limited patent cross-license and license
agreements with Integral Peripherals, Inc., and Syquest Technology.
Employees
At March 31, 1995, the Company employed 7,265 persons. In the advanced
electronics industry, competition for highly skilled employees is intense.
Quantum believes that a great part of its future success will depend on its
continued ability to attract and retain qualified employees. None of the
Company's employees are represented by a trade union, and the Company has
experienced no work stoppage. Quantum believes that its employee relations
are favorable.
Item 2.
Properties
During fiscal 1992, the Company moved its Corporate headquarters and
manufacturing operations to a new 37-acre leased campus complex in Milpitas,
California which currently includes five buildings. During fiscal 1995, the
Company completed the construction of a new repair facility in Malaysia and as
part of the asset acquisition from Digital, the Company acquired two buildings
and the associated 180-acre parcel of land in Shrewsbury, Massachusetts, as
well as manufacturing plants in Malaysia and Indonesia. The Shrewsbury
facilities are currently utilized for research and development activities, as
well as the production of recording heads. The plants in Malaysia and
Indonesia will eventually manufacture a significant portion of the disk drive
and head assemblies, respectively. Currently all of the Company's facilities
are fully utilized. Additionally, the Company leases office and warehouse
space and repair and manufacturing facilities throughout the world, typically
on a short-term basis. The Company believes that its configuration and
warehouse facilities are adequate to support customer requirements during
fiscal 1996. The aggregate lease payments for all facilities in fiscal year
1995 were approximately $18.8 million.
Item 3.
Legal Proceedings
On February 26, 1993, Quantum commenced a declaratory judgment lawsuit against
Rodime PLC of Glasgow, Scotland, in the U.S. District Court for the District
of Minnesota. Minnesota is the site of Rodime's only U.S. office. Rodime has
counterclaimed by asserting that certain Quantum 3.5-inch hard disk drive
products infringe its U.S. Patent No. 4,638,383 and is seeking royalty
payments under that patent. That patent purports to cover hard disk drives
using 3.5-inch disks and specifies an architecture including attributes such
as a head positioning mechanism consisting of a rotary actuator moved by an
open loop stepper motor. Quantum's complaint alleges that the Rodime patent
is invalid and unenforceable, and that it has not been infringed by Quantum.
On April 11, 1994, the United States District Court entered a summary judgment
in Quantum's favor, ruling that claims 4, 6, 7, 9, 14 and 19-27 of the Rodime
patent are invalid because they were impermissibly broadened during earlier
patent reexamination proceedings conducted by the U.S. Patent and Trademark
Office. On November 8, 1994, Rodime's appeal was argued before the United
States Court of Appeals for the Federal Circuit. Quantum is awaiting the
appellate court's decision. Quantum believes that this ruling, if upheld on
appeal, is fully dispositive of its dispute with Rodime. Due to the inherent
uncertainties of litigation, there can be no assurance that such ruling will
be affirmed.
In the opinion of management, the amount of ultimate liability, if any, with
respect to these actions will not materially affect the financial position or
results of operations or liquidity of the Company.
Item 4.
Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters
Quantum Corporation's common stock has been traded in the over-the-counter
market under the NASDAQ symbol QNTM since the Company's initial public
offering on December 10, 1982.
The prices per share reflected in the table represent the range of high and
low closing prices in the NASDAQ National Market System for the quarter
indicated.
Fiscal 1995 High Low
Fourth quarter ended March 31, 1995 15 13/16 13 7/8
Third quarter ended January 1, 1995 16 3/4 13 7/8
Second quarter ended October 2, 1994 17 5/8 12 13/16
First quarter ended July 3, 1994 18 3/16 11 3/4
Fiscal 1994 High Low
Fourth quarter ended March 31, 1994 19 1/4 14 1/8
Third quarter ended January 2, 1994 14 3/4 9 7/8
Second quarter ended October 3, 1993 13 1/2 9 1/2
First quarter ended July 4, 1993 14 1/2 10 1/2
Historically, the Company has not paid cash dividends on its common stock and
the Company's debt agreement currently prohibits the Company from paying
dividends while the debt is outstanding.
As of May 1, 1995, there were approximately 2,036 shareholders of record of
the Company.
Item 6.
Selected Consolidated Financial Data
(In thousands except per Year Ended March 31,(ii)
share amounts, number of
employees and ratios)
1995(i) 1994 1993 1992 1991
Sales $3,367,984 $2,131,054 $1,697,240 $1,127,733 $ 877,733
Net income $ 81,591 $ 2,674 $ 93,811 $ 46,845 $ 73,881
Net income per share
Primary $ 1.72 $ .06 $ 2.05 $ 1.05 $ 1.69
Fully diluted $ 1.52 $ .06 $ 1.77 $ 1.04 $ 1.68
Total assets $1,481,028 $ 997,438 $ 926,633 $ 550,864 $ 489,420
Total long-term debt $ 327,500 $ 212,500 $ 212,500 - -
Shareholders' equity
per share $ 11.04 $ 9.22 $ 9.19 $ 7.19 $ 6.09
Number of employees 7,265 2,984 2,455 1,752 1,445
Sales per average number
of employees $ 763 $ 772 $ 778 $ 713 $ 706
Ratio of earnings to
fixed charges 6.0 1.2 9.6 8.1 19.1
(i) On October 3, 1994, Quantum acquired portions of Digital. The
acquisition is not reflected in the financial statements prior to fiscal 1995,
thus the results for fiscal 1995 are not comparable to the results prior to
fiscal 1995. See Note 13 in Notes to Consolidated Financial Statements.
(ii) No cash dividends were paid for the years presented.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Pursuant to a Stock and Asset Purchase Agreement (the "Agreement") dated July
18, 1994, between Digital Equipment Corporation ("Digital") and Quantum,
Digital agreed to sell to Quantum, effective October 3, 1994, tangible assets
consisting principally of inventory, property, plant and equipment, and
certain contract rights and intellectual property of the Disks, Heads and
Tapes Business (the "Business") of the Storage Unit of Digital in exchange for
consideration totaling $350.5 million. Included in the sales were Digital's
interest in Digital Equipment Storage Products (Malaysia) Sdn. Bhd. and its
81% interest in Rocky Mountain Magnetics, Inc.("RMMI") (See Note 13 in Notes
to Consolidated Financial Statements). Subsequently, RMMI's name was changed
to Quantum Peripherals Colorado, Inc. ("QPC"). The Business acquired was
involved in the design, manufacture and marketing of computer disk drive, tape
drive, tape media, solid state memory device and magnetic recording head
products and optical storage devices and related technology other than CD-ROM.
Quantum's results of operations for fiscal 1995 reflect a significant increase
in sales over the prior fiscal year. Sales for the year ended March 31, 1995
grew 58%, to $3.4 billion, compared to sales of $2.1 billion recorded in
fiscal 1994. This increase in sales is attributable to the newly acquired
products as well as increased unit shipments of existing Quantum products,
offset by a decline in average unit sales prices. Unit shipments for fiscal
1995 increased 50% compared to fiscal 1994 as a result of the expansion of
product line offerings, including the acquired products. Historically, a
limited number of the 3.5-inch disk drive products have contributed the
majority of the consolidated sales for the Company. The Company anticipates
that this trend will continue in the future.
Quantum's results of operations for fiscal 1994 reflected a significant
increase in sales over the prior fiscal year. Sales for the year ended March
31, 1994 grew 26%, to $2.1 billion, compared to sales of $1.7 billion recorded
in fiscal 1993. This increase in sales was the result of an increase in unit
shipments offset by a significant decline in average unit sales prices. On a
proforma basis, Quantum's sales for fiscal 1994 would have been $3.0 billion
had the Digital acquisition occurred at the beginning of fiscal 1994.
The Company continues to focus on meeting the needs of major OEM customers.
Sales to the top five OEM customers represented 46% of sales for fiscal 1995,
compared to 47% and 45% for fiscal 1994 and 1993, respectively. Sales to
Apple Computer, Inc. were $404 million or 12%, of consolidated sales in fiscal
1995, compared to $458 million or 22% of sales in fiscal 1994 and $333 million
or 20% of sales in fiscal 1993. Sales to Compaq Computer, Inc. were $536
million or 16%, of consolidated sales in fiscal 1995, compared to $220 million
or 10%, of sales in fiscal 1994 and were less than 10% in fiscal 1993.
Although sales to Digital for fiscal 1995 were less than 10% of consolidated
sales, sales to Digital for the second half of the year were 14% of sales. In
conjunction with the acquisition, the Company and Digital signed a multi-year
supply agreement providing the Company a substantial percentage of Digital's
internal hard disk drive requirements for its Storageworks subsystems and core
computer systems businesses. There can be no assurance that Digital's future
requirements for hard disk products will increase or remain at the current
levels. Any significant decrease in sales to a major customer or the loss of
a major customer could have a material adverse effect on the Company's results
of operations.
Sales to the distribution channel were 25% of consolidated sales or $856
million for fiscal 1995, compared to 20%, or $428 million for fiscal 1994 and
33% or $568 million for fiscal 1993. Sales increased in the distribution
channel during fiscal 1995 due to the increase in available inventory supply
and demand for the acquired products.
Gross margin increased to 17% for fiscal 1995, compared to 11% and 19% for
fiscal 1994 and 1993. The increase in gross margin in fiscal 1995 is
attributable to the transition to the newer and more cost efficient products,
which began in the second half of fiscal 1994. These product transitions,
along with stabilizing industry conditions, contributed to an increase in
gross margin during the latter part of fiscal 1994 and during fiscal 1995.
The decrease in gross margin during fiscal 1994 was attributable to intense
pricing pressures in both the distribution and OEM sales channels resulting
primarily from an industry-wide oversupply of disk drives, particularly during
the second quarter.
The Company is currently transitioning customers to newer, higher gross
margin products across the desktop and high-end portions of its business.
These transitions have not occurred as rapidly as the Company anticipated
because of component shortages and qualification delays, which negatively
impacted the Company's revenue and gross margin in its first fiscal
quarter. It is anticipated that the results of operations for the first
quarter, when reported, will be below those of the March quarter in both
revenue and profitability. In the future, gross margin may be affected by
pricing and other competitive conditions, as well as the Company's ability
to integrate the Digital businesses including phasing out the older, lower
gross margin product lines and transitioning the manufacturing of its high-
end disk drive products to its lower-cost facility.
Over the past ten years, Quantum has established a strong business
relationship with Matsushita Kotobuki Electronics Industries, Ltd. ("MKE") of
Japan. This relationship has been built on Quantum's engineering and design
expertise and MKE's high-volume, high-quality manufacturing expertise. The
Company's master agreement with MKE, which covers the general terms of the
business relationship, was renegotiated during fiscal 1993 for a period of
five years. During fiscal 1995, approximately 80% of the Company's sales were
derived from products manufactured by MKE, a decline from 90% of fiscal 1994
sales. The decline in MKE products as a percentage of sales is a result of
the increase in consolidated sales due to the products acquired from Digital
and Quantum's manufacturing of those products. There can be no assurance that
the increase in Quantum manufactured products will not adversely influence
the gross margin rate. In the event MKE is unable to supply such products or
increases its prices for manufacturing services, the Company's results of
operations would be adversely affected. The Company's transactions with MKE
are denominated in U.S. dollars with prices for product purchases negotiated
periodically, usually on a semiannual basis. Thus, fluctuations in the
exchange rate have no material short-term impact on Quantum's results of
operations. However, such fluctuations may impact future negotiated prices.
During fiscal 1995, the Company invested $169 million, or 5.0% of sales, in
research and development, compared to $90 million, or 4.2% of sales, in fiscal
1994 and $63 million, or 3.7% of sales, in fiscal 1993. The increase in
fiscal 1995 is due primarily to the acquired Businesses and reflects spending
for both the vertically integrated heads business and the additional high
capacity disk drive products, which tend to be more research and development
intensive. The increase from fiscal 1993 to fiscal 1994 reflect the increased
headcount and higher expenses related to preproduction activity for an
increased number of new products. With the acquisition of the acquired
Businesses the Company expects a continued higher level of expenditures for
research and development and that research and development expenses will
represent a higher percentage of sales on an ongoing basis. The hard disk
drive industry is subject to rapid technological advances and the future
success of the Company is dependent upon continued development and timely
introduction of new products and technologies.
Sales and marketing expenses in fiscal 1995 were $108 million, or 3.2% of
sales, compared to $74 million, or 3.5% of sales, in fiscal 1994 and $77
million, or 4.5% of sales, in fiscal 1993. The increase in absolute dollar
expenditures during fiscal 1995 is related to the Digital acquisition and the
costs associated with supporting the higher sales volume and the expanded
Company infrastructure. Sales and marketing expenses as a percentage of sales
declined in fiscal 1995 due to the increase in consolidated sales. The
decrease in sales and marketing expenses from fiscal 1993 to fiscal 1994 was
attributable to lower co-op marketing and channel development expenses as a
result of a decline in sales to the distribution channel. These decreases
were partially offset by costs associated with supporting the higher OEM sales
volume and expanding the Company's international infrastructure. The Company
anticipates a continued higher level of absolute dollar spending for sales and
marketing related to the Digital acquisition, with expenditures as a
percentage of sales remaining relatively consistent.
General and administrative expenses in fiscal 1995 were $52 million, or 1.5%
of sales, compared to $42 million, or 2.0% of sales, in fiscal 1994, and $34
million, or 2.0% of sales, in fiscal 1993. The absolute dollar increase in
general and administrative expenses between fiscal 1994 and fiscal 1995 is
primarily related to the acquired Businesses and the infrastructure required
to maintain those businesses. The absolute dollar increase in general and
administrative expenses between fiscal 1993 and 1994 reflects the increased
costs necessary to support the Company's international growth, including the
establishment of European and Asia-Pacific regional headquarters operations in
Switzerland and Singapore during fiscal 1993. Fiscal 1994 was the first full
year of operations at these regional headquarters. The Company expects a
continued higher level of general and administrative absolute dollar spending
as a result of the Digital acquisition, with expenditures as a percentage of
sales remaining relatively consistent.
As a result of the acquisition of the acquired Businesses, the Company
incurred a charge of $73 million, which included $68 million of purchased in-
process research and development and $5 million in related merger costs.
Merger costs are comprised of incremental integration costs incurred through
January 1, 1995.
Included in the Company's fiscal 1994 results of operations are restructuring
and non-recurring charges of $22.8 million, which were comprised of: the
write-off of goodwill and certain inventory associated with its former
subsidiary, Plus Development of $7.7 million; the Company's reduction in work
force of $1.5 million; accelerated product transitions of $8.0 million; the
consolidation of sales offices and other facilities of $5.1 million; and other
charges of $0.5 million. Included in the charges for the consolidation of
other facilities was the consolidation of repair facilities from three
facilities worldwide into a single location in Malaysia. The Company had
substantially completed the restructuring as of March 31, 1994.
Net interest and other income and expense for fiscal 1995 was $15.8 million
net expense compared to $6.7 million net expense and $2.3 million net expense
for fiscal 1994 and 1993, respectively. The increase in net expense in fiscal
1995 can be attributed to higher interest expense resulting from the
acquisition financing and lower cash balances due to cash used for the
acquisition. The increase in net expense in fiscal 1994 over 1993 is due
mainly to lower interest income resulting from lower interest rates and lower
cash balances.
The Company anticipates that the acquisition of the acquired Businesses will
have a future affect on both operating and net income resulting from the
amortization of intangibles, depreciation of the acquired fixed assets, and
interest expense on the debt. As detailed in Note 13 in Notes to Consolidated
Financial Statements, the purchase price has not been finalized, although all
other aspects of recording the acquisition are final. While management
believes it is contractually entitled to a reduction in purchase price of
approximately $5 million, it is only through ongoing settlement discussions,
and possibly arbitration, that any reduction will be realized. The timing of
the resolution is not reasonably predictable. The Company estimates that
charges for the amortization of intangibles and depreciation of the acquired
fixed assets will approximate $55 million over the next three fiscal years.
Interest expense on the debt will be dependent on the loan balance and
interest rate (See Note 6 in Notes to Consolidated Financial Statements).
The effective tax rate for fiscal 1995, excluding the write-off of the
purchased research and development, was 30% compared to 27% and 36% for the
fiscal years 1994 and 1993, respectively. The impact of the purchased
research and development write-off increases the tax rate for fiscal 1995 to
44%, as there is minimal tax benefit associated with the acquired technology
that will be utilized offshore. A valuation allowance has been recorded to
offset the deferred tax asset for the intangibles acquired from Digital, which
will be amortized through fiscal 2010. The higher effective tax rate of 30%
for 1995, excluding the write-off of the purchased research and development,
as compared to 1994, is attributed primarily to the lower percentage benefit
of foreign earnings taxed at less than the U.S. rate.
The Company recorded net income for fiscal 1995 of $81.6 million compared to
net income of $2.7 million and $94 million for fiscal 1994 and 1993,
respectively. The increase in net income from fiscal 1994 to fiscal 1995 is
primarily a result of higher unit shipments and revenue in fiscal 1995 offset
by acquisition related expenditures, and fiscal 1994 including a $22.8 million
charge for expenses associated with certain non-recurring write-offs and
restructuring of the Company. The decrease in net income from fiscal 1993 to
fiscal 1994 is due to the reduced gross margin resulting from lower average
sales prices combined with the $22.8 million restructuring charge.
During the period covered by the accompanying financial statements, the
Company has used derivative financial instruments on a limited basis only (See
Note 2 in Notes to Consolidated Financial Statements). The recent acquisition
of certain of Digital's offshore operations and the related debt financing
utilized, as well as other transitions related to the acquisition, will
necessitate reassessing whether further management of interest rate and
foreign currency rate fluctuations via derivative instruments is warranted.
Quantum operates in an extremely competitive industry and its rapid growth has
been the result of the Company's ability to identify customer needs and
develop quality products to meet those requirements. The Company expects that
sales from new products will continue to account for a majority of sales in
1996 and will replace sales of some current products. The Company's ability
to produce new products economically and manage the transition of customers to
these new products is essential for continued success. The hard disk drive
industry is characterized by increasingly shorter product life cycles and is
dependent on the strength of unit demand in the personal computer market. As
a result, the industry tends to experience periods of excess product inventory
and intense price competition. These and other factors may affect the
Company's results of operations, and past financial performance should not be
considered a reliable indicator of future performance. Investors should not
use historical trends to anticipate results of trends in future periods.
Liquidity and Capital Resources
At March 31, 1995, the Company had $188 million in cash and cash equivalents,
compared to $330 million at March 31, 1994, which included short-term
marketable securities. The decrease is due primarily to cash used for the
Digital acquisition, as well as the increase in accounts receivable and
investments in capital equipment.
On October 3, 1994, the Company purchased the acquired Businesses from
Digital. The purchase was financed with cash, bank debt and a note to Digital
for $70 million. The note to Digital was subsequently paid.
The bank debt consists of a three year $350 million senior credit facility
structured as a $225 million revolving credit line and a $125 million term
loan.
The revolving credit will be governed by a borrowing base of eligible accounts
receivable and inventory, and the term loan amortizes in five equal semiannual
installments commencing twelve months from closing. The borrowings, at the
option of the Company, could have interest rates of either LIBOR plus a margin
or a base rate. The facility is secured by all of the Company's domestic
assets and 66% of the Company's ownership of certain of its foreign
subsidiaries.
As of March 31, 1995, total bank debt was $165 million with a weighted average
interest rate of approximately 7.9%. At March 31, 1995, the Company also had
$212.5 million of subordinated debentures outstanding at an interest rate of 6
3/8%.
At this time, the Company expects to spend approximately $245 million for
leasehold improvements, capital equipment and expansion of the Company's
facilities during fiscal 1996. Over the next twelve months, the Company
anticipates a significant amount of additional capital expenditures will be
required to ramp the Asia manufacturing facilities and to support the
recording heads business of the acquired Businesses. In conjunction with the
Digital acquisition, the Company recorded an accrual for exit costs related to
exiting facilities and operations acquired from Digital (See Note 13 in Notes
to Consolidated Financial Statements). During fiscal 1995 cash outlays
related to the exit activities were $1.8 million. The Company anticipates
that cash outlays during fiscal 1996 for the exit activities will be
approximately $23 million. The Company believes that its credit facilities,
as well as anticipated future cash flows from operations, will be sufficient
to meet all currently planned expenditures and sustain operations during the
next fiscal year.
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Page
Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Income for each of the
three years in the period ended March 31, 1995
Consolidated Balance Sheets at March 31, 1995 and 1994
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1995
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended
March 31, 1995
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
Quantum Corporation
We have audited the accompanying consolidated balance sheets of Quantum
Corporation as of March 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 1995. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Quantum Corporation at March 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended March 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Palo Alto, California
April 28, 1995
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data) Year ended March 31,
1995 1994 1993
Sales $3,367,984 $2,131,054 $1,697,240
Cost of sales 2,804,271 1,892,211 1,374,422
563,713 238,843 322,818
Operating expenses:
Research and development 169,282 89,837 63,019
Sales and marketing 108,290 74,015 77,085
General and administrative 52,134 41,910 33,849
Purchased research and development and
in merger costs 72,945 - -
Restructuring and non-recurring charges - 22,753 -
402,651 228,515 173,953
Income from operations 161,062 10,328 148,865
Interest and other income 7,258 8,217 12,077
Interest expense (23,015) (14,882) (14,363)
Income before income taxes 145,305 3,663 146,579
Income tax provision 63,714 989 52,768
Net income $ 81,591 $ 2,674 $ 93,811
Net income per share:
Primary $ 1.72 $ .06 $ 2.05
Fully diluted $ 1.52 $ .06 $ 1.77
Common and common equivalent shares:
Primary 47,319 44,967 45,728
Fully diluted 59,038 44,967 57,499
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) March 31 March 31
1995 1994
Assets
Current assets:
Cash and cash equivalents $ 187,753 $ 217,531
Marketable securities - 112,508
Accounts receivable, net of allowance for
doubtful accounts of $11,963 in 1995 and
$9,391 in 1994 497,887 324,376
Inventories 324,650 194,083
Deferred taxes 44,054 32,821
Other current assets 35,580 14,365
Total current assets 1,089,924 895,684
Property, plant and equipment, less
accumulated depreciation 280,099 85,874
Purchased intangibles, net 95,818 1,295
Other assets 15,187 14,585
$1,481,028 $ 997,438
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 355,117 $ 267,189
Accrued warranty expense 57,001 55,617
Accrued compensation 54,917 15,315
Income taxes payable 17,566 -
Accrued exit costs 32,213 -
Short-term debt 50,000 -
Other accrued liabilities 77,227 35,545
Total current liabilities 644,041 373,666
Subordinated debentures 212,500 212,500
Long-term debt 115,000 -
Commitments and contingencies (Notes 10 and 11) - -
Shareholders' equity:
Preferred stock, $.01 par value; authorized:
4,000,000 shares; issued: none in 1995 and 1994 - -
Common stock, $.01 par value; authorized:
150,000,000 shares; issued and outstanding:
46,164,295 in 1995 and 44,603,808 in 1994 461 446
Capital in excess of par value 140,693 124,084
Retained earnings 368,333 286,742
Total shareholders' equity 509,487 411,272
$1,481,028 $ 997,438
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended March 31,
1995 1994 1993
Cash flows from operating activities:
Net income $ 81,591 $ 2,674 $ 93,811
Adjustments to reconcile net income to
net cash provided by (used in)
operations:
Depreciation and amortization 53,312 29,340 26,929
Write-off of goodwill - 6,338 -
Purchased research and development 67,184 - -
Changes in assets and liabilities:
Accounts receivable (173,511) (57,382) (72,644)
Inventories 16,085 29,079 (135,787)
Accounts payable 87,928 51,744 44,099
Income taxes payable 17,566 (19,026) 2,128
Accrued warranty expense 1,384 13,207 12,843
Other assets and liabilities 9,517 15,316 (1,470)
Net cash provided by (used in)
operating activities 161,056 71,290 (30,091)
Cash flows from investing activities:
Purchases of marketable securities (105,474) (134,581) (434,797)
Proceeds from sales and maturities of
marketable securities 217,982 192,407 351,228
Investment in property and
equipment, net (128,170) (38,372) (36,055)
Purchase of Digital Equipment's Data
Storage Business (285,171) - -
Net cash provided by (used in)
investing activities (300,833) 19,454 (119,624)
Cash flows from financing activities:
Proceeds from revolving line of credit
and term loan borrowings 220,500 - -
Principal payments on short term note (70,000) - -
Principal payments on revolving line (55,500) - -
Repurchase of common stock - (17,479) (19,868)
Proceeds from issuance of common stock 14,999 22,428 10,095
Net proceeds from issuance of
convertible subordinated debentures - - 206,840
Net cash provided by financing activities 109,999 4,949 197,067
Increase (decrease) in cash and
cash equivalents (29,778) 95,693 47,352
Cash and cash equivalents at beginning
of year 217,531 121,838 74,486
Cash and cash equivalents at end of year $ 187,753 $ 217,531 $ 121,838
Supplemental disclosure of cash flow
information:
Issuance of note for acquisition of
Digital Equipment's Data Storage
Business $ 70,000 - -
Cash paid during the year for:
Interest $ 21,113 $ 13,707 $ 7,939
Income taxes $ 47,310 $ 18,100 $ 59,738
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital
Common Stock in excess Retained
(In thousands) Shares Amount of par value Earnings Total
Balances at March 31, 1992 42,893 $429 $88,582 $219,378 $308,389
Shares repurchased in the
open market (1,500) (15) (5,211) (14,642) (19,868)
Shares repurchased from
employees (29) - (104) (358) (462)
Shares issued under employee
stock option plans 1,449 14 5,784 - 5,798
Shares issued under employee
stock purchase plan 509 5 4,754 - 4,759
Tax benefits related to stock
option plans - - 5,811 - 5,811
Net income for year ended
March 31, 1993 - - - 93,811 93,811
Balances at March 31, 1993 43,322 433 99,616 298,189 398,238
Shares repurchased in the open
market (1,500) (15) (3,494) (13,970) (17,479)
Shares repurchased from
employees (11) - (63) (151) (214)
Shares issued under employee
stock option plans 2,058 21 15,581 - 15,602
Shares issued under employee
stock purchase plan 735 7 6,251 - 6,258
Tax benefits related to stock
option plans and other - - 6,193 - 6,193
Net income for year ended
March 31, 1994 - - - 2,674 2,674
Balances at March 31, 1994 44,604 446 124,084 286,742 411,272
Shares issued under employee
stock option plans, net 691 6 6,709 - 6,715
Shares issued under employee
stock purchase plan 869 9 8,275 - 8,284
Tax benefits related to stock
option plans - - 1,625 - 1,625
Net income for year ended
March 31, 1995 - - - 81,591 81,591
Balances at March 31, 1995 46,164 $461 $140,693 $368,333 $509,487
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of significant accounting policies
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements.
These policies are in conformity with generally accepted accounting
principles.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Quantum Corporation and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Revenue recognition: Revenue from sales of products is recognized upon
shipment to customers with provision made for estimated returns.
Foreign currency transactions and translation: A significant percentage of the
Company's sales are made to customers in non-U.S. locations, and a significant
percentage of the Company's products are manufactured by MKE in Japan.
However, the majority of the Company's transactions are denominated in U.S.
dollars. Accordingly, the application of SFAS No. 52, "Foreign Currency
Transactions," to the Company's historical financial statements has not
resulted in transaction or translation gains or losses which are material to
the Company's consolidated financial statements for any year presented. The
effect of foreign
currency exchange rate fluctuations on cash flows was also not material for
any year presented.
Net income per share: Net income per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding.
Net income per share computed on a fully diluted basis assumes conversion of
the Company's outstanding 6 3/8% convertible subordinated debentures having a
principal value of $212.5 million. For fiscal 1994, the net income per share
is the same for both primary and fully diluted, as the convertible
subordinated debentures are anti-dilutive.
Cash equivalents and marketable securities: Through March 31, 1994, cash
equivalents and short-term marketable securities have been carried at
amortized cost which approximated market. Effective April 1, 1994, the
Company adopted Statement of Financial Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In accordance with the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The cumulative effect as of April 1, 1994
of adopting Statement 115 was immaterial. The Company has classified its
entire investment portfolio as available-for-sale.
Available-for-sale securities are carried at fair value, with material
unrealized gains and losses reported in shareholder's equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income
along with interest earned. Realized gains or losses and declines in value
judged to be other-than-temporary on available-for-sale securities are
reported as investment income or investment expense. The cost of securities
sold is based on the specific identification method.
Concentration of credit risk: The Company designs, manufactures and sells hard
disk drives to desktop personal computer, workstation and notebook computer
manufacturers and distributors throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral from its customers. The Company maintains reserves for
potential credit losses and such losses have historically been within
management's expectations.
The Company invests its excess cash in deposits with major banks and in money
market and short-term debt securities of companies with strong credit ratings
from a variety of industries. These securities generally mature within 365
days and, therefore, bear minimal risk. The Company has not experienced any
material losses on its investments. The Company, by Corporate policy, limits
the amount of credit exposure to any one issuer and to any one type of
investment.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment are stated at
cost, with plant and equipment depreciated using the straight-line method over
the estimated useful lives of the assets, which range from three to twenty-
five years. Amortization of leasehold improvements is computed over the
useful life of the improvements or the terms of their respective leases,
whichever is shorter. Land is not depreciated.
Purchased intangibles: Intangible assets were acquired primarily as a result
of the Digital acquisition on October 3, 1994. Intangible assets include
completed technology, workforce in place, a supply agreement and customer
lists related to the Digital acquisition. Intangible assets also include
goodwill resulting from the LaCie, Ltd. acquisition in November 1990. The
assets are being amortized over their estimated useful lives, which range from
three to ten years. The accumulated amortization at March 31, 1995 was $13.4
million.
Warranty expense: The Company generally warrants its products against defect
for a period of one to five years. A provision for estimated future costs
relating to warranty expense is recorded when products are shipped.
Note 2: Financial instruments
Available-for-sale securities
Year Ended
March 31,
Cost (In thousands) 1995
Corporate commercial paper and bank notes $ 31,270
Certificates of deposit 85,000
U.S. Treasury securities and obligations
of U.S. government agencies 9,995
Other 149
Total included in cash and cash equivalents $126,414
The gross unrealized gains and gross unrealized losses at March 31, 1995 were
immaterial to the Company and therefore, no amount was recorded to
shareholders' equity. Proceeds from sales of available-for-sale securities
during fiscal 1995 were $6.2 million and gross realized gains and gross
realized losses were immaterial. At March 31, 1995, the average available-
for-sale portfolio duration was approximately 30 days and no individual
security had a maturity which exceeded 90 days.
Derivative financial instruments
During the period covered by the financial statements, the Company has not
used any derivative instrument for trading purposes.
The Company invests its excess cash in various interest bearing instruments
and also has various borrowings which bear interest. During the period
covered by the financial statements, the Company has not used derivative
instruments to manage interest rate fluctuations.
Although the majority of the Company's transactions are denominated in U.S.
dollars, its global operations have resulted in some foreign currency exchange
rate fluctuation exposure. The Company utilizes foreign currency forward
exchange contracts to minimize the effects of exchange rate fluctuations
arising from certain intercompany receivable/payable transactions. The gains
and losses from market rate changes on these contracts, which are intended to
offset the gains and losses on the underlying recorded receivables/payables,
are recorded currently in the statement of income. During the period covered
by the financial statements, the Company has not utilized derivative
instruments to manage either foreign currency firm commitments or foreign
currency anticipated transactions.
At March 31, 1995, the Company held foreign currency forward contracts with
maturities between April 7, 1995 and July 7, 1995 to sell 2.5 billion yen for
$26.2 million. The fair value of the yen underlying these instruments at
March 31, 1995 totaled $28.9 million. At March 31, 1994, the Company held
foreign currency forward contracts to sell 2.7 billion yen for $25.3 million.
The fair value of the yen underlying these instruments at March 31, 1994
totaled $26.3 million.
Carrying amount and fair values of financial instruments
Year ended March 31,
(In millions) 1995 1994
-------------- --------------
Carrying Fair Carrying Fair
amount value amount value
Cash equivalents and
marketable securities $187.8 $187.8 $330.0 $330.0
Foreign currency contracts $ (2.7) $ (2.7) $ (1.0) $ (1.0)
Borrowings:
Subordinated debentures $212.5 $207.2 $212.5 $219.0
Revolving credit agreement $ 40.0 $ 40.0 - -
Term loan $125.0 $125.0 - -
The fair values for cash equivalents and marketable securities represent the
quoted market prices at the balance sheet dates. The fair values for foreign
currency forward contracts represent the difference between the contracted
forward rate and the quoted fair value of the underlying yen at the balance
sheet dates. Fair value for the subordinated debentures are based on the
quoted market price at the balance sheet dates. Fair values for the revolving
credit agreement and term loan approximate the carrying amounts since interest
rates on these borrowings are adjusted periodically to reflect market interest
rates.
Note 3: Inventories
Inventories consisted of:
(In thousands) Year ended March 31,
1995 1994
Materials and purchased parts $ 116,732 $ 27,841
Work in process 42,091 14,729
Finished goods 165,827 151,513
$324,650 $194,083
Note 4: Property, plant and equipment
Property, plant and equipment consisted of:
(In thousands) Year ended March 31,
1995 1994
Machinery and equipment $ 241,926 $ 81,800
Furniture and fixtures 43,347 32,329
Buildings and leasehold improvements 107,433 44,546
Land 7,224 -
399,930 158,675
Less accumulated depreciation and amortization (119,831) (72,801)
$ 280,099 $ 85,874
Note 5: Credit agreements
The Company has a secured credit agreement expiring in August 1995, with
certain banks totaling $85 million for the issuance of standby letters of
credit. The Company has pledged as collateral cash of $85 million related to
this agreement.
The Company entered into this secured credit agreement in exchange for a lower
interest rate. At each anniversary of renewal of the credit agreement, the
Company has the option of removing the cash restriction by agreeing to pay a
higher interest rate. This agreement requires the Company to maintain a
specific financial covenant relating to tangible net worth and as of March 31,
1995, the Company was in compliance with this covenant.
Note 6: Long-term debt
In October 1994, the Company entered into a three year $350 million senior
credit facility structured as a $225 million revolving credit line and a $125
million term loan. The revolving credit is governed by a borrowing base of
eligible accounts receivable and inventory, and the term loan amortizes in
five equal semiannual installments commencing October 1995. The borrowings,
at the ongoing option of the Company bear interest at either LIBOR plus a
margin or a base rate with option periods of one to six months. The facility
is secured by all the Company's domestic assets and 66% of the Company's
ownership of certain of its subsidiaries.
As of March 31, 1995, total bank debt was $165 million with a weighted average
interest rate of approximately 7.9%. The maximum amount outstanding during
the year was $220.5 million and the average amount outstanding since October
3, 1994 was $192.0 million. The total weighted average interest rate for the
year ended March 31, 1995 was approximately 8.0%. Fair value for the bank
debt approximates cost, as interest rates on these borrowings are adjusted
periodically to reflect market interest rates. At March 31, 1995, the Company
was in compliance with all covenants, which include but are not limited to the
following ratios: fixed charge coverage ratio, debt service coverage ratio and
quick ratio. The Company's debt agreement currently prohibits the Company
from paying dividends while the debt is outstanding.
In April 1992, the Company issued $212.5 million of 6 3/8% convertible
subordinated debentures. Each debenture is convertible, at the option of the
holder, into the Company's common stock at a conversion price of $18.15 per
share. The debentures are redeemable at the Company's option on or after
April 2, 1995, at prices ranging from 104.5% of the principal to 100% at
maturity. The debentures are due April 1, 2002, and are subordinated to all
existing and future senior indebtedness of the Company.
Note 7: Shareholders' equity
1993 Long-Term Incentive Plan: The Company has a Long-Term Incentive Plan
which provides for the issuance of stock options, stock appreciation rights,
stock purchase rights and long-term performance awards. The plan has
available and reserved for issuance 3.7 million shares and allows for an
annual increase in the number of shares available for issuance, subject to a
limitation. Available for grant as of March 31, 1995 were 606,000 shares. To
date only stock options have been granted under this plan and at fair market
value on the date of grant; accordingly, no compensation accounting has been
required.
A summary of transactions relating to the 1993 Long-Term Incentive Plan
follows:
Year ended March 31,
1995 1994
(In thousands) Options Price Options Price
Outstanding beginning of
period 1,012 $ 9.875-15.50 - -
Granted 2,294 $12.875-14.25 1,045 $9.875-15.50
Canceled (158) $ 9.875-15.50 (3) $ 9.875
Exercised (62) $9.875-12.875 (30) $ 9.875
Outstanding end of period 3,086 $ 9.875-15.50 1,012 $9.875-15.50
Exercisable end of period 764 170
Stock Option Plans: The Company has Stock Option Plans (the "Plans") under
which an aggregate of 5.7 million shares of common stock have been reserved
for future issuance. Options under the Plan are granted at prices determined
by the Board of Directors, but at not less than the fair market value, and
expire ten years from the date of grant; accordingly no compensation
accounting has been required. Options generally vest ratably over one to four
years. At March 31, 1995, options with respect to 750,000 shares were
available for grant.
A summary of transactions relating to the Plans' outstanding stock options
follows:
Year ended March 31,
1995 1994
(In thousands) Options Price Options Price
Outstanding beginning of
period 5,914 $ .82-16.00 6,985 $ .82-16.00
Granted 38 $ 15.6875 1,637 $ 9.50-12.00
Canceled (353) $ 8.50-12.50 (680) $ 2.22-13.75
Exercised (633) $ 2.00-13.75 (2,028) $ .82-13.75
Outstanding end of period 4,966 $ .82-16.00 5,914 $ .82-16.00
Exercisable end of period 2,934 1,887
Stock Purchase Plan: The Company has an employee stock purchase plan (the
"Purchase Plan") under which 6.3 million shares of common stock have been
reserved for issuance. The Purchase Plan is qualified under Section 423 of
the Internal Revenue Code. The plan allows for the purchase of stock at 85%
of the fair market value at the date of grant or the exercise date, whichever
is less.
During fiscal 1995, 1994 and 1993, 869,000, 735,000 and 509,000 shares,
respectively, were issued under this plan.
Shareholder Rights Plan: The Company has a shareholder rights plan (the
"Rights Plan") which provides existing shareholders with the right to purchase
1/100 preferred share for each common share held in the event of certain
changes in the Company's ownership. The Rights Plan may serve as a deterrent
to takeover tactics which are not in the best interests of shareholders.
Note 8: Restructuring and non-recurring expenses
During fiscal 1994, the Company recorded $22.8 million in restructuring and
non-recurring charges to operations. The charge was comprised of the
following components:
(In Millions)
Write-off of Plus Development goodwill and certain
Plus Development inventory $ 7.7
Reduction in force 1.5
Accelerated product transitions 8.0
Consolidation of sales offices and other facilities 5.1
Other 0.5
Total $22.8
At March 31, 1994, all of the activities contemplated in the $22.8 million of
restructuring and non-recurring charges had been completed and no material
amount of the accrual remained.
Note 9: Income taxes
The income tax provision computed under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," consists of the following:
(In thousands) Year ended March 31,
1995 1994 1993
Federal: Current $ 31,896 $(10,396) $ 48,637
Deferred (751) 4,805 (12,725)
31,145 (5,591) 35,912
State: Current 19,386 3,965 11,066
Deferred (5,571) (3,219) (2,255)
13,815 746 8,811
Foreign: Current 23,528 1,244 7,915
Deferred (4,774) 4,590 130
18,754 5,834 8,045
Income tax provision $ 63,714 $ 989 $ 52,768
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of stock options and employee stock purchase plan shares reduce
taxes currently payable as shown above by $1.6 million, $5.4 million and $5.8
million in fiscal 1995, 1994 and 1993, respectively. Such benefits are
credited to capital in excess of par value when realized.
The Company's income tax provision differs from the amount computed by
applying the Federal statutory rates of 35% for 1995 and 1994 and 34% for 1993
to income before income taxes as follows:
(In thousands) Year ended March 31,
1995 1994 1993
Tax at federal statutory rate $ 50,857 $ 1,282 $ 49,837
State income tax, net of
federal benefit 8,980 485 5,815
Amortization and write-off of goodwill 68 2,386 299
Foreign earnings taxed at less than
U.S. rates (9,447) (3,007) (517)
Valuation allowance for deferred tax
assets 13,286 - -
Other individually immaterial items (30) (157) (2,666)
$ 63,714 $ 989 $ 52,768
Effective tax rate 44% 27% 36%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows:
(In thousands) Year ended March 31,
1995 1994
Deferred tax assets
Inventory valuation methods $ 30,009 $ 18,221
Accrued warranty expense 10,514 13,627
Allowance for doubtful accounts 4,163 3,218
Distribution reserves 5,439 1,402
Capital equipment reserve 130 136
Depreciation and amortization methods 24,035 4,730
Other accruals and reserves not currently
deductible for tax purposes 5,868 3,318
Federal and state valuation allowance (16,347) -
Deferred tax liabilities 63,811 44,652
Tax on unremitted foreign earnings
net of foreign tax credits and
foreign deferred taxes (12,836) (8,454)
Other (6,921) (3,240)
$ 44,054 $ 32,958
For financial reporting purposes a valuation allowance of $16.3 million has
been recorded to offset the deferred tax asset related to certain intangibles
acquired from Digital.
Pretax income from foreign operations was $113.6 million, $49.2 million and
$14.8 million for the years ended March 31, 1995, 1994 and 1993,
respectively. U.S. taxes have not been provided for unremitted foreign
earnings of $99.6 million, which are considered to be permanently reinvested.
The residual U.S. tax liability if such amounts were remitted would be
approximately $25.0 million.
Note 10: Litigation
On February 26, 1993, Quantum commenced a declaratory judgment lawsuit against
Rodime PLC of Glasgow, Scotland, in the U.S. District Court for the District
of Minnesota. Minnesota is the site of Rodime's only U.S. office. Rodime has
counterclaimed by asserting that certain Quantum 3.5-inch hard disk drive
products infringe its U.S. Patent No. 4,638,383 and is seeking royalty
payments under that patent. That patent purports to cover hard disk drives
using 3.5-inch disks and specifies an architecture including attributes such
as a head positioning mechanism consisting of a rotary actuator moved by an
open loop stepper motor. Quantum's complaint alleges that the Rodime patent
is invalid and unenforceable, and that it has not been infringed by Quantum.
On April 11, 1994, the United States District Court entered a summary judgment
in Quantum's favor, ruling that claims 4, 6, 7, 9, 14 and 19-27 of the Rodime
patent are invalid because they were impermissibly broadened during earlier
patent reexamination proceedings conducted by the U.S. Patent and Trademark
Office. On November 8, 1994, Rodime's appeal was argued before the United
States Court of Appeals for the Federal Circuit. Quantum is awaiting the
appellate court's decision. Quantum believes that this ruling, if upheld on
appeal, is fully dispositive of its dispute with Rodime. Due to the inherent
uncertainties of litigation, there can be no assurance that such ruling will
be affirmed. The Company is also subject to other legal proceedings and
claims which arise in the ordinary course of its business.
In the opinion of management, the amount of ultimate liability, if any, with
respect to these actions will not materially affect the financial position or
results of operations or liquidity of the Company.
Note 11: Commitments
The Company leases its present facilities under non-cancelable operating lease
agreements for periods of up to fifteen years. Some of the leases have
renewal options ranging from one to ten years and contain provisions for
maintenance, taxes or insurance.
Rent expense was $18.8 million, $12.1 million and $8.3 million for the years
ended March 31, 1995, 1994 and 1993, respectively.
Future minimum lease payments under operating leases are as follows:
Year ended March 31, (In thousands)
1996 $ 21,848
1997 19,101
1998 15,945
1999 15,050
2000 13,396
Thereafter 75,521
Total future minimum lease payments $160,861
Note 12: Business segment and foreign operations
The Company is engaged in a single business segment consisting of the design,
manufacture and marketing of hard disk drives based on Winchester technology.
The Company is a leading supplier of small-form-factor hard disk drives for
desktop personal computers, workstations and notebook computers, providing a
broad range of 3.5-inch and 2.5-inch hard disk drives with capacities ranging
from 256 megabytes to 4.3 gigabytes. The Company also manufactures solid
state disks, tape drives and PCMCIA-based flash memory cards. The Company
utilizes a third party to manufacture a substantial majority of the products
it sells.
During fiscal 1994, the Company began operations in its European headquarters.
Prior to fiscal 1994, export sales from domestic operations accounted for a
significant portion of the Company's sales. Export sales for fiscal 1995 were
less than 10% of consolidated sales. Following is a table that summarizes
U.S. export sales to certain geographic areas for the prior two years ended
March 31:
(In thousands) 1995 1994
Europe $140,000 $408,000
Asia-Pacific 59,000 322,000
Other 21,000 91,000
$220,000 $821,000
Geographic information for fiscal 1995 and 1994 are presented in the tables
below. Transfers between geographic areas are accounted for at amounts which
are generally above cost and are eliminated in the consolidated financial
statements. Identifiable assets are those assets that can be directly
associated with a particular geographic location. Operating income (loss) by
geographic area does not include an allocation of general corporate expenses.
Fiscal 1995 Geographic Area
Rest
(In millions) U.S. Europe of World Corp Elims Total
Revenue from unaffiliated
customers $1,596 $1,663 $ 109 - $ - $3,368
Transfers between geographic
locations 312 75 - - (387) -
Total net sales $1,908 $1,738 $ 109 - $(387) $3,368
Operating income (loss) $ 56 $ 294 $ (3) $(186) - $ 161
Identifiable assets $ 917 $ 429 $ 100 $ 35 - $1,481
Fiscal 1994 Geographic Area
Rest
(In millions) U.S. Europe of World Corp Elims Total
Revenue from unaffiliated
customers $1,218 $ 837 $ 76 - $ - $2,131
Transfers between geographic
locations 261 77 - - (338) -
Total net sales $1,479 $ 914 $ 76 - (338) $2,131
Operating income (loss) $ 4 $ 120 $ (4) $(110) - $ 10
Identifiable assets $ 666 $ 252 $ 53 $ 26 - $ 997
Foreign operations prior to fiscal 1994 were not material.
One major customer accounted for 12%, 22% and 20% of consolidated sales in
1995, 1994 and 1993, respectively. In addition, another customer accounted
for 16% and 10% of consolidated sales in 1995 and 1994, respectively, and less
than 10% in 1993.
Note 13: Acquisition of businesses from Digital Equipment Corporation
On October 3, 1994, Quantum Corporation ("Quantum" or "the Company") acquired
the Disks, Heads and Tapes Business of the Storage Business Unit of Digital
Equipment Corporation ("the acquired Business"), in a transaction accounted
for as a purchase. The operating results of the acquired Business from the
date of the purchase through March 31, 1995 have been reflected in the
Company's consolidated financial statements.
The contractual terms of the purchase contain certain purchase price
adjustment provisions, which have not been finalized. While management
believes it is contractually entitled to a reduction in the purchase price of
approximately $5 million, it is only through ongoing settlement discussions,
and possibly arbitration, that any reduction will be realized; and even then
the timing is not reasonably predictable.
The Company has assumed the contractually stated purchase price of $350.5
million, in addition to the direct costs of the transaction incurred for
investment banker and professional fees and other direct incremental
transaction costs of $4.7 million.
Recap of purchase price allocation
(In Millions)
Inventories $146.7
Property and equipment 104.3
Intangible assets 106.1
Accrual for exit costs (34.9)
Other assets/liabilities, net (34.2)
Purchased research and development 67.2
-------
$355.2
=======
Intangible assets include $79.5 million of completed technology and an
aggregate of $26.6 million for workforce in place, a supply agreement and
customer lists. Completed technology and workforce in place have been
assigned four year lives, while the customer base has been assigned a ten year
life. The lives were assigned based on their estimated useful lives. The
supply agreement has been assigned a life equal to the terms of the
contractual agreement.
The accrual for exit costs includes only those direct costs related to exiting
facilities and operations acquired from Digital and does not include any costs
related to modifications of the previous Quantum business. As part of the
acquisition completed in October 1994, the Company developed a plan regarding
utilization and deployment of the assets and operations acquired from Digital.
The plan primarily encompasses transitioning Colorado Springs disk drive
manufacturing to Penang, Malaysia and shutting down the related operations in
Colorado Springs. The transition is planned to commence in July 1995 and the
expected closure date for Colorado Springs is March 1996. In addition, the
Company plans to exit the QPC lease arrangement assumed in the Digital
acquisition and relocate locally to a new Quantum facility in 1996. The
Company expects to have substantially completed the plan regarding the
utilization and deployment of the acquired Business' assets and operations by
March 1996. Of the total exit accrual, approximately $25 million results in
cash outlays.
The components of the exit activities are as follows:
(In Millions)
Non-cancelable lease commitments after closure
and cost to "make new" as required by the
lease $11.4
Reduction in force 7.7
Retention bonuses 4.5
Write-off of capital assets resulting from
closures 9.3
Other 2.0
Total exit costs $34.9
Exit activities through March 31, 1995 have been nominal, representing
severance payments resulting in cash outlays of $1.8 million and asset write-
offs resulting in a $0.9 million reduction of the accrual. Substantially all
of the exit accrual remains at March 31, 1995.
The $67.2 million allocated to purchased research and development was expensed
immediately as required under generally accepted accounting principles.
The unaudited pro forma combined condensed results of operations of the
Company for the twelve months ended March 31, 1995 and 1994, had the
acquisition occurred at the beginning of each of the periods presented and
which eliminates the non-recurring charges, are as follows:
(In thousands except per share data)
Twelve Months Ended
------------------------------
Mar. 31, Mar. 31,
1995 1994
-------- ---------
Net sales $3,790,769 $2,956,307
Net income (loss) $75,877 $(40,696)
Net income (loss) per share:
Primary $1.60 $(0.94)
Fully diluted $1.29 $(0.94)
The unaudited pro forma results for the twelve months ended March 31, 1995 and
1994 exclude the effects of the charge for purchased research and development
and other in merger costs of $73 million, as such amounts are non-recurring.
The pro forma results for the twelve months ended March 31, 1995 and 1994
reflect intangible asset amortization, depreciation of acquired fixed assets,
amortization of loan fees and interest expense on the new debt related to the
acquisition.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would
have occurred had the transaction been completed at the beginning of the
periods indicated, nor is it necessarily indicative of future operating
results.
Note 14: Unaudited quarterly consolidated financial data
(In thousands except Fiscal 1995(i)
per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Sales $725,304 $726,169 $932,702 $983,809
Gross profit $146,077 $132,730 $135,255 $149,651
Net income (loss) $ 58,241 $ 48,603 $(48,310) $ 23,057
Net income (loss) per share
Primary $ 1.24 $ 1.03 $ (1.06) $ .48
Fully diluted $ 1.03 $ .85 $ (1.06) $ .42
(In thousands except Fiscal 1994
per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Sales $479,112 $493,955 $523,021 $634,966
Gross profit $ 58,494 $ 10,533 $ 56,822 $112,994
Net income (loss) $ 3,373 $(45,340) $ 6,139 $ 38,502
Net income (loss) per share
Primary $. 08 $ (1.02) $ .14 $ .83
Fully diluted $.08 $ (1.02) $ .14 $ .70
(i) On October 3, 1994, Quantum acquired portions of Digital's Business. The
acquisition is not reflected in the financial statements prior to the third
quarter of fiscal 1995, thus the results for the third and fourth quarters of
fiscal 1995 are not comparable to the prior results. See Note 13 in Notes to
the Consolidated Financial Statements.
Part III
Item 10.
Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to Part I,
Item 1 of this document and to the Company's Proxy Statement.
Item 11.
Executive Compensation
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
Item 13.
Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and 13
of this Form 10-K Annual Report, the Company's definitive Proxy Statement for
its 1995 Annual Meeting of Shareholders is not deemed "filed" as part of this
Form 10-K Annual Report.
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements and Financial Statement Schedules - See Index to
Consolidated Financial Statements at Item 8 on page 24 of this
report.
2. Exhibits
Sequentially
Exhibit Numbered
Number Page
2.1(a) (17) Stock and Asset Purchase Agreement by and among
Quantum Corporation, Quantum Peripherals (Europe)
S.A. and Digital Equipment Corporation, dated as
of July 18, 1994
2.1(b) (17) Amendment No. 1 dated as of October 3, 1994, to
the Stock and Asset Purchase Agreement by and
among Quantum Corporation, Quantum Peripherals
(Europe) S.A. and Digital Equipment Corporation,
dated as of July 18, 1994
2.1(c) (17) Supplemental agreement to the Stock and Asset
Purchase Agreement by and among Quantum
Corporation, Quantum Peripherals (Europe) S.A.
and Digital Equipment Corporation, dated as of
July 18, 1994
2.2 (17) RMMI Stock Purchase Agreement, dated as of July
18, 1994 among Quantum Corporation, Digital
Equipment Corporation and Rocky Mountain
Magnetics, Inc.
3.1(a) (2) Certificate of Incorporation of Registrant
3.1(b) (11) Certificate of Amendment of Certificate of
Incorporation of Registrant
3.2 (11) By-laws of Registrant, as amended
4.1 (10) Indenture between Registrant and LaSalle National
Bank, Trustee, covering $212.5 million of 6 3/8%
Convertible Subordinated Debentures due 2002
(including form of Debenture)
4.2 (16) Shareholder Rights Plan
10.7 (2) Registrant's 1984 Incentive Stock Option Plan and
Agreement
10.8 (4) Registrant's 1986 Stock Option Plan and
Agreement, as amended
10.9 (5) Registrant's Employee Stock Purchase Plan and
form of Subscription Agreement, as amended
10.10 (1) Form of Indemnification Agreement between
Registrant and Certain Officers and Directors
10.11 (12) Agreement between Registrant and MKE
10.12 (3) (6) Purchase Agreement between Registrant and MKE
10.13 (7) Lease (dated October 13, 1989) between Registrant
and John Arrillaga and Richard T. Perry, Separate
Property Trusts
10.14 (8) Lease (dated September 17, 1990) between
Registrant and John Arrillaga and Richard T.
Perry, Separate Property Trusts
10.15 (11) Lease (dated April 10, 1992) between Registrant
and John Arrillaga and Richard T. Perry, Separate
Property Trusts
10.16 (9) Form of Statement of Employment Terms executed by
Stephen M. Berkley, David A. Brown and William J.
Miller, directors of Registrant, and Joseph T.
Rodgers, William F. Roach and Michael A. Brown,
executive officers of Registrant
10.17 (12) Lease (dated November 13, 1992) and First
Amendment to Lease (dated November 17, 1992)
between Registrant and Milpitas Realty Delaware,
Inc.
10.18 (3)(13) Credit Agreement dated August 18, 1992, among
Registrant, Bank of America NT&SA as agents and
other financial institutions party hereto
10.19 (14) Third Amendment to the Purchase Agreement between
Registrant and MKE dated December 31, 1992
10.20 (15) 1993 Long-Term Incentive Plan
10.21 (20) Amendment dated August 18, 1993 to Credit
Agreement (dated August 18, 1992), among
Registrant, Bank of America NT&SA as agents and
other financial institutions party hereto
10.22 (19) Second Amendment (dated April 15, 1993) to Lease
(dated November 13, 1992) between Registrant and
Milpitas Realty Delaware, Inc.
10.23 (19) Lease (dated April 14, 1993) between Registrant
and Milpitas Realty Delaware, Inc.
10.24 (17) Patent Assignment and License Agreement, dated as
of October 3, 1994, by and between Digital
Equipment Corporation and Quantum Corporation
10.25 Amendment dated August 18, 1994 to Credit Agreement
(dated August 18, 1992), among Registrant, Bank of
America NT&SA as agents and other financial
institutions party hereto
10.26 Amendment dated August 18, 1994 to Credit Agreement
(dated August 18, 1992), among Registrant, Bank of
America NT&SA as agents and other financial
institutions party hereto
10.27 (3)(18) Supply Agreement between Digital Equipment
Corporation (Buyer) and Quantum Corporation
(Seller) for Storage Devices, as dated as of
October 3, 1994
10.28 (18) Credit Agreement among Quantum Corporation and
The Banks named herein and ABN AMRO BANK N.V.,
San Francisco International Branch, BARCLAYS BANK
PLC and CIBC INC. as Managing Agents for the
Banks, and CANADIAN IMPERIAL BANK OF COMMERCE as
Administrative Agent and Collateral Agent for the
Banks dated as of October 3, 1994
10.29 First Amendment dated February 15, 1995 to Credit
Agreement (dated October 3, 1994), among Quantum
Corporation and The Banks named herein and ABN
AMRO BANK N.V., San Francisco International
Branch, BARCLAYS BANK PLC and CIBC INC. as
Managing Agents for the Banks, and CANADIAN
IMPERIAL BANK OF COMMERCE as Administrative Agent
and Collateral Agent for the Banks
11 Statement of Computation of Earnings Per Share
12 Statement of Computation of Ratios of Earnings to
Fixed Charges
21 Subsidiaries of Registrant
23 Consent of Ernst & Young LLP, Independent
Auditors
24 Power of Attorney. See page 44.
(1) Incorporated by reference to the Registrant's Definitive Special
Meeting Proxy Statement filed with the Securities and Exchange
Commission on March 24, 1987.
(2) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1987.
(3) Confidential Treatment Requested. Granted by the Securities and
Exchange Commission.
(4) Incorporated by reference from exhibits filed with Registrant's
Form S-8, No. 33-52190 filed with the Securities and Exchange
Commission on September 21, 1992.
(5) Incorporated by reference from exhibits filed with Registrant's
Form S-8, No. 33-52192 filed with the Securities and Exchange
Commission on September 21, 1992.
(6) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1988.
(7) Incorporated by reference from exhibits filed with Registrant's
Form 10-Q for the quarterly period ended December 31, 1989, filed
with the Securities and Exchange Commission on February 14, 1990.
(8) Incorporated by reference from exhibits filed with Registrant's
Form 10-Q for the quarterly period ended December 30, 1990, filed
with the Securities and Exchange Commission on February 13, 1991.
(9) Incorporated by reference to the Registrant's Amendment No. 1 to
Form 10-Q for the quarter ended June 30, 1991.
(10) Incorporated by reference from Registration Statement No. 33-46387
on Form S-3.
(11) Incorporated by reference from exhibits filed with Registrant's
Annual Report on Form 10-K for fiscal year ended March 31, 1992.
(12) Incorporated by reference from exhibits filed with Registrant's
Form 10-Q for the quarterly period ended December 27, 1989, filed
with the Securities and Exchange Commission on February 10, 1993.
(13) Incorporated by reference from exhibits filed with Registrant's
Form 10-Q for the quarterly period ended September 27, 1992, filed
with the Securities and Exchange Commission on November 10, 1992.
(14) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1993.
(15) Incorporated by reference from Registration Statement No. 33-72222
on Form S-8 filed with the Securities and Exchange Commission on
November 30, 1993.
(16) Incorporated by reference from Form 8-A filed with the Securities
and Exchange Commission on August 5, 1988.
(17) Incorporated by reference from Form 8-K filed with the Securities
and Exchange Commission on October 17, 1994.
(18) Incorporated by reference from Form 8-K/A-1 filed with the
Securities and Exchange Commission on January 31, 1995.
(19) Incorporated by reference from exhibits filed with Registrant's
Annual Report on Form 10-K for fiscal year ended March 31, 1994.
(b) Reports on Form 8-K
(1) Form 8-K dated October 3, 1994, filed on October 17, 1994.
(2) Form 8-K/A-1 dated October 3, 1994, filed on January 31, 1995.
(3) Form 8-K/A-2 dated October 3, 1994, filed on March 28, 1995.
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedules
See Item 14(a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANTUM CORPORATION
Dated: July 14, 1995 \s\ JOSEPH T. RODGERS
Joseph T. Rodgers
Executive Vice President, Finance
Chief Financial Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William J. Miller and Joseph T. Rodgers,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to
this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
July 14, 1995.
Signature Title
\s\ WILLIAM J. MILLER Chairman of the Board and Chief Executive
(William J. Miller) Officer (principal executive officer)
\s\ JOSEPH T. RODGERS Executive Vice President, Finance, Chief
(Joseph T. Rodgers) Financial Officer and Secretary (principal
financial and accounting officer)
\s\ STEPHEN M. BERKLEY Director
(Stephen M. Berkley)
\s\ DAVID A. BROWN Director
(David A. Brown)
\s\ ROBERT J. CASALE Director
(Robert J. Casale)
\s\ EDWARD M. ESBER, JR. Director
(Edward M. Esber, Jr.)
\s\ STEVEN C. WHEELWRIGHT Director
(Steven C. Wheelwright)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
Classification beginning of charged to end of
(In thousands) period expense Write-offs period
Allowance for doubtful
accounts year ended:
March 31, 1995 $ 9,391 $4,142 $(1,571) $11,962
March 31, 1994 $ 8,118 $6,296 $(5,023) $ 9,391
March 31, 1993 $ 6,474 $4,724 $(3,080) $ 8,118
Accrued exit (i)
March 31, 1995 $34,937 - $(2,724) $32,213
(i) Established October 3, 1994, when recording the Digital acquisition.