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As filed with the Securities and Exchange Commission on June 29, 2001
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to_____________
Commission file number 0-12390
___________
QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2665054
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
501 Sycamore Drive., Milpitas, California 95035
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 894-4000
___________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
QUANTUM CORPORATION-DLT & STORAGE SYSTEMS GROUP COMMON STOCK NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES B JUNIOR PARTICIPATING PREFERRED STOCK NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED NOTES DUE 2004
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 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. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 31, 2001, was $1,381,849,861. 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 of affiliate status is not necessarily
conclusive.
As of the close of business on May 27, 2001, the registrant had 154,444,379
shares of DLT & Storage Systems group common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2001 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part III
of this Form 10-K Report.
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PART I
ITEM 1. Business
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements usually contain the
words "estimate," "anticipate," "expect" or similar expressions. All forward-
looking statements, including statements regarding anticipated operating results
and gross margin trends, are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties. These uncertainties could
cause actual results to differ materially from those expected for the reasons
set forth under Trends and Uncertainties in Part IV of this report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Specifically, statements regarding Quantum's
anticipated revenues and earnings, including anticipated revenue from the
Company's DLTtape business, ATL Enterprise Solutions Group and Snap Server
division, as well as the impact of current market conditions on the expected
future financial health of those businesses, are all forward-looking statements
within the meaning of the Safe Harbor. These statements are based on
management's current expectations and are subject to certain risks and
uncertainties. As a result, actual results may differ materially from the
forward-looking statements contained herein. Factors that could cause actual
results to differ materially from those described herein include (1) the amount
of orders received and products shipped through the remainder of the quarter or
year and any adjustments made at the close of the quarter or year; (2) the
ability of Quantum to timely ship its products; (3) uncertainty regarding the
slowdown in IT spending and the corresponding reduction in the demand for
DLTtape drives; (4) a continued trend toward centralization of storage; (5)
Quantum's ability to maintain anticipated pricing and cost levels; (6) the
successful execution of Quantum's strategy to expand its businesses into new
directions; (7) Quantum's ability to successfully introduce new products; (8)
Quantum's ability to anticipate and capitalize on changes in market demand; (9)
acceptance of, and demand for, Quantum's products; (10) Quantum's ability to
maintain supplier relationships; (11) Quantum's ability to work with industry
leaders to deliver customers with integrated business solutions; (12) the
ability of Quantum's competitors to introduce new products that compete more
successfully with its products; (13) the economic environment and the continued
growth of the storage industry; (14) the ability of the Company to sustain
and/or improve its cash and overall financial position; and (15) the general
economic environment.
Business Description
Quantum Corporation ("Quantum" or the "Company") (NYSE:DSS), founded in 1980, is
a global leader in data protection, meeting the rapidly growing needs of
business customers for innovative enterprise-wide storage solutions and
services. The Company's products provide backup, archiving and recovery of
business-critical data through solutions that deliver high performance,
reliability, cost effectiveness and scalability. Quantum is the world's largest
supplier of DLTtape(TM) automation systems, DLTtape drives, Super DLTtape(TM)
drives, and workgroup-class network attached storage appliances through its Snap
Server products.
Until the beginning of fiscal year 2002, Quantum Corporation had operated its
business through two separate business groups: the DLT & Storage Systems group
("DSS") and the Hard Disk Drive group ("HDD"), that were represented by two
classes of Quantum common stock, DSS common stock and HDD common stock, which
were intended to track the respective businesses. On March 30, 2001, Quantum's
stockholders approved the disposition of the HDD group to Maxtor Corporation
(Maxtor). On April 2, 2001, each authorized share of HDD common stock was
exchanged for 1.52 shares of Maxtor common stock. The DSS business now
represents Quantum, and as such, DSS is no longer a tracking stock, but is now
the common stock for Quantum Corporation.
The Quantum tracking stock structure had begun on August 3, 1999, when each
authorized share of Quantum common stock was exchanged for one share of DSS
common stock and one-half share of HDD common stock. This followed stockholders
approval on July 23, 1999, when Quantum's stockholders approved a tracking stock
proposal that created two new classes of Quantum common stock, DSS common stock
and HDD common stock, intended to track separately the performance of the DLT &
Storage Systems group and the Hard Disk Drive group.
A summary of Quantum's ongoing DLT & Storage Systems business, following the
disposition of the HDD group follows.
QUANTUM CORPORATION BUSINESS SUMMARY
Quantum designs, develops, manufactures, licenses, services, and markets DLTtape
and Super DLTtape drives, DLTtape and Super DLTtape media cartridges and storage
solutions. Quantum's storage solutions consist of tape automation systems,
network attached storage solutions and service.
DLTtape products are used to back up large amounts of data stored on network
servers. Digital Linear Tape, or DLTtape, is Quantum's half-inch tape technology
that is the industry standard for mid-range UNIX and NT system backup and
archive applications.
In fiscal year 2001, Quantum introduced a new family of tape drive products
based on Super DLTtape technology, targeted to serve workgroup, mid-range and
enterprise business needs.
Quantum's tape automation systems and network attached storage solutions are
part of its storage solutions business. Quantum's tape automation systems serve
the entire tape library data storage market from desktop computers to enterprise
class computers. Quantum offers a broad line of tape automation systems which
are used to manage, store and transfer data in enterprise networked computing
environments through its ATL business. Quantum is a leading provider of NAS
solutions for workgroups, with its network attached storage solutions,
consisting of products which incorporate hard disk drives and an operating
system designed to meet the requirements of entry and workgroup level computing
environments, where multiple computer users access shared data files over a
local area network.
DLTtape and Super DLTtape drives store data on DLTtape and Super DLTtape media
cartridges, respectively. Historical use of tape drives has shown that drives
use many media cartridges per year. Growth in the installed base of DLTtape or
Super DLTtape drives is expected to result in continued demand for DLTtape and
Super DLTtape media cartridges. Quantum's DLTtape media cartridges are
manufactured and sold by licensed third-party manufacturers.
The installed base of DLTtape drives resulted in shipments of approximately 17
million DLTtape media cartridges in fiscal year 2001. The installed base of
DLTtape drives includes more than 1.6 million DLTtape drives that have been
shipped to date.
Prior to 1998, Quantum's DLTtape media cartridge revenue was derived from direct
sales. Beginning in 1998, Quantum's licensed third party DLTtape media
manufacturers also began selling DLTtape media cartridges. Quantum receives a
royalty fee on DLTtape and Super DLTtape media cartridges sold by its licensees
which, while resulting in lower revenue than media sold directly by Quantum,
generates comparable income from operations. Quantum prefers to have a
substantial portion of media cartridge sales occur through its license model
because this minimizes Quantum's operational risks and expenses and provides an
efficient distribution channel. Currently, approximately 86% of media sales
occur through this license model. Quantum believes that the large installed base
of DLTtape drives and its licensing of DLTtape and Super DLTtape media
cartridges give Quantum a unique competitive advantage. Media royalties have
been a primary source of earnings for Quantum and this trend is expected to
continue. This expectation is a forward looking statement and actual results may
be affected by factors discussed in Trends and Uncertainties.
In fiscal year 2000, Quantum announced the formation of Quantum Technology
Ventures ("QTV"), an investment arm for Quantum. QTV is used to explore, develop
and invest in new storage technologies and storage businesses. QTV is managed as
a wholly-owned subsidiary of Quantum Corporation. Quantum has committed $50
million of funding to QTV over 2001 and 2002 fiscal years.
2
In the fourth quarter of fiscal year 2001, Quantum signed a definitive agreement
to acquire M4 Data (Holdings) Ltd., a privately held data storage company based
in the United Kingdom. M4 Data provides high performance and scalable tape
automation products for the data storage market. This acquisition closed in
April 2001 and enables Quantum to leverage M4 Data's complementary products and
technologies to enhance the range of storage solutions offered to customers.
Products
The DLT & Storage Systems group's products include:
DLT:
---
. Super DLTtape (TM) drives. Quantum introduced a new family of tape
drive products based on Super DLTtape technology, targeted to serve
workgroup, mid-range and enterprise business needs. Native capacity of
110GB (220GB compressed) and a transfer rate of 11MB per second (22MB
compressed).
. DLTtape drives. The family of DLTtape drives includes performance up
to 40GB of native capacity (80GB compressed) and a sustained data
transfer rate of 6MB per second (12MB compressed).
. Super DLTtape media cartridges. The Super DLTtape media cartridges are
designed and formulated specifically for use with Super DLTtape
drives. The capacity of a Super DLTtape media cartridge is up to 110GB
(220GB compressed).
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges is designed and formulated specifically for use with
DLTtape drives. The capacity of a DLTtape media cartridge is up to
40GB (80GB compressed).
Storage Solutions:
-----------------
. Tape automation systems. Quantum offers a broad line of DLTtape
automation systems that support a wide range of back-up and archival
needs from workgroup servers to enterprise-class servers. Quantum's
tape automation systems range from its tape autoloaders which
accommodate a single DLTtape drive to the P6000 series library which
features Prism Library Architecture(TM) and can be configured in
multiple units to scale up to 143 terabytes of storage capacity. In
addition, Quantum offers WebAdmin(TM), the industry's first Internet
browser-based tape library management system, allowing system
administrators to monitor widely distributed storage systems at remote
locations with point-and-click ease. In early 2001, Quantum introduced
modular automation systems with the M1500. The M1500 is a modular
library that is rack mountable and available in increments of two
drives and 20 cartridges that easily scale up to 20 drives and 200
cartridges.
. Network attached storage solutions. Quantum's Snap! Server(TM) family
of network attached storage appliances, include the Snap Server 1000,
Snap Server 2000, and Snap Server 4100, with storage capacities
ranging from 20GB to 300GB. The Snap Server 4100 features rack mount
form factor and RAID 0, 1, and 5. Snap Servers connect directly to a
network and can be easily and seamlessly integrated with other network
devices. The Snap solution includes a proprietary file system that can
simultaneously function in a variety of operating environments,
including Apple MacOS, Linux, Microsoft Windows, Novell Netware and
UNIX and hard disk drive technology.
Customers
Quantum's tape drives have achieved broad market acceptance in the mid-range
network server market with leading computer equipment manufacturers such as
Compaq Computer Corporation, Dell Computer Corporation, Hewlett-Packard Company,
IBM Corporation, StorageTek and Sun Microsystems, Inc. Customers for Quantum's
storage
3
solutions, including tape automation systems and network attached storage
solutions include Compaq, EMC Corporation, Hewlett-Packard, IBM, Ingram Micro,
Micro Tech, Sun Microsystems and Tech Data.
Because the leading computer equipment manufacturers have a dominant market
share for the computer systems within which Quantum's products are incorporated,
Quantum's sales are concentrated with several key customers. Sales to Quantum's
top five customers in fiscal year 2001 represented 43% of revenue, compared to
47% of revenue in fiscal year 2000. Sales to Compaq were 19% of revenue in
fiscal year 2001, compared to 20% of revenue in fiscal year 2000. Sales to
Hewlett-Packard were 10% of revenue in fiscal year 2001 compared to 13% in
fiscal year 2000.
Sales and Marketing
Quantum markets its products directly to end customers, manufacturers of
computer systems and workstations, distributors, resellers and systems
integrators through its worldwide sales force. Quantum also sells its products
through the www.quantum.com website.
Quantum supports international sales and operations by maintaining a European
headquarters in Geneva, Switzerland; a Japanese headquarters in Tokyo; an Asia
Pacific headquarters in Singapore and additional sales offices throughout the
world. Quantum's international sales, including sales to foreign subsidiaries of
United States companies, were 35% of Quantum's total revenue in both fiscal
years 2001 and 2000, and 29% of total revenue in fiscal year 1999.
Strategic Licensing Partners
Fuji Photo Film Co., Ltd. ("Fuji") and Hitachi Maxell, Ltd. ("Maxell") have
historically been the primary manufacturers of DLTtape media cartridges for
Quantum. In addition, Maxell is licensed to manufacture Super DLTtape media.
Quantum's license agreements with Fuji and Maxell allow those companies to
independently sell tape media cartridges for which Quantum receives royalties.
Quantum believes these strategic license agreements can expand the market for
DLTtape and Super DLTtape technology and provide customers with multiple sources
for tape media cartridges.
In fiscal year 1999, Quantum entered into a manufacturing license and marketing
agreement with Tandberg Data ASA, a European-based data storage company, through
which Tandberg has become an independent manufacturer of DLTtape drives, and can
manufacture products such as those based on Super DLTtape technology. Under the
terms of the agreement, Quantum receives royalties on all DLTtape drives that
Tandberg manufactures and sells. Tandberg also markets a full spectrum of
DLTtape drives, DLTtape media cartridges and tape automation systems.
In fiscal year 2000, Quantum entered into a manufacturing license agreement with
Benchmark Tape Systems Corporation, a company dedicated to the development of
tape backup and archive systems, through which Benchmark can manufacture and
sell certain versions of tape drives based on Quantum technology.
Manufacturing
Quantum manufactures DLTtape drives in both Penang, Malaysia and Colorado
Springs, Colorado. In addition, Quantum manufactures Super DLTtape drives,
DLTtape drives and network attached storage appliances in its Colorado Springs,
Colorado facility. Network attached storage appliances are also manufactured by
two third parties. Quantum manufactures tape automation systems in its Irvine,
California facility. Quantum also has a logistics site in Dundalk, Ireland. With
the acquisition of M4 Data in April 2001, Quantum will manufacture its modular
tape automation systems in Yately, United Kingdom. All of Quantum's DLTtape
media cartridges are manufactured by third parties - Fuji and Maxell.
4
Research and Development
Quantum's DLT and Storage Solutions businesses invested approximately $130
million, $123 million and $99 million in research and development in fiscal
years 2001, 2000 and 1999, respectively. Quantum is focusing its research and
development efforts on the development of new tape drives, tape automation
systems, network attached storage solutions, software storage architectures, and
other storage solutions and services. In particular, Quantum is currently
developing a family of tape drives based on Super DLTtape technology. Quantum
maintains research and development facilities in Shrewsbury, Massachusetts;
Boulder, Colorado; Irvine, California; and San Jose, California.
Competition
Competition in the mid-range network market for tape drives has intensified. In
this market Quantum competes primarily with Exabyte Corporation, Hewlett-
Packard, IBM, Sony Corporation and StorageTek. Hewlett-Packard, IBM and Seagate
Technology, Inc. formed a consortium that developed new tape drive products
using linear tape open technology. Such products target the high-capacity data
storage market and compete with products based on Super DLTtape technology. Key
competitive factors in the tape storage market include capacity, reliability,
durability, scalability, compatibility and cost.
ADIC, Exabyte, Hewlett-Packard, Overland Data Inc. and StorageTek also offer
tape automation systems incorporating DLTtape and Super DLTtape technology.
Quantum expects increased competition from large integrated computer equipment
companies, many of whom have historically incorporated their own tape storage
products into their computer systems, and are broadening their focus on the
enterprise-wide computing market.
Quantum's products, particularly tape products, including tape drives and tape
automation systems, also compete with other storage technologies, such as hard
disk drives. The competition from hard disk drives may increase if hard disk
drive prices continue to decline.
In the market for network attached storage appliances, Quantum competes with
Hewlett Packard, Intel Corporation, Maxtor Corporation and Nortel Networks
Corporation. Large traditional suppliers of general purpose computer servers
also offer specialized server storage solutions. Any one of these companies, or
any other company, could introduce network attached storage appliances or
another similar storage solution targeted at workgroup-level applications that
could result in increased competition with Quantum's network attached storage
appliances.
Warranty and Service
Quantum generally warrants its products against defects for a period of one to
three years from the date of sale. Quantum generally provides warranty service
on DLTtape drives on a return-to-factory basis. Quantum's tape automation
systems generally have a warranty period of one year, with service agreements
available to customers for additional years of warranty service. Quantum
maintains in-house product repair facilities in Colorado Springs, Colorado,
Penang, Malaysia, and Dundalk, Ireland to support warranty and service
obligations for tape drives, automation systems and other storage products.
Quantum also performs tape library warranty service in its facility in Irvine,
California. In addition, third party service providers throughout the world
perform tape library service.
Backlog
Quantum manufactures its products based upon forecasts of customer demand.
Orders are generally placed by customers on an as-needed basis. In general,
customers may cancel or reschedule orders without penalty. For these reasons,
Quantum does not believe orders constitute a firm backlog and believes customer
orders are not a meaningful indicator of revenues nor material to an
understanding of its business.
5
Employees
At March 31, 2001, Quantum DLT and Storage Solutions businesses had
approximately 2,450 regular employees. In addition, approximately 750 employees
performed services for both the Quantum DLT and Storage Solutions business and
the former Quantum Hard Disk Drive business. Of these 750 employees who
performed services for both business groups, approximately 200 will remain with
Quantum, approximately 320 have accepted severance packages in conjunction with
the disposition of the HDD group to Maxtor, and approximately 230 will transfer
to Maxtor. Those employees that have accepted severance packages will provide
Quantum with on-going support for up to the first nine months of fiscal year
2002.
With the acquisition of HDD by Maxtor, approximately 650 employees in the HDD
group, primarily manufacturing employees in Penang, Malaysia, will transfer to
the Quantum DLT and Storage Solutions business and approximately 1,660 employees
with the HDD group will transfer to Maxtor. Including 125 employees from the
acquisition of M4 Data in April 2001, Quantum will have a combined workforce of
approximately 3,425 employees following the disposition of the HDD group.
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 Quantum's ability to attract and retain highly skilled employees. None of
Quantum's employees are represented by a union, and Quantum has experienced no
work stoppages. Quantum believes that its employee relations are favorable.
Technology
Quantum develops and protects its technology and know-how, principally in the
field of computer-based on-line data storage, data backup and data archive
technology.
Quantum presently has been granted and/or owns by assignment 96 United States
patents. In general, these patents would have a 20 year term from the first
effective filing date. Quantum also has certain foreign patents and patent
applications relative to certain of its products and technologies. Although
Quantum believes that its patents and applications have significant value, the
rapidly changing computer industry technology makes Quantum's future success
dependent primarily upon the technical competence and creative skills of its
personnel rather than on patent protection.
From time to time, third parties have approached Quantum concerning the need for
Quantum to take a license under patented technology of such third party that
Quantum assertedly used, or is assertedly using, in the manufacture or sale of
one or more of its 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, Quantum
cannot provide assurance that such licenses are presently obtainable, or if
later determined to be required, could be obtained on commercially reasonable
terms or at all.
Quantum has signed a patent cross-licensing agreement with Seagate Technology
and has agreed to a time-limited mutual patent non-assertion agreement with
Maxtor Corporation covering certain technologies and patents of each party.
Quantum may enter into patent cross-licensing agreements with other third
parties in the future as part of its normal business activities. These
agreements, when and if entered into, would enable Quantum to use certain
patents owned by these third parties and to enable these third parties to use
certain patents owned by Quantum.
6
EXECUTIVE OFFICERS OF QUANTUM CORPORATION
Set forth below are the names, ages (as of June 25, 2001), positions and offices
held by, and a brief account of the business experience of, each executive
officer of Quantum.
Name Age Position with Quantum
- ---- --- ---------------------
Michael A. Brown............................. 42 Chairman of the Board and Chief Executive Officer
Renee Budig/(1)/............................. 40 Vice President, Finance, Acting Chief Financial Officer
Kevin Daly................................... 56 Chief Executive Officer and President of ATL Products
John J. Gannon/(2)/.......................... 54 President, Hard Disk Drive Group
Jerald L. Maurer............................. 58 Executive Vice President, Human Resources, Real Estate, and Corporate
Services
Barbara Nelson............................... 46 President, DLTtape Group
/(1)/ Ms. Budig was promoted to Acting Chief Financial Officer effective May
15, 2001.
/(2)/ In connection with the transfer of the hard disk drive business to
Maxtor, Mr. Gannon will be terminating his employment with Quantum
effective August 2, 2001.
Mr. Brown has been Chairman of the Board and Chief Executive Officer since 1998
and 1995, respectively. Mr. Brown was President of the Desktop Storage Division
from 1993 to 1995 and Executive Vice President in a chief operating officer role
from 1992 to 1993. Previously, Mr. Brown was named Vice President of Marketing
in 1990 and held positions in product and marketing management since joining
Quantum's marketing organization in August 1984. Before joining Quantum, Mr.
Brown served in the marketing organization at Hewlett-Packard and provided
management consulting services at Braxton Associates. Mr. Brown is also a member
of the board of Digital Impact, a publicly held internet marketing company.
Ms. Budig is currently Acting Chief Financial Officer, and has been Vice
President, Finance since 2000. From 1999 to 2000, Ms. Budig was Director,
Investor Relations. Before joining Quantum, from 1990 to 1998, Ms. Budig was a
partner at Murdock & Associates, a financial consulting firm. Ms. Budig worked
in public accounting for nine years prior to that and is a Certified Public
Accountant.
Mr. Daly has served as Chief Executive Officer and President of ATL Products,
Inc., a wholly owned subsidiary of Quantum acquired in 1998, since its formation
in 1991. Mr. Daly had been with Odetics, Inc., ATL's former parent company,
since 1985, most recently as Chief Technical Officer. From 1974 through 1985 Mr.
Daly was Director of the Control and Dynamics Division of the Charles Stark
Draper Laboratory in Cambridge, MA. Mr. Daly is a member of the board of
directors of Odetics, Inc. and Ascolta Training Company, Inc.
Mr. Gannon has been President of the Hard Disk Drive Group since February 1999.
From May 1998 to February 1999, Mr. Gannon was Executive Vice President of
Worldwide Sales. Prior to joining Quantum, Mr. Gannon spent seventeen years with
Hewlett Packard from 1981 to 1998, last serving as General Manager of Commercial
Personal Computer Business from 1996 to 1998 and its Digital Audio Tape business
from 1993 to 1996.
Mr. Maurer joined Quantum as Executive Vice President of Human Resources, Real
Estate and Corporate Services in December 1998. Prior to joining Quantum, Mr.
Maurer was Senior Vice President of Human Resources at Seagate Technology from
1996 to 1998. Previously, he was Senior Vice President of Human Resources for
Melville Corporation from 1993 to 1996 and spent more than 25 years in a variety
of management and human resources positions with companies such as Illinois Bell
Telephone Co., AT&T and Aetna Life & Casualty.
Ms. Nelson has been president of Quantum's DLTtape Group since December 1999.
From September 1999 to December 1999, Ms. Nelson was the General Manager of
Quantum's high-end storage division. Before this, from November 1997 to August
1999, Ms. Nelson was Vice President and General Manager of Quantum's desktop
storage division, joining Quantum as Vice President of Marketing in January
1997. Prior to joining Quantum, Ms. Nelson spent 13 years in various management
positions at Intel Corporation, including operations manager for
7
private label technology, and 7 years in various management positions at Lumina
Office Products, Inc., a start-up supplier of consumer office equipment, Maxtor
Corporation, and Weitek, Inc., a provider of high-end math microprocessors and
application software.
8
ITEM 2. Properties
Quantum's headquarters is located in Milpitas, California. Quantum owns or
leases facilities in North America, Europe and Asia. The following is a summary
of the locations, functions and approximate square footage:
Location Function Square Feet
- -------- -------- -----------
North America
Milpitas, CA Corporate headquarters 72,000
Santa Clara, CA QTV headquarters 3,000
San Jose, CA Network attached storage operations including research and development 64,000
Irvine, CA Tape library manufacturing and research and development 187,000
Shrewsbury, MA Tape research and development 57,000
Colorado Springs, CO Super DLTtape, DLTtape and network attached storage products manufacturing 554,000
Boulder, CO Tape research and development 93,000
Other USA Sales offices 15,000
Europe
Dundalk, Ireland DLTtape configuration and distribution 110,000
Geneva, Switzerland European Headquarters 9,000
Other Europe Sales and administrative offices 18,000
Asia
Tokyo, Japan Sales office and procurement center 7,000
Singapore City, Singapore Asia Pacific headquarters; DLTtape configuration and distribution 5,000
Penang, Malaysia Tape manufacturing and customer service 159,000
Other Asia Sales offices 7,000
ITEM 3. Legal Proceedings
For information regarding legal proceedings, refer to Note 15 of the Notes to
the Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
A special meeting of the stockholders of Quantum was held on March 30, 2001.
Following are the matters voted upon at the meeting, and the number of votes
cast for or against, as well as the number of abstentions for each such matter:
Matter 1. Proposal to adopt the Amended and Restated Agreement and Plan of
Merger and Reorganization with Maxtor Corporation, as provided in the proxy
statement/prospectus.
For: 148,185,435 Against: 1,021,655 Abstained: 261,402
Matter 2. Proposal to amend Quantum's restated certificate of incorporation
regarding redemption of Quantum's HDD common stock, as provided in the proxy
statement/prospectus.
For: 148,543,924 Against: 644,670 Abstained: 279,908
Matter 3. Proposal to amend Quantum's restated certificate of incorporation to
delete provisions relating to Quantum's HDD common stock, as provided in the
proxy statement/prospectus.
9
For: 148,714,250 Against: 555,372 Abstained: 198,880
10
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Quantum Corporation's common stock was traded in the over-the-counter market
under the Nasdaq symbol QNTM for the period beginning December 10, 1982, the
date of Quantum's initial public offering, through August 3, 1999, the date of
the tracking stock recapitalization. On August 4, 1999, DSS common stock and HDD
common stock began trading on the New York Stock Exchange under the symbols DSS
and HDD, respectively.
The prices per share reflected in the following table represent the range of
high and low closing prices of QNTM and DSS for the quarters indicated.
Fiscal Year 2000 - QNTM High Low
- ----------------------- ---- ---
First quarter ended June 27, 1999............................................. $25.0625 $16.9375
Second quarter (for the period from June 28, 1999 through August 3, 1999)..... 27.1875 21.9675
Fiscal Year 2000 - DSS High Low
- ---------------------- ---- ---
Second quarter (for the period from August 4, 1999 through September 26, 1999) 21.4375 14.3750
Third quarter ended December 26, 1999......................................... 18.5625 11.5000
Fourth quarter ended March 31, 2000........................................... 15.6875 8.7500
Fiscal Year 2001 - DSS High Low
- ---------------------- ---- ---
First quarter ended July 2, 2000.............................................. $11.9375 $ 9.4375
Second quarter ended October 1, 2000.......................................... 15.5625 9.4375
Third quarter ended December 31, 2000......................................... 16.1250 11.3125
Fourth quarter ended March 31, 2001........................................... 14.9375 11.5000
Historically, Quantum has not paid cash dividends on its common stocks.
As of May 27, 2001, there were approximately 1,966 Quantum shareholders of
record.
ITEM 6. Selected Financial Data
The information required by Item 6 is incorporated by reference from Part IV
herein.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 is incorporated by reference from Part IV
included herein.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For information about market risk, refer to the "Financial Market Risks"
sections in Part IV of this report.
11
ITEM 8. Financial Statements and Supplementary Data
The information required by Item 8 is incorporated by reference from Part IV
herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
12
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to directors is incorporated by reference from
Quantum's Proxy Statement. For information pertaining to executive officers of
Quantum, refer to the "Executive Officers of Quantum Corporation" section of
Part I, Item 1 of this document.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference from Quantum's
Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from Quantum's
Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from Quantum's
Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and 13 of
this Form 10-K Annual Report, Quantum's definitive Proxy Statement for its 2001
Annual Meeting of Shareholders is not deemed "filed" as part of this Form 10-K
Annual Report.
13
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--The consolidated financials statements of Quantum
Corporation are listed in the Index to Financial Statements and Financial
Statement Schedules.
2. Financial Statement Schedules--The consolidated valuation and qualifying
accounts (Schedule II) financial statement schedule of Quantum Corporation
are listed in the Index to Financial Statements and Financial Statement
Schedules.
3. Exhibits
Exhibit Exhibit
Number -------
- ------
3.1 Amended and Restated Certificate of Incorporation of Registrant
3.2(1) Amended and Restated By-laws of Registrant, as amended
3.3(2) Certificate of Designations for the Series B Participating Junior
Preferred Stock and Series C Participating Junior Preferred Stock
4.1(2) Restated Preferred Shares Rights Agreement between the Registrant
and Harris Trust and Savings Bank
10.1 Form of Indemnification Agreement between Registrant and the
Named Executive Officers and Directors
10.2 Form of Change of Control Agreement between Registrant and the
Named Executive Officers and Directors
10.3(3) 1993 Long-Term Incentive Plan (as amended May 29, 2001)
10.4(3) 1993 Long-Term Incentive Plan Form of Stock Option Agreement
10.5(3) Supplemental Stock Option Plan (as amended May 29, 2001)
10.6(3) Supplemental Stock Option Plan Form of Stock Option Agreement
10.7 1996 Board of Directors Stock Option Plan (as amended May 29, 2001)
10.8 1996 Board of Directors Stock Option Plan Form of Stock Option
Agreement
10.9 Employee Stock Purchase Plan (as amended May 29, 2001)
10.10(4) Patent Assignment and License Agreement, dated as of October 3,
1994, by and between Digital Equipment Corporation and Registrant
10.11(5) Indenture, dated August 1, 1997, between the Registrant and La
Salle National Bank as trustee, related to the Registrant's
subordinated debt securities
10.12(5) Supplemental Indenture, dated August 1, 1997, between the Registrant
and Trustee, relating to the Notes, including the form of Note
10.13 Second Supplemental Indenture, dated as of August 4, 1999, between
the Registrant and Trustee, relating to the Notes, including the form
of Note
10.14 Third Supplemental Indenture, dated as of April 2, 2001, between
the Registrant and Trustee, relating to the Notes, including the
form of Note
10.15(6) Amended and Restated Master Agreement, dated April 30, 1997, between
Registrant and Matsushita-Kotobuki Electronics Industries, Ltd.
10.16(6) Amended and Restated Purchase Agreement, dated April 30, 1997,
between Registrant and Matsushita-Kotobuki Electronics Industries,
Ltd.
14
Exhibit
Number Exhibit
- ------ -------
10.17(6) License Agreement, dated as of April 17, 1997, between International
Business Machines Corporation and Registrant
10.18(7) Amended and Restated Master Lease, dated July 12, 2000, between Selco
Service Corporation, as Lessor and Registrant, as Lessee
10.19(7) Amended and Restated Participation Agreement, dated July 12, 2000,
among Registrant, as Lessee, Selco Service Corporation, as Lessor,
the Participants and The Bank of Nova Scotia, as Agent
10.20 First Amendment to Amended and Restated Participation Agreement,
dated as of March 28, 2001, among Registrant, as Lesee, Selco Service
Corporation, as Lessor, the Participants and The Bank of Nova Scotia,
as Agent
10.21(8) Industrial Lease, dated as of July 17, 1998, between The Irvine
Company as lessor, and ATL Products, Inc. as lessee
10.22(9) Agreement and Plan of Merger and Reorganization, dated as of May 10,
1999, by and among Registrant, Defiant Acquisition Sub, Inc. and
Meridian Data, Inc.
10.23(9) First Amendment, dated as of June 28, 1999, to Agreement and Plan of
Merger and Reorganization, dated as of May 10, 1999, by and among
Registrant, Defiant Acquisition Sub, Inc. and Meridian Data, Inc.
10.24(10) Amended and Restated Agreement and Plan of Merger and Reorganization
dated as of October 3, 2000 by and among Quantum Corporation, Maxtor
Corporation, Insula Corporation and Hawaii Corporation (excluding
exhibits).
10.25 Credit Agreement, entered into as of April 19, 2000 and amended and
restated as of the Restatement Date, by and among Registrant, the
Lenders and Bank of America, N.A., as Administrative Agent and
Issuing Lender
12 Statement of Computation of Ratios of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney (see signature page)
_________
1. Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 2000.
2. Incorporated by reference to Registrant's Registration Statement on Form S-
4, Amendment No.2, filed with the Securities and Exchange Commission on June
10, 1999.
3. Incorporated by reference to Registrant's Schedule TO filed with the
Securities and Exchange Commission on May 29, 2001.
4. Incorporated by reference to Registrant's Form 8-K filed with the Securities
and Exchange Commission on October 17, 1994.
5. Incorporated by reference to Registrant's Form 8-K filed with the Securities
and Exchange Commission on August 6, 1997.
6. Incorporated by reference to Registrant's Form 10-Q for the quarterly period
ended June 29, 1997 filed with the Securities and Exchange Commission on
August 13, 1997.
7. Incorporated by reference to Registrant's Form 10-Q for the quarterly period
ended October 1, 2000 filed with the Securities and Exchange Commission on
November 14, 2000
8. Incorporated by reference to Registrant's Form 10-Q for the quarterly period
ended December 27, 1998 filed with the Securities and Exchange Commission on
February 9, 1999.
9. Incorporated by reference to Registrant's Registration Statement on Form S-4
filed with the Securities and Exchange Commission on August 10, 1999
10. Incorporated by reference to Registrant's Form 10-Q for the quarterly period
ended December 31, 2000 filed with the Securities and Exchange Commission on
February 14, 2001.
(b) Reports on Form 8-K: None.
(c) Exhibits: See Item 14(a) above.
(d) Financial Statement Schedules: See Item 14(a) above.
15
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: June 28, 2001
/s/ RENEE BUDIG
------------------------
Renee V. Budig
Acting Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Renee Budig and Shawn Hall, 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
June 28, 2001.
Signature Title
--------- -----
/s/ MICHAEL A. BROWN Chairman of the Board, and Chief
- -----------------------------------
Michael A. Brown Executive Officer (Principal
Executive Officer)
/s/ RENEE V. BUDIG Acting Chief Financial Officer
- -----------------------------------
Renee V. Budig (Principal Financial and
Accounting Officer)
/s/ STEPHEN M. BERKLEY Director
- -----------------------------------
Stephen M. Berkley
/s/ DAVID A. BROWN Director
- -----------------------------------
David A. Brown
/s/ EDWARD M. ESBER, JR. Director
- -----------------------------------
Edward M. Esber, Jr.
/s/ KEVIN J. KENNEDY Director
- -----------------------------------
Kevin J. Kennedy
/s/ GREGORY W. SLAYTON Director
- -----------------------------------
Gregory W. Slayton
16
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
------
Quantum Corporation -- Financial Statements
Selected Consolidated Financial Information.......................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations................ 20
Report of Ernst & Young LLP, Independent Auditors.................................................... 39
Consolidated Statements of Operations for the Years Ended March 31, 2001, 2000 and 1999.............. 40
Consolidated Balance Sheets as of March 31, 2001 and 2000............................................ 42
Consolidated Statements of Cash Flows for the Years Ended March 31, 2001, 2000 and 1999.............. 44
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2001, 2000 and 1999.... 45
Notes to Consolidated Financial Statements........................................................... 48
Schedule II--Consolidated Valuation and Qualifying Accounts.......................................... 75
17
QUANTUM CORPORATION SELECTED FINANCIAL INFORMATION
This summary of consolidated financial information of Quantum for fiscal years
1997 to 2001 should be read along with Quantum's audited consolidated financial
statements contained in this Annual Report on Form 10-K. The summarized
financial information, other than the statement of operations data for fiscal
years 1997 and 1998 and the balance sheet data at March 31, 1997, 1998 and 1999,
was taken from these financial statements. As a result of the disposition of the
HDD business on April 2, 2001, the selected financial information below has been
restated to present the results of the HDD business as discontinued operations
(see note 18 to the consolidated financial statements).
A number of items affect the comparability of this information.
. The results of operations for fiscal year 2000 include the effect of a
$40.1 million special charge associated with Quantum's strategy to reduce
overhead expenses and product cost including the transfer of DLTtape drive
volume manufacturing to Penang, Malaysia from Colorado Springs, Colorado.
. The results of operations for fiscal years 1999 and 2000 include charges of
$89 million and $37 million, respectively, for purchased in-process
research and development in connection with the acquisitions of ATL
Products, Inc. ("ATL") and Meridian Data Inc. ("Meridian"), respectively.
. Prior to fiscal year 1999, almost all DLTtape media cartridges were sold
directly by Quantum. However, beginning in fiscal year 1999, increased
DLTtape media availability allowed licensed third party DLTtape media
cartridge manufacturers to sell DLTtape media cartridges for which Quantum
receives royalties. Royalty receipts by Quantum are reported as royalty
revenue, which is significantly lower than the equivalent DLTtape media
cartridge product revenue for Quantum. However, this royalty model has
generated income from operations comparable to that generated by DLTtape
media cartridge sales made directly by Quantum.
At or For the Year Ended March 31,
----------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Statement of Operations Data
Product revenue............................................. $1,183,845 $1,232,442 $1,181,273 $1,162,725 $ 719,925
Royalty revenue............................................. 221,973 186,429 121,463 27,075 8,088
---------- ---------- ---------- ---------- ----------
Total revenue............................................. 1,405,818 1,418,871 1,302,736 1,189,800 728,013
Gross profit................................................ 623,036 648,890 579,919 502,214 270,339
Research and development expenses........................... 130,106 122,821 99,330 62,825 30,039
Sales and marketing, general and administrative
expenses.................................................. 231,684 181,495 114,895 69,607 35,240
Special charge.............................................. -- 40,083 -- -- --
Purchased in-process research and development
expense................................................... -- 37,000 89,000 -- --
Income from operations...................................... 261,246 267,491 276,694 369,782 205,060
Income from continuing operations........................... 167,446 145,614 122,991 223,659 107,460
Income (loss) from discontinued operations.................. (6,760) (104,770) (152,526) (52,858) 41,055
Net income (loss)........................................... $ 160,686 $ 40,844 $ (29,535) $ 170,801 $ 148,515
Income per share from continuing operations
Basic..................................................... $ 1.13 $ 0.53 $ 0.77 $ 1.64 $ 0.92
Diluted................................................... $ 1.08 $ 0.51 $ 0.74 $ 1.37 $ 0.75
Net income (loss)per share (1), (2):
Basic..................................................... (0.10) $ (0.18) $ 1.25 $ 1.27
Diluted................................................... (0.10) $ (0.18) $ 1.07 $ 1.04
18
Balance Sheet Data
Property, plant and equipment, net.......................... $ 94,700 $ 78,137 $ 73,122 $ 57,399 $ 39,114
Total assets................................................ 1,899,704 1,862,480 1,804,889 1,698,516 1,293,193
Total long-term debt, convertible debt and
redeemable preferred stock................................ 287,500 287,500 287,500 287,500 320,587
Net current assets of discontinued operations 501,839 674,248 708,610 738,707 616,903
Net non-current assets of discontinued operations 184,504 102,228 82,636 167,739 238,366
(1) Net income (loss) per share for fiscal year 2000 is presented for the period
from April 1, 1999 through August 3, 1999, as there is no single class of stock
that represents the consolidated company after August 3, 1999, the date of the
recapitalization.
(2) Net income (loss) per share for fiscal year 2001 is not presented, as there
is no single class of stock that represents the consolidated company after
August 3, 1999, the date of the recapitalization.
(3) Income per share from continuing operations for fiscal year 2000 presented
in the table is for the period from August 4, 1999 through March 31, 2000, after
the recapitalization that occurred on August 3, 1999. The income per share from
continuing operations for the period from April 1, 1999 through August 3, 1999
was $0.36 (basic) and $0.35 (dilutive).
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Continuing Operations
Fiscal Year 2001 Compared With Fiscal Year 2000
- -----------------------------------------------
Revenue
Total revenue in fiscal year 2001 was $1,406 million, compared to $1,419 million
in fiscal year 2000. The slight decline in revenue reflected decreased revenue
from DLTtape drives, partially offset by increased storage solutions revenue and
DLTtape media royalties. The decline in DLTtape drive revenue reflected
decreased shipments and a decline in average unit prices due to competitive
pricing. The increase in DLTtape media royalties reflected an increase in sales
of DLTtape media cartridges at licensed media manufacturers for which Quantum
earns a royalty. The increase in storage solutions revenue reflects increased
shipments of tape automation systems and network attached storage appliances,
which in part reflects Quantum's introduction of these products following and in
conjunction with the acquisition of Meridian Data, Inc. in September 1999 or the
second quarter of fiscal year 2000.
The table below summarizes the components of Quantum's revenue in the years
ended March 31, 2001 and March 31, 2000.
(in millions)
2001 2000
------ ------
DLTtape drives $ 754 $ 858
DLTtape media 114 147
DLTtape royalty 222 187
Storage solutions 413 323
Inter-group elimination* (97) (96)
------ ------
Revenue $1,406 $1,419
====== ======
* Represents inter-group sales of DLTtape drives for incorporation into tape
automation systems, for which the sales are included in storage solutions
revenue.
Sales to the top five customers in fiscal year 2001 represented 43% of revenue,
compared to 47% of revenue in fiscal year 2000. Sales to Compaq were 19% of
revenue in fiscal year 2001, compared to 20% of revenue in fiscal year 2000.
Sales to Hewlett-Packard were 10% of revenue in fiscal years 2001, compared to
13% of revenue in fiscal year 2000.
Sales to computer equipment manufacturers and distribution channel customers
were 59% and 15% of revenue, respectively, in fiscal year 2001, compared to 63%
and 16% of revenue, respectively, in fiscal year 2000. The remaining revenue in
fiscal years 2001 and 2000 represented media royalty revenue and sales to value-
added resellers.
Gross Margin Rate
The gross margin rate in fiscal year 2001 was 44.3%, compared to 45.7% in fiscal
year 2000. The slight decrease reflected lower DLTtape drive margins is a
result of price declines, partially offset by an increase in the proportion of
overall revenue represented by DLTtape media royalty revenue and storage
solutions. As a result of economic conditions and an expected increase in
competition in the tape drive market, Quantum expects that DLTtape drive margins
will face increasing pressure in the future, which could cause a decline in the
overall gross margin rate. In addition, a substantial portion of the overall
gross margin is derived from media sales. To the extent that media sales
decline, our business could be adversely affected.
20
Research and Development Expenses
Research and development expenses in fiscal year 2001 were $130 million, or 9.3%
of revenue, compared to $123 million, or 8.7% of revenue, in fiscal year 2000.
The increase in research and development expenses reflected an increase in
network attached storage solutions research and development, which in part
reflects Quantum's acquisition of Meridian Data, Inc. in September 1999, the
second quarter of fiscal year 2000.
Sales and Marketing Expenses
Sales and marketing expenses in fiscal year 2001 were $153 million, or 10.9% of
revenue, compared to $119 million, or 8.4% of revenue in fiscal year 2000. The
increase was the result of additional marketing expense to build category
awareness for NAS applications and brand awareness for our network attached
storage product line and in part reflects Quantum's acquisition of Meridian
Data, Inc. in September 1999, the second quarter of fiscal year 2000. The
increase also reflected the increased sales and marketing for tape automation
systems, including the development of a direct sales channel.
General and Administrative Expenses
General and administrative expenses in fiscal year 2001 were $79 million, or
5.6% of revenue, compared to $63 million, or 4.4% of revenue, in fiscal year
2000. The increase in general and administrative expenses reflected increased
storage solutions expenses, with increased costs related to tape automation
systems and network attached storage solutions and in part reflects Quantum's
acquisition of Meridian Data, Inc. in September 1999 or the second quarter of
fiscal year 2000.
Purchased In-process Research and Development Expense
In fiscal year 2000, Quantum expensed purchased in-process research and
development costs of $37 million as a result of the Meridian acquisition in the
second quarter.
On September 10, 1999, Quantum completed the acquisition of Meridian Data, Inc.
("Meridian" - now known as Snap Appliances Inc, which is part of Quantum's
Storage Solutions business). Four in-process research and development projects
were identified and valued, including three Snap network attached storage server
projects and one operating system ("O/S") project. The Snap server is a family
of network attached storage appliances with products that incorporate hard disk
drives and an O/S designed to meet the requirements of entry and workgroup level
computing environments where multiple computer users access shared data files
over a local area network. Since the O/S represents a significant technology
component of the Snap server product, the O/S technology was valued as a
separate technology asset. These projects are intended to provide additional
capacity and enhanced functionality to current Snap server products. The Snap
server projects and the O/S project represent 61% and 39%, respectively, of the
total in-process research and development value of $37 million. As of September
10, 1999, the Snap server projects ranged from 24% to 82% complete and the O/S
technology project was 39% complete. The Snap server and O/S projects were
completed on schedule in fiscal year 2000.
For additional information regarding the Meridian acquisition and the costs
associated with in-process research and development, refer to Note 6 of the
Notes to the Financial Statements.
Goodwill and intangible assets
Goodwill and intangible assets at March 31, 2001, represented approximately 12%
and 18% of total assets and stockholders' equity, respectively. The goodwill
and intangible assets balance at March 31, 2001, was approximately $228 million
and included goodwill of $115 million from the acquisition of ATL and goodwill
of $25 million from the acquisition of Meridian.
Goodwill and other acquired intangible assets are amortized over their estimated
useful lives, which range from three to fifteen years. Management in estimating
the useful lives of the goodwill and other intangible assets considered the
following factors:
21
. The cash flow projections used to estimate the useful lives of the goodwill
and other intangible assets showed a trend of growth that was expected to
continue for an extended period of time;
. The products offered by Snap and ATL, in particular, have long development
cycles and corresponding long product life cycles;
. The ability to leverage core technology into new Snap and ATL products, and
to therefore extend the life of these technologies.
Quantum assesses the recoverability of its assets, including goodwill, by
comparing projected undiscounted net cash flows associated with those assets
against their respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets. No such
impairment has been identified to date with respect to Quantum's acquired
intangible assets and goodwill.
Special Charge
During the fourth quarter of fiscal year 2000, Quantum recorded a special charge
of $40.1 million. The charge was primarily focused on Quantum's DLTtape division
and reflected Quantum's strategy to align its DLTtape drive operations with
market conditions. These conditions include slower growth in the mid-range
server market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat to declining DLTtape
drive shipments. The special charge included a reduction of overhead expenses
throughout the DLTtape division and an acceleration of Quantum's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed asset
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
In the third quarter of fiscal year 2001, Quantum reversed $7 million as a
special charge benefit on the income statement. This reversal was primarily due
to a revised estimate of the vacancy period related to a facility in Colorado
Springs, Colorado.
Quantum recorded a special charge of $7 million in the third quarter of fiscal
year 2001. This is a result of Quantum's decision to establish a close proximity
between its design and manufacturing operations in order to accelerate time-to-
market for future products within its DLTtape drive product family. This
impacted engineering, marketing and administrative employees in Shrewsbury,
Massachusetts, as these positions were transitioned to Boulder, Colorado. The
special charge is related to severance and benefits associated with terminated
employees affected by this plan.
Quantum is proceeding according to plan and expects to realize annual cost
savings from the plans of approximately $50 million, beginning upon full
implementation of the plans in the beginning of fiscal year 2002. Approximately
$25 million of the savings are expected in cost of revenue as a result of
reduced manufacturing costs, with the remaining amount in operating expenses,
primarily research and development, as a result of ending research on certain
optical-based storage solutions and a reduction in headcount. These expectations
are forward-looking statements and actual results could vary. See "safe harbor"
disclosure in Part I, Item 1. See also risk factors entitled - Quantum's
quarterly operating results could fluctuate significantly and past quarterly
operating results should not be used to predict future performance.
Interest and Other Income/Expense
Net interest and other income/expense for the fiscal year 2001 was $0.4 million
income compared to $0.1 million expense in fiscal year 2000. The change from
expense to income reflected increased interest income as a result of higher
average cash balances and higher interest rates, partially offset by a write-
down of an equity investment.
22
Income Taxes
Quantum's effective rate in fiscal 2001 was 36% compared to 40% in fiscal year
2000. The fiscal year 2000 tax rate excludes the write-off for purchased in-
process research and development for which a tax benefit is not recognizable.
Quantum recorded a provision of 45.5% of pretax earnings in fiscal 2000. The
lower effective rate in fiscal 2001 is primarily attributable to increased
foreign earnings taxed at less than the U.S. rate.
Income from Continuing Operations
Income from continuing operations in fiscal year 2001 was $167 million, compared
to $146 million in fiscal year 2000. The increase in income from continuing
operations reflects the exclusion in fiscal year 2001 of purchased in-process
research and development costs and special charges. The exclusion of these
expenses was partially offset by increased operating expenses.
Events Subsequent to Year-End
- -----------------------------
Discontinued Operations - Disposition of the Hard Disk Drive group
On March 30, 2001, Quantum's stockholders approved the disposition of the HDD
group to Maxtor Corporation. On April 2, 2001, each authorized share of HDD
common stock was exchanged for 1.52 shares of Maxtor common stock.
The HDD group produced two primary product lines, desktop hard disk drives and
high-end hard disk drives. HDD had two separate business units that supported
these two product lines. The desktop business unit designed, developed and
marketed desktop hard disk drives designed to meet the storage requirements of
entry-level to high-end desktop personal computers in home and business
environments. The high-end business unit designed, developed and marketed high-
end hard disk drives designed to meet the storage requirements of network
servers, workstations and storage subsystems.
Quantum expects to realize a net gain on the disposal of the HDD business of
between $135 million to $160 million to be recorded in the June quarter of
fiscal year 2002. This is a forward looking statement and actual results could
differ. See risk factor entitled - If Quantum incurs non-insured tax as a
result of the disposition, Quantum's financial condition and operating results
could be negatively affected.
The following table summarizes the results of discontinued operations:
Year Ended March 31,
2001 2000
---------- ----------
(In thousands)
Revenue.................................................. $3,046,489 $3,311,579
Gross Profit............................................. 410,867 230,070
Operating Expenses....................................... 434,418 420,994
Loss from operations..................................... (23,551) (190,924)
Loss before income taxes................................. (9,660) (178,181)
Income tax benefit....................................... 2,900 73,411
Loss from discontinued operations........................ $ (6,760) $ (104,770)
The decreased revenue for fiscal year 2001 primarily reflected decreased
shipments of desktop hard disk drives in conjunction with lower average unit
prices. The lower than expected shipments were attributable to an economic
slowdown and a specific component shortage experienced in the third fiscal
quarter.
The increase in gross profit resulted from higher gross margin rates and a
special charge of $57 million incurred in fiscal year 2000, of which $16 million
was reversed in fiscal year 2001. The higher gross margin rates were due to a
shift towards lower cost, higher capacity, higher margin products in both the
desktop and high-end divisions. The special charge related to Quantum's
strategy to modify the Hard Disk Drive business model with the low-cost PC
23
market. The special charge benefit in fiscal year 2001 was due to negotiated
lease cancellations and reduced severance and benefits due to the redeployment
of employees.
The increase in operating expenses primarily resulted from expenses associated
with the disposition of HDD to Maxtor and higher research and development costs,
partially offset by lower sales and marketing and general and administrative
expenses. Merger costs incurred in fiscal year 2001 were $19 million and
reflected employee retention, legal, accounting and underwriter fees.
Non-Recurring and Special Charges, In-Process Research and Development Expenses
Transition Expenses
(i) Non-Recurring Charges
As a result of the disposition of the HDD business and its merger with Maxtor in
the first quarter of fiscal year 2002, Quantum will record certain stock and
other compensation charges to better align resources with the requirements of
Quantum's ongoing operations. These charges will be recorded in Quantum's
results of operations.
Stock Compensation Charges
As described in the paragraphs below, approximately $17 million of stock
compensation charges will be immediately expensed upon completing the
disposition in the first quarter of fiscal year 2002, and approximately $17
million of deferred stock compensation charges will be recorded and expensed
over remaining vesting periods or up to four years.
The following table estimates the vesting and expense recognition for the $17
million of deferred stock compensation charges.
Period Stock
------ Compensation
Recognized
(in millions)
1/st/ quarter fiscal year 2002 $ 9.7
2/nd/ quarter fiscal year 2002 2.0
3/rd/ quarter fiscal year 2002 1.8
4/th/ quarter fiscal year 2002 0.7
-----
Fiscal Year 2002 14.2
Fiscal Year 2003 2.0
Fiscal Year 2004 0.6
Fiscal Year 2005 0.2
=====
Total $17.0
=====
Stock Compensation Charges - Continuing Quantum Employees
In the first quarter of fiscal year 2002, continuing DSS employees, including
corporate employees with HDD stock options and HDD restricted stock will have
their HDD equity interests converted into DSS stock options and restricted
stock, respectively. The aggregate intrinsic value of the stock option and
restricted stock immediately after the conversion will equal the intrinsic value
of the stock option and restricted stock immediately before the conversion. In
addition, the ratio of the exercise price per share to the market value per
share will not be reduced. Resulting compensation at approximately $15 million,
related to vested stock options will be immediately expensed, and compensation
at approximately $8 million, related to unvested options and restricted stock
will be expensed over the remaining vesting periods of those awards or up to
four years. The compensation expense related to these replacement awards will be
included in continuing operations in Quantum's consolidated financial
statements.
24
Stock Compensation Charge - Corporate Employees Terminated at the time of the
Merger
Most Quantum employees whose employment is terminated coincident with the
closing of the HDD and Maxtor transaction will be afforded the normal 90-day
period in which to exercise their vested HDD and DSS stock option awards.
Employees designated for termination at the merger consummation date had their
unvested HDD and DSS stock options and restricted stock converted in to shares
of DSS restricted stock based on a conversion formula that conferred an economic
value at least equal to the intrinsic value of the HDD and DSS options and
restricted stock at the time of the conversion. Terminated employees who are not
party to a transition arrangement will receive accelerated vesting of 50% of the
unvested portion of their restricted stock awards. Compensation expense related
to the stock conversions and acceleration granted to former corporate employees
terminated coincident with the closing of the transaction at approximately $3
million will be included in continuing operations in Quantum's consolidated
financial statements. Compensation expense related to the stock conversions and
acceleration granted to former Quantum HDD employees terminated with the closing
of the transaction will be included in the calculation of the gain on disposal
of discontinued operations.
Stock Compensation Charge - Employees to be Terminated After the Merger
Employees designated for termination on or about the merger consummation date,
but who will remain employed by Quantum pursuant to a transition service
arrangement, had their unvested HDD and DSS stock options and restricted stock
converted into shares of DSS restricted stock based on a conversion formula that
conferred an economic value at least equal to the intrinsic value of the HDD and
DSS options and restricted stock at the time of the conversion (vested but
unexercised awards will be permitted to expire according to their original
terms). Fifty percent of the DSS restricted stock issued upon conversion of such
outstanding unvested awards will vest upon the earlier of three months
succeeding the initial three-month period or the termination date of the
employee. Quantum will account for the award of restricted stock, in settlement
of existing unvested options and restricted stock, as the cancellation of an
award and concurrent new issuance. The other 50% of the DSS restricted stock
will vest ratably over the successive nine month period so long as such
individuals remain employed by Quantum during this time. Quantum will record
deferred compensation of approximately $9 million for the value of the DSS
restricted stock issued, fixed as of the issuance date, and will recognize
compensation expense through continuing operations over the period during which
the restrictions on such stock lapse, or up to nine months.
Corporate Severance and Compensation Charges
Subsequent to the disposition of the HDD business and its merger with Maxtor,
Quantum will be left with excess administration and overhead costs. Pursuant to
the merger agreement, Maxtor has agreed to hire, or in the event it does not
hire, pay the severance costs associated with the termination of substantially
all of the of the HDD employees and a significant portion of the corporate
employees, including certain members of Quantum's senior management. The
severance costs that will not be paid by Maxtor will be included in Quantum's
results of operations. The corporate severance and compensation costs that will
be included in Quantum first quarter of fiscal year 2001 are estimated at
approximately $10 million.
(ii) Special Charges - DLT and Storage Solutions
In the first quarter of fiscal year 2001, Quantum expects to incur approximately
$25 million of special charges related to: 1) discontinuing business activities
in solid state storage systems, 2) the decision to withdraw the plans for an
initial public offering of its Snap Appliances subsidiary, namely writing off
deferred costs that were related to the plan, 3) staff reductions and other cost
incurred related to cost savings activities related to tape automation systems
activities, and 4) DLT relocation and transition expenses that will be incurred
as DLTtape product development is moved from Shrewsbury, Massachusetts, to
Boulder, Colorado.
25
(iii) In-Process Research and Development Expenses
Approximately $13 million of the M4 purchase price will be assigned to in-
process research and development, which will be expensed in the first quarter of
fiscal year 2002.
(iv) Transition Expenses
Certain Quantum employees designated for termination on or about the merger
consummation date, but who will remain employed by Quantum pursuant to a
transition service arrangement will provide transition services to Quantum, as
well as to Maxtor. These transition services will be aimed at transitioning
certain activities to Maxtor or for ongoing Quantum activities, to a scaled down
version of the function that is appropriate to the size of Quantum after the
disposition of the HDD business. The transition services include real estate,
information systems and equipment, accounting, payroll, sales and marketing,
product support, inventory maintenance, procurement, costing, warehouse
management, communications, human resources and other specific services. Maxtor
will reimburse Quantum for a portion of the transition services. Quantum's
portion of the transition services is expected to be approximately $10 million
and $5 million in the first and second quarters of fiscal year 2002,
respectively, excluding stock compensation charges associated with transition
employees. The related transition charges will be included in continuing
operations in Quantum's consolidated financial statements.
Acquisition of M4 (Data) Holdings Ltd
On February 7, 2001, Quantum announced that it had signed a definitive agreement
to acquire M4 Data (Holdings) Ltd., a privately held data storage company based
in the United Kingdom. The acquisition enables Quantum to leverage M4 Data's
complementary products and technologies to enhance the range of tape automation
storage solutions offered to enterprise customers. M4 Data provides scalable
high performance tape automation products for the data storage market.
Under the terms of the agreement, Quantum acquired on April 12, 2001, all the
outstanding stock of M4 Data for approximately $56 million in consideration,
including $15 million in cash and $41 million in notes payable. These notes are
due 2006 and are callable by the holders at their option, beginning April 2002.
The purchase agreement also includes additional contingent consideration based
on the achievement of future performance goals.
The acquisition will be accounted for as a purchase, and Quantum expects that
approximately $13 million of the purchase price will be assigned to in-process
research and development, which will be expensed in the first quarter of fiscal
year 2002.
26
Fiscal Year 2000 Compared With Fiscal Year 1999
- ------------------------------------------------
Revenue
Total revenue in fiscal year 2000 was $1,419 million, compared to $1,303 million
in fiscal year 1999, an increase of 9%. The increase in revenue reflected
increased revenue from sales of storage solutions and increased DLTtape media
royalties and a decline in revenue from sales of DLTtape drives. The increase
in storage solutions revenue reflected an increase in shipments of tape
automation systems and the acquisition of the ATL tape library business in
September 1998, and shipments of network attached storage appliances following
the acquisition of Meridian in September 1999. The increase in DLTtape media
royalties reflected an increase in sales of DLTtape media cartridges by licensed
media manufacturers for which Quantum earns a royalty. The overall increase in
market sales of DLTtape media cartridges reflected sales of cartridges for use
in both new DLTtape drives and to meet the ongoing new media needs of the
installed base of DLTtape drives. The decrease in DLTtape drive revenue
reflected increased shipments, offset by competitive price declines.
The table below summarizes the components of Quantum's revenue in the years
ended March 31, 2000 and March 31, 1999.
(in millions)
2000 1999
------ ------
DLTtape drives.............................. $ 858 $ 872
DLTtape media............................... 147 195
DLTtape royalty............................. 187 122
Storage solutions........................... 323 154
Inter-group elimination*.................... (96) (40)
------ ------
Revenue $1,419 $1,303
====== ======
* Represents inter-group sales of DLTtape drives for incorporation into
Quantum's tape automation systems, for which the sales are included in storage
solutions revenue.
Sales to the top five customers in fiscal year 2000 represented 47% of revenue,
compared to 53% of revenue in fiscal year 1999. These amounts reflected a
retroactive combination of sales to Compaq and Digital Equipment as a result of
their merger in June 1998. Sales to Compaq were 20% of revenue in fiscal year
2000, compared to 25% of revenue in fiscal year 1999, including sales made to
Digital Equipment. Sales to Hewlett-Packard were 13% of revenue in fiscal years
2000 and 1999.
Sales to computer equipment manufacturers and distribution channel customers
were 63% and 16% of revenue, respectively, in fiscal year 2000, compared to 71%
and 17% of revenue, respectively, in fiscal year 1999. The remaining revenue in
fiscal years 2000 and 1999 represented media royalty revenue and sales to value-
added resellers.
Gross Margin Rate
The gross margin rate in fiscal year 2000 was 45.7%, compared to 44.5% in fiscal
year 1999. The 1.2 percentage point increase reflected an increase in the
proportion of overall revenue represented by DLTtape media royalty revenue,
partially offset by a decline in the gross margin rate earned on DLTtape drives.
Research and Development Expenses
Research and development expenses in fiscal year 2000 were $123 million, or
8.7% of revenue, compared to $99 million, or 7.6% of revenue, in fiscal year
1999. The increase in research and development expenses reflected the
following:
. inclusion of ATL's expenses, which were not included in the first two
quarters of fiscal year 1999, as the acquisition occurred on September
28, 1998,
. inclusion of Snap's expenses, which were not included in fiscal year
1999 and the first quarter of fiscal year 2000, as the acquisition
occurred on September 10, 1999 and
. higher research and development expenses related to new tape drive
products and other new information storage products, including Super
DLTtape technology.
27
Sales and Marketing Expenses
Sales and marketing expenses in fiscal year 2000 were $119 million, or 8.4% of
revenue, compared to $77 million, or 5.9% of revenue in fiscal year 1999. The
increase in sales and marketing expenses reflected the inclusion of ATL and
Snap's expenses and an increase in marketing and advertising costs associated
with DLTtape products.
General and Administrative Expenses
General and administrative expenses in fiscal year 2000 were $63 million, or
4.4% of revenue, compared to $38 million, or 2.9% of revenue, in fiscal year
1999. The increase in general and administrative expenses reflected the
inclusion of ATL and Snap's expenses and the amortization of intangible assets,
particularly goodwill.
Purchased In-process Research and Development Expense
Quantum expensed purchased in-process research and development costs of $37
million as a result of the Snap acquisition in the second quarter of fiscal year
2000, and $89 million as a result of the ATL acquisition in the third quarter of
fiscal year 1999. On September 28, 1998, Quantum completed the acquisition of
ATL Products, Inc. ("ATL"). Five in-process research and development projects
were identified and valued, including three tape library projects, one network
project and one software project. These projects were intended to develop next-
generation tape automation systems and software management products. As of
September 28, 1998, the tape library projects ranged from 68% to 83% complete,
the network project was 54% complete and the software project was 78% complete.
These projects were completed by the end of fiscal year 2000.
For additional information regarding the Snap and ATL acquisitions and the costs
associated with in-process research and development, refer to Note 6 of the
Notes to the Financial Statements.
Interest and Other Income/Expense
Net interest and other income and expense in fiscal year 2000 was $0.1 million
expense compared to $12 million expense in fiscal year 1999. The decrease in
expense reflected increased interest income as a result of higher cash balances
and a $2.6 million gain on the sale of an equity investment. In addition, the
expense in fiscal year 1999 reflected a $6.8 million write-down of an equity
investment.
Income Taxes
Quantum's effective tax rate in fiscal years 2000 and 1999, excluding the write-
off for purchased in-process research and development was 40%. Quantum recorded
a provision of 45.5% of pretax earning in fiscal year 2000, compared to 53.5% in
fiscal year 1999. This lower effective rate was primarily attributable to a
decreased amount of purchased in-process research and development write-off in
fiscal year 2000, for which a tax benefit is not recognizable.
Income from continuing operations
Quantum reported income from continuing operations in fiscal year 2000 of $146
million, compared to $123 million in fiscal year 1999. The increase reflected
the lower charge for purchased in-process research and development in fiscal
year 2000, partially offset by increased operating expenses, including the
special charge and increased amortization of goodwill and other intangible
assets resulting from the ATL and Snap acquisitions.
28
Discontinued operations
The following table summarizes the results of operations for discontinued
operations:
Year Ended March 31,
2000 1999
---------- ----------
(In thousands)
Revenue................................................................. $3,311,579 $3,599,320
Gross Profit............................................................ 230,070 291,419
Operating Expenses...................................................... 420,994 423,874
Loss from operations.................................................... (190,924) (132,455)
Loss before income taxes................................................ (178,181) (264,503)
Income tax benefit...................................................... 73,411 111,977
Loss from discontinued operations....................................... $ (104,770) $ (152,526)
The decreased revenue for fiscal year 2000 primarily reflected a decline in
average unit prices of desktop hard disk drives, partially offset by an increase
in shipments. The decline in average unit prices was a result of intense
competitive pricing pressures, especially in the first two quarters of fiscal
year 2000.
The decrease in gross profit resulted from a special charge of $57 million
incurred in fiscal year 2000 and decreased revenues, partially offset by higher
gross margin rates. The special charge related to Quantum's strategy to modify
the Hard Disk Drive business model with the low-cost PC market. The higher gross
margin rate was due to a shift towards higher margin products in the high-end
divisions.
The decrease in operating expenses reflected decreases in research and
development expenses and sales and marketing expenses of $11 million and $4
million, respectively, partially offset by an increase of $10 million in general
and administrative expenses and a special charge of $2 million incurred in
fiscal year 2000 related to the modification of the Hard Disk Drive business
model.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Quantum is required
to adopt SFAS 133 in fiscal year 2002 and management does not expect SFAS No.
133 to have a material effect on the Quantum's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarized certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 was effective for Quantum in the first quarter of fiscal
year 2001. The adoption of SAB 101 did not have a material impact on Quantum's
financial position or results of operations.
In March 2000, FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of
Accounting Principles Board ("APB") Opinion No. 25." FIN 44 clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. FIN 44 did
not have a material impact on the Quantum's financial position or results of
operations.
Liquidity and Capital Resources
Quantum's cash, cash equivalents and marketable securities were $399 million at
March 31, 2001, compared to $339 million at March 31, 2000. Quantum generated
cash from operations of $177 million, primarily reflecting net income, increases
in income taxes payable, partially offset by increases in inventories and other
assets and liabilities.Quantum used cash in fiscal year 2001 to purchase $241
million of treasury stock, as discussed below.
29
Other uses of cash included approximately $92 million for purchases of property
and equipment. Other sources of cash included $64 million from the issuance of
common stock.
Net cash provided by continuing operations in fiscal years 2001 and 2000 was $61
million and $64 million, respectively, and net cash used by continuing
operations in fiscal year 1999 was $116 million. Net cash used by discontinued
operations in fiscal year 2001 was $178 million and net cash provided by
discontinued operations in fiscal years 2000 and 1999 was $82 million and $246
million, respectively.
Net cash provided by the operating activities of continuing operations in fiscal
years 2001, 2000 and 1999 was $241 million, $380 million and $217 million,
respectively. Net cash used in the operating activities of discontinued
operations in fiscal year 2001 was $64 million and net cash provided by the
operating activities of discontinued operations in fiscal years 2000 and 1999
was $117 million and $247 million, respectively.
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stock in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSS or HDD common stock. An
additional $100 million was authorized for repurchase of HDD common stock. Under
these authorizations, as of March 31, 2001, including 13.5 million shares of DSS
common stock and 10 million shares of HDD common stock repurchased for a
combined total of $241 million during the year ended March 31, 2001, Quantum had
repurchased a total of 3.9 million shares of Quantum common stock, 29.2 million
shares of DSS common stock and 13.5 million shares of HDD common stock for a
combined total of $566 million.
In April 2000, Quantum entered into two unsecured senior credit facilities, each
providing a $187.5 million revolving credit line and expiring in April 2001 and
April 2003, respectively. At Quantum's option, borrowings under the revolving
credit lines bear interest at either the London interbank offered rate or a base
rate, plus a margin determined by a leverage ratio with option periods of one to
six months. In March 2001, Quantum canceled the credit facility expiring April
2001. At March 31, 2001, there were no outstanding balances drawn on these
lines.
Quantum filed a registration statement that became effective on July 24, 1997,
pursuant to which Quantum may issue debt or equity securities, in one or more
series or issuances, limited to $450 million aggregate public offering price.
Under the registration statement, in July 1997, Quantum issued $288 million of
7% convertible subordinated notes. The notes mature on August 1, 2004, and were
convertible at the option of the holder at any time prior to maturity, unless
previously redeemed, into shares of Quantum DSS common stock and HDD common
stock. The notes are convertible into 6,206,152 shares of Quantum common stock,
or 21.587 shares per $1,000 note, and were originally convertible to 3,103,076
shares of HDD common stock, or 10.793 shares per $1,000 note. However, as a
result of the disposition of HDD, the HDD shares are convertible into 16.405
shares of Maxtor common stock per $1,000 note. Quantum has the option to redeem
the notes on or after August 1, 1999 and prior to August 1, 2001, under certain
conditions related to the price of Quantum's common stocks. Subsequent to
August 1, 2001, Quantum may redeem the notes at any time. In the event of
certain changes involving all or substantially all of Quantum's common stocks,
the holder would have the option to redeem the notes. Redemption prices range
from 107% of the principal to 100% at maturity. The notes are unsecured
obligations subordinated in right of payment to all of Quantum's existing and
future senior indebtedness.
Quantum expects to spend approximately $60 million in fiscal year 2002 for
capital equipment and leasehold improvements. These capital expenditures will
support the tooling and other capital expenditures related to the ramp of Super
DLTtape products; additional manufacturing of tape drives in Penang, Malaysia;
and Quantum's general infrastructure. Quantum expects its cash flow from
operations, together with available financing sources, will be sufficient to
meet all currently planned expenditures and sustain operations for the next 12
months. However, this belief assumes that operating results and cash flow from
operations will meet Quantum's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt or
equity securities. Such financing may not be on terms favorable to Quantum.
30
Financial Market Risks
Quantum is exposed to a variety of risks, including changes in interest rates,
foreign currency fluctuations and marketable equity security prices. To manage
the volatility relating to these exposures, Quantum enters into various
derivative transactions pursuant to Quantum's policies to hedge against known or
forecasted market exposures.
Changes in interest rates affect interest income earned on Quantum's cash
equivalents and short-term investments, and interest expense on short-term and
long-term borrowings. Quantum does not enter into derivative transactions
related to its cash, cash equivalents or short-term investments, nor existing or
anticipated liabilities.
As a multinational corporation, Quantum is exposed to changes in foreign
exchange rates. These exposures may change over time and could have a material
adverse impact to our financial results.
Quantum utilizes foreign currency forward contracts to manage the risk of
exchange rate fluctuations. In all cases, Quantum uses these derivative
instruments to reduce its foreign exchange risk by essentially creating
offsetting market exposures. The instruments held by Quantum are not leveraged
and are not held for trading or speculative purposes.
Quantum uses forward exchange contracts to hedge its net asset or net liability
position, which primarily consists of inter-company balances, foreign tax
liabilities and non-functional currency denominated receivables. The hedging
activity is intended to manage the effects of foreign currency re-measurement
arising from certain assets and liabilities denominated in foreign currency.
The success of the hedging program depends on forecasts of transaction activity
in the various currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, Quantum could experience
unanticipated currency gains or losses.
Quantum maintains a portfolio of equity investments in companies that are not
currently publicly traded. These investments are recorded at cost, adjusted for
other than temporary impairment and are included in other assets. At March 31,
2001, the cost of these investments was $15.4 million. Quantum regularly reviews
the financial information of these investments and does not believe there has
been any impairment in the value of these investments.
Quantum is exposed to equity price risk on its investment in TiVo. Inc. common
stock. Quantum does not attempt to reduce or eliminate its market exposure on
this security. Quantum entered into a strategic alliance with TiVo in fiscal
year 1999 to supply hard drives utilizing Quantum's QuickView technology for
integration into TiVo's Personal Video Recorder. At March 31, 2001, the fair
market value of Quantum's investment was approximately $4.5 million. As TiVo is
a relatively new company and has introduced a new product in the consumer
electronics market, Quantum does not believe it is possible to reasonably
estimate any future price movement of TiVo common stock. This investment is
included in current assets from discontinued operations.
Trends and Uncertainties Relating to Quantum
- --------------------------------------------
Quantum is exposed to general economic conditions that have resulted in lower
sales and actions to reduce operating expenses and continued or worsened
conditions may result in additional actions to reduce operating expenses.
As a result of recent unfavorable economic conditions and reduced capital
spending, Quantum's sales have declined in the fourth quarter of fiscal year
2001 compared to the previous three quarters of fiscal 2001. In particular,
sales to OEMs and resellers in the server equipment manufacturing and storage
networking markets in the United States were impacted during the fourth quarter
of fiscal 2001. If the economic conditions in the United States worsen or if a
wider or global economic slowdown occurs, Quantum may experience a material
adverse impact on its business, operating results, and financial condition. For
example, Quantum expects a reduction in sales in the first quarter of fiscal
year 2002 compared to the fourth quarter of fiscal year 2001, which will result
in comparatively lower operating results as well as adjustments and other
charges associated with actions aimed at reducing operating expenses.
Comparatively lower sales have resulted in operating expenses increasing as a
percentage of revenue in the fourth quarter of fiscal year 2001 and this trend
is expected to worsen in the first quarter of fiscal year 2002 and although
Quantum is taking actions and charges in the first quarter of 2002 to reduce
operating expenses, a prolonged continuation or worsening of sales trends may
result in additional actions and charges aimed at further reducing operating
expenses in subsequent quarters of fiscal year 2002. The impact of charges or
an inability to reduce operating expenses consistent with future trends in sales
may adversely impact Quantum's operating results.
31
The disposition of HDD may be determined not to be tax-free, which would result
in Quantum or its stockholders, or both, incurring a substantial tax liability.
Maxtor and Quantum have agreed not to request a ruling from the Internal Revenue
Service (the "IRS"), or any state tax authority confirming that the structure of
the combination of Maxtor with HDD will not result in any federal income tax or
state income or franchise tax to Quantum, or the holders of HDD common stock.
Instead, Maxtor and Quantum have agreed to effect the disposition and the merger
on the basis of an opinion from Ernst & Young LLP, Quantum's tax advisors, and a
tax opinion insurance policy issued by a syndicate of major insurance companies
covering up to $340 million of tax loss to Quantum caused by disposition and
merger.
The tax opinion insurance policy does not cover all circumstances under which
the disposition could become taxable to Quantum.
In addition to customary exclusions from its coverage, the tax opinion insurance
policy does not cover any federal or state tax payable by Quantum if the
disposition becomes taxable to Quantum as a result of:
. a change in relevant tax law;
. an acquisition representing a 50% or greater interest in Quantum during
the two-year period following the merger, whether or not approved by
Quantum's board of directors; or
. an acquisition representing a 50% or greater interest in Maxtor during
the two-year period following the merger, whether or not approved by
Maxtor's board of directors.
If Quantum incurs non-insured tax as a result of the disposition, Quantum's
financial condition and operating results could be negatively affected.
If the split-off is determined to be taxable to Quantum, Quantum will not be
able to recover the tax either from Maxtor or under the insurance policy under
the following circumstances:
. If the tax loss were not covered by the policy because it fell under one
of the exclusions described above, insurance proceeds would not be
available to cover the loss.
. If the tax loss were caused by Quantum's own acts or those of a third
party that made the disposition taxable (for instance, an acquisition of
control of Quantum during the two-year period following the closing),
Maxtor would not be obligated to indemnify Quantum for the tax.
. If Maxtor was obligated to indemnify Quantum for the tax but was not
able to make the payment, Quantum would nevertheless be obligated, as
the taxpayer, to make the payment.
In any of these circumstances, the tax payments due from Quantum could be
substantial. In order to pay the tax, Quantum would have to either deplete its
existing cash resources or borrow money to cover its tax obligation. Quantum's
payment of the tax prior to Maxtor's payment to it under Maxtor's
indemnification obligations, or in circumstances where those obligations do not
apply, could harm Quantum's business, financial condition and operating results.
Because the disposition would be taxable to Quantum if either Maxtor or Quantum
undergoes a change of control as part of the disposition plan, Quantum may be a
less attractive acquisition candidate for at least two years after the
disposition.
32
Under the federal tax rules applicable to the disposition, if a 50% or greater
interest in either Maxtor or Quantum is acquired within two years after the
disposition, the disposition would become taxable to Quantum under circumstances
not covered by the tax opinion insurance policy and/or under which Maxtor would
be required to pay Quantum for the amount of the tax. Neither Maxtor nor
Quantum will have control over all the circumstances under which an acquisition
could occur. Because of the restriction on acquisitions, Quantum:
. may have to forego significant growth and other opportunities;
. may not be deemed an attractive acquisition target reducing
opportunities for its stockholders to sell or exchange their shares in
attractive transactions which might otherwise be proposed; and
. will be restricted in its ability to initiate a business combination
that its board of directors might wish to pursue because it will not be
able to structure the transaction as an acquisition, even if that would
otherwise be the most attractive structure.
The foregoing effects of the restriction on an acquisition of Quantum could have
a negative impact on Quantum's business and stockholder value.
Quantum may be harmed as a result of operating solely as a DLTtape and storage
solutions business.
Quantum's operations have consisted of the DLTtape and storage solutions
business and the Hard Disk Drive business. Operating results of the DSS
business alone may be adversely affected by the loss of one or more of the
following benefits that HDD had contributed to Quantum:
. The ability to leverage the expertise of HDD in areas related to HDD's
core competency in hard disk drives;
. The opportunity to jointly develop various products, such as online
storage solutions;
. The ability to more effectively enable and cost reduce data storage
solutions;
. Use of the goodwill and brand recognition associated with HDD;
. The benefit of Quantum as a whole having a larger market capitalization
related to the two tracking stocks;
. Diversification associated with a single company serving the DLTtape,
storage solutions and hard disk drive markets.
Maxtor's failure to perform under the indemnification agreement in connection
with Quantum's convertible debt would harm Quantum's business.
Maxtor has agreed to assume responsibility for payments of up to $95,833,000 of
Quantum's convertible debt. If Maxtor fails to indemnify Quantum under the
indemnification agreement for Maxtor's portion of the convertible debt, Quantum
could experience a material adverse effect on its business and financial
performance.
Quantum may have contingent liabilities for some obligations assumed by Maxtor,
and Maxtor's failure to perform under these obligations could result in
significant costs for Quantum that could have an adverse impact on Quantum
operating results.
Maxtor has agreed to assume responsibility for obligations related to Quantum
and its HDD business, including obligations associated with taxes, real estate,
computer equipment, software, litigation, and human resources. If Maxtor fails
to perform under these obligations, Quantum may have contingent liability and
incur costs that have a material adverse effect on its business and financial
performance.
Quantum's continuing operations may experience difficulty attracting and
retaining quality employees, which may hurt its ability to operate its business
effectively.
The ability of Quantum to maintain its competitive technological position will
depend, in large part, on its ability to attract and retain highly qualified
technical and managerial personnel. The combination of DSS and HDD has resulted
in faster growth and greater scale for Quantum. After the disposition, without
the benefits of a combined business, Quantum may not experience the same success
in attracting quality employees. Competition for qualified personnel is intense.
There is a risk that some key employees will depart as a result of the
disposition. Lack of
33
success in attracting qualified employees could lead to lower than expected
operating results and delays in the introduction of new products and could have
a negative effect on the ability of Quantum to support customers.
The historical financial information of Quantum's DSS group may not be
representative of its future results as a separate company.
The historical financial information of DSS does not necessarily reflect what
its financial position, operating results, and cash flows would have been had it
been a separate, stand-alone entity during the periods presented. In addition,
the historical information is not necessarily indicative of what its operating
results, financial position and cash flows will be in the future. Quantum has
not made adjustments to reflect many significant changes that may occur in its
cost structure, funding and operations as a result of its separation from HDD,
including changes in its employee base, legal structure, costs associated with
reduced economics of scale, marketing expenses related to establishing a new
brand identity, and costs associated with being a public stand-alone company.
Quantum is exposed to general economic conditions that have resulted in lower
sales and actions to reduce operating expenses and continued or worsened
conditions may result in additional actions to reduce operating expenses.
As a result of recent unfavorable economic conditions and reduced capital
spending, our sales have declined in the fourth quarter of fiscal year 2001
compared to the previous three quarters of fiscal 2001. In particular, sales to
OEMs and resellers in the server equipment manufacturing and storage networking
markets in the United States were impacted during the fourth quarter of fiscal
2001. If the economic conditions in the United States worsen or if a wider or
global economic slowdown occurs, we may experience a material adverse impact on
our business, operating results, and financial condition. For example, we expect
a reduction in sales in the first quarter of fiscal year 2002 compared to the
fourth quarter of fiscal year 2001, which will result in comparatively lower
operating results as well as adjustments and other charges associated with
actions aimed at reducing operating expenses. Comparatively lower sales have
resulted in operating expenses increasing as a percentage of revenue in the
fourth quarter of fiscal year 2001 and this trend is expected to worsen in the
first quarter of fiscal year 2002 and although we are taking actions and charges
in the first quarter of 2002 to reduce operating expenses, a prolonged
continuation or worsening of sales trends may result in additional actions and
charges aimed at further reducing operating expenses in subsequent quarters of
fiscal year 2002. The impact of charges or an inability to reduce operating
expenses consistent with future trends in sales may adversely impact Quantum's
operating results.
Competition has increased and may increasingly intensify in the tape drive
market as a result of competitors introducing tape drive products based on new
technology standards and on DLTtape technology.
Quantum competes with companies that develop, manufacture, market and sell tape
drive products. Quantum's principal competitors include Benchmark Storage
Innovations Inc., Hewlett-Packard, Seagate Technology, Inc., Sony Corporation
and Storage Technology Corporation. These competitors are aggressively trying to
develop new tape drive technologies to compete more successfully with products
based on DLTtape technology. Hewlett-Packard, IBM Corporation and Seagate formed
a consortium and developed new linear tape drive products. Such products target
the high-capacity data back-up market and compete with Quantum's products based
on Super DLTtape technology. This competition has resulted in a trend, which is
expected to continue, toward lower prices and margins earned on Quantum's
DLTtape and Super DLTtape drives. A combination of the current economic
environment, which has resulted in reduced shipments of tape drives, and
increased competition could result in a further deterioration in prices and
reduced margins which could have a material adverse impact on Quantum's
operating results.
34
Competition has increased and may increasingly intensify and sales have trended
lower in the tape library market as a result of current economic conditions.
Quantum's tape library products compete with product offerings of ADIC, Inc.,
Exabyte, Hewlett-Packard, Overland Data Inc. and StorageTek, who also offer tape
automation systems incorporating DLTtape and Super DLTtape technology. Current
economic conditions have been marked by lower information technology investment,
particularly for higher priced products such as high-end tape automation
systems. The lower demand has resulted in lower sales as well as increased
price competition. If this trend continues or intensifies, sales and margins
may be further reduced which could have a material adverse impact on Quantum's
operating results.
Competition from alternative storage solutions that compete with Quantum
products may increase.
Quantum's products, particularly tape products, including tape drives and
automation systems, also compete with other storage technologies, such as hard
disk drives. Hard disk drives have experienced a trend toward lower prices while
capacity and performance has increased. If hard disk drive costs continue to
decline, the competition resulting from hard disk drive based storage solutions
may increase.
Quantum's operating results depend on new product introductions, which may not
be successful.
To compete effectively, Quantum must improve existing products and introduce new
products, such as products based on Super DLTtape technology and network
attached storage appliances. Quantum cannot provide assurance that:
. It will introduce any of these new products in the time frame Quantum
currently forecasts;
. It will not experience technical or other difficulties that could
prevent or delay the introduction of these new products;
. Its new products will achieve market acceptance;
. Its new products will be successfully or timely qualified with Quantum's
customers by meeting customer performance and quality specifications. A
successful and timely customer qualification must occur before customers
will place large product orders; or
. It will achieve high volume production of these new products in a timely
manner, if at all.
These risks are magnified because Quantum expects that technological changes,
changes in customer requirements and increasing competition could result in
declining sales and gross margins on its existing products.
Reliance on a limited number of third-party suppliers could result in
significantly increased costs and delays in the event these suppliers experience
shortages or quality problems.
Quantum depends on a limited number of suppliers for components and sub-
assemblies, including recording heads, media cartridges and integrated circuits,
all of which are essential to the manufacture of DLTtape drives and tape
automation systems.
Quantum currently purchases the DLTtape media cartridges it sells primarily from
Fuji Photo Film Co., Ltd. and from Hitachi Maxell, Ltd. Maxell is also the sole
supplier of Super DLTtape media cartridges. Quantum cannot provide assurance
that Fuji or Maxell will continue to supply an adequate number of high quality
media cartridges in the future. If component shortages occur, or if Quantum
experiences quality problems with component suppliers, shipments of products
could be significantly delayed and/or costs significantly increased. In
addition, Quantum
35
qualifies only a single source for many components and sub-assemblies, which
magnifies the risk of future shortages.
Quantum's main supplier of tape heads is located in China. Political
instability, trade restrictions, changes in tariff or freight rates or currency
fluctuations in China could result in increased costs, delays in shipment and
could have an adverse impact on Quantum's operating results.
Quantum's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance.
Quantum's quarterly operating results have fluctuated significantly in the past
and could fluctuate significantly in the future. As a result, Quantum's past
quarterly operating results should not be used to predict future performance.
Quarterly operating results could be adversely affected by:
. An inadequate supply of DLTtape media cartridges;
. Customers canceling, deferring or rescheduling significant orders as a
result of excess inventory levels or other factors;
. Declines in network server demand;
. Failure to complete shipments in the last month of a quarter during
which a substantial portion of Quantum's products are typically shipped;
or
. Increased competition.
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments.
Quantum's sales are concentrated with a few customers. Customers are not
obligated to purchase any minimum product volume and Quantum's relationships
with its customers are terminable at will. The loss of, or a significant change
in demand from, one or more key customers could materially and adversely impact
Quantum's operating results.
Unpredictable end-user demand, combined with the computer equipment manufacturer
trend toward carrying minimal inventory levels, increases the risk that Quantum
will manufacture and custom configure too much or too little inventory for
particular customers. Significant excess inventory could result in inventory
write-downs and losses, while inventory shortages could adversely impact
Quantum's relationship with its customers, either of which could adversely
impact Quantum's operating results. For example, current economic conditions,
which in part have resulted in reduced product orders from Quantum's customers
will have an adverse impact on Quantum's operating results.
Quantum does not control licensee pricing or licensee sales of DLTtape media
cartridges and as a result Quantum's royalty revenue may decline.
Quantum receives a royalty fee based on sales of DLTtape media cartridges by
Fuji and Maxell. Under Quantum's license agreements with Fuji and Maxell, each
of the licensees determines the pricing and number of units of DLTtape media
cartridges sold by it. In addition, other companies may begin to sell DLTtape
media cartridges under license agreements. As a result, Quantum's royalty
revenue will vary depending upon the level of sales and prices set by Fuji,
Maxell and potentially other licensees. In addition, lower licensee pricing
could require Quantum
36
to lower its prices on direct sales of DLTtape media cartridges, which would
adversely impact Quantum's margins for this product.
Quantum's royalty revenue is dependent on an installed base of tape drives that
utilize DLTtape media cartridges and if the installed base declines royalty
revenue may decline.
Competition from other tape technologies could result in reduced sales of
DLTtape drives and the replacement of currently installed DLTtape drives with
drives that do not consume DLTtape media. This could cause a decline in the
installed base of tape drives that utilize DLTtape media from which Quantum
earns a royalty and a reduction in Quantum's royalty revenue.
Third party infringement claims could result in substantial liability and
significant costs.
From time to time, third parties allege Quantum's infringement of and need for a
license under their patented or other proprietary technology. While management
currently believes the amount of ultimate liability, if any, with respect to
these actions will not materially affect the financial position, results of
operations, or liquidity of Quantum, the ultimate outcome of any litigation is
uncertain. Adverse resolution of any third party infringement claim could
subject Quantum to substantial liabilities and require it to refrain from
manufacturing and selling certain products. In addition, the costs incurred in
intellectual property litigation can be substantial, regardless of the outcome.
Power outages which currently impact companies with facilities in California may
adversely affect Quantum's California facilities.
Quantum conducts operations in the state of California and relies on a
continuous power supply to conduct operations. California's current energy
crisis could disrupt Quantum's operations and increase expenses. In the event
of an acute power shortage, that is, when power reserves for the state of
California fall below 1.5%, California has on some occasions implemented, and
may in the future continue to implement, rolling blackouts throughout the state.
Although state lawmakers are working to minimize the impact, if blackouts
interrupt our power supply, Quantum may be temporarily unable to continue
operations at its facilities. Any such interruption in Quantum's ability to
continue operations at its facilities could delay the development of products
and manufacturing processes. Future interruptions could damage Quantum's
reputation and could result in lost revenue, either of which could harm
Quantum's business and results of operations. Furthermore, the deregulation of
the energy industry instituted in 1996 by the California government and
shortages in wholesale electricity supplies have caused power prices to
increase. If wholesale prices continue to increase, Quantum's operating
expenses will likely increase which will have a negative effect on Quantum's
operating results.
The Snap product line, which is part of the Storage Solutions group, is
currently not profitable and may never be profitable.
Quantum has invested, and will continue to invest, in the Snap product line,
consisting of network attached storage solutions. This product line is currently
not profitable and the unprofitability may continue in the future. Quantum's
limited historical financial performance associated with the Snap products make
it difficult to evaluate the success of the product line to date and to assess
its future viability.
Quantum's operating expenses associated with its Snap product line revenue are
comparatively high. Therefore, the Snap product line will need to generate
significant revenues or a significant reduction in related operating expenses to
achieve profitability. Future revenues are dependent upon, among others, the
following factors:
. growth of the Network Attached Storage (NAS) market,
37
. acceptance of NAS appliances in the entry and mid-range market,
. demand for existing Snap products and levels of product and price
competition, and
. expansion of current product offerings and introduction of new
technologies.
Investments in equity securities currently recorded at cost may be subject to
write-downs in the future.
Quantum currently records its investments in certain equity securities,
particularly venture capital type investments on a cost basis, adjusted for
other than temporary impairment. Quantum has incurred impairment losses in the
past. These equity investments are mostly in companies that are currently not
profitable. Therefore, these investments may be subject to write-downs in the
future due to impairment in the carrying value.
Quantum will continue to invest in businesses that are not profitable at the
time of investment. Currently there is $50 million intended for future
investments in equity securities. In the future, impairment losses associated
with these investments may have an adverse impact on Quantum's earnings.
Euro Impact
Quantum believes that the adoption of a single currency, the Euro, by eleven
European countries has not and will not materially affect its business,
information systems or consolidated financial position, operating results or
cash flows.
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Quantum Corporation
We have audited the accompanying consolidated balance sheets of Quantum
Corporation (the "Company") as of March 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 2001. Our audits also
included the financial statement schedule listed in the index at Item 14a.
These financial statements are the responsibility of Quantum'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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Quantum
Corporation at March 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2001, in conformity with accounting principles generally accepted in
the United States. 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.
/s/ Ernst & Young LLP
San Jose, California
April 27, 2001
39
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended March 31,
------------------------------------------
2001 2000 1999
---------- ---------- ----------
Product revenue......................................................... $1,183,845 $1,232,442 $1,181,273
Royalty revenue......................................................... 221,973 186,429 121,463
---------- ---------- ----------
Total revenue........................................................... 1,405,818 1,418,871 1,302,736
Cost of revenue......................................................... 782,782 769,981 722,817
---------- ---------- ----------
Gross profit............................................................ 623,036 648,890 579,919
Operating expenses:
Research and development............................................. 130,106 122,821 99,330
Sales and marketing.................................................. 152,819 118,504 76,737
General and administrative........................................... 78,865 62,991 38,158
Special charge....................................................... -- 40,083 --
Purchased in-process research and development........................ -- 37,000 89,000
---------- ---------- ----------
361,790 381,399 303,225
---------- ---------- ----------
Income from operations.................................................. 261,246 267,491 276,694
Interest income and other, net.......................................... 18,047 18,838 5,946
Interest expense........................................................ (17,658) (18,978) (18,322)
---------- ---------- ----------
Income before income taxes.............................................. 261,635 267,351 264,318
Income tax provision.................................................... 94,189 121,737 141,327
---------- ---------- ----------
Income from continuing operations....................................... 167,446 145,614 122,991
Loss from discontinued operations, net of income taxes.................. (6,760) (104,770) (152,526)
---------- ---------- ----------
Net income (loss)....................................................... $ 160,686 $ 40,844 $ (29,535)
========== ========== ==========
Income per share from continuing operations:
Basic................................................................ $ 1.13 $ 0.77
========== ==========
Diluted.............................................................. $ 1.08 $ 0.74
========== ==========
Weighted-average common shares:
Basic................................................................ 148,150 160,670
========== ==========
Diluted.............................................................. 155,645 166,215
========== ==========
Net loss per share (1):
Basic................................................................ $ (0.18)
==========
Diluted.............................................................. $ (0.18)
==========
Weighted-average common shares:
Basic................................................................ 160,670
==========
Diluted.............................................................. 166,215
==========
Net loss for the period from April 1, 1999 to August 3, 1999 (1)........ $(17,193)
========
Net loss per share:
Basic................................................................ $ (0.10)
========
Diluted.............................................................. $ (0.10)
========
Weighted-average common shares:
Basic................................................................ 165,788
========
Diluted.............................................................. 172,016
========
Income from continuing operations for the period from April 1, 1999 to $ 60,028
August 3, 1999 (2)..................................................... ========
Net income per share from continuing operations:
Basic................................................................ $ 0.36
========
40
Diluted.............................................................. $ 0.35
========
Weighted-average common shares:
Basic................................................................ 165,788
========
Diluted.............................................................. 172,016
========
Income from continuing operations for the period from August 4, 1999 to $ 85,586
March 31, 2000 (2)..................................................... ========
Income per share from continuing operations:
Basic................................................................ $ 0.53
========
Diluted.............................................................. $ 0.51
========
Weighted-average common shares:
Basic................................................................ 162,023
========
Diluted.............................................................. 167,734
========
(1) Net income (loss) per share for fiscal year 2001 and the period from August
4, 1999 through March 31, 2000 is not presented, as there is no single
class of stock that represents the consolidated company after the
recapitalization that occurred on August 3, 1999 (as discussed in Note 1 to
consolidated financial statements).
(2) Income per share from continuing operations for fiscal year 2000 is
presented for the two following periods- the period from April 1, 1999
through August 3, 1999 and for the period from August 4, 1999 through March
31, 2000 because of the recapitalization that occurred on August 3, 1999
(as discussed in Note 1 to consolidated financial statements).
See accompanying notes to consolidated financial statements.
41
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31,
--------------------------
2001 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents............................................................. $ 397,537 $ 336,720
Marketable securities................................................................. 1,084 2,032
Accounts receivable, net of allowance for doubtful accounts of $3,227 and
$3,492 respectively.................................................................. 208,402 214,107
Inventories........................................................................... 130,763 101,478
Deferred taxes........................................................................ 48,329 54,669
Other current assets.................................................................. 72,592 38,424
Net current assets of discontinued operations 501,839 674,248
---------- ----------
Total current assets............................................................... 1,360,546 1,421,678
Property, plant and equipment, less accumulated depreciation........................... 94,700 78,137
Goodwill and intangible assets, less accumulated amortization.......................... 227,501 248,288
Other assets........................................................................... 32,453 12,149
Net non-current assets of discontinued operations...................................... 184,504 102,228
---------- ----------
Total Assets $1,899,704 $1,862,480
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................................................................... $ 86,510 $ 94,596
Accrued warranty...................................................................... 54,771 52,593
Accrued compensation.................................................................. 36,326 36,379
Income taxes payable.................................................................. 22,424 --
Accrued special charge................................................................ 8,081 20,954
Due to the Hard Disk Drive group...................................................... 34,000 30,100
Other accrued liabilities............................................................. 37,945 27,749
---------- ----------
Total current liabilities.......................................................... 280,057 262,371
Deferred taxes......................................................................... 35,807 13,578
Convertible subordinated debt.......................................................... 287,500 287,500
---------- ----------
Total term liabilities............................................................. 323,307 301,078
Stockholders' equity
Preferred Stock:
Quantum Corporation preferred stock, $.01 par value; 20,000,000 shares authorized at
March 31, 2001 and 2000; no shares issued at March 31, 2001, and March 31, 2000. - -
Common Stock:
DSS common stock, $.01 par value; 1,000,000,000 shares authorized at
March 31, 2001 and 2000; 152,061,529 and 157,422,824 shares issued and
outstanding at March 31, 2001 and 2000, respectively................................. 1,551 1,574
HDD common stock, $.01 par value; 600,000,000 shares authorized at
March 31, 2001 and 2000; 80,084,678 and 83,784,277 shares issued and
outstanding at March 31, 2001 and 2000, respectively................................. 801 838
Capital in excess of par value....................................................... 749,066 734,608
Retained earnings.................................................................... 584,696 545,050
Accumulated other comprehensive income (loss)........................................ (4,854) 16,961
42
Treasury stock....................................................................... (34,920) --
---------- ----------
Total stockholders' equity......................................................... 1,296,340 1,299,031
---------- ----------
$1,899,704 $1,862,480
========== ==========
See accompanying notes to consolidated financial statements.
43
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
----------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................................................................ $ 160,686 $ 40,844 $ (29,535)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Loss from investee.......................................................................... -- -- 124,809
Special charge.............................................................................. -- 90,468 --
Purchased in-process research and development............................................... -- 37,000 89,000
Depreciation................................................................................ 90,119 98,646 92,522
Amortization................................................................................ 30,576 31,923 20,413
Deferred taxes.............................................................................. (46,600) (7,315) 22,904
Compensation related to stock incentive plans............................................... 19,352 7,868 5,636
Changes in assets and liabilities:
Accounts receivable........................................................................ 141,400 37,696 114,792
Inventories................................................................................ (85,661) 49,302 67,149
Accounts payable........................................................................... (153,769) 61,726 (56,211)
Income taxes payable....................................................................... 77,057 10,873 (6,367)
Accrued warranty........................................................................... (5,812) 22,070 2,037
Other assets and liabilities............................................................... (49,886) 15,568 16,740
--------- --------- ---------
Net cash provided by operating activities..................................................... 177,462 496,669 463,889
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities........................................................... -- (37,890) (78,145)
Maturities of marketable securities.......................................................... 2,032 70,400 125,292
Purchases of equity securities............................................................... (26,803) (4,147) (1,750)
Acquisition of intangible assets............................................................. -- (2,500) --
Purchases of property and equipment.......................................................... (91,823) (85,608) (115,662)
Proceeds from disposition of property and equipment.......................................... -- -- 143
Proceeds from repayment of note receivable................................................... -- 3,126 --
--------- --------- ---------
Net cash used in investing activities......................................................... (116,594) (56,619) (70,122)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities.................................................... -- 10,000 33,545
Purchase of treasury stock................................................................... (240,848) (324,698) (305,287)
Principal payments on long-term credit facilities............................................ (1,131) (29,114) (34,090)
Proceeds from issuance of common stock, net.................................................. 64,039 49,656 42,283
Proceeds from factoring...................................................................... 100,000
Payments on factoring........................................................................ (100,000) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities........................................... (177,940) (294,156) (263,549)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.............................................. (117,072) 145,894 130,218
Cash and cash equivalents at beginning of period.............................................. 918,262 772,368 642,150
--------- --------- ---------
Cash and cash equivalents at end of period.................................................... $ 801,190 $ 918,262 $ 772,368
========= ========= =========
Reconciliation of cash and cash equivalents at end of period:
Cash and cash equivalents of continuing operations at end of period........................... $ 397,537 $ 336,720 $ 272,643
Cash and cash equivalents of discontinued operations at end of period......................... $ 403,653 $ 581,542 $ 499,725
--------- --------- ---------
Cash and cash equivalents at end of period.................................................... $ 801,190 $ 918,262 $ 772,368
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................................................... $ 15,505 $ 26,878 $ 26,721
========= ========= =========
Income taxes................................................................................ $ 32,912 $ 28,469 $ 2,718
========= ========= =========
Tangible and intangible assets acquired for shares of Quantum, DSS and HDD common stock,
net of cash acquired and liabilities assumed................................................. $ -- $ 104,698 $ 289,474
========= ========= =========
See accompanying notes to consolidated financial statements.
44
QUANTUM CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
DLT & Storage Systems
Quantum Corporation Group
Common Stock Common Stock
--------------------- --------------------------
Shares Amount Shares Amount
---------- --------- ------------ ------------
Balances at March 31, 1998................................. $ 160,879 $ 1,609 -- --
Comprehensive loss:
Income from continuing operations....................
Loss from discontinued operations, net...............
Net loss................................................ -- -- -- --
Other comprehensive income--foreign currency
translation adjustments.............................. -- -- --
Comprehensive loss......................................... -- -- -- --
Shares issued under employee stock purchase plan........... 2,555 26 -- --
Shares issued under employee stock option plans, net....... 2,502 25 -- --
Treasury shares repurchased................................ (15,477) -- -- --
Treasury shares reissued for ATL acquisition............... 15,477 -- -- --
New shares issued for ATL acquisition...................... 1,471 15 -- --
Conversion of ATL stock options............................ -- -- -- --
Compensation expense and other............................. -- -- -- --
Tax benefits related to stock option plans................. -- -- -- --
-------- -------- ------- -----------
Balances at March 31, 1999................................. 167,407 1,675 -- --
======== ======== ======= ===========
Comprehensive income:
Income from continuing operations....................
Loss from discontinued operations, net...............
Net income.............................................. -- -- -- --
Other comprehensive income:
Foreign currency translation adjustments............ -- -- -- --
Unrealized gain on investments, net of tax of -- -- -- --
$12,025
Other comprehensive income.............................. -- -- -- --
Comprehensive income....................................... -- -- -- --
Shares issued under employee stock purchase plan........... 829 8 1,145 11
Shares issued under employee stock option plans, net....... 1,065 10 2,526 25
Treasury shares repurchased-Quantum common stock ......... (3,868) -- -- --
Recapitalization (August 3, 1999).......................... (165,433) (1,693) 165,433 1,693
Tracking stock issuance costs.............................. -- -- -- --
Treasury shares reissued for Meridian acquisition.......... -- -- 3,868 --
New shares issued for Meridian acquisition................. -- -- 186 2
Conversion of Meridian stock options....................... -- -- -- --
Treasury shares repurchased and retired common stock...... -- -- (15,735) (157)
Compensation expense and other............................. -- -- -- --
Tax benefits related to stock option plans................. -- -- -- --
-------- -------- ------- -----------
Balances at March 31, 2000................................. -- -- 157,423 1,574
======== ======== ======= ===========
Comprehensive income:
Income from continuing operations....................
Loss from discontinued operations, net...............
Net income.............................................. -- -- -- --
Other comprehensive income:
Foreign currency translation adjustments............ -- -- -- --
Unrealized loss on investments, net of tax of -- -- -- --
$10,218
Other comprehensive income.............................. -- -- -- --
Comprehensive income....................................... -- -- -- --
Shares issued under employee stock purchase plan........... -- -- 2,119 21
Shares issued under employee stock option plans, net...... -- 6,000 61
Treasury shares repurchased and retired common stock...... -- -- (13,480) (105)
Compensation expense and other............................. -- -- -- --
Tax benefits related to stock option plans................. -- -- -- --
-------- -------- ------- -----------
Hard Disk Drive
Group
Common Stock Capital in
----------------- Excess of
Shares Amount Par Value
-------- ------- -----------
Balances at March 31, 1998................................. -- -- $ 774,682
Comprehensive loss:
Income from continuing operations....................
Loss from discontinued operations, net...............
Net loss................................................ -- -- --
Other comprehensive income--foreign currency
translation adjustments.............................. -- --
Comprehensive loss......................................... -- -- --
Shares issued under employee stock purchase plan........... -- -- 24,014
Shares issued under employee stock option plans, net -- -- 18,218
Treasury shares repurchased................................ -- -- --
Treasury shares reissued for ATL acquisition............... -- -- --
New shares issued for ATL acquisition...................... -- -- 22,973
Conversion of ATL stock options............................ -- -- 22,367
Compensation expense and other............................. -- -- 5,636
Tax benefits related to stock option plans................. -- -- 16,869
------ ------ ---------
Balances at March 31, 1999................................. -- -- 884,759
====== ====== =========
Comprehensive income:
Income from continuing operations....................
Loss from discontinued operations, net...............
Net income.............................................. -- -- --
Other comprehensive income:
Foreign currency translation adjustments............ -- -- --
Unrealized gain on investments, net of tax of -- -- --
$12,025
Other comprehensive income.............................. -- -- --
Comprehensive income....................................... -- -- --
Shares issued under employee stock purchase plan........... 572 6 25,462
Shares issued under employee stock option plans, net....... 1,923 19 31,331
Treasury shares repurchased-Quantum common stock ......... -- -- --
Recapitalization (August 3, 1999).......................... 82,716 846 (846)
Tracking stock issuance costs.............................. -- -- (7,216)
Treasury shares reissued for Meridian acquisition.......... 1,934 -- 3,505
New shares issued for Meridian acquisition................. 93 1 4,216
Conversion of Meridian stock options....................... -- -- 10,276
Treasury shares repurchased and retired common stock...... (3,454) (34) (240,268)
Compensation expense and other............................. -- -- 7,868
Tax benefits related to stock option plans................. -- -- 15,521
------ ------ ---------
Balances at March 31, 2000................................. 83,784 838 734,608
====== ====== =========
Comprehensive income:
Income from continuing operations....................
Loss from discontinued operations, net...............
Net income.............................................. -- -- --
Other comprehensive income:
Foreign currency translation adjustments............ -- -- --
Unrealized loss on investments, net of tax of -- -- --
$10,218
Other comprehensive income.............................. -- -- --
Comprehensive income....................................... -- -- --
Shares issued under employee stock purchase plan........... 1,058 11 23,795
Shares issued under employee stock option plans, net...... 5,240 52 40,297
Treasury shares repurchased and retired common stock...... (9,997) (100) (84,886)
Compensation expense and other............................. -- -- 19,357
Tax benefits related to stock option plans................. -- -- 15,895
------ ------ ---------
45
Balances at March 31, 2001........... $ -- $ -- 152,062 $ 1,551 80,085 $ 801 $ 749,066
======== ======== ========= ========= ======= ====== =========
Accumulated
Other
Retained Comprehensive Treasury
Earnings Income (Loss) Stock Total
-------- ------------- ----- -----
Balances at March 31, 1998................................... $ 597,193 $ (1,462) $ -- $1,372,022
Comprehensive loss:
Income from continuing operations...................... 122,991 122,991
Loss from discontinued operations, net (152,526) -- -- (152,526)
----------
Net loss (29,535)
Other comprehensive income--foreign currency
translation adjustments................................ -- 612 -- 612
----------
Comprehensive loss........................................... -- -- -- (28,923)
Shares issued under employee stock purchase plan............. -- -- -- 24,040
Shares issued under employee stock option plans, net......... -- -- -- 18,243
Treasury shares repurchased.................................. -- -- (305,287) (305,287)
Treasury shares reissued for ATL acquisition................. (63,452) -- 305,287 241,835
New shares issued for ATL acquisition........................ -- -- -- 22,988
Conversion of ATL stock options.............................. -- -- -- 22,367
Compensation expense and other............................... -- -- -- 5,636
Tax benefits related to stock option plans................... -- -- -- 16,869
--------- -------- ----------- ----------
Balances at March 31, 1999................................... 504,206 (850) -- 1,389,790
========= ======== =========== ==========
Comprehensive income:
Income from continuing operations...................... 145,614 145,614
Loss from discontinued operations, net................. (104,770) -- -- (104,770)
----------
Net income................................................ 40,844
Other comprehensive income:
Foreign currency translation adjustments............... -- (212) -- --
Unrealized gain on investments, net of tax of $12,025 -- 18,023 -- --
--------
Other comprehensive income................................ -- 17,811 -- 17,811
----------
Comprehensive income......................................... -- -- -- 58,655
Shares issued under employee stock purchase plan............. -- -- -- 25,487
Shares issued under employee stock option plans, net......... -- -- -- 31,385
Treasury shares repurchased-Quantum common stock ........... -- -- (84,239) (84,239)
Recapitalization (August 3, 1999)............................ -- -- -- --
Tracking stock issuance costs................................ -- -- -- (7,216)
Treasury shares reissued for Meridian acquisition............ -- -- 84,239 87,744
New shares issued for Meridian acquisition................... -- -- -- 4,219
Conversion of Meridian stock options......................... -- -- -- 10,276
Treasury shares repurchased and retired common stock......... -- -- -- (240,459)
Compensation expense and other............................... -- -- -- 7,868
Tax benefits related to stock option plans................... -- -- -- 15,521
--------- -------- ----------- ----------
Balances at March 31, 2000................................... 545,050 16,961 -- 1,299,031
========= ======== =========== ==========
Comprehensive income:
Income from continuing operations...................... 167,446 -- -- 167,446
Loss from discontinued operations, net of tax......... (6,760) -- -- (6,760)
----------
Net income 160,686
Other comprehensive income:
Foreign currency translation adjustments............... -- (6,487) -- --
Unrealized loss on investments, net of tax of $10,218 -- (15,328) -- --
--------
Other comprehensive loss.................................. -- (21,815) -- (21,815)
----------
Comprehensive income......................................... -- -- -- 138,871
Shares issued under employee stock purchase plan............. -- -- -- 23,827
Shares issued under employee stock option plans, net......... -- -- -- 40,410
Treasury shares repurchased and retired common stock........ (121,040) -- (34,920) (241,051)
46
Compensation expense and other............................... -- -- -- 19,357
Tax benefits related to stock option plans................... -- -- -- 15,895
--------- -------- ------------- ----------
Balances at March 31, 2001................................... $ 584,696 $ (4,854) $ (34,920) $1,296,340
========= ======== ============= ==========
See accompanying notes to consolidated financial statements.
47
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
------------------------------------------
Nature of Business
Until the beginning of fiscal year 2002, Quantum operated its business through
two separate business groups: the DLT & Storage Systems group ("DSS") and the
Hard Disk Drive group ("HDD"). On March 30, 2000, Quantum's stockholders
approved the sale of HDD to Maxtor Corporation ("Maxtor"). On April 2, 2001,
each authorized share of HDD common stock was exchanged for 1.52 shares of
Maxtor common stock.
DSS designs, develops, manufactures, licenses, services, and markets DLTtape and
Super DLTtape drives, DLTtape and Super DLTtape media cartridges and storage
solutions. DSS' storage solutions consist of tape automation systems, network
attached storage solutions and service.
HDD designed, developed and marketed a diversified product portfolio of hard
disk drives to meet the storage requirements of entry-level to high-end desktop
PCs in home and business environments, and high-end hard disk drives for the
storage needs of network servers, workstations and storage sub-systems.
Recapitalization
On July 23, 1999, Quantum's stockholders approved a tracking stock proposal. As
a result, Quantum's Certificate of Incorporation was amended and restated,
effective as of the close of business on August 3, 1999, designating two new
classes of Quantum Corporation common stock, DLT & Storage Systems group common
stock, $0.01 par value per share and Hard Disk Drive group common stock, $0.01
par value per share. On August 3, 1999, each authorized share of Quantum common
stock, $0.01 par value per share, was exchanged for one share of DSS stock and
one-half share of HDD stock. These two securities were intended to track
separately the performance of the DLT & Storage Systems group and the Hard Disk
Drive group. As a result of the disposition of HDD to Maxtor, as of April 2,
2001, the DSS business represents Quantum, and as such, DSS is no longer a
tracking stock, but is now the common stock for Quantum Corporation.
Financial Statement Presentation
As a result of the disposition of the HDD business on April 2, 2001, the
consolidated financial statements and related footnotes have been restated to
present the results of the HDD business as discontinued operations (See note
18). Accordingly in the consolidated Statements of Operations, the results of
the HDD group have been classified as "Loss from discontinued operations, net of
income taxes", for fiscal year 2001 and comparatively for fiscal years 2000 and
1999. In the consolidated Balance Sheets, the assets and liabilities of the HDD
group have been classified as "Net current assets of discontinued operations"
and "Net non-current assets of discontinued operations" for fiscal year 2001 and
comparatively for fiscal year 2000.
The accompanying consolidated financial statements include the accounts of
Quantum and its majority-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated. Certain amounts in prior periods have
been reclassified to conform to the current presentation.
Use of Estimates
The preparation of the consolidated financial statements of Quantum in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated
48
with Quantum's warranties. If the actual value of Quantum's inventories and
associated provisions differs from these estimates, the Quantum's operating
results could be materially adversely impacted. The actual results with regard
to warranty expenditures could also have a material adverse impact on Quantum if
the actual rate of unit failure or the cost to repair a unit is greater than
what Quantum has used in estimating the warranty expense accrual.
Revenue Recognition
Revenue from sales of products is recognized on passage of title to customers,
when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price to the buyer is fixed or determinable and
collectibility is reasonably assured, with provision made for estimated returns.
Quantum accrues royalty revenue based on licensees' sales that incorporate
certain licensed technology as reported by the licensees.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarized certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 was effective for the Quantum in the first quarter of
fiscal year 2001. The adoption of SAB 101 did not have a material effect on
Quantum's financial position or results of operations.
Foreign Currency Translation and Transactions
Assets, liabilities, and operations of foreign offices and subsidiaries are
recorded based on the functional currency of the entity. For a majority of
Quantum's material foreign operations, the functional currency is the U.S.
dollar. The assets and liabilities of foreign offices with a local functional
currency are translated, for consolidation purposes, at current exchange rates
from the local currency to the reporting currency, the U.S. dollar. The
resulting gains or losses are reported as a component of other comprehensive
income (loss) within stockholders' equity. Although close to one third of
Quantum's sales are made to customers in non-U.S. locations and all of Quantum's
hard disk drive products are manufactured in Japan, Singapore and Ireland by
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), a majority of
Quantum's material transactions are denominated in U.S. dollars. Accordingly,
transaction gains or losses have been immaterial to Quantum's consolidated
financial statements for all years presented. The effect of foreign currency
exchange rate fluctuations on cash was also immaterial for the years presented.
Assets and liabilities denominated in other than the functional currency are
remeasured each month with the remeasurement gain or loss recorded in other
income.
Foreign Exchange Contracts
The effect of foreign currency rate changes on the remeasurement of certain
assets and liabilities denominated in a foreign currency are managed using
foreign currency forward exchange contracts. Foreign currency forward exchange
contracts represent agreements to exchange the currency of one country for the
currency of another country at an agreed-upon price, on an agreed-upon
settlement date. Foreign currency forward exchange contracts are accounted for
by the fair value method, with changes in value recognized in other income.
Equity Instruments Indexed to Quantum's Common Stock
Equity instruments are utilized in connection with Quantum's stock repurchase
program, which give Quantum the choice of cash settlement or settlement in
shares of common stock. Proceeds received upon the sale of equity instruments
and amounts paid upon the purchase of equity instruments are recorded as a
component of stockholders' equity. Subsequent changes in the fair value of the
equity instruments are not recognized. If the contracts are ultimately settled
in cash, the amount of cash paid or received is recorded as a component of
stockholders' equity.
Income Taxes
The federal income taxes of Quantum and the subsidiaries that own assets
allocated between continuing and discontinued operations are determined on a
consolidated basis. Consolidated federal income tax provisions and
49
related tax payments or refunds are allocated between continuing and
discontinued operations based principally on the taxable income and tax credits
directly attributable to each operation, as if each operation were a stand-alone
entity. Such allocations reflect each operation's contribution (whether positive
or negative) to Quantum's consolidated federal taxable income and the
consolidated federal tax liability and tax credit position. Tax benefits that
cannot be used by the operation generating those benefits but can be used on a
consolidated basis are credited to the operation that generated such benefits.
Accordingly, the amounts of taxes payable or refundable allocated to each
operation may not necessarily be the same as that which would have been payable
or refundable had each operation filed a separate income tax return.
See note 14 for the discussion of Quantum's income tax provision.
Cash Equivalents and Marketable Securities
Quantum considers all highly liquid debt instruments with a maturity of 90 days
or less at the time of purchase to be cash equivalents. Cash equivalents are
carried at fair value, which approximates cost. Quantum's marketable securities
have maturities of more than 90 days at the time of purchase.
Quantum has classified all cash equivalents and marketable securities as
available-for-sale. Securities classified as available-for-sale are carried at
fair value with material unrealized gains and losses reported in stockholders'
equity. The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other-
than-temporary are recorded in other income or expense. The cost of securities
sold is based on the specific identification method.
Concentration of Credit Risk
Quantum performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. Sales to
Quantum's top five customers in fiscal year 2001 represented 43% of revenue.
Two customers accounted for 19% and 10% of revenue, respectively. Quantum
maintains reserves for potential credit losses and such losses have historically
been within management's expectations.
Quantum invests its excess cash in deposits with major banks and in money market
funds 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. Quantum has not experienced any material
losses on these investments. Quantum limits the amount of credit exposure to
any one issuer and to any one type of investment.
Investments in Other Entities
Investments in other entities are recorded in other assets. Investments in
other entities (generally less-than-20-percent-owned companies) that are not
represented by marketable securities are carried at cost less write-downs for
declines in value that are judged to be other-than-temporary. Dividends are
recorded in other income when received.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
Shipping and handling costs are included in cost of sales.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation
and amortization computed on a straight-line basis over the lesser of the
estimated useful lives of the assets (generally three to ten years for
50
machinery, equipment, furniture, and leasehold improvements; and twenty-five
years for buildings) or the lease term.
Goodwill and Intangible Assets
Goodwill and other acquired intangible assets are amortized over their estimated
useful lives, which range from three to fifteen years. Intangible assets are
reviewed for impairment whenever events or circumstances indicate impairment
might exist, or at least annually. Quantum assesses the recoverability of its
assets, including goodwill, by comparing projected undiscounted net cash flows
associated with those assets against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets. No such impairment has been identified to date with
respect to Quantum's acquired intangible assets and goodwill.
The following table summarizes Quantum's goodwill and intangible assets (in
thousands):
March 31 March 31
2001 2000
Goodwill $167,054 $161,333
Acquired intangible assets 120,800 128,736
-------- --------
287,854 290,069
Less accumulated amortization (60,353) (41,781)
-------- --------
$227,501 $248,288
======== ========
Warranty Expense
Quantum generally warrants its products against defects for a period of one to
three years. A provision for estimated future costs and estimated returns for
credit relating to warranty are recorded when products are shipped and revenue
recognized.
Advertising Expense
Quantum accrues for co-operative advertising as the related revenue is earned,
and other advertising expense is recorded as incurred. Advertising expense for
the years ended March 31, 2001, 2000 and 1999, was $39 million, $29 million, and
$26 million, respectively.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), Quantum accounts for employee stock-
based compensation in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations. Under APB 25, when the exercise price of its employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Any deferred stock compensation calculated
according to APB 25 is amortized over the vesting period of the individual stock
awards.
In March 2000, FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the following: the definition of an employee
for purposes of applying APB Opinion No. 25; the criteria for determining
whether a plan qualifies as a noncompensatory plan; the accounting consequence
of various modifications to the terms of the previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material
impact on the Quantum's financial position or results of operations.
51
Risks and Uncertainties
As is typical in the information storage industry, a significant portion of the
Quantum's customer base is concentrated with a small number of OEMs, and Quantum
is not able to predict whether there will be any significant change in the
demand for its customers' products. The loss of any one of the Quantum's more
significant customers could have a material adverse effect on the Quantum's
results of operations. A limited number of tape drive storage products make up
a significant majority of the Quantum's sales, and due to increasingly rapid
technological change in the industry, the Quantum's future depends on its
ability to develop and successfully introduce new products.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. Quantum is required to adopt SFAS 133 in fiscal year 2002. Management
does not expect SFAS No. 133 to have a material effect on Quantum's financial
position or results of operations.
Note 2: Recapitalization
----------------
On July 23, 1999, the Quantum's stockholders approved a tracking stock proposal.
As a result, Quantum's Certificate of Incorporation was amended and restated,
effective as of the close of business on August 3, 1999, designating two new
classes of Quantum Corporation common stock, DLT & Storage Systems group ("DSS")
common stock, $0.01 par value per share and Hard Disk Drive group ("HDD") common
stock, $0.01 par value per share. On August 3, 1999, each authorized share of
Quantum common stock, $0.01 par value per share, was exchanged for one share of
DSS stock and one-half share of HDD stock. These two securities were intended
to track separately the performance of the DLT & Storage Systems group and the
Hard Disk Drive group.
On March 30, 2001, Quantum's stockholders approved the sale of HDD to Maxtor
Corporation. On April 2, 2001, each authorized share of HDD common stock was
exchanged for 1.52 shares of Maxtor common stock.
Note 3: Financial Instruments
---------------------
Available-For-Sale Securities
The following is a summary of Quantum's consolidated available-for-sale
securities, all of which are classified as cash equivalents and marketable
securities:
March 31, March 31,
---------- -----------
2001 2000
---- ----
(In thousands)
Certificates of deposit.................................................. $145,181 $223,690
Money market funds....................................................... 87,337 49,993
Corporate commercial paper and bank notes................................ 144,088 48,599
U.S. Treasury securities and obligations of U.S. government agencies.... -- 10,974
Other.................................................................... 22,015 5,496
-------- --------
$398,621 $338,752
======== ========
Included in cash and cash equivalents.................................... $397,537 $336,720
Included in marketable securities........................................ 1,084 2,032
-------- --------
$398,621 $338,752
======== ========
52
The difference between the amortized cost of available-for-sale securities and
fair value was immaterial at March 31, 2000 and March 31, 2001. At March 31,
2001, unrealized gains on available-for-sale securities were recorded, net of
tax, as a component of accumulated other comprehensive income within Quantum's
stockholders' equity. The estimated fair value of available-for-sale securities
is based on market quotations. There were no sales of available-for-sale
securities in fiscal years 2000 or 2001. At March 31, 2001, the average
available-for-sale portfolio duration was approximately 22 days for debt
securities, and no security had a maturity longer than one year.
Derivative Financial Instruments
Foreign Exchange--Asset and Liability Management. During the periods covered by
the financial statements, Quantum utilized foreign currency forward exchange
contracts to manage the effects of foreign currency remeasurement arising from
certain assets and liabilities denominated in a foreign currency. The gains and
losses from market rate changes on these contracts, which are intended to offset
the losses and gains on certain foreign currency denominated assets and
liabilities, are recorded monthly in other income.
The following is a summary of foreign currency forward contracts held for asset
and liability management purposes:
March 31, March 31,
--------- ---------
2001 2000
---- ----
(In millions, except for forward rates)
Currency to be sold............................. - Yen
Maturity dates.................................. - April 2000
Foreign currency notional amount................ - 650 yen
Weighted average forward rate................... - 109.88
U.S. dollar notional amount..................... - $ 5.9
U.S. dollar equivalent.......................... - $ 6.2
Fair value...................................... - $ (0.3)
March 31, March 31,
-------- ---------
2001 2000
---- ----
(In millions, except for forward rates)
Currency to be purchased........................ Swiss Franc Swiss Franc Yen Irish Punt
Maturity dates.................................. April 2001 April 2000 April 2000 April 2000
Foreign currency notional amount................ 57.0 Swiss Francs 42.7 Swiss Francs 400 yen 7.6 Irish Punt
Weighted average forward rate................... 1.73 1.65 104.7 1.23
U.S. dollar notional amount..................... $32.9 $ 25.9 $ 3.8 $ 9.3
U.S. dollar equivalent.......................... $32.8 $ 25.8 $ 3.8 $ 9.3
Fair value...................................... $(0.1) $ (0.1) $ -- $ --
There were no foreign currency forward contracts to be sold outstanding at March
31, 2001.
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, Swiss Francs or Irish Punt at the balance sheet dates. Quantum generally
does not require collateral from the counterparties to foreign currency forward
contracts.
Carrying Amount and Fair Values of Financial Instruments
The estimated fair value of Quantum's borrowings are summarized as follows:
53
March 31,
---------
2001 2000
------ ------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In millions)
Convertible subordinated debt........................ $287.5 $253.0 $287.5 $227.1
The fair values for the convertible subordinated debt were based on the quoted
market price at the balance sheet dates.
Note 4: Inventories
-----------
Inventories consisted of:
March 31,
----------------------
2001 2000
-------- --------
(In thousands)
Materials and purchased parts........................................................... $ 73,020 $ 41,819
Work in process......................................................................... 31,098 37,024
Finished goods.......................................................................... 26,645 22,635
-------- --------
$130,763 $101,478
======== ========
Note 5: Property, Plant and Equipment
------------------------------
Property, plant and equipment consisted of:
March 31,
-------------------------
2001 2000
--------- --------
(In thousands)
Machinery and equipment................................................................ $ 147,843 $116,864
Furniture and fixtures................................................................. 11,123 8,006
Buildings and leasehold improvements................................................... 47,995 33,305
Land................................................................................... 947 959
--------- --------
207,908 159,134
Less accumulated depreciation and amortization......................................... (113,208) (80,997)
--------- --------
$ 94,700 $ 78,137
========= ========
Note 6: Business Combinations
---------------------
Meridian Data, Inc.
On September 10, 1999, Quantum completed the acquisition of Meridian Data, Inc.
("Meridian" - now known as Snap). Meridian is a developer and manufacturer of
network attached storage appliances for the PC local area network environment.
The acquisition has been accounted for as a purchase at a total cost of $115
million. The acquisition was completed with the issuance of 4.1 million shares
of DSS common stock and 2 million shares of HDD common stock valued at $74
million and $18 million, respectively, on the date of acquisition in exchange
for all outstanding shares of Meridian; the conversion of outstanding Meridian
stock options into options to purchase 630,000 shares of DSS common stock and
315,000 shares of HDD common stock valued at $8 million and $2 million,
respectively; and the assumption of Meridian liabilities and other acquisition
costs of approximately $13 million. At the date of acquisition, Meridian had
$11 million of cash and marketable securities and a net operating loss
carryforward for U.S. federal income tax purposes of approximately $46 million.
Meridian's results of operations are included in the financial statements from
the date of acquisition, and the assets and liabilities acquired were recorded
based on their fair values as of the date of acquisition. Pro forma results of
operations have not been
54
presented because the effect of the acquisition was not material to Quantum's
financial position or results of operations.
The purchase price has been allocated based on the estimated fair market value
of net tangible and intangible assets acquired and assumed liabilities as well
as in-process research and development costs. As of the acquisition date,
technological feasibility of the in-process technology has not been established
and the technology has no alternative future use. Therefore, Quantum expensed
$37 million of the purchase price as in-process research and development in the
second quarter of fiscal year 2000. The remaining intangible assets are being
amortized on a straight-line basis over periods ranging from five to ten years.
The following is a summary of the purchase price allocation (in millions):
Tangible assets acquired.................................................. $ 12
In-process research and development....................................... 37
Completed technology...................................................... 29
Trademark................................................................. 4
Assembled workforce....................................................... 3
Goodwill.................................................................. 45
Deferred tax liability.................................................... (15)
----
$115
====
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects, and
discounting the net cash flows back to their present value using a discount rate
of 21%, which represents a premium to Quantum's cost of capital. The expected
revenue assumes an average compound annual revenue growth rate of 64% during
calendar years 1999 through 2007. Expected total revenue from the purchased in-
process projects peak in calendar year 2005 and then begin to decline as other
new products are expected to be introduced. These projections are based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions.
ATL Products, Inc.
On September 28, 1998, Quantum completed the acquisition of ATL Products, Inc.
("ATL"). ATL designs, manufactures, markets and services tape automation
systems for the networked computer market. ATL's products incorporate DLTtape
drives as well as ATL's proprietary IntelliGrip automation technology. The
acquisition has been accounted for as a purchase with a total cost of $335
million. The acquisition was completed with the issuance of 16.9 million shares
of Quantum common stock valued at $265 million on the date of acquisition in
exchange for all outstanding shares of ATL, the conversion of outstanding ATL
stock options into options valued at $22 million to purchase 1.8 million shares
of Quantum common stock and the assumption of $45 million of ATL liabilities.
Quantum also recognized deferred tax liabilities of $33 million. ATL's results
of operations are included in the financial statements from the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the date of acquisition.
The purchase price was allocated based on the estimated fair market value of net
tangible and intangible assets acquired and assumed liabilities as well as in-
process research and development costs. As of the acquisition date,
technological feasibility of the in-process technology has not been established,
and the technology has no alternative future use. Therefore, Quantum expensed
$89 million of the purchase price as in-process research and development in the
third quarter of fiscal year 1999. The remaining identifiable intangible assets
are being amortized on a straight-line basis over periods ranging from two to
fifteen years.
The following is a summary of the purchase price allocation (in millions):
55
Tangible assets acquired................................................. $ 59
In-process research and development...................................... 89
Completed technology..................................................... 42
Trademarks and trade names............................................... 20
Original equipment manufacturer and value added reseller
customer relationships................................................ 14
Assembled workforce...................................................... 4
Non-compete agreements................................................... 2
Goodwill................................................................. 138
Deferred tax liability................................................... (33)
----
$335
====
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects, and
discounting the net cash flows back to their present value using a discount rate
of 20%, which represents a premium to Quantum's cost of capital. The expected
revenue assumes an average compound annual revenue growth rate of 37% during
fiscal years 1999 to 2007. Expected total revenues from the purchased in-
process projects peak in fiscal year 2002 and then begin to decline as other
new products are expected to be introduced. These projections were based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions.
The following unaudited pro forma information has been prepared assuming that
the acquisition had taken place at the beginning of fiscal year 1999. The pro
forma financial information is not necessarily indicative of the combined
results that would have occurred had the acquisition taken place at the
beginning of the periods, nor is it necessarily indicative of results that may
occur in the future.
Year Ended
March 31, 1999
--------------
(In thousands)
Total revenue....................................... $1,343,037
Net income.......................................... $ 202,363
Note 7: Special Charges
---------------
During the fourth quarter of fiscal year 2000, Quantum recorded a special charge
of $40.1 million. The charge was primarily focused on Quantum's DLTtape
Division and reflected Quantum's strategy to align its DLTtape drive operations
with market conditions. These conditions include slower growth in the mid-range
server market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTtape Division and an acceleration of Quantum's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs, $13.9
million for the write-off of investments in optical technology, $7.6 million for
severance and benefits for terminated employees, $3.2 million for fixed assets
write-offs, primarily related to the transfer of manufacturing to Penang,
Malaysia and $1.9 million in other costs associated with the plan.
The facilities costs noted above include lease payments for vacant space in a
facility in Colorado Springs, Colorado, the write-off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang, Malaysia, as this space
is converted to Quantum manufacturing. Quantum had vacated the Colorado
facility by the end of fiscal year 2001.
56
The write-off of investments reflects Quantum's decision to end its research on
certain optical based storage solutions. As a result, Quantum has written-off
an equity investment and technology licenses related to optical technology.
In connection with the charge, Quantum currently expects a workforce reduction
of approximately 800 employees, down from the original expectation of 900
employees. The reduction in force primarily affects employees at Quantum's
manufacturing operations in Colorado Springs, Colorado, as well as
administrative employees within the DLTtape Division. As of March 31, 2001, 779
employees have been terminated. Quantum anticipates that the remaining employees
will be terminated by the end of the first quarter of fiscal year 2002.
As of March 31, 2001, Quantum had incurred cash expenditures of $8 million
associated with employee severance and benefits, facilities and other costs.
Quantum expects to incur additional cash expenditures associated with the plan
of approximately $3 million, which will be funded out of operations.
In the third quarter of fiscal year 2001, Quantum reversed $7 million as a
special charge benefit on the income statement. This reversal is primarily due
to a revised estimate of the vacancy period related to a facility in Colorado
Springs, Colorado.
The following tables summarize the activity related to the fourth quarter fiscal
year 2000 special charge through March 31, 2001:
(In thousands) Severance
And Facility Fixed Other
Benefits Costs Investments Assets Costs Total
-------- ----- ----------- ------ ----- -----
Special charge provision $ 7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments (956) -- -- -- (1,102) (2,058)
Non-cash charges -- -- (13,908) (3,163) -- (17,071)
------- ------- -------- ------- ------- --------
Balance at March 31, 2000 $ 6,690 $13,500 $ -- $ -- $ 764 $ 20,954
Cash payments (5,181) (748) -- -- (68) (5,997)
Non-cash charges -- (5,219) -- -- -- (5,219)
Special charge benefit -- (7,000) -- -- -- ( 7,000)
------- ------- -------- ------- ------- --------
Balance at March 31, 2001 $ 1,509 $ 533 $ -- $ -- $ 696 $ 2,738
======= ======= ======== ======= ======= ========
Quantum recorded a special charge of $7 million in the third quarter of fiscal
year 2001. This is a result of Quantum's decision to establish a close proximity
between its design and manufacturing operations in order to accelerate time-to-
market for future products within its DLTtape drive product family. This will
impact engineering, marketing and administrative employees in Shrewsbury,
Massachusetts, as these positions will be transitioned to Boulder, Colorado. The
special charge is related to severance, benefits and costs associated with
terminated employees affected by this plan.
Quantum currently expects a workforce reduction of approximately 200 employees.
As of March 31, 2001, 84 employees have been terminated, representing $1.7
million in cash expenditures. Quantum anticipates that the remaining employees
will be terminated by the end of the first quarter of fiscal year 2002. Quantum
expects to incur additional cash expenditures associated with the plan of
approximately $5.3 million, which will be funded out of operations.
The following table summarizes activity related to the third quarter fiscal year
2001 special charge at March 31, 2001:
57
(In thousands) Severance
and
Benefits
Special charge provision $ 7,000
Cash payments (1,657)
-------
Balance at March 31, 2001 $ 5,343
=======
Note 8: Common Stock Repurchase
------------------------
During fiscal year 2000, the Board of Directors authorized Quantum to repurchase
up to $700 million of Quantum's common stock in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSS or HDD common stock. An
additional $100 million was authorized for repurchase of HDD common stock.
Since the beginning of the authorization through March 31, 2001, Quantum has
repurchased a total of 3.9 million shares of Quantum common stock, 29.2 million
shares of DSS common stock and 13.5 million shares of HDD common stock for a
combined total of $566 million. For the year ended March 31, 2001, Quantum
repurchased 13.5 million shares of DSS common stock and 10 million shares of HDD
common stock for a combined total of $241 million.
Note 9: Credit Agreements, Long-Term Debt and Convertible Subordinated Debt
--------------------------------------------------------------------
Quantum's debt includes the following:
March 31,
------------------------
2001 2000
-------- --------
(In thousands)
7% convertible subordinated notes................................................ $287,500 $287,500
======== ========
Weighted average interest rate on Quantum's debt at period-end................... 7.00% 7.00%
In April 2000, Quantum entered into two unsecured senior credit facilities, each
providing a $187.5 million revolving credit line and expiring in April 2001 and
April 2003, respectively. At the option of Quantum, borrowings under the
revolving credit line bear interest at either the London interbank offered rate
plus a margin determined by a total funded debt ratio, or at a base rate, with
option periods of one to six months. At March 31, 2000, and March 31, 2001,
there was no outstanding balance drawn on this line.
In July 1997, Quantum issued $288 million of 7% convertible subordinated notes.
The notes mature on August 1, 2004, and are convertible at the option of the
holder at any time prior to maturity, unless previously redeemed, into shares of
DSS common stock and HDD common stock. The notes are convertible into 6,206,152
shares of DSS common stock, or 21.587 shares per $1,000 note, and were
convertible into 3,103,076 shares of HDD common stock, or 10.793 shares per
$1,000 note. However, as a result of the Maxtor acquisition of HDD, the HDD
shares are convertible into 16.405 shares of Maxtor common stock per $1,000
note. Quantum has the option to redeem the notes on or after August 1, 1999 and
prior to August 1, 2001, under certain conditions related to the price of
Quantum's common stocks. Subsequent to August 1, 2001, Quantum may redeem the
notes at any time. In the event of certain changes involving all or
substantially all of Quantum's common stocks, the holder would have the option
to redeem the notes. Redemption prices range from 107% of the principal to 100%
at maturity. The notes are unsecured obligations subordinated in right of
payment to all of Quantum's existing and future senior indebtedness.
58
Note 10: Stock Incentive Plans
---------------------
As a result of the recapitalization, each outstanding stock option under
Quantum's stock option plans was converted into separately exercisable options
to acquire one share of DLT & Storage Systems group stock and one-half of a
share of Hard Disk Drive group stock. The exercise price for the resulting DSS
stock options and HDD stock options was calculated by multiplying the exercise
price under the original options by a fraction, the numerator of which was the
opening price of DSS stock or HDD stock on August 4, 1999 (the date such stocks
were first traded on the New York Stock Exchange) and the denominator of which
was the sum of these DSS and HDD stock prices. However, the aggregate intrinsic
value of the options was not increased, and the ratio of the exercise price per
option to the market value per share was not reduced. In addition, the vesting
provisions and option periods of the original grants remained the same upon
conversion.
Long-Term Incentive Plan
Quantum has a Long-Term Incentive Plan (the "Plan") that provides for the
issuance of stock options, stock appreciation rights, stock purchase rights, and
long-term performance awards (collectively referred to as "options") to
employees, consultants, officers and affiliates of Quantum. The Plan has
reserved for future issuance 27.8 million shares and 11.7 million shares of DSS
stock and HDD stock, respectively, 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, 2001, were 3.9 million shares of DSS group stock and 0.9
million shares of HDD stock. Options under the Plan generally expire no later
than ten years from the grant date and generally vest over four years.
Restricted stock granted under the Plan generally vests over two to three years.
In fiscal years 2001, 2000 and 1999, DSS recorded compensation expense of
$1,618,000, $2,097,000 and $2,141,000, respectively, related to restricted stock
granted pursuant to stock purchase rights under the Plan. In fiscal years 2001,
2000 and 1999, HDD recorded compensation expense of $710,000, $1,070,000 and
$985,000, respectively, related to restricted stock granted pursuant to stock
purchase rights under the Plan.
In fiscal years 2000 and 1999, Quantum granted 99,800 shares and 157,200 shares,
respectively, of Quantum Corporation restricted stock under the Plan at an
exercise price of $0.01 per share. Additionally, nil shares and 321,600 shares
of DSS restricted stock and 1,000 shares and 155,800 shares of HDD restricted
stock were granted during fiscal years 2001 and 2000, respectively, at an
exercise price of $.01 per share.
Supplemental Plan
Quantum has a Supplemental Stock Plan (the "SSOP") that provides for the
issuance of stock options and stock purchase rights (collectively referred to as
"options") to employees and consultants of Quantum. The SSOP has available and
reserved for future issuance 6.4 million shares and 3.8 million shares of DSS
stock and HDD stock, respectively. Options under the SSOP generally vest over
two to four years and expire ten years after the grant date. At March 31, 2001,
options with respect to 0.7 million shares of DSS stock and 0.5 million shares
of HDD stock were available for grant. Restricted stock granted under the SSOP
generally vests over two to three years. In fiscal years 2001 and 2000,
continuing operations recorded compensation expense of $11,225,000 and
$3,108,000, respectively, related to DSS restricted stock granted pursuant to
stock purchase rights under the SSOP. In fiscal years 2001 and 2000,
discontinued operations recorded compensation expense of $5,067,000 and
$1,423,000, respectively, related to HDD restricted stock granted pursuant to
stock purchase rights under the SSOP. In fiscal years 2001 and 2000, 80,000
shares and 3.0 million shares of DSS restricted stock and 77,000 shares and 1.5
million shares of HDD restricted stock, respectively, were granted under the
SSOP at an exercise price of $.01 per share.
Stock Option Plans
59
Quantum has Stock Option Plans (the "Plans") under which 5.1 million shares and
2.4 million shares of DSS stock and HDD stock, respectively, were reserved for
future issuance at March 31, 2001 to employees, officers and directors of
Quantum. Options under the Plans are granted at prices determined by the Board
of Directors, but at not less than the fair market value, and accordingly no
compensation accounting has been required at the original date of grant.
Options currently expire no later than ten years from the grant date and
generally vest ratably over one to four years. At March 31, 2001, options with
respect to 343,000 shares and 170,000 shares of DSS stock and HDD stock,
respectively, were available for grant.
Stock Option Summary Information. A summary of activity relating to Quantum's
stock option plans follows:
Year Ended March 31,
---------------------------
1999
---------------------------
Shares Weighted-Avg.
(000s) Exercise Price
---------------------------
Outstanding at beginning of period................................................ 17,005 $12.09
Granted........................................................................... 10,781 $21.51
Canceled.......................................................................... (1,880) $22.63
Exercised......................................................................... (2,530) $ 7.23
------
Outstanding at end of period...................................................... 23,376 $14.68
======
Exercisable at end of period...................................................... 11,786 $10.65
======
Year Ended March 31,
------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------
Period from Period from
April 1, 1999, to August 4, 1999, to
August 3, 1999 March 31, 2000
-------------------------- -------------------------------------------------------
DLT & Storage Systems
Quantum Corporation Group Hard Disk Drive Group
-------------------------- -------------------------------------------------------
Shares Weighted-Avg. Shares Weighted-Avg. Shares Weighted-Avg.
(000s) Exercise Price (000s) Exercise Price (000s) Exercise Price
-------- -------------- -------- -------------- -------- ---------------
Outstanding at beginning of period.... 23,376 $14.68 26,412 $13.18 13,206 $4.80
Granted............................... 4,719 $18.91 11,037 $ 6.45 7,430 $6.19
Canceled.............................. (585) $18.56 (3,404) $15.17 (1,789 $6.39
Exercised............................. (1,098) $ 8.87 (2,605) $ 6.27 (1,961 $3.06
------ ------ ------
Outstanding at end of period.......... 26,412 $15.58 31,440 $11.14 16,886 $5.37
====== ====== ======
Exercisable at end of period.......... 13,037 $11.95 13,686 $11.03 6,407 $4.23
====== ====== ======
Year Ended March 31, 2001
----------------------------------------------------------
DLT & Storage Systems Hard Disk Drive
-------------------------- --------------------------
Shares Weighted-Avg. Shares Weighted-Avg.
(000s) Exercise Price (000s) Exercise Price
------ -------------- ------ ---------------
Outstanding at beginning of period........................ 31,440 $11.14 16,886 $ 5.37
Granted................................................... 12,358 $10.18 5,906 $11.01
Canceled.................................................. (4,413) $13.60 (1,744) $ 8.13
Exercised................................................. (6,716) $ 3.90 (5,636) $ 3.80
------ ------
Outstanding at end of period.............................. 32,669 $11.91 15,412 $ 7.76
====== ======
Exercisable at end of period.............................. 17,291 $11.93 7,685 $ 6.31
====== ======
The exercise prices for options outstanding at March 31, 2001, range from $0.01
to $26.07 and from $0.01 to $11.63 for DSS stock and HDD stock, respectively.
60
In fiscal years 2001, 2000 and 1999, continuing operations recorded compensation
expense of $93,000, $189,000 and $1,459,000, respectively, in connection with
accelerated vesting of DSS stock options under the Plans. In fiscal years 2001,
2000 and 1999, discontinued operations recorded compensation expense of $98,000,
$93,000 and $729,000, respectively, in connection with accelerated vesting of
HDD stock options under the Plans.
The following tables summarize information about options outstanding and
exercisable at March 31, 2001:
DLT & Storage Systems Group
- ---------------------------
Outstanding Options
-------------------
Shares Outstanding at Weighted-Average
March 31, 2001 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ ------ ---------------- --------------
$ 0.01 -- $ 8.69 8,555 6.80 $ 7.09
$ 8.72 -- $15.75 15,535 8.27 $11.24
$15.81 -- $26.07 8,579 7.66 $17.93
------
32,669 7.72 $11.91
======
Options Exercisable
-------------------
Shares Outstanding at
March 31, 2001 Weighted-Average
Range of Exercise Prices (000s) Exercise Price
------------------------ ------ --------------
$ 0.01 -- $ 8.69 6,196 $ 6.55
$ 8.72 -- $ 15.75 6,066 $12.20
$ 15.81 -- $ 26.07 5,029 $18.23
------
17,291 $11.93
======
Hard Disk Drive Group
- ---------------------
Outstanding Options
-------------------
Shares Outstanding at Weighted-Average
March 31, 2001 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ ------ ---------------- --------------
$ 0.01 -- $ 5.85
$ 5.87 -- $ 8.25 4,443 5.98 $ 4.09
$ 8.28 -- $11.63 5,934 8.18 $ 7.61
5,032 9.25 $11.17
------
15,409 7.90 $ 7.76
======
Options Exercisable
-------------------
Shares Outstanding at
March 31, 2001 Weighted-Average
Range of Exercise Prices (000s) Exercise Price
------------------------ ------ ---------------
$ 0.01 -- $ 5.85 3,500 $ 3.69
$ 5.87 -- $ 8.25 3,192 $ 7.64
$ 8.28 -- $11.63 993 $11.25
-----
7,685 $ 6.31
=====
Expiration dates ranged from April 15, 2001 to June 21, 2011 for options
outstanding at March 31, 2001. Prices for options exercised during the three-
year period ended March 31, 2001, are as follows:
Period Price range
------------------ ----------------
Quantum Corporation 4/1/98 -- 8/3/99 $0.01 -- $ 23.94
DLT & Storage Systems Group 8/4/99 -- 3/31/01 $0.01 -- $ 19.83
Hard Disk Drive Group 8/4/99 -- 3/31/01 $0.01 -- $ 14.50
Proceeds received by Quantum from exercises are credited to common stock and
capital in excess of par value.
61
Stock Purchase Plan
Quantum has an employee stock purchase plan (the "Purchase Plan") that allows
for the purchase of stock at 85% of fair market value at the date of grant or
the exercise date, whichever value is less. The Purchase Plan is qualified
under Section 423 of the Internal Revenue Code. Of the 27.9 million DSS shares
and 14.1 million HDD shares authorized to be issued under the plan, 2,422,000
shares and 1,315,000 shares, respectively, were available for issuance at March
31, 2001. Employees purchased 2,555,000 shares and 829,000 shares of Quantum
Corporation common stock under the Purchase Plan in fiscal years 1999 and 2000,
respectively.
Additionally, employees purchased 2,121,000 shares and 1,145,000 shares of DSS
stock in fiscal years 2001 and 2000, respectively, and 1,059 shares and 571,000
of HDD stock in fiscal years 2001 and 2000, respectively.
The weighted average exercise price of Quantum Corporation stock purchased under
the Purchase Plan was $16.16 and $9.41, in fiscal years 2000 and 1999,
respectively. The weighted average exercise prices of DSS stock and HDD stock
purchased under the Purchase Plan were $8.29 and $5.93, respectively, in fiscal
year 2001, and $8.08 and $5.03, respectively, in fiscal year 2000.
Pro forma information
Quantum adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in
fiscal year 1997. Quantum has elected to continue to account for its stock-
based compensation plans under APB Opinion No. 25 and disclose the pro forma
effects of the plans on net income and earnings per share as provided by SFAS
No. 123. Accordingly, no compensation expense has been recognized for the stock
option plans and the employee stock purchase plans as all options have been
issued at fair market value.
Pro forma net income and earnings per share information, as required by SFAS No.
123, have been determined as if Quantum had accounted for its employee stock
options (including shares issued under the Long-Term Incentive Plan,
Supplemental Plan, Stock Option Plans, and the Stock Purchase Plan, collectively
called "options") granted subsequent to March 31, 1995, under the fair value
method of that statement.
The fair value of options granted in fiscal years 2001, 2000 and 1999 reported
below have been estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
Quantum Corporation
- -------------------
Long-Term Incentive Plan,
Supplemental Plan And Stock Option Plans Stock Purchase Plan
---------------------------------------- -------------------
Fiscal 2000 Fiscal 1999 Fiscal 2000 Fiscal 1999
----------- ----------- ----------- -----------
Option life (in years)............... 2.8 3.1 1.1 1.4
Risk-free interest rate.............. 5.19% 5.52% 5.57% 5.85%
Stock price volatility............... 0.65 0.61 0.62 0.56
Dividend yield....................... -- -- -- --
DLT & Storage Systems Group
- ---------------------------
Long-Term Incentive Plan,
Supplemental Plan And Stock Option Plans Stock Purchase Plan
----------------------------------------- -------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999 Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- ----------- ----------- ----------- -----------
Option life (in years)............... 3.0 2.2 -- 1.1 0.8 --
Risk-free interest rate.............. 5.32% 6.43% -- 5.87% 6.12% --
Stock price volatility............... 0.79 0.67 -- 0.69 0.66 --
Dividend yield....................... -- -- -- -- -- --
62
Hard Disk Drive Group
- ---------------------
Long-Term Incentive Plan,
Supplemental Plan And Stock Option Plans Stock Purchase Plan
---------------------------------------- -------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999 Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- ----------- ----------- ----------- -----------
Option life (in years)............... 3.2 3.5 -- 1.2 1.51 --
Risk-free interest rate.............. 5.30% 6.27% -- 5.89% 5.57% --
Stock price volatility............... 0.79 0.68 -- 0.70 0.63 --
Dividend yield....................... -- -- -- -- -- --
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
Quantum's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of the options.
The following is a summary of weighted-average grant date fair values:
Quantum Corporation
- -------------------
Weighted-Average Grant Date Fair
Value
-----
Fiscal Fiscal Fiscal
2001 2000 1999
------ ------ ------
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans................................. -- $ 8.55 $ 9.86
Restricted stock granted under the Long-Term --
Incentive Plan and Supplemental Plan..................................... $18.99 $22.40
Shares granted under the Stock Purchase Plan............................... -- $ 7.85 $ 4.86
DLT & Storage Systems Group
- ---------------------------
Weighted-Average Grant Date Fair
Value
-----
Fiscal Fiscal
2001 2000
------ ------
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans................................. $ 5.01 $4.03
Restricted stock granted under the Long-Term
Incentive Plan and Supplemental Plan..................................... $12.70 $8.86
Shares granted under the Stock Purchase Plan............................... $ 5.22 $4.62
Hard Disk Drive Group
- ---------------------
Weighted-Average Grant Date Fair
Value
-----
Fiscal Fiscal
2001 2000
------ ------
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans................................. $6.14 $4.16
Restricted stock granted under the Long-Term
Incentive Plan and Supplemental Plan..................................... $9.35 $7.98
Shares granted under the Stock Purchase Plan............................... $3.04 $2.73
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. Quantum's pro forma
net income (loss) and net income (loss) per share follows:
63
Quantum Corporation
- -------------------
Period from Year Ended
---------
April 1, March 31,
---------
1999, to 1999
August 3, ----
---------
1999
----
Net loss (in thousands).................................................. $(32,227) $(83,964)
======== ========
Net loss per share:
Basic................................................................. $ (0.19) $ (0.52)
======== ========
Diluted............................................................... $ (0.19) $ (0.52)
======== ========
DLT & Storage Systems Group
- ---------------------------
Year Ended Period from
----------
March 31, August 4, 1999,
---------
2001 to March 31,
---- ------------
2000
----
Income from continuing operations (in thousands)......................... $100,185 $54,265
======== =======
Income per share from continuing operations:
Basic................................................................. $ 0.68 $ 0.33
======== =======
Diluted............................................................... $ 0.64 $ 0.33
======== =======
Hard Disk Drive Group
- ---------------------
Year Ended Period from
----------
March 31, August 4, 1999,
---------
2001 to March 31,
---- ------------
2000
----
Income from discontinued operations (in thousands)....................... $(31,267) $(35,678)
======== ========
Income per share from discontinued operations:
Basic................................................................. $ (0.40) $ (0.43)
======== ========
Diluted............................................................... $ (0.40) $ (0.43)
======== ========
Since the DSS stock and HDD stock were not part of the capital structure of
Quantum prior to the recapitalization on August 3, 1999 and no DSS stock options
and HDD stock options were outstanding prior to this date, pro forma information
for DSS and HDD for fiscal years 1999 is omitted. Accordingly, the pro forma
effect of DSS stock options and HDD stock options is not representative of what
the effect will be in future years.
As SFAS No. 123 is applicable only to options granted subsequent to March 31,
1995, its pro forma effect has only been fully reflected in fiscal year 2001.
Note 11: Common Stock and Stockholder Rights Agreement
---------------------------------------------
The number of authorized shares of DSS common stock is 1,000,000,000. The
number of authorized shares of preferred stock is 20,000,000.
Quantum has a stockholder rights agreement (the "Rights Plan") that provides
existing stockholders with the right to purchase preferred stock in the event of
certain changes in Quantum's ownership. Specifically, existing DSS stockholders
will have the right to purchase one one-thousandth of a share of Series B Junior
Participating Preferred Stock for each share of DSS common stock held, or, under
certain circumstances, shares of DSS common stock with a market value twice the
exercise price of such right. The purchase price in either case is determined
by the Board of Directors, subject to adjustment. Subject to certain
exceptions, these rights may be exercised the tenth day after any person or
group becomes the beneficial owner (or makes an offer that would result in such
beneficial ownership) of 20% or more of the outstanding DSS common stock. If
such change in beneficial ownership is
64
combined with a merger of Quantum or a sale of more than 50% of the assets of
Quantum, then the existing stockholders have the right to purchase, for the
exercise price, a number of shares of common stock in the surviving entity
having a market value of twice the exercise price of such right. The Rights Plan
may serve as a deterrent to takeover tactics that are not in the best interests
of stockholders. There are 1,000,000 preferred shares reserved for issuance
under the Rights Plan.
As at March 31, 2001, there were 600,000,000 shares authorized for HDD common
stock. Existing HDD stockholders had the right to purchase one one-thousandth of
a share of Series C Junior Participating Preferred Stock for each share of HDD
common stock held or, under certain circumstances, shares of HDD common stock
with a market value twice the exercise price of such right. As a result of
disposition of HDD to Maxtor on April 2, 2001, Quantum is in the process of
amending the Rights Plan to remove the provisions applicable to HDD.
Note 12: Net Income (Loss) Per Share
---------------------------
Net income (loss) per share was calculated on a consolidated basis until DSS
stock and HDD stock were created as a result of the recapitalization on August
3, 1999. Subsequent to this date, net income (loss) per share was computed
individually for DSS and HDD.
The following tables set forth the computation of basic and diluted net income
(loss) per share as well as income(loss) from continuing and discontinuing
operations per share:
(In thousands, Year Ended March Period from Period from Year Ended March 31, 1999
except per share 31, 2001 August 4, 1999 to April 1, 1999 to August 3, 1999
data) March 31, 2000
Quantum Quantum
Cont. Ops Disc. Ops Cont. Ops Disc. Ops Cont. Ops Disc. Ops Corp. Cont. Ops Disc. Ops Corp.
--------- --------- --------- --------- --------- -------- ---------- --------- --------- ----------
Numerator:
Numerator for
basic and diluted
net income (loss)
per share -
income (loss)
available to
common
stockholders $ 167,446 $ (6,760) $ 85,586 $ (27,549) $ 60,028 $ (77,221) $ (17,193) $ 122,991 $(152,526) $ (29,535)
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Denominator:
Denominator for
basic net income
(loss) per share
- weighted
average shares 148,150 78,407 162,023 83,018 165,788 165,788 165,788 160,670 160,670 160,670
Effect of
dilutive
securities:
Outstanding
options 7,495 5,711 6,228 6,228 5,545 5,545
---------- --------- --------- --------- -------- --------
Denominator for
diluted net
income (loss) per
share - adjusted
weighted average
shares 155,645 78,407 167,734 83,018 172,016 165,788 172,016 166,215 160,670 166,215
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Basic net income
(loss) per share $ 1.13 $ (0.09) $ 0.53 $ (0.33) $ 0.36 $ (0.47) $ (0.10) $ 0.77 $ (0.95) $ (0.18)
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Diluted net income
(loss) per share $ 1.08 $ (0.09) $ 0.51 $ (0.33) $ 0.35 $ (0.47) $ (0.10) $ 0.74 $ (0.95) $ (0.18)
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
65
The computation of diluted net income (loss) per share for DSS, HDD and Quantum
for all periods presented, excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 6,206,152
shares of DSS common stock, or 21.587 shares per $1,000 note, and 3,103,076
shares of HDD common stock, or 10.793 shares per $1,000 note, because the effect
would have been antidilutive.
Options to purchase 32,668,918 shares of DSS common stock were outstanding for
the fiscal year ended March 31, 2001, of which 13,225,845 shares were not
included in the computation of diluted net income per share because the options'
exercise price was greater than the average market price of the common stock
and, therefore, the effect would have been antidilutive.
Options to purchase 15,408,994 shares of HDD common stock were outstanding for
the fiscal year ended March 31, 2001. However, the corresponding weighted
average outstanding options were not included in the computation of diluted net
loss per share because the effect would have been antidilutive.
Options to purchase 16,885,729 shares of HDD common stock were outstanding at
March 31, 2000. However, the corresponding weighted average outstanding options
were not included in the computation of diluted net loss per share for HDD for
the period August 4, 1999 through March 31, 2000, because the effect would have
been antidilutive.
Options to purchase 23,376,499 and 26,411,958 shares of Quantum common stock
were outstanding at March 31, 1999, and August 3, 1999, respectively. Although
the effect is antidilutive, the corresponding weighted average outstanding
options were included in the computation of diluted net loss per share for
Quantum for the year ended March 31, 1999, and the period April 1, 1999 through
August 3, 1999, due to Quantum reporting income from continuing operations in
the respective periods.
Note 13: Savings and Investment Plan
---------------------------
Substantially all of the regular domestic employees are eligible to make
contributions to Quantum's 401(k) savings and investment plan. Quantum matches
a percentage of the employees' contributions and may also make additional
discretionary contributions to the plan. Contributions for DSS and HDD combined
were $8 million, $9 million and $7 million, in fiscal years 2001, 2000 and 1999,
respectively.
Note 14: Income Taxes
------------
The income tax provision for continuing operations consists of the following:
Year Ended March 31,
----------------------------------------
2001 2000 1999
------- -------- --------
(In thousands)
Federal: Current........................................... $34,900 $126,793 $110,509
Deferred.......................................... 24,523 (25,050) 5,710
------- -------- --------
59,423 101,743 116,219
------- -------- --------
State: Current........................................... 9,673 24,236 27,430
Deferred.......................................... 1,293 (4,242) (2,322)
------- -------- --------
10,966 19,994 25,108
------- -------- --------
Foreign: Current........................................... 22,519 -- --
Deferred.......................................... 1,281 -- --
------- -------- --------
23,800 -- --
------- -------- --------
Income tax provision.......................................... $94,189 $121,737 $141,327
======= ======== ========
66
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of incentive stock options, and employee stock purchase plan shares
reduced taxes currently payable as shown above by $11 million, $10 million, and
$8 million in fiscal years 1999, 2000 and 2001, respectively. Such benefits are
credited to equity when realized.
The income tax provision for continuing operations differs from the amount
computed by applying the federal statutory rate of 35% to income before income
taxes as follows:
Year Ended March 31,
---------------------------------------
2001 2000 1999
------- -------- --------
(In thousands)
Tax at federal statutory rate................................................ $91,574 $ 93,570 $ 92,511
State income tax, net of federal benefit..................................... 7,128 12,996 16,320
Research and development credit.............................................. (3,933) (2,109) (634)
Acquired in-process research and development................................. 12,950 31,150
Goodwill amortization........................................................ 3,930 4,075 1,609
Foreign earnings taxed at less than U.S. rates............................... (8,898) -- --
Other items.................................................................. 4,388 255 371
------- -------- --------
$94,189 $121,737 $141,327
======= ======== ========
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:
Year Ended March 31,
------------------------------------
2001 2000
-------- --------
(In thousands)
Deferred tax assets:
Inventory valuation methods............................................. $ 14,606 $ 15,283
Accrued warranty expense................................................ 13,477 16,193
Distribution reserves................................................... 6,895 3,206
Loss carryforwards and tax credits................................... 13,109 16,287
Restructuring Reserves............................................... 3,295 8,725
Other accruals and reserves not currently deductible for tax
Purposes............................................................ 7,408 16,532
Depreciation and amortization methods................................... 12,813 9,156
-------- --------
71,603 85,382
-------- --------
Deferred tax liabilities:
Acquired intangibles................................................... (37,368) (40,821)
Tax on unremitted foreign earnings net of foreign tax credits.......... (17,917) --
Other.................................................................... (3,796) (3,470)
-------- --------
(59,081) (44,291)
-------- --------
Net deferred tax asset.................................................... $ 12,522 $ 41,091
======== ========
67
Pretax income from foreign operations was $133 million for the fiscal year ended
March 31, 2001. U.S. taxes have not been provided for unremitted foreign
earnings of $42 million. The residual U.S. tax liability, if such amounts were
remitted would be approximately $11 million.
The net operating loss carryforwards and credit carryforwards disclosed above
expire in varying amounts between fiscal years 2005 and 2018 if not previously
utilized. Ownership change provisions of tax law result in these carryforwards
being available ratably over the next six years.
Note 15: Litigation
----------
On August 7, 1998, Quantum was named as one of several defendants in a patent
infringement lawsuit filed in the U.S. District Court for the Northern District
of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH, owns at
least 26 United States patents having claims which Papst has asserted are or
have been infringed by Quantum's hard disk drive products. In October 1999 the
case was transferred to a federal district court in New Orleans, Louisiana,
where it has been joined with similar suits brought by Papst against Maxtor
Corporation and Minebea Company, Ltd., for purposes of coordinated discovery
under multi-district litigation rules. IBM was sued by Papst in New Orleans, and
this suit has been added to the multi-district proceedings. As part of Quantum's
disposition of its Hard Disk Drive business to Maxtor Corporation, Maxtor has
agreed to assume defense of Quantum's hard disk drive business disposed to
Maxtor, and to indemnify Quantum in this litigation going forward. A motion to
dismiss Quantum as a party from this lawsuit has been filed. While Quantum
believes that it should be dismissed from this lawsuit under established legal
principles, there is no guarantee that Quantum will be dismissed from the
lawsuit, or that Maxtor would have sufficient resources to indemnify Quantum in
the event that Papst prevails in the lawsuit against the Quantum pre-merger hard
disk drive products. If Maxtor were unable for any reason to indemnify Quantum
in accordance with the merger agreement, the outcome of this litigation would be
uncertain and the costs to Quantum could be substantial.
Quantum is also subject to other legal proceedings and claims that arise during
the ordinary course of its business. While management currently believes that
the amount of ultimate liability, if any, with respect to these actions and
claims will not materially affect the financial position, results of operations,
or liquidity of Quantum, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur, the impact could be material to Quantum.
Note 16: Commitments
-----------
Quantum leases certain facilities under non-cancelable operating lease
agreements for periods of up to 15 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 $17 million, $11 million, and $10 million for the fiscal years
ended March 31, 2001, 2000, and 1999, respectively.
Future minimum lease payments under operating leases are as follows:
Year ended March 31, (In thousands)
2002..................................................... $16,936
2003..................................................... 13,074
2004..................................................... 7,457
2005..................................................... 3,963
2006..................................................... 2,870
Thereafter............................................... 7,259
-------
Total future minimum lease payments...................... $51,559
=======
68
Quantum is contingently liable, under residual value guarantees, for
approximately $63 million for one of its current facility leases.
Note 17: Business Segment and Geographic Information
-------------------------------------------
Quantum's reportable segments are the DLTtape group and the Storage Solutions
group. These reportable segments are each managed separately as they manufacture
and distribute distinct products with different production processes. The
DLTtape group consists of DLTtape drives and media. The Storage Solutions group
consists of tape automation systems, network attached storage appliances and
solid state storage systems. Quantum directly markets its products to computer
manufacturers and through a broad range of distributors, resellers and systems
integrators.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Quantum evaluates
segment performance based on operating profit (loss) excluding non-recurring
gains or losses. Quantum does not allocate interest and other income, interest
expense, or taxes to operating segments. Additionally, Quantum does not allocate
all assets by operating segment, only inventories and accounts receivable.
Year Ended March 31,
---------------------
2001 2000 1999
------ ------ ------
DLTtape Storage Total DLTtape Storage Total DLTtape Storage Total
------- ------- ----- ------- ------- ----- ------- ------- -----
Solutions Solutions Solutions
--------- --------- ---------
(in millions)
Revenue from external
customers................. $993 $413 $1,406 $1,096 $323 $1,419 $1,149 $154 $1,303
Intersegment revenue....... 97 -- 97 96 -- 96 40 -- 40
Operating expenses 188 174 362 194 110 *304 162 52 **214
Operating income (loss).... 301 (34) 267 351 (7) *344 374 (8) **366
Inventories 87 44 131 58 43 101 106 18 124
Accounts receivable, net 139 69 208 152 62 214 212 42 254
* Special charge of $40 million and in-process research and development of
$37 million excluded.
** In-process research and development of $89 million excluded.
Product Information
Revenue for reportable segments is comprised of the following:
Year Ended March 31,
--------------------------------
2001 2000 1999
------ ------ ------
(In millions)
DLTtape group:
DLTtape drives................................................................ $ 756 $ 858 $ 872
DLTtape media................................................................. 115 147 195
DLTtape royalties............................................................. 219 187 122
Intersegment elimination...................................................... (97) (96) (40)
------ ------ ------
$ 993 $1,096 $1,149
Storage Solutions group:......................................................... 413 323 154
------ ------ ------
Total $1,406 $1,419 $1,303
====== ====== ======
69
Inter-group elimination represents intra-group sales of DLTtape drives
incorporated into the Storage Solutions group's tape automation systems.
Geographic and Customer Information
Revenue by region is as follows (revenue is attributed to regions based on the
location of customers):
Year Ended March 31,
--------------------
2001 2000 1999
---- ---- ----
Long-Lived Long-Live Long-Lived
Revenue Assets Revenue Assets Revenue Assets
------- ------ ------- ------ ------- ------
(In millions)
United States............................. $ 909 $317 $ 915 $322 $ 922 $291
United Kingdom............................ 181 1 117 -- 188 --
Rest of Europe............................ 145 2 259 4 134 1
Asia Pacific.............................. 168 2 126 -- 59 1
Latin America............................. 3 -- 2 -- -- --
------ ---- ------ ---- ------ ----
Total.................................. $1,406 $322 $1,419 $326 $1,303 $293
====== ==== ====== ==== ====== ====
Two customers accounted for 10% or more of Quantum's revenue in fiscal years
2001, 2000 and 1999. Revenue from one customer represented $263 million, $283
million and $329 million of Quantum's revenue in the respective periods. Revenue
from the other customer represented $146 million, $183 million and $171 million
of Quantum's revenue in the respective periods.
Note 18: Discontinued Operations
-----------------------
On March 30, 2001, Quantum's stockholders approved the disposition of the HDD
group to Maxtor Corporation. On April 2, 2001, each authorized share of HDD
common stock was exchanged for 1.52 shares of Maxtor common stock.
The HDD group produced two primary product lines, desktop hard disk drives and
high-end hard disk drives. HDD had two separate business units that supported
these two product lines. The desktop business unit designed, developed and
marketed desktop hard disk drives designed to meet the storage requirements of
entry-level to high-end desktop personal computers in home and business
environments. The high-end business unit designed, developed and marketed high-
end hard disk drives designed to meet the storage requirements of network
servers, workstations and storage subsystems.
Quantum expects to realize a net gain on the disposal of the HDD business to be
recorded in the June quarter of fiscal year 2002.
The following table details the net current assets and net other assets of
discontinued operations:
March 31,
---------------------------------
2001 2000
--------- ---------
(In thousands)
Net current assets of discontinued operations
Cash and marketable securities..................................................... $ 408,155 $ 611,590
Accounts receivable, net of allowance for doubtful accounts of $2,083 and
$19,618 respectively............................................................ 259,339 395,118
Inventories........................................................................ 179,197 122,347
Accounts payable................................................................... (229,931) (375,614)
70
Other net current liabilities...................................................... (114,921) (79,193)
--------- ---------
$ 501,839 $ 674,248
========= =========
Net other assets of discontinued operations
Property, plant, and equipment, less accumulated depreciation...................... 138,566 158,548
Long-term debt..................................................................... (36,608) (37,838)
Other net assets (liabilities)..................................................... 82,546 (18,482)
--------- ---------
$ 184,504 $ 102,228
========= =========
As Quantum remains the obligor of the convertible subordinated debt subsequent
to the merger with Maxtor, Quantum will record a receivable for the portion of
the convertible subordinated debt Maxtor is obligated to reimburse Quantum as a
result of the merger.
The following table summarizes the results of discontinued operations:
Year Ended March 31,
2001 2000 1999
---------- ---------- ----------
(In thousands)
Revenue................................................................. $3,046,489 $3,311,579 $3,599,320
Gross profit............................................................ 410,867 230,070 291,419
Operating expenses: 434,418 420,994 423,874
Loss from operations.................................................... (23,551) (190,924) (132,455)
Loss before income taxes................................................ (9,660) (178,181) (264,503)
Income tax benefit...................................................... 2,900 73,411 111,977
Net loss................................................................ (6,760) (104,770) (152,526)
Net cash used by discontinued operations in fiscal years 2001 was $178 million
and net cash provided by discontinued operations in fiscal years 2000 and 1999
was $82 million and $246 million, respectively.
Note 19: Unaudited Quarterly Financial Data
----------------------------------
Year Ended March 31, 2001
-------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ------------ ------------ -----------
(In thousands, except per share data)
Revenue....................................................... $366,184 $361,751 $369,271 $308,612
Gross profit.................................................. 159,835 157,838 163,410 141,953
Income from continuing operations............................. 43,950 44,285 47,519 31,692
Net income.................................................... 60,420 35,614 44,235 20,417
Income per share from continuing operations:
Basic...................................................... 0.29 0.30 0.32 0.21
Diluted.................................................... 0.28 0.29 0.30 0.20
Year Ended March 31, 2000
-------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ------------ -----------
(In thousands, except per share data)
Revenue....................................................... $330,744 $357,098 $365,780 $365,249
Gross profit.................................................. 151,650 170,206 164,088 162,946
Income from continuing operations............................. 51,465 21,060 50,790 22,299
Net income (loss)............................................. 8,281 (62,653) 55,896 39,320
Net income (loss) per share:
Basic...................................................... 0.05 (0.15) NA NA
71
Diluted.................................................... 0.05 (0.15) NA NA
Income per share from continuing operations:
Basic...................................................... 0.05 0.08 0.31 0.14
Diluted.................................................... 0.05 0.07 0.30 0.14
NA:
- - Net income (loss) per share is not presented for the third and fourth
quarters of fiscal year 2000, as there is no single class of stock that
represents the consolidated company after August 3, 1999, the date of the
recapitalization.
Revenue and gross profit figures presented from continuing operations are from
DSS' quarterly financial statements as included in Quantum's quarterly reports.
Net income (loss) per share for the second quarter of fiscal year 2000 reflected
the net loss per share for Quantum through August 3, 1999, the date of the
recapitalization. Options to purchase 26,411,958 shares of Quantum common stock
were outstanding at August 3, 1999. Although the effect is antidilutive, the
corresponding weighted average outstanding options were included in the
computation of diluted net loss per share for the period, due to Quantum
reporting income from continuing operations.
The results of operations for continuing operations in the fourth quarter of
fiscal year 2000 included the effect of a $40 million special charge associated
with Quantum's strategy to reduce overhead expenses and product cost including
the transfer of volume manufacturing to Penang, Malaysia.
The results of operations for continuing operations for the second quarter of
fiscal year 2000 included a $37 million charge related to purchased in-process
research and development related to the acquisition of Meridian.
Note 20: Subsequent Events
-----------------
Acquisition of M4 (Data) Holdings Ltd
- -------------------------------------
On February 7, 2001, Quantum announced that it signed a definitive agreement to
acquire M4 Data (Holdings) Ltd., a privately held data storage company based in
the United Kingdom. The acquisition enables Quantum to leverage M4 Data's
complementary products and technologies to enhance the range of storage
solutions offered to enterprise customers. M4 Data provides high performance
tape automation products for the data storage market.
Under the terms of the agreement, Quantum acquired on April 12, 2001, all the
outstanding stock of M4 Data for approximately $56 million in consideration,
including $15 million in cash and $41 million in notes payable. These notes are
due 2006 and are callable by the holders at their option, beginning April 2002.
The purchase agreement also includes additional contingent consideration based
on the achievement of future performance goals.
The acquisition will be accounted for under the purchase method of accounting.
Disposition of the Hard Disk Drive group
- ----------------------------------------
On October 3, 2000, Quantum entered into a definitive agreement with Maxtor
Corporation to combine Maxtor and HDD in an all-stock transaction. The merger
agreement resulted in HDD's stockholders receiving on April 2, 2001, 1.52 shares
of Maxtor common stock for every share of HDD common stock. The transaction,
which was approved by the stockholders of both companies, is expected to be tax-
free to Quantum and its stockholders.
The disposition of the HDD group to Maxtor will be recorded in the June quarter
of fiscal year 2002 and is expected to result in a net gain on disposal. This
gain will be included in the income statement of the first quarter of fiscal
year 2000 and is based on
72
the difference between the purchase price and the net book value of the disposed
assets, net of certain stock charges and other adjustments. The net book value
of the disposed assets used in the calculation of the gain on disposition
comprises the assets of the discontinued operations as at March 31, 2001, less a
receivable for the portion of the convertible subordinated debt Maxtor is
obligated to reimburse Quantum.
The conversions of employee options and restricted stock related to the
disposition of HDD to Maxtor will result in additional dilution to Quantum of
approximately six million shares. These conversions include:
. HDD stock options converting to DSS stock options for employees remaining
with Quantum,
. HDD stock options converting to DSS restricted stock for employees being
terminated,
. HDD restricted stock converting to DSS restricted stock for employees
remaining with Quantum or being terminated and
. DSS options converting to DSS restricted stock for employees transferring
to Maxtor.
Non-Recurring and Special Charges, and In-Process Research and Development
- --------------------------------------------------------------------------
Expenses
- --------
(i) Non-Recurring Charges
As a result of the disposition of the HDD business and its merger with Maxtor,
in the first quarter of fiscal year 2002, Quantum will record certain stock and
other compensation charges to better align resources with the requirements of
Quantum's ongoing operations. These charges will be recorded in Quantum's
results of operations.
Stock Compensation Charges
As described in the paragraphs below, a portion of the total stock compensation
charges will be immediately expensed upon completing the disposition in the
first quarter of fiscal year 2002, and the remaining deferred stock compensation
charges will be recorded and expensed over remaining vesting periods, or up to
four years.
Stock Compensation Charges - Continuing Quantum Employees
In the first quarter of fiscal year 2002, continuing Quantum DSS employees,
including corporate employees with HDD stock options and HDD restricted stock
will have their HDD equity interests converted into DSS stock options and
restricted stock, respectively. The aggregate intrinsic value of the stock
option and restricted stock immediately after the conversion will equal the
intrinsic value of the stock option and restricted stock immediately before the
conversion. In addition, the ratio of the exercise price per share to the market
value per share will not be reduced. Resulting compensation related to vested
stock options will be immediately expensed, and compensation related to unvested
options and restricted stock will be expensed over the remaining vesting periods
of those awards or up four years. The compensation expense related to these
replacement awards will be included in continuing operations in Quantum's
consolidated financial statements.
Stock Compensation Charge - Corporate Employees Terminated at the time of the
Merger
Most Quantum employees whose employment is terminated coincident with the
closing of the HDD and Maxtor transaction will be afforded the normal 90-day
period in which to exercise their vested HDD and DSS stock option awards.
Employees designated for termination at the merger consummation date had their
unvested HDD and DSS stock options and restricted stock converted in to shares
of DSS restricted stock based on a conversion formula that conferred an economic
value at least equal to the intrinsic value of the HDD and DSS options and
restricted stock at the time of the conversion. Terminated employees who are
not party to a transition arrangement will receive accelerated vesting of 50% of
the unvested portion of their restricted stock awards. Compensation expense
related to the stock conversions and acceleration granted to former corporate
employees terminated coincident with the closing of the transaction will be
included in continuing operations in Quantum's consolidated financial
statements. Compensation expense related to the stock conversions and
acceleration granted to former Quantum HDD employees terminated with the closing
of the transaction will be included in the calculation of the gain on disposal
of discontinued operations.
73
Stock Compensation Charge - Employees to be Terminated After the Merger
Employees designated for termination on or about the merger consummation date,
but who will remain employed by Quantum pursuant to a transition service
arrangement, had their unvested HDD and DSS stock options and restricted stock
converted into shares of DSS restricted stock based on a conversion formula that
conferred an economic value at least equal to the intrinsic value of the HDD and
DSS options and restricted stock at the time of the conversion (vested but
unexercised awards will be permitted to expire according to their original
terms). Fifty percent of the DSS restricted stock issued upon conversion of such
outstanding unvested awards will vest upon the earlier of three months
succeeding the initial three-month period or the termination date of the
employee. The other 50% of the DSS restricted stock will vest ratably over the
successive nine month period so long as the employee remains employed by Quantum
during this time. Quantum will account for the award of restricted stock, in
settlement of existing unvested options and restricted stock, as the
cancellation of an award and concurrent new issuance. Quantum will record
deferred compensation for the value of the DSS restricted stock issued, fixed as
of the issuance date, and will recognize compensation expense through continuing
operations over the period during which the restrictions on such stock lapse, or
up to nine months.
Corporate Severance and Compensation Charges
Subsequent to the disposition of the HDD business and its merger with Maxtor,
Quantum will be left with excess administration and overhead costs. Pursuant to
the merger agreement, Maxtor has agreed to hire, or in the event it does not
hire, pay the severance costs associated with the termination of substantially
all of the of the HDD employees and a significant portion of the corporate
employees, including certain members of Quantum's senior management. The
severance costs that will not be paid by Maxtor will be included in Quantum's
results of operations.
(ii) Special Charges - DLT and Storage Solutions
In the first quarter of fiscal year 2001, Quantum expects to incur significant
special charges related to: 1) discontinuing business activities in solid state
storage systems, 2) the decision to withdraw the plans for an initial public
offering of its Snap Appliances subsidiary, namely writing off deferred costs
that were related to the plan, 3) staff reductions and other cost incurred
related to cost savings activities related to tape automation systems
activities, and 4) DLT relocation and transition expenses that will be incurred
as DLTtape product development is moved from Shrewsbury, Massachusetts, to
Boulder, Colorado.
(iii) In-Process Research and Development Expenses
A portion of the M4 purchase price will be assigned to in-process research and
development, which will be expensed in the first quarter of fiscal year 2002.
Voluntary Employee Stock Option Exchange Program
- ------------------------------------------------
On June 4, 2001, Quantum announced that the Quantum Board of Directors had
approved a Voluntary Stock Option Exchange program in which eligible employees
will have the opportunity to exchange certain options that have an exercise
price of $14 per share or more for the promise to grant new options on January
7, 2002, under the Quantum Corporation Supplemental Stock Option Plan. The
offer for the Exchange Program began June 4, 2001, and ends July 3, 2001. There
are approximately 2.6 million DSS options eligible under this program.
74
QUANTUM CORPORATION
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
beginning of charged to end of
period expense Deductions (i) period
------ ------- -------------- ------
Classification (In thousands)
- -----------------------------
Allowance for doubtful accounts year ended:
March 31, 1999..................................... $2,586 $2,709 $(2,788) $2,507
March 31, 2000..................................... $2,507 $1,297 $ (312) $3,492
March 31, 2001..................................... $3,492 $ 824 $(1,089) $3,227
____________
(i) Uncollectible accounts written off, net of recoveries.
75