Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 2010
OR
OR
| o | 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 1-13449
Commission file number 1-13449
QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
(Exact name of Registrant as specified in its charter)
| Delaware | 94-2665054 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 1650 Technology Drive, Suite 800, San Jose, California | 95110 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area
code: (408) 944-4000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| QUANTUM CORPORATION COMMON STOCK | NEW YORK STOCK EXCHANGE |
Securities registered pursuant to Section
12(g) of the Act:
NONE
NONE
Indicate by check mark
whether the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. YES o NO x
Indicate by check mark
if the Registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. YES o NO x
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 o
Indicate by checkmark
whether the registrant has submitted electronically and posted on its corporate
website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). YES o NO o
Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate by checkmark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
The aggregate market
value of Quantum Corporation’s common stock, $0.01 par value per share, held by
nonaffiliates of the Registrant was approximately $218.7 million on September
30, 2009, the last day of the Registrant’s most recently completed second fiscal
quarter, based on the closing sales price of the Registrant’s common stock on
that date on the New York Stock Exchange. 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 June 4, 2010, there were approximately 215.9 million shares of
Quantum Corporation’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
The Registrant’s
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
August 18, 2010, which the Registrant will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report, is incorporated by reference in Part III of this Form 10-K to the extent
stated herein.
INDEX
| Page Number |
|||
| PART I | |||
| Item 1 | Business | 1 | |
| Item 1A | Risk Factors | 11 | |
| Item 1B | Unresolved Staff Comments | 24 | |
| Item 2 | Properties | 24 | |
| Item 3 | Legal Proceedings | 24 | |
| Item 4 | Reserved | 25 | |
| PART II | |||
| Item 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 25 | |
| Item 6 | Selected Financial Data | 26 | |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 | |
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 49 | |
| Item 8 | Financial Statements and Supplementary Data | 51 | |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 91 | |
| Item 9A | Controls and Procedures | 91 | |
| Item 9B | Other Information | 92 | |
| PART III | |||
| Item 10 | Directors, Executive Officers and Corporate Governance | 92 | |
| Item 11 | Executive Compensation | 93 | |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 93 | |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 94 | |
| Item 14 | Principal Accounting Fees and Services | 94 | |
| PART IV | |||
| Item 15 | Exhibits, Financial Statement Schedules | 94 | |
| SIGNATURE | 99 | ||
| POWER OF ATTORNEY | 100 | ||
PART I
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 in this report usually contain the words
“will,” “estimate,” “anticipate,” “expect”, “believe” or similar expressions and
variations or negatives of these words. All such forward-looking statements
including, but not limited to, (1) our goals for future operating performance,
including our expectations regarding our performance for fiscal 2011; (2) our
expectations relating to growing our disk backup, software and services
businesses; (3) our research and development plans and focuses; (4) our
expectation that we will continue to derive a substantial majority of our
revenue from products based on tape technology; (5) our belief that our existing
cash and capital resources will be sufficient to meet all currently planned
expenditures, debt repayments and sustain our operations for at least the next
12 months; (6) our expectations regarding our ongoing efforts to reduce our cost
structure; (7) our expectations about the timing and maximum amounts of our
future contractual payment obligations; (8) our belief that our ultimate
liability in any infringement claims made by any third parties against us will
not be material to us; and (9) our business objectives, key focuses,
opportunities and prospects which are inherently uncertain as they are based on
management’s expectations and assumptions concerning future events, and they are
subject to numerous known and unknown risks and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. As a result, our 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, but are not limited to: (1) the amount of orders received in future
periods; (2) our ability to timely ship our products; (3) uncertainty regarding
information technology spending and the corresponding uncertainty in the demand
for our products and services; (4) our ability to maintain supplier
relationships; (5) the successful execution of our strategy to expand our
businesses in new directions; (6) our ability to successfully introduce new
products; (7) our ability to capitalize on changes in market demand; (8) our
ability to achieve anticipated gross margin levels; (9) the availability of
credit on terms that are beneficial to us; and (10) those factors discussed
under “Risk Factors” in Part I, Item 1A. Our forward-looking statements are not
guarantees of future performance. We disclaim any obligation to update
information in any forward-looking statement.
ITEM 1. Business
Business Description
Quantum Corporation
(“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a leading global
storage company specializing in backup, recovery and archive solutions.
Combining focused expertise, customer-driven innovation and platform
independence, we provide a comprehensive, integrated range of disk, tape and
software solutions supported by our sales and service organization. We work
closely with a broad network of distributors, value-added resellers (“VARs”),
original equipment manufacturers (“OEMs”) and other suppliers to meet customers’
evolving data protection needs. Our stock is traded on the New York Stock
Exchange (“NYSE”) under the symbol “QTM.”
We offer a comprehensive
range of solutions in the data storage market providing performance and value to
organizations of all sizes. We believe our combination of expertise, innovation
and platform independence allows us to solve customers’ data protection and
retention issues more easily, effectively and securely. In addition, we have the
global scale and scope to support our worldwide customer base. As a pioneer in
disk-based data protection, we have a broad portfolio of disk backup solutions
featuring deduplication and replication technology. We are also the worldwide
independent leader in open systems tape automation revenue, with products
spanning from entry-level autoloaders to enterprise libraries, and are a major
supplier of tape drives and media. Our data management software provides
technology for shared workflow applications and multi-tiered archiving in
high-performance, large-scale storage environments. We offer a full range of
service with support available in more than 100 countries. For further
information see Note 17, “Geographic and Customer Information” to the Consolidated Financial Statements and Part
II, Item 6, “Selected Financial Data.”
1
Industry Background
Information Technology
(“IT”) departments continue to experience pressure around cost effectively
storing rapidly increasing amounts of data. Even in the face of the recent
economic downturn, companies still save data of all types, structured and
unstructured, for both near and long-term retention. This rapid data growth
combined with demands for ready access to data, expanding retention policies and
laws regarding compliance, and limited IT budget increases represent major
challenges for IT managers.
Many companies
experience rapid data growth year over year and have data retention policies
that require them to save data for lengthy periods or even forever. This is one
factor driving the need for long-term data retention solutions and archive
technologies. Additionally, many companies face regulatory requirements that
mandate both long-term preservation of and secure access to data. Even in
industries without strong regulatory requirements, companies are recognizing the
value of securing access to their data as good business practice.
This rapid data growth
combined with the need for ready access to data is driving the steady expansion
of newer technologies such as deduplication and replication to help address
these needs. Customers are increasingly looking to deploy these technologies at
various points in their organizations to take advantage of storage optimization,
effective data movement and increased disaster recovery capabilities.
Deduplication technology is moving from being available primarily in dedicated
appliances to being embedded in a broad variety of solutions, including most
backup software.
Companies recognize that
technologies alone cannot solve their problems and rely on organizations that
can provide them with complete solutions, including the services, support and
experience needed for complete customer satisfaction. Quantum is a specialist in
the backup, recovery and archive business and offers worldwide support and
maintenance from offices around the world to meet its customers’ needs.
Strategy Update
Backup, recovery and
archive continues to be a major focus for customers who face a number of
challenges in managing and protecting their data which continues to grow
significantly year after year. Both recovery point and recovery time objectives
are becoming shorter as users no longer tolerate data loss or downtime for their
critical applications. There are also growing compliance and security
requirements, particularly as the majority of data is stored outside of primary
data centers, making data protection an important issue in remote locations.
Finally, customers must address all these challenges in a time of constrained
budgets and staffing levels.
With these customer
challenges in mind, our strategy is to continue building out a portfolio of
integrated solutions encompassing disk, tape, software and services to enable
users to protect and manage data from the edge of the network to the core data
center. A key component of this strategy is the value provided through our
DXi™-Series platform, a single disk-based
architecture with deduplication and replication for backup and recovery that can
scale from protecting and managing a terabyte of data at a remote office to over
200 terabytes at a data center. We have designed the DXi-Series products to be
closely integrated with tape for disaster recovery, long-term archive and
compliance, and they also leverage our StorNext® software as the underlying file system. In
addition, our edge-to-core strategy includes centralized management and secure
data transfer across sites and storage tiers.
During fiscal 2011, we
plan to continue building out our product and solutions portfolio that support
this strategy. In addition, we intend to leverage growth through increased
engagement with our channel partners to increase disk backup and software
solutions revenue in addition to gaining share in the open systems tape
automation market.
As we expand our branded
business, we also intend to continue leveraging our leadership in deduplication
and replication technology to create an open systems ecosystem with
compatibility across multiple vendors’ solutions. We believe this will provide
end user customers greater flexibility and choice in how they meet their backup,
recovery and archive needs.
2
Products
As a leading global
specialist in backup, recovery and archive, we provide a comprehensive range of
disk, tape and software solutions supported by a worldwide sales and service
organization. Our solutions are designed to provide IT departments in a wide
variety of organizations with innovative and dependable tools for protecting,
retaining and accessing their digital assets. We sell our products via our
branded channels and through OEMs such as Dell, Inc. (“Dell”), Hewlett-Packard
Company (“HP”) and International Business Machines Corporation (“IBM”). We
divide our products into three broad categories: (1) tape automation systems,
(2) disk backup systems and data management software and (3) devices and media.
The devices and media category includes removable disk drives, standalone tape
drives and media products.
Tape Automation Systems
We are the leading named
supplier of tape automation shipments. Our tape automation portfolio includes a
range of products from our SuperLoader3™ autoloader with one tape drive and up to
sixteen cartridges, to large enterprise-class libraries which can hold hundreds
of drives and thousands of cartridges. These products integrate tape drives into
a system with automation technology, advanced connectivity and sophisticated
management tools. Our automation products support multiple drive technologies,
though the primary tape drive format for automation environments continues to be
LTO.
Tying our libraries
together from entry-level to enterprise is a common, integrated software called
iLayer™, which provides monitoring, alerts and
diagnostics, thereby reducing service calls, shortening issue resolution time
and reducing the time users spend managing their tape automation solutions. This
fiscal year we introduced new libraries, the Scalar® i40 and Scalar i80, which brought iLayer
software to entry automation for the first time and were designed to compete
directly with offerings in the entry-level market.
Our midrange and
enterprise tape automation libraries, the Scalar i500 and Scalar i2000, can be
easily scaled, allowing users to expand the capacity of their libraries as their
data grows. In April 2010, we introduced the Scalar i6000, a product upgrade and
expansion of the Scalar i2000 which adds capacity. We anticipate the Scalar
i6000 will broaden our market reach. These products include connectivity options
to improve backup performance and reliability in Storage Area Network (“SAN”)
environments in an effort to make them the right fit for a variety of
organizations from medium sized businesses to major enterprise
datacenters.
Disk Backup Systems
We offer a broad range
of disk solutions for backup and recovery, notably our DXi-Series disk backup
appliances featuring data deduplication and replication technologies: the
DXi7500, DXi7500 Express, DXi6500 family, DXi4500 family, DXi3500 and DXi2500-D.
Data deduplication is an enabling technology that has been fundamentally
changing the economics of disk storage and data transmission. By greatly
increasing effective disk capacity, data deduplication enables users to retain
backup data on fast recovery disk much longer than is possible using
conventional disk and significantly reduces the bandwidth needed to move data
between sites. We hold a key patent in one of the most common methods of data
deduplication, known as variable-length data deduplication.
Our DXi-Series systems
use this patented data deduplication technology to expand the amount of backup
data users can retain on redundant array independent disk systems by 10 to 50
times. The result is a cost-effective means for IT departments to store backup
data on disk for months instead of days, providing high speed restores,
increasing available data recovery points and reducing media management. For
disaster recovery in distributed environments, the DXi-Series also makes wide
area network (“WAN”) replication practical because of the greatly reduced
bandwidth required with data deduplication. DXi-Series solutions are integrated
systems that are easy to install and use with leading backup applications. They
provide superior performance and flexible, easy-to-use interface options
including network-attached solutions (“NAS”), virtual tape library (“VTL”) or
mixed presentations, along with Fibre Channel or iSCSI connectivity.
Our DXi-Series systems
provide a combination of enhanced enterprise performance and advanced
functionality. In addition to data deduplication, the core set of advanced
features of the DXi-Series includes a high performance embedded file system,
support for high speed data compression, asynchronous replication and built-in
monitoring and diagnostic tools. Our DXi-Series products also offer an
extensible foundation for future intelligent backup and archive solutions that
will improve data protection for a broad range of customer environments, from
remote offices to large enterprise data centers.
3
In fiscal 2010, we
introduced the DXi6500 family of appliances designed to provide simple and
affordable deduplication solutions for the midrange market. There are five
turnkey models that come with the core set of deduplication and replication
software and each model is customer installable and expandable. The DXi6500
family offers the highest performance of our DXi series, up to 2.5TB an hour
adaptive ingest. All of the DXi6500 family systems provide support for the
Symantec Open Storage (“OST”) Application Programming Interface for integration
with NetBackup and BackupExec enabling end-to-end protection across sites for
both disk and tape. Each model in the DXi6500 family is optimized for sales
through channel partners.
In May 2010, we released
the DXi4500 family of products comprised of two turnkey disk backup appliances
designed to work with the leading backup software packages to provide
non-disruptive deduplication for small and medium-size businesses and remote
offices to simply and cost-effectively address their backup needs. Both DXi4500
models are bundled with DXi software to support backup, including in VMware
environments, deduplication and replication. In addition, the DXi4500 products
are optimized for sales through channel partners.
Data Management Software
Our data management
software helps businesses with large-scale data needs to benefit from workflow
efficiencies, storage consolidation and archive management. Designed for open
system computing environments, our data management software products allow
multiple applications to rapidly access a single data set, increasing
productivity and maximizing storage utilization. They also transparently move
data based on business value, reducing storage costs while providing embedded
data protection. For several years, organizations within rich media production
and broadcasting, the federal government, life sciences and other disciplines
have utilized our data management software to derive more value from their data
while controlling costs. Many of these customers now rely on our software as a
key technology enabler for their business processes and workflow.
Designed for
data-intensive SAN environments, our flagship software solution is StorNext,
data management software that reduces the time and total cost of managing data
for end users with large data sets and challenging distributed environments.
StorNext provides high-performance shared access to data across different
operating systems and storage platforms, and based on user-defined policies, it
automatically copies and migrates data between different tiers of storage. The
result is a scalable, high-performance data management solution that is designed
to optimize the use of SAN storage while ensuring the long-term safety and
recoverability of data.
StorNext also uses our
deduplication technology which enables customers to more efficiently store data
and use much lower bandwidth networks for replication. These software solutions
make it practical to use standard WANs and replication for disaster recovery
protection and also reduce tape handling requirements. StorNext software, in
addition to being a standalone product, is also a key component within our
DXi-Series product line.
Devices and Media
Our device and media
products include removable disk devices as well as a broad family of tape drives
and media representing all major tape technology formats including LTO, DLT and
DAT/DDS. We sell performance line and value line tape drive devices to meet the
varied needs of our customers.
Our GoVault drive is a
removable and ruggedized disk backup device which combines attributes of disk
and tape. GoVault utilizes a server-embedded dock with removable disk cartridges
that can be stored in remote locations for data retention and disaster recovery.
GoVault was designed to offer small businesses an alternative to other existing
data protection technologies.
We offer tape drives and
media based on the LTO format, the leading technology in the midrange and open
systems enterprise market segment. Our LTO tape drives are designed to provide
midrange and enterprise customers with disaster recovery solutions and with
cost-effective backup. We strive to provide increased capacity and performance
while also saving space with our newest generation tape drives. These products
also include a feature called green mode which reduces power consumption by
shutting off power to components inside the drive when idle or on standby and
have been designed to use less power when actively operating. Our performance
line DLT tape drive is the DLT-S4, and the latest value line DLT tape drive is
the DLT-V4. Our DAT/DDS tape drives are intended to provide backup, recovery and
archive for small businesses.
4
We also sell a full
range of storage media offerings to complement each tape drive technology and
satisfy a variety of specific media requirements. Our media includes
DLTtape®, LTO Ultrium™, DAT and DDS data cartridges. Our media is
compatible with our drives, autoloaders and libraries as well as other industry
products.
For more information
about our products, visit our website at http://www.quantum.com. The contents of
our website are not incorporated by reference into this Annual Report on Form
10-K.
Global Services and
Warranty
Our global services
strategy is an integral component of our total customer solution. Service is
typically a significant purchase factor for customers considering data
management and storage solutions, and our ability to provide comprehensive
service and support can present us with a noteworthy competitive advantage. In
addition, we believe that our ability to retain long-term customer relationships
and secure repeat business is frequently tied directly to our service
capabilities and performance.
Through the combined use
of new technology and traditional service components, we believe we can
effectively meet the dynamic support needs of our customers. StorageCare™ is our comprehensive suite of services
designed to meet our customers’ requirements for product support. StorageCare
services include: StorageCareGuardian™, our remote service feature; the Customer
Service Website, our web support capability; and Online Service Request, an
enhanced online service request tool that includes access to an extensive
knowledge base, allowing customers to perform basic troubleshooting themselves.
We continue to provide conventional support capabilities such as technical
support and on-site services.
Our extensive use of
technology and innovative, built-in product intelligence allows us to scale our
global services operations to meet the needs of our expanding installed base. We
are currently able to provide service to customers in more than 100 countries,
supported by 24-hour, multi-language technical support centers located in North
America, Europe and Asia. We provide our customers with warranty coverage on all
of our products. Customers with high availability requirements may also purchase
additional service to extend the warranty period, obtain faster response times,
or both, on our tape automation, disk backup systems and software products. We
offer this additional support coverage at a variety of response levels up to
24-hours a day, seven-days-a-week, 365-days-a-year, for customers with stringent
high-availability needs. Our service revenue includes the sale of hardware
service contracts as well as repair, installation, integration and consulting
services. We provide support ranging from repair and replacement to 24-hour
rapid exchange to on-site service support for our midrange and enterprise-class
products.
We generally warrant our
hardware products against defects for periods ranging from one to three years
from the date of sale. We provide hardware systems warranty and service from our
facility in Colorado Springs, Colorado. Jabil Global Service provides screening
and repair services for our products from their facilities in Reynosa, Mexico
and in Szombathely, Hungary. Benchmark Electronics, Inc. also provides repair
and warranty service for our products from their facilities in Huntsville,
Alabama; Angleton, Texas and Penang, Malaysia. In addition, we utilize various
other third party service providers throughout the world to perform repair and
warranty services for us to reach additional geographic areas and industries in
order to provide quality services in a cost-effective manner.
Research and Development
Our research and
development teams are working on the next generation disk, tape automation, data
deduplication and data movement technologies for the backup, recovery and
archive markets. We continue to focus our research and development efforts on
integrated software and hardware solutions that offer improvements in the cost
of storing, moving, managing and protecting large amounts of data and closely
integrating our products to provide compelling solutions for our
customers.
Our efforts depend on
the integration of multiple engineering disciplines to generate products that
competitively meet or exceed market needs in a timely fashion. Our new product
development is frequently stimulated by the availability of an enhanced or more
cost-effective storage capacity technology, the emergence of new storage
protocols and evolving end user requirements. We are constantly evaluating
alternative technologies that can be incorporated into our products and provide
us a competitive advantage. We identify and define new products based on their
ability to meet a perceived market need in a rapidly evolving field. Our sales,
marketing, product development, engineering, supply chain and global services
organizations all contribute to the process of identifying and implementing
advances in technology.
5
In fiscal 2010, we
further expanded our disk backup product family employing our patented data
deduplication technology with the DXi6500 family of NAS-based midrange
platforms. Building on the launch of our second-generation DXi7500 platform
products, we also introduced two significant software releases in fiscal 2010
that enhanced performance, scalability and reliability. We made improvements to
our replication technology, enabling the more efficient copying of data to a
remote replication site, a critical capability for disaster recovery. We
continue to invest in building out our disk backup product line, striving to
provide superior edge-to-core data protection and management
solutions.
We are investing in
software to provide superior disk and tape integration as well as highly
differentiated end-to-end storage and data management solutions for the backup
and nearline markets. New solutions will be integrated with or layered on our
core deduplication, file system and replication technologies and focused on the
distributed recovery management, server virtualization and file and email
archiving markets. We introduced a significant enhancement to our StorNext file
system offerings in fiscal 2010 with the launch of StorNext release 4.0. This
release added replication capability to StorNext along with integrated
deduplication of the file system.
Although deduplication
disk systems are rapidly becoming the standard for backup and fast recovery of
archive data, automated tape continues to maintain a strong role in the data
preservation hierarchy. We view our tape automation systems business as a mature
segment of storage solutions. As a result, our research and development
investments in tape technology are measured and strategic, for example the
Scalar i40 and Scalar i80. Strategic introductions in fiscal 2010 included an
encryption solution for our tape automation systems and the Scalar i40 and
Scalar i80 tape automation libraries that were designed to provide small and
medium businesses and distributed data centers with more storage capacity, room
for continued growth and simplified system management. In March 2010, we began
to introduce LTO-5 technology-based solutions across the breadth of our product
line. We continue LTO technology research and development efforts to maintain
our technology position in the devices and media and tape automation systems
markets, partnering with HP to jointly develop future generation LTO products as
we have done in recent years. We continue to invest strategically in our
enterprise, midrange and entry-level tape automation platforms to create
innovative and differentiating technologies, features and solutions.
We maintain research and
development facilities in Boulder, Colorado Springs and Englewood, Colorado;
Irvine and San Jose, California; Mendota Heights, Minnesota; Richardson, Texas;
Hyderabad, India and Adelaide, Australia. Research and development costs were
$69.9 million, $70.5 million and $89.6 million for fiscal 2010, 2009 and 2008,
respectively.
Sales and Marketing
Our sales and marketing
employees are focused exclusively on backup, recovery and archive solutions for
our customers. The expertise of our sales and marketing professionals enables us
to provide tailored advice and targeted solutions for our end user customers.
Furthermore, since we offer many different ways of protecting data involving
disk, tape and software, our recommendations can be broad and are based on what
serves the customer best. We rely on our sales force and an array of channel
partners to reach end user customers, which range in size from small businesses
to government agencies and large, multinational corporations. Our products are
sold under both the Quantum brand name and the names of various OEM customers.
Our sales operations are based in Bellevue, Washington; Irvine and San Jose,
California; Munich, Germany; Paris, France; Singapore City, Singapore and
Shanghai, China, with regional and field offices throughout North America,
Europe and Asia.
Quantum Branded Sales
Channels
For Quantum-branded
products, we utilize distributors, VARs and direct marketing resellers. We also
maintain a reseller agreement with EMC Corporation (“EMC”), through which EMC
sells Quantum-branded tape automation systems to its customer base and through
its own network of resellers. Additionally, we sell directly to a select number
of large corporate entities and governmental agencies.
Our integrated Quantum
Alliance™ Reseller Program allows our channel partners the option to purchase
products directly or through distribution and provides them access to a more
comprehensive product line. In January 2010, Quantum was recognized as one of
the best channel vendors by Business Solutions Magazine and we were ranked in
the top 15 percent of all storage vendors for reliable products and exceptional
service and support.
6
OEM Relationships
We sell our products to
several OEM customers who generally resell our hardware products under their own
brand name and typically assume responsibility for product sales, end user
service and support. We also license DXi software to certain OEM customers who
include this software in their own brand name products. These OEM relationships
enable us to reach end users not served by our branded distribution channels or
our direct sales force. They also allow us to sell to select geographic or
vertical markets where specific OEMs have exceptional strength. We maintain
ongoing discussions with numerous OEMs, including leading systems suppliers,
regarding opportunities for our products.
Our OEM fulfillment
models for hardware products vary, but generally require maintaining an
inventory of OEM product in third party logistics centers near the OEM’s
manufacturing or distribution facility. In these relationships, we generally
maintain title to products until those products leave the third party logistics
location. Service support differs widely from one OEM to another.
Customers
Customers for our
systems products, including tape automation and disk backup systems and data
management software, include Bell Microproducts, Inc. (“Bell Micro”), Dell, EMC,
HP and IBM and a variety of other distributors, resellers and OEMs to reach end
user customers from small businesses to government agencies and large,
multinational corporations. Software OEMs include EMC, Fujitsu Technology
Solutions GmbH and Grass Valley Group, Inc. Our devices and media have achieved
broad market acceptance in the midrange network server market with leading
computer equipment manufacturers such as Dell, HP and Oracle Corporation
(“Oracle”).
Our sales are
concentrated with several key customers because under our business model, as is
typical for our industry, we sell to OEMs, distributors, VARs and direct
marketing resellers to reach end user customers. Sales to our top five customers
represented 37% of revenue in fiscal 2010 and 42% of revenue in both fiscal 2009
and 2008. Sales to Dell comprised 13% of revenue in fiscal 2010 compared to 14%
of revenue in fiscal 2009 and 16% of revenue in fiscal 2008. These sales
concentrations do not include revenues from sales of our media that were sold to
our top five customers by media licensees, for which we earn royalty revenue, or
revenues from sales of products sold to these customers by our other OEM
customers.
Through our Quantum
Alliance Reseller Program and our emphasis on our branded business we have
expanded our customer base in recent years. With our continued focus on growing
our branded business, we expect to continue to distribute our product revenue
across a larger number of customers.
Strategic Licensing
Partners
Multiple recording tape
media manufacturing companies are qualified and licensed to manufacture, use,
offer for sale and sell one or more DLTtape and LTO Ultrium media products.
License agreements with these companies allow them to independently sell tape
media cartridges for which we receive royalty payments. These strategic license
agreements expand the market for DLTtape and LTO Ultrium media products and
provide customers with multiple channels for obtaining tape media cartridges.
We have entered into
various licensing agreements with respect to our technology, patents and similar
intellectual property which provide licensing revenues in certain cases and may
expand the market for products and solutions using these technologies. We have
licensed certain technology to software OEM partners, under which the partner
may use our DXi-Series data deduplication and replication enterprise software to
deliver its own solution. We anticipate licensing our technology, patents and
similar intellectual property with select licensing partners in the future,
expanding the licensing partner program based on market demand.
7
Competition
We are a leading
independent supplier of backup, recovery and archive solutions. All the markets
in which we participate continue to be highly competitive, and in some cases,
our competitors in one area are customers or suppliers in another. Our
competitors often have greater financial, technical, manufacturing, marketing or
other resources than we do. Additionally, the competitive landscape continues to
change due to merger and acquisition activity.
In the tape automation
market, we primarily compete for midrange and enterprise reseller and end user
business with Dell, IBM and Oracle as well as HP through its OEM relationship
with other tape automation suppliers. Competitors for entry-level and OEM tape
automation business include BDT Products, Inc. and several others that supply or
manufacture similar products. In addition, disk backup products are a
competitive alternative to tape products and solutions.
Our disk backup
solutions compete with products sold by EMC, HP, IBM and NetApp, Inc.
(“NetApp”). Additionally, a number of software companies that have traditionally
been partners with us have added deduplication to their products and will at
times compete with us, including CommVault Systems, Inc. and Symantec
Corporation. A number of our competitors also license technology from competing
start-up companies such as FalconStor Software, Inc. and Sepaton, Inc. Our
StorNext software products face competition from Cray, IBM, Isilon Systems,
Inc., Oracle and Silicon Graphics, Inc.
At the storage device
level, our main competitors in the market for performance tape drives are HP,
IBM and Tandberg Data. Both IBM and HP develop and sell their own LTO tape
drives, which compete with our LTO and DLT-S4 offerings. Our value line tape
drives, DAT/DDS and DLT-V4, largely compete with those from HP. We also face
competition from disk alternatives, including removable disk drives in the
entry-level market. Although we have our own removable disk drive in GoVault,
several other companies sell removable disk drives, such as Imation Corporation,
Iomega Corporation and Tandberg Data.
For a discussion of
risks associated with competing technologies, see the Risk Factor in Item 1A
titled, “We derive the majority of our revenue from products incorporating tape
technology. If competition from new or alternative storage technologies
continues or increases, our business, financial condition and operating results
could be materially and adversely affected.”
Manufacturing
We utilize contract
manufacturers to produce a number of our products and we manufacture various
other products in our own facilities. During fiscal 2010 we continued to
streamline our manufacturing processes and simplify our supply chain model
through further integration and continuous improvement. We consolidated our
externally manufactured products into a fewer number of key, quality contract
manufacturing partners while reducing our overall cost and creating a stronger,
more reliable chain of supply. We continue to improve our manufacturing
operations by increasing the efficiency, cost effectiveness and quality of our
manufacturing solutions in addition to reducing our inventory.
We outsource the
manufacture of certain tape automation systems, tape devices and service parts
from contract manufacturers. Our tape drives and head assemblies are sourced
from Malaysia and Hungary. Certain automation products and assemblies are
sourced in Singapore, Malaysia and the U.S.
We manufacture tape
automation systems and our disk products and perform device and system
configuration for our North American customers from our Colorado Springs,
Colorado facility. In addition, we perform test and repair for these same
products in that same facility.
Our recording tape media
is manufactured by multiple tape media manufacturing companies, which are
qualified and licensed to manufacture, use and sell one or more DLTtape and LTO
Ultrium media products. In most cases, the media is produced in Japan and
multi-sourced on a worldwide basis.
8
Backlog
We manufacture our
products based on forecasts of customer demand. We also place inventory in
strategic locations in order to enable certain key customers to obtain products
on demand. Orders are generally placed by customers on an as-needed basis.
Product orders are confirmed and, in most cases, shipped to customers within one
week. More complex systems and product configurations often have longer lead
times and may include on-site integration or customer acceptance. We ship most
of the backlog that we accumulate during any particular fiscal quarter in the
same quarter in which the backlog is first reported. Therefore, our backlog
generally grows during each fiscal quarter and shrinks during the latter part of
the quarter to reach its lowest levels at the end of that same quarter, by which
time significant shipments have occurred. As a result, our backlog as of the end
of any fiscal quarter frequently is not material. Our backlog was immaterial as
of both March 31, 2010 and March 31, 2009.
Information Technology and Infrastructure
We are focused on
continuous improvement of our internal business system and global information
technology infrastructure. We continue to identify areas for consolidation and
efficiencies gains. This includes the ongoing implementation and expansion of
our core backup and archive products and a continuous process improvement focus.
In the past few years our efforts to create a consolidated platform has allowed
us to streamline processes and enable the IT function to serve as a strategic
partner to internal business functions. We continue to focus on improved
efficiencies and cost reduction measures within our infrastructure. These
efforts have included expansion of virtualization tools, standardization on
common architectures and the elimination of custom applications.
Technology
We develop and protect
our technology and know-how, principally in the field of data storage. As of
March 31, 2010, we hold 504 U.S. patents and have 96 pending U.S. patent
applications. In general, these patents have a 20-year term from the first
effective filing date for each patent. We also hold a number of foreign patents
and patent applications for certain of our products and technologies. Although
we believe that our patents and applications have significant value, rapidly
changing storage industry technology means that our future success will also
depend heavily on the technical competence and creative skills of our employees.
From time to time, third
parties have asserted that the manufacture and sale of our products and services
have infringed on their patents. We conduct ongoing investigations into the
assertions and presently believe that either licenses are not required or that
any licenses ultimately determined to be required could be obtained on
commercially reasonable terms. However, we cannot provide assurance that such
licenses are presently obtainable, or if later determined to be required, could
be obtained on commercially reasonable terms.
We have various patent
licensing and cross-licensing agreements with other companies including EMC, HP,
IBM, Maxtor Corporation, Riverbed Technology, Inc. (“Riverbed”) and Oracle. We
may enter into patent cross-licensing agreements with other third parties in the
future as part of our normal business activities. These agreements, when and if
entered into, would enable these third parties to use certain patents that we
own and enable us to use certain patents owned by these third parties.
Environmental Compliance
We are subject to
federal, state, local and international environmental laws and regulations.
Compliance with these laws and regulations has not had a material effect on our
capital expenditures, earnings or competitive position.
Employees
We had approximately
1,800 employees worldwide as of March 31, 2010.
9
Available Information
Our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to reports filed or furnished pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are available free of
charge on our website at http://www.quantum.com generally when such reports are available on the Securities and Exchange
Commission (“SEC”) website. The contents of our website are not incorporated
into this Annual Report on Form 10-K.
The public may
read and copy any materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC at http://www.sec.gov.
New York Stock Exchange
Certification
We submitted
the certification of our Chief Executive Officer required by the NYSE Listing
Standards, Section
303A.12(a), relating to our compliance with the NYSE Corporate Governance
Listing Standards, to the NYSE on September 18, 2009 with no qualifications.
Executive Officers of Quantum
Corporation
Set forth
below are the names, ages (as of June 1, 2010), positions and offices held by,
and a brief account of the business experience of each executive officer of
Quantum.
| Name | Age | Position with Quantum | ||
| Barbara L. Barrett | 61 | Senior Vice President, Human Resources | ||
| Richard E. Belluzzo | 56 | Chairman and Chief Executive Officer | ||
| William C. Britts | 51 | Executive Vice President, Sales and Marketing | ||
| Jon W. Gacek | 48 | Executive Vice President, Chief Financial Officer and Chief Operating Officer | ||
| Shawn D. Hall | 41 | Senior Vice President, General Counsel and Secretary | ||
| Gerald G. Lopatin | 51 | Executive Vice President, Engineering |
Ms. Barrett joined Quantum in 1999, became Vice
President of Human Resources in July 2003 and assumed the role of Senior Vice
President of Human Resources in May 2009. Prior to her current role, Ms. Barrett
held other human resources management positions within the Company, including
Vice President, Human Resources of the DLTtape business. Before joining Quantum,
Ms. Barrett held leadership positions at companies in the telecommunications and
utilities industries in a variety of human resource functions, including
compensation, training, consulting and organizational development.
Mr. Belluzzo has been Chief Executive Officer
since joining the Company in September 2002 and Chairman of the Board since July
2003. Before joining Quantum, from September 1999 to May 2002, Mr. Belluzzo held
senior management positions with Microsoft Corporation, most recently as
President and Chief Operating Officer. Prior to Microsoft, from January 1998 to
September 1999, Mr. Belluzzo was Chief Executive Officer of Silicon Graphics,
Inc. Before his tenure at Silicon Graphics, from 1975 to January 1998, Mr.
Belluzzo was with HP, most recently as Executive Vice President of the computer
organization. Currently, Mr. Belluzzo is a member of the board of directors of
PMC-Sierra, Inc. as well as JDS Uniphase Corporation.
Mr. Britts became Executive Vice President of
Sales, Marketing and Service in August 2006, upon Quantum’s acquisition of
Advanced Digital Information Corporation (“ADIC”). In May 2009, he narrowed his
focus to sales and marketing, assuming the role of Executive Vice President of
Sales and Marketing. Before joining Quantum, Mr. Britts was the Co-Executive
Vice President of Products, Sales and Service at ADIC. In his 12 years at ADIC,
he held numerous leadership positions, including Executive Vice President of
Worldwide Sales and Marketing, Vice President of Sales and Marketing and
Director of Marketing. Prior to ADIC, Mr. Britts held a number of marketing and
sales positions at Raychem Corp. and its subsidiary, Elo
TouchSystems.
10
Mr. Gacek joined Quantum as Executive Vice
President and Chief Financial Officer in August 2006, upon Quantum’s acquisition
of ADIC and assumed the role of Executive Vice President, Chief Financial
Officer and Chief Operating Officer in June 2009. Previously, he served as the
Chief Financial Officer at ADIC from 1999 to 2006 and also led Operations during
his last three years there. Prior to ADIC, Mr. Gacek was an audit partner at
PricewaterhouseCoopers LLP and led the Technology Practice in the firm’s Seattle
office. While at PricewaterhouseCoopers LLP, he assisted several private equity
investment firms with a number of mergers, acquisitions, leveraged buyouts and
other transactions. Mr. Gacek serves on the board of directors for Market
Leader, Inc. and Power-One, Inc.
Mr. Hall joined Quantum in 1999 as Corporate
Counsel, became Vice President, General Counsel and Secretary in 2001 and was
promoted to Senior Vice President, General Counsel and Secretary in May 2009.
Prior to Quantum, Mr. Hall worked at the law firms of Skadden, Arps and Willkie
Farr & Gallagher, where he practiced in the areas of mergers and
acquisitions and corporate finance, representing numerous public and private
technology companies.
Mr. Lopatin joined Quantum in March 2008 as
Senior Vice President, Engineering and assumed the role of Executive Vice
President, Engineering in August 2008. Before Quantum, Mr. Lopatin was Senior
Vice President, Engineering, Operations and Customer Support and a member of the
executive team at ONStor, Inc. He also spent six years at NetApp, serving as
Senior Vice President, Worldwide Engineering and, before that, General Manager
of that company’s Near Store business unit. Prior to NetApp, Mr. Lopatin held
leadership positions at Iomega, Samsung Electronics, Seagate Technology and WD
Media, Inc., formerly Komag, Inc., and spent the first nine years of his career
at IBM. He is the inventor of two issued patents.
ITEM 1A. Risk
Factors
YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE OTHER
INFORMATION INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K. THE RISKS AND
UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES FACING QUANTUM. ADDITIONAL RISKS AND UNCERTAINTIES
NOT PRESENTLY KNOWN TO US OR THAT ARE CURRENTLY DEEMED IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS AND OPERATIONS. THIS ANNUAL REPORT ON FORM 10-K CONTAINS
“FORWARD-LOOKING” STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PLEASE SEE
PAGE 1 OF THIS REPORT FOR ADDITIONAL DISCUSSION OF THESE FORWARD-LOOKING
STATEMENTS.
We rely on indirect sales channels
to market and sell our branded products. Therefore, the loss of or deterioration
in our relationship with one or more of our resellers or distributors could
negatively affect our operating results.
We sell the
majority of our branded products to value-added resellers, or VARs, and to
direct marketing resellers such as CDW Corporation, who in turn sell our
products to end users, and to distributors such as Bell Microproducts, Inc.,
Ingram Micro, Inc. and others. We also have a relationship with EMC Corporation
(“EMC”) through which we make available our branded products that complement
EMC’s product offerings. The success of these sales channels is hard to predict,
particularly over time, and we have no purchase commitments or long-term orders
from them that assure us of any baseline sales through these channels. Several
of our resellers carry competing product lines that they may promote over our
products. A reseller might not continue to purchase our products or market them
effectively, and each reseller determines the type and amount of our products
that it will purchase from us and the pricing of the products that it sells to
end user customers.
Certain of our
contracts with our distributors contain “most favored nation” pricing provisions
mandating that we offer our products to these customers at the lowest price
offered to other similarly situated customers. In addition, sales of our
enterprise-class libraries, and the revenue associated with the on-site service
of those libraries, are somewhat concentrated in specific customers, including
government agencies and government-related companies. Our operating results
could be adversely affected by any number of factors including:
|
•
|
A change in
competitive strategy that adversely affects a reseller’s willingness or
ability to distribute our products;
|
|
•
|
The reduction,
delay or cancellation of orders or the return of a significant amount of
products;
|
|
•
|
The loss of one or
more of such distributors or
resellers;
|
|
•
|
Any financial
difficulties of such distributors or resellers that result in their
inability to pay amounts owed to us; or
|
|
•
|
Changes in
requirements or programs that allow our products to be sold by third
parties to government
customers.
|
11
Our operating results depend on new
product introductions, which may not be successful, in which case our business,
financial condition and operating results may be materially and adversely
affected.
To compete
effectively, we must continually improve existing products and introduce new
ones, such as our new DXi-Series product offerings and next generation StorNext
software. We have devoted and expect to continue to devote considerable
management and financial resources to these efforts. We cannot provide assurance
that:
|
•
|
We will introduce
new products in the timeframe we are
forecasting;
|
|
•
|
We will not
experience technical, quality, performance-related or other difficulties
that could prevent or delay the introduction and market
acceptance of new products;
|
|
•
|
Our new products
will achieve market acceptance and significant market share, or that the
markets for these products will continue or grow as we have
anticipated;
|
|
•
|
Our new products
will be successfully or timely qualified with our customers by meeting
customer performance and quality specifications which must occur before customers will place
large product orders; or
|
|
•
|
We will achieve
high volume production of these new products in a timely manner, if at
all.
|
If we are not
successful in timely completion of our new product qualifications and then
ramping sales to our key customers, our revenue and results of operations could
be adversely impacted. In addition, if the quality of our products is not
acceptable to our customers, this could result in customer dissatisfaction, lost
revenue and increased warranty and repair costs.
Competition has increased and
evolved, and may increasingly intensify, in the tape and disk storage products
markets as a result of competitors introducing products based on new technology
standards, and merger and acquisition activity, which could materially and
adversely affect our business, financial condition and results of operations.
Our disk
backup systems compete with product offerings of EMC, Hewlett Packard Co.
(“HP”), International Business Machines (“IBM”) and NetApp, Inc. A number of our
competitors also license technology from competing start-up companies such as
FalconStor Software, Inc. and Sepaton Inc. These competitors are aggressively
trying to advance and develop new technologies and products to compete against
our technologies and products, and we face the risk that customers could choose
competitor products over ours due to these features and technologies.
Competition in the disk backup systems market, including deduplication and
replication technologies, is characterized by technological innovation and
advancement. As a result of competition and new technology standards, our sales
or gross margins for disk backup systems could decline, which could materially
and adversely affect our business, financial condition and results of
operations.
Our tape
automation products compete with product offerings of Dell Inc. (“Dell”), HP,
IBM and Oracle Corporation (“Oracle”). Increased competition has resulted in
decreased prices for entry-level tape automation products and more product
offerings by our competitors that incorporate new features and technologies. We
face risks that customers could choose competitor products over ours due to
these features and technologies. If competition further intensifies, or if
industry consolidation occurs, our sales and gross margins for tape automation
systems could decline, which could materially and adversely affect our business,
financial condition and results of operations.
Our tape drive
business competes with companies that develop, manufacture, market and sell tape
drive and tape automation products. The principal competitors for our tape drive
products include HP and IBM. These competitors are aggressively trying to
advance and develop new technologies and products to compete against our
technologies and products. This intense competition, and additional factors,
such as the possibility of further industry consolidation, has resulted in
decreased prices of tape drives and increasingly commoditized products. Our
response has been to manage our tape drive business at the material margin level
and we have chosen not to compete for sales in intense price-based situations.
Our focus has shifted to higher margin opportunities in other product lines.
Although revenue from tape drives has decreased in recent years, our material
margins have remained relatively stable over this period. We face risk of
reduced shipments of our tape drive products, and could have reduced margins on
these products, which could materially and adversely impact our business,
financial condition and results of operations.
12
Additionally,
the competitive landscape continues to change due to merger and acquisition
activity in the storage industry, such as the purchase of Sun by Oracle
Corporation and the acquisition of Data Domain by EMC. Transactions such as
these may impact us in a number of ways. For instance, they could result in:
|
•
|
Smaller number of
competitors having greater resources and becoming more competitive with
us;
|
|
•
|
Companies that we
have not historically competed against entering into one or more of our
primary markets and increasing competition in that market(s);
and
|
|
•
|
Customers that are
also competitors becoming more competitive with us and/or reducing their
purchase of our products.
|
These
transactions also create uncertainty and disruption in the market, given that it
is often unknown whether a pending transaction will be completed, the timing of
such a transaction, and its degree of impact. Given these factors and others,
such merger and acquisition activity may materially and adversely impact our
business, financial condition and results of operations.
If we do not successfully manage the
changes that we have made and may continue to make to our infrastructure and
management, our business could be disrupted, and that could adversely impact our
results of operations and financial condition.
Managing
change is an important focus for us. In recent years, we have implemented
several significant initiatives involving our sales and marketing, engineering
and operations organizations, aimed at increasing our efficiency and better
aligning these groups with our corporate strategy. In addition, we have reduced
headcount to streamline and consolidate our supporting functions as appropriate
following past acquisitions and in response to market or competitive conditions.
Our inability to successfully manage the changes that we implement, and detect
and address issues as they arise could disrupt our business and adversely impact
our results of operations and financial condition.
We derive the majority of our
revenue from products incorporating tape technology. If competition from new or
alternative storage technologies continues or increases, our business, financial
condition and operating results could be materially and adversely affected.
We derive the
majority of our revenue from products that incorporate some form of tape
technology and we expect to continue to derive a majority of our revenue from
these products for the foreseeable future. As a result, our future operating
results depend in significant part on the continued market acceptance of
products employing tape drive technology. Our tape products, including tape
drives and automation systems, are increasingly challenged by products using
hard disk drive technology, such as VTL, standard disk arrays and NAS. If disk
backup products gain comparable or superior market acceptance, or their costs
decline far more rapidly than tape drive and media costs, the competition
resulting from these products would increase as our tape customers migrate
toward them.
We are working
to address this risk through our own targeted investment in disk products and
other alternative technologies, but these markets are characterized by rapid
innovation, evolving customer demands and strong competition, including
competition with several companies who are also significant customers. If we are
not successful in our efforts, our business, financial condition and operating
results could be materially and adversely affected.
13
We continue to face risks related to
the economic crisis.
The economic
crisis in the U.S. and global financial markets had and may continue to have a
material and adverse impact on our business and our financial condition.
Uncertainty about economic conditions always poses a risk as businesses may
further reduce or postpone spending in response to tighter credit, negative
financial news and declines in income or asset values. In addition, economic
conditions over the past year have resulted in the reduced credit worthiness and
bankruptcies of certain customers and increased our potential exposure to bad
debt, and a global disruption in the credit markets, which continues to affect
consumers’ and businesses’ efforts to obtain credit. These factors have had a
material negative effect on our business and the demand for our products, the
initial impact of which was reflected in our results for the second quarter of
fiscal 2009. In addition, our ability to access capital markets may be
restricted which could have an impact on our ability to react to changing
economic and business conditions. Another global economic crisis like the one
that we recently experienced would materially adversely affect our results of
operations and financial condition. For additional information regarding the
impact of current economic conditions on our results of operations and financial
condition, refer to Item 2 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
A large percentage of our sales come
from a few customers, some of which are also competitors, and these customers
generally have no minimum or long-term purchase commitments. The loss of, or a
significant reduction in demand from, one or more key customers could materially
and adversely affect our business, financial condition and operating
results.
Our sales have
been and continue to be concentrated among a few customers. Sales to our top
five customers in fiscal 2010 represented 37% of total revenue. This sales
concentration does not include revenues from sales of our media that our
licensees sold to these customers, for which we earn royalty revenue.
Furthermore, customers are not obligated to purchase any minimum product volume
and our relationships with our customers are terminable at will. As an example,
in fiscal 2010, sales to Dell contributed approximately 13% of our revenue, a
decline from prior years. If we experience further declines in revenue from Dell
or any of our other large customers, we could be materially and adversely
affected. In addition, certain of our large customers are also our competitors,
and such customers could decide to reduce or terminate their purchases of our
products for competitive reasons. Merger and acquisition activity, such as the
purchase of Data Domain by EMC, could increase the risk that large customers
reduce or terminate their purchases of our products.
Many of our
tape and disk products are primarily incorporated into larger storage systems or
solutions that are marketed and sold to end users by our large OEM customers as
well as our value added resellers, channel partners and other distributors.
Because of this, we have limited market access to these end users, limiting our
ability to reach and influence their purchasing decisions. These market
conditions further our reliance on these OEM and other large customers. Thus if
they were to significantly reduce, cancel or delay their orders with us, our
results of operations could be materially and adversely affected.
If our products fail to meet our or
our customers’ specifications for quality and reliability, our results of
operations may be adversely impacted and our competitive position may
suffer.
Although we
place great emphasis on product quality, we may from time to time experience
problems with the performance of our products, which could result in one or more
of the following:
|
•
|
Increased costs
related to fulfillment of our warranty obligations;
|
|
•
|
The reduction, delay or cancellation of orders or the return of a significant amount of products; |
|
•
|
Focused failure
analysis causing distraction of the sales, operations and management
teams; or
|
|
•
|
The loss of
reputation in the market and customer
goodwill.
|
These factors could cause
our business, financial condition and results of operations to be materially and
adversely affected.
14
We have significant indebtedness,
which has substantial debt service obligations and operating and financial
covenants that constrain our ability to operate our business. Unless we are able
to generate sufficient cash flows from operations to meet these debt
obligations, our business, financial condition and operating results could be
materially and adversely affected.
In connection
with our acquisition of Advanced Digital Information Corporation in August 2006,
we incurred significant indebtedness and increased interest expense obligations.
As of March 31, 2010, the total amount outstanding under the Credit Suisse
senior secured credit agreement (“CS credit agreement”) was $186.1 million. In
addition, in connection with our efforts to refinance our convertible
subordinated notes, we have incurred $121.7 million in additional subordinated
long-term debt with EMC International Company that has a higher coupon interest
rate. Our level of indebtedness presents significant risks to investors, both in
terms of the constraints that it places on our ability to operate our business
and because of the possibility that we may not generate sufficient cash to pay
the principal and interest on our indebtedness as it becomes due.
The
significance of our substantial debt could have important consequences, such as:
|
•
|
Requiring that we
dedicate a significant portion of our cash flow from operations and other
capital resources to debt service, thereby reducing our
ability to fund working capital, capital expenditures, research and
development and other cash requirements;
|
|
•
|
Making it more
difficult or impossible for us to make payments on other indebtedness or
obligations;
|
|
•
|
Increasing our
vulnerability to adverse economic and industry
conditions;
|
|
•
|
Limiting our
flexibility in planning for, or reacting to, changes and opportunities in
the markets in which we compete, such as limiting our ability
to engage in mergers and acquisitions activity, which may place us at a
competitive disadvantage; and
|
|
•
|
Limiting our
ability to incur additional debt on acceptable terms, if at
all.
|
In addition, there is a
risk that we may not be able to repay our debt obligations as they become due.
We incurred significant losses from fiscal 2002 through fiscal 2009. Our ability
to meet our debt service obligations and fund our working capital, capital
expenditures, acquisitions, research and development and other general corporate
needs depends upon our ability to generate sufficient cash flow from operations.
We cannot provide assurance that we will generate sufficient cash flow from
operations to service these debt obligations, or that future borrowings or
equity financing will be available to us on commercially reasonable terms, or at
all, or available in an amount sufficient to enable us to pay our debt
obligations or fund our other liquidity needs. Unless we are able to maintain
our cash flows from operations we may not generate sufficient cash flow to
service our debt obligations, which would require that we reduce or delay
capital expenditures and/or sell assets, thereby affecting our ability to remain
competitive and materially and adversely affecting our business. Such a failure
to repay our debt obligations when due would result in default under our loan
agreements, which would give our lenders the right to seize all of our assets.
Any such inability to meet our debt obligations could therefore have a material
and adverse effect on our business, financial condition and results of
operations.
Our Credit Suisse credit agreement
contains various covenants that limit our discretion in the operation of our
business, which could have a materially adverse effect on our business,
financial condition and results of operations.
Our CS credit
agreement contains numerous restrictive covenants that require us to comply with
and maintain certain financial tests and ratios, as well as restrict our ability
to:
|
•
|
Incur
debt;
|
|
•
|
Incur
liens;
|
|
•
|
Make acquisitions
of businesses or entities or sell certain assets;
|
|
•
|
Make investments,
including loans, guarantees and advances;
|
|
•
|
Make capital
expenditures beyond a certain threshold;
|
|
•
|
Engage in
transactions with affiliates;
|
|
•
|
Pay dividends or
engage in stock repurchases; and
|
|
•
|
Enter into certain
restrictive agreements.
|
15
Our ability to
comply with covenants contained in our credit agreement may be affected by
events beyond our control, including prevailing economic, financial and industry
conditions. In prior years, we violated certain financial covenants under a
prior credit agreement and received waivers or amendments for such violations.
Even if we are able to comply with all covenants, the restrictions on our
ability to operate our business could harm our business by, among other things,
limiting our ability to take advantage of financings, mergers, acquisitions and
other corporate opportunities.
Our CS credit
agreement is secured by a pledge of all of our assets. If we were to default
under our CS credit agreement and were unable to obtain a waiver for such a
default, the lenders would have a right to foreclose on our assets in order to
satisfy our obligations under the CS credit agreement. Any such action on the
part of the lenders against us could have a materially adverse impact on our
business, financial condition and results of operations.
Our tape media royalties, branded
software and OEM DXi software revenues are relatively profitable and can
significantly impact total company profitability. A significant decline in
royalty, branded software or OEM DXi software revenues could materially and
adversely affect our business, financial condition and operating results.
Our tape media
royalty revenues depend on many factors, including the following:
|
•
|
The size of the
installed base of tape drives that use our tape
cartridges;
|
|
•
|
The performance of
our strategic licensing partners, which sell tape media
cartridges;
|
|
•
|
The relative growth
in units of newer tape drive products, since the associated media
cartridges typically sell at higher prices than the media
cartridges associated with older tape drive products;
|
|
•
|
The media
consumption habits and rates of end users;
|
|
•
|
The pattern of tape
drive retirements; and
|
|
•
|
The level of
channel inventories.
|
To the extent that our
media royalties depend upon royalty rates and the quantity of media consumed by
the installed base of our tape drives, reduced royalty rates, or a reduced
installed tape drive base, would result in further reductions in our media
royalty revenue. This could materially and adversely affect our business,
financial condition and results of operations.
Our branded
software revenues are also dependent on many factors, including the success of
competitive offerings, our ability to execute on our product roadmap and our
effectiveness at marketing and selling our branded software solutions directly
or through our channel partners.
Our OEM DXi
software revenues also depend on many factors, including the success of
competitive offerings, our ability to execute on our product roadmap with our
OEM DXi software partners, the effort our OEM DXi software partners put into
marketing and selling the resulting products, the market acceptance of the
resulting products and changes in the competitive landscape such as that which
occurred with EMC’s purchase of Data Domain. Our relationship with EMC changed
from partner to competitor in deduplication as a result of their acquisition of
Data Domain. Following this acquisition, our OEM DXi software revenue has
significantly declined, which has negatively impacted our results.
We have taken considerable steps
towards reducing our cost structure and may take further cost reduction actions.
The steps we have taken and may take in the future may not reduce our cost
structure to a level appropriate in relation to our future sales and therefore,
these anticipated cost reductions may be insufficient to result in consistent
profitability.
In the last
several years, we have recorded significant restructuring charges and made cash
payments in order to reduce our cost of sales and operating expenses to
rationalize our operations following past acquisitions and in response to
adverse economic, industry and competitive conditions. We may take future steps
to further reduce our operating costs, including those we undertook recently, as
described below in “Results of Operations” within Item 2 “Management’s
Discussion and Analysis.” These steps and additional future restructurings in
response to rationalization of operations following strategic decisions, adverse
changes in our business or industry or future acquisitions may require us to
make cash payments that, if large enough, could materially and adversely affect
our liquidity. We may be unable to reduce our cost of sales and operating
expenses at a rate and to a level consistent with a future potential adverse
sales environment, which may adversely affect our business, financial condition
and operating results.
16
Our inability to attract and retain
skilled employees could adversely impact our business.
We may be
subject to increased turnover in our employee base or the inability to fill open
headcount requisitions due to concerns about our operational performance,
capital structure, competition or other factors. In addition, we may rely on the
performance of employees whose skill sets are not sufficiently developed enough
to completely realize the expected fulfillment of their job responsibilities.
Either of these situations could impair or delay our ability to realize
operational and strategic objectives and cause increased expenses and lost sales
opportunities.
Economic or other business factors
may lead us to further write down the carrying amount of our goodwill or
long-lived assets, such as the $339 million goodwill impairment charge taken in
fiscal 2009, which could have a material and adverse effect on our results of
operations.
We evaluate
our goodwill for impairment annually during the fourth quarter of our fiscal
year, or more frequently when indicators of impairment are present. Long-lived
assets are reviewed for impairment whenever events or circumstances indicate
impairment might exist. We continue to monitor relevant market and economic
conditions, including the price of our stock, and perform appropriate impairment
reviews when conditions deteriorate such that we believe the value of our
goodwill could be further impaired or an impairment exists in our long-lived
assets. It is possible that conditions may worsen due to economic or other
factors that affect our business, resulting in the need to write down the
carrying amount of our goodwill or long-lived assets to fair value at the time
of such assessment. As a result, our operating results could be materially and
adversely affected.
Third party intellectual property
infringement claims could result in substantial liability and significant costs,
and, as a result, our business, financial condition and operating results may be
materially and adversely affected.
From time to
time, third parties allege our infringement of and need for a license under
their patented or other proprietary technology. While we currently believe the
amount of ultimate liability, if any, with respect to any such actions will not
materially affect our financial position, results of operations or liquidity,
the ultimate outcome of any license discussion or litigation is uncertain.
Adverse resolution of any third party infringement claim could subject us to
substantial liabilities and require us to refrain from manufacturing and selling
certain products. In addition, the costs incurred in intellectual property
litigation can be substantial, regardless of the outcome. As a result, our
business, financial condition and operating results could be materially and
adversely affected.
In addition,
certain products or technologies acquired or developed by us may include
so-called “open source” software. Open source software is typically licensed for
use at no initial charge. Certain open source software licenses, however,
require users of the open source software to license to others any software that
is based on, incorporates or interacts with, the open source software under the
terms of the open source license. Although we endeavor to comply fully with such
requirements, third parties could claim that we are required to license larger
portions of our software than we believe we are required to license under open
source software licenses. If such claims were successful, they could adversely
impact our competitive position and financial results by providing our
competitors with access to sensitive information that may help them develop
competitive products. In addition, our use of open source software may harm our
business and subject us to intellectual property claims, litigation or
proceedings in the future because:
|
•
|
Open source license
terms may be ambiguous and may subject us to unanticipated obligations
regarding our products, technologies and intellectual
property;
|
|
•
|
Open source
software generally cannot be protected under trade secret law;
and
|
|
•
|
It may be difficult
for us to accurately determine the origin of the open source code and
whether the open source software infringes, misappropriates or violates third party
intellectual property or other
rights.
|
17
As a result of our global
manufacturing and sales operations, we are subject to a variety of risks that
are unique to businesses with international operations of a similar scope, any
of which could, individually or in the aggregate have a material adverse effect
on our business.
A significant
portion of our manufacturing and sales operations and supply chain occurs in
countries other than the U.S. We also have sales outside the U.S. We utilize
contract manufacturers to produce certain of our products and have suppliers for
various components, several of which have operations located in foreign
countries including China, Hungary, Japan, Malaysia, Mexico, Singapore and
Taiwan. Because of these operations, we are subject to a number of risks
including:
|
•
|
Shortages in
component parts and raw materials;
|
|
•
|
Import and export
and trade regulation changes that could erode our profit margins or
restrict our ability to transport our
products;
|
|
•
|
The burden and cost
of complying with foreign and U.S. laws governing corporate conduct
outside the U.S.;
|
|
•
|
Adverse movement of
foreign currencies against the U.S. dollar (the currency in which our
results are reported) and global economic conditions
generally;
|
|
•
|
Inflexible employee
contracts and employment laws that may make it difficult to terminate or
change the compensation structure for employees in some foreign countries in
the event of business downturns;
|
|
•
|
Potential
restrictions on the transfer of funds between
countries;
|
|
•
|
Political,
military, social and infrastructure risks, especially in emerging or
developing economies;
|
|
•
|
Import and export
duties and value-added taxes; and
|
|
•
|
Natural disasters,
including earthquakes, typhoons and
tsunamis.
|
Any or all of
these risks could have a material adverse effect on our business.
Our quarterly operating results
could fluctuate significantly, and past quarterly operating results should not
be used to predict future performance.
Our quarterly
operating results have fluctuated significantly in the past and could fluctuate
significantly in the future. As a result, our quarterly operating results should
not be used to predict future performance. Quarterly operating results could be
materially and adversely affected by a number of factors, including, but not
limited to:
|
•
|
Failure to complete
shipments in the last month of a quarter during which a substantial
portion of our products are typically
shipped;
|
|
•
|
Customers
canceling, reducing, deferring or rescheduling significant orders as a
result of excess inventory levels, weak economic conditions or other
factors;
|
|
•
|
Declines in royalty
revenues;
|
|
•
|
Product development
and ramp cycles and product performance or quality
issues;
|
|
•
|
Poor execution of
and performance against expected sales and marketing plans and
strategies;
|
|
•
|
Reduced demand from
our OEM customers; and
|
|
•
|
Increased
competition.
|
If we fail to
meet our projected quarterly results, our business, financial condition and
results of operations may be materially and adversely affected.
If we fail to protect our
intellectual property or if others use our proprietary technology without
authorization, our competitive position may suffer.
Our future
success and ability to compete depends in part on our proprietary technology. We
rely on a combination of copyright, patent, trademark, and trade secrets laws
and nondisclosure agreements to establish and protect our proprietary
technology. As of March 31, 2010, we held 504 U.S. patents and had 96 U.S.
patent applications pending. However, we cannot provide assurance that patents
will be issued with respect to pending or future patent applications that we
have filed or plan to file or that our patents will be upheld as valid or will
prevent the development of competitive products or that any actions we have
taken will adequately protect our intellectual property rights. We generally
enter into confidentiality agreements with our employees, consultants,
customers, potential customers and others as required, in which we strictly
limit access to, and distribution of, our software, and further limit the
disclosure and use of our proprietary information.
18
Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain or use our products or technology. Enforcing our
intellectual property rights can sometimes only be accomplished through the use
of litigation, such as in the litigation with Riverbed Technology, Inc. settled
in fiscal 2009. Our competitors may also independently develop technologies that
are substantially equivalent or superior to our technology. In addition, the
laws of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the U.S.
Because we may order components from
suppliers in advance of receipt of customer orders for our products which
include these components, we could face a material inventory risk, which could
have a material and adverse effect on our results of operations and cash flows.
Although we
use third parties to manufacture certain of our products, we also manufacture
products in-house. Managing our in-house manufacturing capabilities presents a
number of risks that could materially and adversely affect our financial
condition. For instance, as part of our component planning, we place orders with
or pay certain suppliers for components in advance of receipt of customer
orders. We occasionally enter into negotiated orders with vendors early in the
manufacturing process of our storage products to ensure that we have sufficient
components for our new products to meet anticipated customer demand. Because the
design and manufacturing process for these components is complicated, it is
possible that we could experience a design or manufacturing flaw that could
delay or even prevent the production of the components for which we previously
committed to pay. We also face the risk of ordering too many components, or
conversely, not enough components, since supply orders are generally based on
forecasts of customer orders rather than actual customer orders. In addition, in
some cases, we make non-cancelable order commitments to our suppliers for
work-in-progress, supplier’s finished goods, custom sub-assemblies, discontinued
(end-of-life) components and Quantum-unique raw materials that are necessary to
meet our lead times for finished goods. If we cannot change or be released from
supply orders, we could incur costs from the purchase of unusable components,
either due to a delay in the production of the components or other supplies or
as a result of inaccurately predicting supply orders in advance of customer
orders. Many of these same risks exist with our third party contract
manufacturing partners. Our business and operating results could be materially
and adversely affected as a result of these increased costs.
Some of our manufacturing, component
production and service repair is outsourced to third party contract
manufacturers, component suppliers and service providers. If we cannot obtain
products, parts and services from these third parties in a cost effective and
timely manner that meets our customers’ expectations, this could materially and
adversely impact our business, financial condition and results of operations.
Many aspects
of our supply chain and operational results are dependent on the performance of
third party business partners. We face a number of risks as a result of these
relationships, including, among others:
|
•
|
Sole source of product
supply
In many cases, our business partner may be the sole source of supply for the products or parts they manufacture, or the services they provide, for us. Because we are relying on one supplier, we are at greater risk of experiencing shortages, reduced production capacity or other delays in customer deliveries that could result in customer dissatisfaction, lost sales and increased expenses, which could materially damage customer relationships and result in lost revenue. |
|
•
|
Cost and purchase
commitments
We may not be able to control the costs we would be required to pay our business partners for the products they manufacture for us or the services they provide to us. They procure inventory to build our products based upon a forecast of customer demand that we provide. We could be responsible for the financial impact on the contract manufacturer, supplier or service provider of any reduction or product mix shift in the forecast relative to materials that they had already purchased under a prior forecast. Such a variance in forecasted demand could require us to pay them for finished goods in excess of current customer demand or for excess or obsolete inventory and generally incur higher costs. As a result, we could experience reduced gross margins and larger operating losses based on these purchase commitments. With respect to service providers, although we have contracts for most of our third party repair service vendors, the contract period may not be the same as the underlying service contract with our customer. In such cases, we face risks that the third party service provider may increase the cost of providing services over subsequent periods. |
19
|
•
|
Financial condition and
stability
Our third party business partners may suffer adverse financial or operational results or may be negatively impacted by the current economic climate. Therefore, we may face interruptions in the supply of product components or service as a result of financial instability within our supply chain. We could suffer production downtime or increased costs to procure alternate products or services as a result of the possible inadequate financial condition of one or more of our business partners. |
|
•
|
Quality and supplier
conduct
We have limited control over the quality of products and components produced and services provided by our supply chain business partners. Therefore, the quality of the products, parts or services may not be acceptable to our customers and could result in customer dissatisfaction, lost revenue and increased warranty costs. In addition, we have limited control over the manner in which our business partners conduct their business. Sub-tier suppliers selected by the primary third party could have process control issues or could select components with latent defects that manifest over a longer period of time. Therefore, we may face negative consequences or publicity as a result of a third party’s failure to comply with applicable compliance, trade, environmental or employment regulations. |
Any or all of
these risks could have a material adverse effect on our business. In the past we
have successfully transitioned products or component supply from one supplier to
another existing supplier of different products, but there is no guarantee of
our continued ability to do so.
We do not control licensee sales of
tape media cartridges. To the extent that our royalty revenue is dependent on
the volumes of cartridges sold by our licensees, should these licensees
significantly sell fewer media products, such decreased volumes could lower our
royalty revenue, which could materially and adversely affect our business,
financial condition, and operating results.
We receive a
royalty fee based on tape media cartridges sold by Fujifilm Corporation, Imation
Corporation, Hitachi Maxell, Limited, Sony Corporation and TDK Corporation.
Under our license agreements with these companies, each of the licensees
determines the pricing and number of units of tape media cartridges that it
sells. Our royalty revenue varies depending on the level of sales of the various
media cartridge offerings sold by the licensees. If licensees sell significantly
fewer tape media cartridges, our royalty revenue would decrease, which could
materially and adversely affect our financial condition and operating
results.
In addition,
lower prices set by licensees could require us to lower our prices on direct
sales of tape media cartridges, which could reduce our revenue and margins on
these products beyond anticipated decreases. As a result, lower prices on our
tape media cartridges could reduce media revenue, which could materially and
adversely affect our financial condition and operating results.
Our stock price could become more
volatile if certain institutional investors were to increase or decrease the
number of shares they own. In addition, there are other factors and events that
could affect the trading prices of our common stock.
Five
institutional investors owned approximately 30% of our common stock as of March
31, 2010. If any or all of these investors were to decide to purchase
significant additional shares or to sell significant or all of the common shares
they currently own, that may cause our stock price to be more volatile. For
example, there have been instances in the past where a shareholder with a
significant equity position began to sell shares, putting downward pressure on
our stock price for the duration of their selling activity. In these situations,
selling pressure outweighed buying demand and our stock price declined. This
situation has occurred due to our stock price falling below institutional
investors’ price thresholds and our volatility increasing beyond investors’
volatility parameters causing even greater sell pressure.
20
Trading prices of our
common stock may fluctuate in response to a number of other events and factors,
such as:
|
•
|
General economic
conditions;
|
|
•
|
Changes in interest
rates;
|
|
•
|
Fluctuations in the stock
market in general and market prices for technology companies in
particular;
|
|
•
|
Quarterly variations in our
operating results;
|
|
•
|
New products, services,
innovations and strategic developments by our competitors or us, or
business combinations and investments by our competitors or
us;
|
|
•
|
Changes in financial
estimates by us or securities analysts and recommendations by securities
analysts;
|
|
•
|
Changes in our capital
structure, including issuance of additional debt or equity to the public;
and
|
|
•
|
Strategic
acquisitions.
|
Any of these events and
factors may cause our stock price to rise or fall and may adversely affect our
business and financing opportunities.
Our design and production processes are
subject to safety and environmental regulations which could lead to increased
costs, or otherwise adversely affect our business, financial condition and
results of operations.
We are subject to a
variety of laws and regulations relating to, among other things, the use,
storage, discharge and disposal of materials and substances used in our
facilities and manufacturing processes as well as the safety of our employees
and the public. Directives first introduced in the European Union impose a “take
back” obligation on manufacturers for the financing of the collection, recovery
and disposal of electrical and electronic equipment and restrict the use of
certain potentially hazardous materials, including lead and some flame
retardants, in electronic products and components. Other jurisdictions in the
U.S. and internationally have since introduced similar requirements, and we
anticipate that future regulations might further restrict allowable materials in
our products, require the establishment of additional recycling or take back
programs or mandate the measurement and reduction of carbon emissions into the
environment. We have implemented procedures and will likely continue to
introduce new processes to comply with current and future safety and
environmental legislation. However, measures taken now or in the future to
comply with such legislation may adversely affect our manufacturing or personnel
costs or product sales by requiring us to acquire costly equipment or materials,
redesign production processes or to incur other significant expenses in adapting
our manufacturing programs or waste disposal and emission management processes.
Furthermore, safety or environmental claims or our failure to comply with
present or future regulations could result in the assessment of damages or
imposition of fines against us, or the suspension of affected operations, which
could have an adverse effect on our business, financial condition and results of
operations.
We are subject to many laws and regulations,
and violation of or changes in those requirements could materially and adversely
affect our business.
We are subject to
numerous U.S. and international laws regarding corporate conduct, fair
competition, preventing corruption and import and export practices, including
requirements applicable to U.S. government contractors. While we maintain a
rigorous corporate ethics and compliance program, we may be subject to increased
regulatory scrutiny, significant monetary fines or penalties, suspension of
business opportunities or loss of jurisdictional operating rights as a result of
any failure to comply with those requirements. We may also be exposed to
potential liability resulting from our business partners’ violation of these
requirements. In addition, U.S. regulatory agencies have recently introduced new
enforcement efforts that may proactively seek conduct-related information from
companies operating in certain targeted industries or locations, without regard
for whether potential violations have been identified. If we were to receive
such an information request, we may incur increased personnel and legal costs in
order to adequately review and respond to the request. Further our U.S. and
international business models are based on currently applicable regulatory
requirements and exceptions. Changes in those requirements or exceptions could
necessitate changes to our business model. Any of these consequences could
materially and adversely impact our business and operating results.
21
We may be sued by our customers as a result of
failures in our products.
We face potential
liability for performance problems of our products because our end users employ
our storage technologies for the storage and backup of important data and to
satisfy regulatory requirements. Although we maintain technology errors and
omissions insurance, our insurance may not cover potential claims of this type
or may not be adequate to indemnify us for all liability that may be imposed.
Any imposition of liability or accrual of litigation costs that is not covered
by insurance or is in excess of our insurance coverage could harm our
business.
In addition, we could
potentially face claims for product liability from our customers if our products
cause property damage or bodily injury. Although we maintain general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to indemnify us for all liability that may be imposed. Any
imposition of liability or accrual of litigation costs that is not covered by
insurance or is in excess of our insurance coverage could harm our
business.
We must maintain appropriate levels of service
parts inventories. If we do not have sufficient service parts inventories, we
may experience increased levels of customer dissatisfaction. If we hold
excessive service parts inventories, we may incur financial
losses.
We maintain levels of
service parts inventories to satisfy future warranty obligations and also to
earn service revenue by providing enhanced and extended warranty and repair
service during and beyond the warranty period. We estimate the required amount
of service parts inventories based on historical usage and forecasts of future
warranty requirements, including estimates of failure rates and costs to repair,
and out of warranty revenue. Given the significant levels of judgment inherently
involved in the process, we cannot provide assurance that we will be able to
maintain appropriate levels of service parts inventories to satisfy customer
needs and to avoid financial losses from excess service parts inventories. If we
are unable to maintain appropriate levels of service parts inventories, our
business, financial condition and results of operations may be materially and
adversely impacted.
Because we rely heavily on distributors and
other resellers to market and sell our products, if one or more distributors
were to experience a significant deterioration in its financial condition or its
relationship with us, this could disrupt the distribution of our products and
reduce our revenue, which could materially and adversely affect our business,
financial condition and operating results.
In certain product and
geographic segments we heavily utilize distributors and value added resellers to
perform the functions necessary to market and sell our products. To fulfill this
role, the distributor must maintain an acceptable level of financial stability,
creditworthiness and the ability to successfully manage business relationships
with the customers it serves directly. Under our distributor agreements with
these companies, each of the distributors determines the type and amount of our
products that it will purchase from us and the pricing of the products that it
sells to its customers. If the distributor is unable to perform in an acceptable
manner, we may be required to reduce the amount of sales of our product to the
distributor or terminate the relationship. We may also incur financial losses
for product returns from distributors or for the failure or refusal of
distributors to pay obligations owed to us. Either scenario could result in
fewer of our products being available to the affected market segments, reduced
levels of customer satisfaction and/or increased expenses, which could in turn
have a material and adverse impact on our business, results of operations and
financial condition.
From time to time we make acquisitions. The
failure to successfully integrate future acquisitions could harm our business,
financial condition and operating results.
As a part of our
business strategy, we have in the past and may make acquisitions in the future
subject to certain debt covenants. We may also make significant investments in
complementary companies, products or technologies. If we fail to successfully
integrate such acquisitions or significant investments, it could harm our
business, financial condition and operating results. Risks that we may face in
our efforts to integrate any recent or future acquisitions include, among
others:
22
|
•
|
Failure to realize
anticipated savings and benefits from the acquisition;
|
|
•
|
Difficulties in assimilating
and retaining employees;
|
|
•
|
Potential incompatibility of
business cultures;
|
|
•
|
Coordinating geographically
separate organizations;
|
|
•
|
Diversion of management’s
attention from ongoing business concerns;
|
|
•
|
Coordinating infrastructure
operations in a rapid and efficient manner;
|
|
•
|
The potential inability to
maximize our financial and strategic position through the successful
incorporation of acquired
technology and rights into our products and services;
|
|
•
|
Failure of acquired
technology or products to provide anticipated revenue or margin
contribution;
|
|
•
|
Insufficient revenues to
offset increased expenses associated with the
acquisition;
|
|
•
|
Costs and delays in
implementing or integrating common systems and
procedures;
|
|
•
|
Reduction or loss of customer
orders due to the potential for market confusion, hesitation and
delay;
|
|
•
|
Impairment of existing
customer, supplier and strategic relationships of either
company;
|
|
•
|
Insufficient cash flows from
operations to fund the working capital and investment
requirements;
|
|
•
|
Difficulties in entering
markets in which we have no or limited direct prior experience and where
competitors in such markets
have stronger market positions;
|
|
•
|
The possibility that we may
not receive a favorable return on our investment, the original investment
may become impaired, and/or
we may incur losses from these investments;
|
|
•
|
Dissatisfaction or
performance problems with the acquired company;
|
|
•
|
The assumption of risks of
the acquired company that are difficult to quantify, such as
litigation;
|
|
•
|
The cost associated with the
acquisition; and
|
|
•
|
Assumption of unknown
liabilities or other unanticipated adverse events or
circumstances.
|
Acquisitions present
many risks, and we may not realize the financial and strategic goals that were
contemplated at the time of any transaction. We cannot provide assurance that we
will be able to successfully integrate any business, products, technologies or
personnel that we may acquire in the future, and our failure to do so could harm
our business, financial condition and operating results.
If the future outcomes related to the
estimates used in recording tax liabilities to various taxing authorities result
in higher tax liabilities than estimated, then we would have to record tax
charges, which could be material.
We have provided amounts
and recorded liabilities for probable and estimable tax adjustments that may be
proposed by various taxing authorities in the U.S. and foreign jurisdictions. If
events occur that indicate payments of these amounts will be less than
estimated, then reversals of these liabilities would create tax benefits being
recognized in the periods when we determine the liabilities have reduced.
Conversely, if events occur which indicate that payments of these amounts will
be greater than estimated, then tax charges and additional liabilities would be
recorded. In particular, various foreign jurisdictions could challenge the
characterization or transfer pricing of certain intercompany transactions. In
the event of an unfavorable outcome of such challenge, there exists the
possibility of a material tax charge and adverse impact on the results of
operations in the period in which the matter is resolved or an unfavorable
outcome becomes probable and estimable.
Certain changes in stock
ownership could result in a limitation on the amount of net operating loss and
tax credit carryovers that can be utilized each year. Should we undergo such a
change in stock ownership, it would severely limit the usage of these carryover
tax attributes against future income, resulting in additional tax charges, which
could be material.
We are exposed to fluctuations in foreign
currency exchange rates, and an adverse change in foreign currency exchange
rates relative to our position in such currencies could have a materially
adverse impact on our business, financial condition and results of
operations.
We do not currently use
derivative financial instruments for foreign currency hedging or speculative
purposes. To minimize foreign currency exposure, we use foreign currency
obligations to match and offset net currency exposures associated with certain
assets and liabilities denominated in non-functional currencies. We have used in
the past, and may use in the future, foreign currency forward contracts to hedge
our exposure to foreign currency exchange rates. To the extent that we have
assets or liabilities denominated in a foreign currency that are inadequately
hedged or not hedged at all, we may be subject to foreign currency losses, which
could be significant.
23
Our international
operations can act as a natural hedge when both operating expenses and sales are
denominated in local currencies. In these instances, although an unfavorable
change in the exchange rate of a foreign currency against the U.S. dollar would
result in lower sales when translated to U.S. dollars, operating expenses would
also be lower in these circumstances. An increase in the rate at which a foreign
currency is exchanged for U.S. dollars would require more of that particular
foreign currency to equal a specified amount of U.S. dollars than before such
rate increase. In such cases, and if we were to price our products and services
in that particular foreign currency, we would receive fewer U.S. dollars than we
would have received prior to such rate increase for the foreign currency.
Likewise, if we were to price our products and services in U.S. dollars while
competitors priced their products in a local currency, an increase in the
relative strength of the U.S. dollar would result in our prices being
uncompetitive in those markets. Such fluctuations in currency exchange rates
could materially and adversely affect our business, financial condition and
results of operations.
ITEM 1B. Unresolved Staff
Comments
None.
ITEM 2. Properties
Our headquarters are
located in San Jose, California. We lease facilities in North America, Europe
and Asia Pacific. The following is a summary of the significant locations and
primary functions of those facilities as of March 31, 2010:
| Location | Function | |
| North America | ||
| San Jose, CA | Corporate headquarters, sales, research and development | |
| Irvine, CA | Administration, sales, service, research and development | |
| Colorado Springs, CO | Operations, service, research and development, administration | |
| Boulder, CO | Research and development | |
| Englewood, CO | Research and development, service and operations | |
| Mendota Heights, MN | Research and development | |
| Richardson, TX | Research and development | |
| Bellevue, WA | Sales and administration | |
| Other North America | Sales, research and development | |
| Europe | ||
| Paris, France | Sales | |
| Munich, Germany | Sales and service | |
| Zurich, Switzerland | Operations and administration | |
| Bracknell, UK | Sales and service | |
| Northampton, UK | Sales and service | |
| Other Europe | Sales, service and administration | |
| Asia Pacific | ||
| Adelaide, Australia | Research and development | |
| Brisbane, Australia | Sales and administration | |
| Shanghai, China | Sales | |
| Hyderabad, India | Research and development | |
| Tokyo, Japan | Sales and media procurement center | |
| Kuala Lumpur, Malaysia | Administration and customer service | |
| Singapore City, Singapore | Sales and distribution | |
| Other Asia Pacific | Sales | |
ITEM 3. Legal Proceedings
For information
regarding legal proceedings, refer to Note 14 “Litigation” to the Consolidated
Financial Statements.
24
ITEM 4. Reserved
PART II
ITEM 5. Market for the Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is
traded on the New York Stock Exchange under the symbol “QTM.” As of June 4,
2010, the closing price of our common stock was $2.28 per share. The prices per
share reflected in the following table represent the range of high and low sales
prices of our common stock for the quarters indicated:
| Fiscal 2010 | High | Low | |||
| First quarter ended June 30, 2009 | $ | 1.50 | $ | 0.66 | |
| Second quarter ended September 30, 2009 | 1.30 | 0.79 | |||
| Third quarter ended December 31, 2009 | 3.15 | 1.15 | |||
| Fourth quarter ended March 31, 2010 | 3.18 | 2.18 | |||
| Fiscal 2009 | High | Low | |||
| First quarter ended June 30, 2008 | $ | 2.55 | $ | 1.33 | |
| Second quarter ended September 30, 2008 | 1.95 | 0.96 | |||
| Third quarter ended December 31, 2008 | 1.17 | 0.09 | |||
| Fourth quarter ended March 31, 2009 | 0.94 | 0.24 | |||
Historically, we have
not paid cash dividends on our common stock and do not intend to pay dividends
in the foreseeable future. Our ability to pay dividends is restricted by the
covenants in our Credit Suisse senior secured credit agreement. See “Liquidity
and Capital Resources” in Item 7 and Note 7 “Convertible Subordinated Debt and
Long-Term Debt” to the Consolidated Financial Statements.
As of June 4, 2010,
there were 1,568 Quantum stockholders of record, including the Depository Trust
Company, which holds shares of Quantum common stock on behalf of an
indeterminate number of beneficial owners.
The information required
by this item regarding equity compensation plans is provided in Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
Performance Graph
The following graph
compares the cumulative total return to stockholders of Quantum common stock at
March 31, 2010 for the period since March 31, 2005 to the cumulative total
return over such period of (i) the NASDAQ Composite Index, and (ii) the S &
P Computer Storage & Peripherals Index. The graph assumes the investment of
$100 on March 31, 2005 in our common stock and in each of the indices listed on
the graph and reflects the change in the market price of our common stock
relative to the changes in the noted indices at March 31, 2006, March 31, 2007,
March 31, 2008, March 21, 2009 and March 31, 2010. The performance shown below
is based on historical data and is not indicative of, nor intended to forecast,
future price performance of our common stock.
25
COMPARISON OF 5 YEAR CUMULATIVE TOTAL
RETURN*
Among Quantum Corporation, The NASDAQ Composite Index
And The S&P Computer Storage & Peripherals Index
Among Quantum Corporation, The NASDAQ Composite Index
And The S&P Computer Storage & Peripherals Index
| *$100 invested on 3/31/05 in stock or index,
including reinvestment of dividends. Fiscal year ending March 31. |
| Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All rights
reserved. Copyright© 2010 Dow Jones & Co. All rights reserved. |
ITEM 6. Selected Financial
Data
This summary of selected
consolidated financial information of Quantum for fiscal 2006 to 2010 should be
read along with our Consolidated Financial Statements contained in this Annual
Report on Form 10-K. We have acquired companies in addition to certain other
items that affect the comparability of the selected financial information as
described below.
Acquisitions
On August 22, 2006, we
completed the acquisition of Advanced Digital Information Corporation (“ADIC”).
The selected information below includes the results of operations of our
acquisition from the acquisition date.
Other Items
We had a $12.9 million
gain on debt extinguishment, net of costs in fiscal 2010. Fiscal 2009 results
included $11.0 million of royalty revenue from a legal settlement and a $339.0
million goodwill impairment charge. We had a $12.6 million loss on debt
extinguishment, net of costs in fiscal 2008. The results of operations for
fiscal 2007 included $14.7 million of purchased in-process research and
development in connection with the acquisition of ADIC. The results of
operations for fiscal 2006 included loss on settlement charges from two legal
settlements totaling $20.5 million.
26
| For the year ended March 31, | |||||||||||||||||||
| (In thousands, except per-share data) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Total revenue | $ | 681,427 | $ | 808,972 | $ | 975,702 | $ | 1,016,174 | $ | 834,287 | |||||||||
| Total cost of revenue | 401,390 | 504,658 | 656,598 | 722,789 | 602,359 | ||||||||||||||
| Gross margin | 280,037 | 304,314 | 319,104 | 293,385 | 231,928 | ||||||||||||||
| Income (loss) from operations | 29,309 | (329,925 | ) | (8,097 | ) | (27,154 | ) | (41,481 | ) | ||||||||||
| Net income (loss) | 16,634 | (358,264 | ) | (60,234 | ) | (64,094 | ) | (41,479 | ) | ||||||||||
| Basic net income (loss) share | 0.08 | (1.71 | ) | (0.30 | ) | (0.33 | ) | (0.23 | ) | ||||||||||
| Diluted net income (loss) per share | 0.02 | (1.71 | ) | (0.30 | ) | (0.33 | ) | (0.23 | ) | ||||||||||
| As of March 31, | ||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||
| Total assets | $ | 504,143 | $ | 549,369 | $ | 1,065,725 | $ | 1,125,829 | $ | 663,344 | ||||||||
| Short-term debt | 23,983 | 4,000 | 4,000 | 25,000 | — | |||||||||||||
| Long-term debt | 305,899 | 404,000 | 496,000 | 497,500 | 160,000 | |||||||||||||
27
ITEM 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
Quantum Corporation
(“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a leading global
storage company specializing in backup, recovery and archive solutions.
Combining focused expertise, customer-driven innovation and platform
independence, we provide a comprehensive, integrated range of disk, tape and
software solutions supported by our sales and service organization. We work
closely with a broad network of distributors, value-added resellers (“VARs”),
original equipment manufacturers (“OEMs”) and other suppliers to meet customers’
evolving data protection needs. Our stock is traded on the New York Stock
Exchange under the symbol “QTM.”
We offer a comprehensive
range of solutions in the data storage market providing performance and value to
organizations of all sizes. We believe our combination of expertise, innovation
and platform independence allows us to solve customers’ data protection and
retention issues more easily, effectively and securely. In addition, we have the
global scale and scope to support our worldwide customer base. As a pioneer in
disk-based data protection, we have a broad portfolio of disk backup solutions
featuring deduplication and replication technology. We have products spanning
from entry-level autoloaders to enterprise libraries and are a major supplier of
tape drives and media. Our data management software provides technology for
shared workflow applications and multi-tiered archiving in high-performance,
large-scale storage environments. We offer a full range of service with support
available in more than 100 countries.
Business
We earn our revenue from
the sale of products, systems and services through our sales force and an array
of channel partners to reach end user customers, which range in size from small
businesses and satellite offices to government agencies and large, multinational
corporations. Our products are sold under both the Quantum brand name and the
names of various OEM customers. We face a variety of challenges and
opportunities in responding to the competitive dynamics of the technology market
which is characterized by rapid change, evolving customer demands and strong
competition, including competition with several companies who are also
significant customers.
We offer a comprehensive
range of solutions in the data storage market, providing performance and value
to organizations of all sizes. We have a broad portfolio of disk backup
solutions, tape libraries, autoloaders, tape drives and media. Our data
management software provides technology for shared workflow applications and
multi-tiered archiving in high-performance, large-scale storage environments. We
also feature software options with products that provide disk and tape
integration capabilities with our core deduplication and replication
technologies. In addition, our service offerings include a broad range of
coverage options to provide the level of support for the widest possible range
of information technology (“IT”) environments, with service available in more
than 100 countries.
For fiscal 2010 we
identified the following key objectives to enable us to improve our operating
results:
|
•
|
Building out our edge-to-core
product and solutions portfolio;
|
|
•
|
Articulating and
communicating our edge-to-core vision to customers and end
users;
|
|
•
|
Executing our go-to-market
model to improve our alignment with our channel partners
and
|
|
•
|
Completing a capital
structure solution to address our convertible debt refinancing
requirement.
|
We worked through a
series of significant changes during fiscal 2010, including a challenging
economic environment, an altered relationship with EMC, the pressures of a
constrained debt market as well as market transitions. Throughout these changes,
we continued to focus on executing our business strategy, leading to a
significantly improved business model with growth opportunities. We introduced a
number of new products which expanded our edge-to-core product and solutions
portfolio. In addition, by building out our portfolio we were able to better
demonstrate edge-to-core solutions that we had been communicating to customers
and end users.
28
Although the environment
for IT spending, including storage, improved during fiscal 2010, there is still
an atmosphere of caution. For example, storage projects continue to be highly
scrutinized within companies and there were difficulties with deals progressing
through customers’ approval processes resulting in reduced and delayed sales
this fiscal year. However, there was measurable improvement in the storage
purchasing environment during the second half of fiscal 2010. IT budgets were
more available, channel inventories began to replenish and, as a result, the
industry had modest growth.
Our results this fiscal
year also demonstrated our ability to deliver operating profit regardless of
whether we have significant revenue from OEM DXi™ software, as we did in the first half of
fiscal 2010, or do not have significant OEM DXi software revenue, as was the
case the second half of the fiscal year. We believe we have the foundation from
which we can grow the company and improve our overall performance as we continue
to launch new products.
As of July 1, 2009, we
completed a capital structure solution which addressed the requirement that at
least $135.0 million of our convertible subordinated debt (“the notes”) be
refinanced by February 2010 under our senior secured credit agreement with
Credit Suisse (“CS credit agreement”). We are no longer at risk of acceleration
of the maturity date related to this refinancing requirement. We reduced our
overall debt level by $16.2 million in connection with this capital structure
solution.
As noted above, building
out our edge-to-core product and solutions portfolio was a key objective and we
launched a number of critical new products during fiscal 2010 to expand our
growth platform for disk backup systems and software solutions centered on
deduplication and replication. Industry data indicates the market for
target-based deduplication systems is growing substantially despite the cautious
economic environment, and we believe we are well positioned to capitalize on
this opportunity. During fiscal 2010, new products and enhancements introduced
included the NAS-based DXi6500 family, disk backup appliances with advanced data
deduplication technology targeted to meet the needs of midrange customers. The
DXi6500 family consists of five preconfigured appliance models and has been
designed to be simple for customers and end users to order, deploy, operate and
manage while providing the advantages of data deduplication. We believe the
DXi6500 family is an ideal offering for the independent channel and will provide
us incremental opportunities.
We continue to provide
enterprise disk solutions in the growing target-based deduplication systems
market. Our current DXi results are dominated by the DXi7500 appliance in a VTL
implementation, and we believe there are additional opportunities in this
market. We plan to expand and further improve our product line of disk solutions
for the enterprise market to deliver edge-to-core solutions for end user
customers and increase our revenue.
Although deduplication
disk systems are rapidly becoming the standard for backup and fast recovery of
archive data, automated tape continues to hold a strong role in the data
preservation hierarchy. We view our tape automation systems business as a mature
segment of storage solutions and have worked to improve our branded sales
productivity and decrease our manufacturing cost structure for these products.
We continue to manage our tape business in a manner that recognizes the mature
nature of tape technology. During fiscal 2010, we released products and upgrades
that we expect will deliver incremental revenue growth opportunities in the near
term due to our strength in this market, including an encryption solution and
the Scalar® i40 and Scalar i80 tape automation libraries
that were designed to provide small and medium businesses and distributed data
centers with more storage capacity, room for continued growth and simplified
system management. In addition, we were the first company to introduce LTO-5
technology-based solutions. LTO-5 tape drives nearly double capacity and
increase transfer rates by up to 15 percent over LTO-4 technology in addition to
enabling media partitioning functionality. We believe these innovations, along
with native encryption, enhance tape's role in providing long-term data
retention, archiving and disaster recovery as an integral component of a broader
tiered storage strategy.
In April 2010, we
announced a new enterprise tape library, the Scalar i6000, designed to meet the
challenges of high data growth while facilitating tape consolidation in tiered
storage environments. The Scalar i6000 provides a significant increase in
capacity, high availability and enhanced security over the previous generation
enterprise library and incorporates the company's next-generation iLayer
software. This combination of enhanced capabilities and intelligence provides
enterprise customers with a long-term archive and data retention solution
optimized for the evolving role of tape in data protection.
Also in April 2010, we
released version 4.0 of the Quantum Vision™ software, which supports a tiered
storage strategy by enhancing centralized monitoring and reporting of Scalar
tape libraries and DXi-Series disk backup and deduplication
products.
29
In May 2010, we released
the DXi4500 family of products comprised of two turnkey disk backup appliances
designed to work with the leading backup software packages to provide
non-disruptive deduplication for small and medium-size businesses and remote
offices to simply and cost-effectively address their backup needs. Both DXi4500
models are bundled with DXi software to support backup, including in VMware
environments, deduplication and replication. In addition, the DXi4500 products
are optimized for sales through channel partners.
We anticipate these
recently introduced product offerings will expand our market opportunities. We
continue to work with our channel partners to take advantage of opportunities to
reach end customers that have historically chosen competitor products, but due
to consolidation in the market and resulting actions by competitors, we believe
are more likely to select our products and solutions.
We have been focused on
transforming the company for several years; however, we view fiscal 2010 as the
year where most aspects of this transformation were completed. We believe the
transitions we worked through in fiscal 2010, including launching a number of
new products and improving our engagement with channel partners, position us for
stronger performance through revenue growth. Our product portfolio provides us
with a competitive advantage and establishes the foundation for building revenue
momentum. Capitalizing on this opportunity by growing revenue and continuing to
improve our competitive position is our priority in fiscal 2011. Specifically,
for fiscal 2011 our goals are:
|
•
|
To gain share in the open
systems tape automation market;
|
|
•
|
To increase revenue
from disk backup systems and software solutions;
and
|
|
•
|
To deliver new technology in
order to extend our ability to
grow.
|
Our intent is to
capitalize on the actions we have taken during fiscal 2010 and on the improved
external environment to build revenue momentum in fiscal 2011. In order to
achieve our goals, we are focused on three primary objectives. These objectives
are to continue to extend and improve our product portfolio, to expand our
position with the VAR channel and to further invest in our technology
platform.
We believe we are well
positioned with our product portfolio from a competitive perspective. Between
new product releases in the fourth quarter of fiscal 2010 and in the first
quarter of fiscal 2011, we have expanded our offerings for end user customers
ranging from small business to large enterprise corporations. We believe this
and future expansion of our product portfolio will enable us to increase sales
of both our disk backup systems and software solutions and tape automation
systems.
Our edge-to-core disk
and tape offerings provide strategic solutions for independent VARs. We have
seen increased engagement with this channel due to the combination of value from
our product offerings and competitive dynamics in the market. We believe
continuing to expand our engagement with VARs will be key toward improving our
go-to-market leverage and growing our business, especially for sales of branded
disk systems to midrange and small and medium-sized business end
users.
We are investing in our
technology platform for a number of market areas expected to have significant
growth in order to extend our ability to grow. These include deduplication and
replication technology as well as extending technology in our StorNext software
to provide solutions into a broader market as companies struggle to manage the
vast growth in unstructured data. We believe we are in the early evolution of
deduplication and replication technology. In addition, cloud storage solutions
are another area where we intend to invest resources to increase our ability to
grow in the future.
The relative strength in
the deduplication market, in addition to the fact that the majority of storage
system end users have not implemented deduplication in their environments,
provides us with opportunities for revenue growth. We also see growing strength
in other market areas which reinforce our opportunities for revenue growth,
especially for StorNext solutions, including tiered storage, rich media and
consolidation. Although the role of tape continues to evolve, 85% of customers
still use tape as part of a disk-to-tape strategy or on a standalone
basis.1 We believe the market environment and our
product offerings provide the path to achieve our revenue growth goals. We
expect momentum to grow as the year progresses. We recognize there are numerous
risks to the successful execution of our business plans, including changes in
the economic environment. For a discussion of some of the risks and
uncertainties that impact our business, see “Risk Factors” in Item
1A.
____________________
____________________
| 1 | February 2010, Gartner, Inc. “Poll Shows Disk-Based Backup on the Rise, With a Few Surprises.” http://www.gartner.com |
30
Results
We achieved our primary
goals for fiscal 2010, improving our operating results and addressing the
refinancing requirement of our convertible debt. Our operating income increased
$359.2 million to $29.3 million in fiscal 2010 from an operating loss of $329.9
million in fiscal 2009. Although $339.0 million of the increase was due to the
prior year goodwill impairment, we also increased our gross margin percentage
and reduced operating expenses in fiscal 2010. The improvement in our gross
margin reflects the continued mix shift to higher margin products in addition to
improvements in our manufacturing cost structure and service delivery model.
Operating expenses, led by sales and marketing expense, decreased primarily due
to cost-savings initiatives. In addition, we increased cash generated from
operations by $11.1 million to $100.2 million in fiscal 2010.
In fiscal 2010, we had
total revenue of $681.4 million, a 16% decrease from fiscal 2009. Although there
has been measurable improvement in the IT and storage purchasing environment
during fiscal 2010, spending has not returned to pre-recession levels and was
reflected in lower revenues in each quarter of fiscal 2010 compared to the
corresponding quarter of fiscal 2009. Decreased demand in the global IT market
has increased competition for sales resulting in pricing pressure on the
majority of our products. We continue to address this price-competitive
environment by managing at the material margin level and continuing to shift our
revenue mix toward higher margin opportunities.
Between the recession
and our continued strategy of shifting our sales mix toward higher margin
opportunities, revenue decreases in fiscal 2010 were primarily due to expected
reductions in OEM revenue, including tape automation systems and devices and
media. In addition, we had decreased OEM DXi software revenue due to the changed
nature of our relationship with EMC, from partner to competitor in
deduplication, as a result of its July 2009 acquisition of Data Domain, a
competitor of ours. Our product revenue from OEM customers decreased 34% while
revenue from branded products decreased 8% from fiscal 2009. Service revenue
decreased primarily due to reduced revenues from our OEM customers. Our focus on
growing the branded business during the fiscal year is reflected in the greater
proportion of non-royalty revenue from our branded business, at 74% in fiscal
2010 compared to 67% in fiscal 2009 and 62% in fiscal 2008. Royalty revenue
decreased primarily due to $11.0 million from a settlement agreement in the
prior year that was not repeated.
Our gross margin
percentage increased 350 basis points in fiscal 2010 to 41.1% due to the
continued shift in sales mix toward higher margin products and services in
addition to efficiencies in our manufacturing structure and service delivery
model. Gross margin was favorably impacted by cost-cutting measures and because
product sales through our branded channels comprised a larger percentage of
non-royalty revenue in fiscal 2010 than in fiscal 2009. Although sales of
branded products typically generate higher gross margins than sales to our OEM
customers, OEM DXi software revenue provides one of our highest product margins.
The gross margin percentage increase was tempered by decreases in OEM DXi
software revenue and in royalty revenue.
Operating expenses
decreased $383.5 million due to the $339.0 million goodwill impairment in the
prior year that was not repeated as well as reductions in all other operating
expenses. Notably, we reduced our sales and marketing expenses by $26.6 million,
or 19%, from our efforts to align our resources with market opportunities, and
general and administrative expenses decreased $15.3 million, or 20%, in fiscal
2010 compared to the prior year. As a result of our increased gross margin rate
and decreased operating expenses, we had $29.3 million in income from operations
in fiscal 2010, our first operating profit in nine years.
Interest expense
decreased in fiscal 2010 due to decreased principal balances. During fiscal
2010, we paid $61.9 million in principal on our senior secured term loan,
decreasing our acquisition-related term debt to $186.1 million at March 31,
2010. We have reduced our acquisition-related debt by 63% since its inception in
August 2006. We also reduced our debt level another $16.2 million from our
convertible debt refinancing capital structure solution. We continued to
increase cash flow generation from operating activities, with $100.2 million of
cash from operating activities in fiscal 2010, up from $89.1 million and $24.2
million in fiscal 2009 and 2008, respectively. In addition, we increased our
cash and cash equivalents by $29.4 million at March 31, 2010 compared to March
31, 2009.
The following discussion
of our financial condition and results of operations is intended to provide
information that will assist in understanding our financial statements, the
changes in certain key items in those financial statements from year to year,
and the primary factors for those changes.
31
RESULTS OF OPERATIONS FOR FISCAL 2010, 2009
AND 2008
Revenue
| For the year ended March 31, | Change | |||||||||||||||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||||||
|
% of
revenue |
% of revenue |
%
of revenue |
||||||||||||||||||||||||||||||
| Product revenue | $ | 456,101 | 66.9 | % | $ | 556,484 | 68.8 | % | $ | 714,837 | 73.3 | % | $ | (100,383 | ) | (18.0 | )% | $ | (158,353 | ) | (22.2 | )% | ||||||||||
| Service revenue | 156,477 | 23.0 | % | 164,664 | 20.4 | % | 160,920 | 16.5 | % | (8,187 | ) | (5.0 | )% | 3,744 | 2.3 | % | ||||||||||||||||
| Royalty revenue | 68,849 | 10.1 | % | 87,824 | 10.8 | % | 99,945 | 10.2 | % | (18,975 | ) | (21.6 | )% | (12,121 | ) | (12.1 | )% | |||||||||||||||
| Total revenue | $ | 681,427 | 100.0 | % | $ | 808,972 | 100.0 | % | $ | 975,702 | 100.0 | % | $ | (127,545 | ) | (15.8 | )% | $ | (166,730 | ) | (17.1 | )% | ||||||||||
Total revenue decreased
in fiscal 2010 compared to fiscal 2009 primarily due to expected reductions in
product revenue, specifically OEM revenue, including tape automation systems and
devices and media sales as a result of both the global recession reducing market
demand and because we continued to choose not to pursue sales of products that
typically have lower margins. These same factors were the primary reasons we
also had decreased revenue from branded tape automation systems and devices and
media. In addition, OEM DXi software revenue decreased from the changed nature
of our relationship with EMC. Royalty revenues declined primarily from a royalty
settlement in fiscal 2009 that was not repeated in fiscal 2010 while service
revenue decreased from fiscal 2009, reflecting the reduction in our OEM product
revenue and associated service relationships.
Total revenue decreased
$166.7 million to $809.0 million in fiscal 2009 compared to fiscal 2008
primarily due to both the global recession reducing market demand and because we
chose not to pursue sales of products that typically have lower margins. Royalty
revenues declined $12.1 million, or 12%, while service revenue increased $3.7
million, or 2%, compared to fiscal 2008.
Product revenue
| For the year ended March 31, | Change | |||||||||||||||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||||||
| % of revenue |
% of revenue |
% of revenue |
||||||||||||||||||||||||||||||
| Disk backup systems and | ||||||||||||||||||||||||||||||||
| software solutions | $ | 83,508 | 12.3 | % | $ | 87,574 | 10.8 | % | $ | 49,226 | 5.1 | % | $ | (4,066 | ) | (4.6 | )% | $ | 38,348 | 77.9 | % | |||||||||||
| Tape automation systems | 263,977 | 38.7 | % | 317,907 | 39.3 | % | 425,795 | 43.6 | % | (53,930 | ) | (17.0 | )% | (107,888 | ) | (25.3 | )% | |||||||||||||||
| Device and media | 108,616 | 15.9 | % | 151,003 | 18.7 | % | 239,816 | 24.6 | % | (42,387 | ) | (28.1 | )% | (88,813 | ) | (37.0 | )% | |||||||||||||||
| Total product revenue | $ | 456,101 | 66.9 | % | $ | 556,484 | 68.8 | % | $ | 714,837 | 73.3 | % | $ | (100,383 | ) | (18.0 | )% | $ | (158,353 | ) | (22.2 | )% | ||||||||||
Fiscal 2010 Compared to Fiscal 2009
Our product revenue
includes sales of our hardware and software products sold through both our
Quantum branded and OEM channels. Revenue from OEM sales decreased $72.0
million, while revenue from branded products decreased $28.4 million. Similar to
the prior year, the product revenue decrease was most pronounced in our tape
automation systems and to a lesser extent from devices and media products. We
had a modest decrease in our disk backup systems and software solutions
revenue.
Revenues from disk
backup systems and software solutions decreased $4.1 million to $83.5 million in
fiscal 2010 compared to fiscal 2009 due to decreased DXi OEM software revenue
which was partially offset by increases in branded disk backup systems and
software solutions revenue. Our focus on expanding disk backup systems and
software solutions revenue was reflected in increased sales of our branded
DXi-Series products, including DXi7500 revenues and the addition of revenue from
our DXi6500 product family. In addition, StorNext software revenue increased in
fiscal 2010.
32
Tape automation system
sales decreased $53.9 million to $264.0 million in fiscal 2010 compared to
fiscal 2009. This decrease was primarily due to the decline in demand resulting
from the global recession and to a lesser extent from our decision to exit
portions of the entry-level automation market in current and prior years. Over
half of the decrease was attributable to reduced revenue from OEM customers in
fiscal 2010.
Devices, including tape
drives and removable hard drives, and media product revenues decreased $42.4
million to $108.6 million largely due to decreased sales of midrange drives sold
to OEMs and to a lesser extent decreased sales of entry-level drives sold to
OEMs as our older tape drives reach their end of life. We continued to place
emphasis on sales of non-royalty media that bring higher margins and to not
pursue volume sales at lower margins, resulting in lower overall revenue from
non-royalty media products.
Fiscal 2009 Compared to Fiscal 2008
Our product revenue
decreased in fiscal 2009 compared to fiscal 2008. Revenue from OEM sales
decreased $82.1 million, while revenue from branded products decreased $76.2
million. The product revenue decrease was most pronounced in our tape automation
systems and to a lesser extent from devices and media products. These decreases
were partially offset by an increase in our disk backup systems and software
solutions revenue.
Revenues from disk
backup systems and software solutions increased $38.3 million to $87.6 million
in fiscal 2009 compared to fiscal 2008 primarily due to the addition of OEM DXi
software revenue. Increased sales of our StorNext software, especially in
branded channels, and the addition of DXi7500 revenue also contributed to
increased disk backup and software solutions revenue in fiscal
2009.
Tape automation system
sales decreased $107.9 million to $317.9 million in fiscal 2009 compared to
fiscal 2008. This decrease was due to both a decline in demand resulting from
the global economic recession as well as our decision to exit portions of the
entry-level automation market in the second half of the fiscal year. Over half
of the decrease was attributable to reduced revenue from OEM tape automation
system sales in fiscal 2009.
Devices, including tape
drives and removable hard drives, and media product revenues decreased $88.8
million to $151.0 million largely due to decreased sales of entry-level drives
sold to OEMs and to a lesser extent decreased sales of midrange drives sold to
OEMs as our older tape drives reach their end of life. We continued to place
emphasis on sales of non-royalty media that bring higher margins and to not
pursue volume sales at lower margins, resulting in lower overall revenue from
non-royalty media products.
Service revenue
Service revenue includes
revenue from sales of hardware service contracts, product repair, installation
and professional services. Hardware service contracts are typically purchased by
our customers to extend the warranty or to provide faster service response time,
or both. Service revenue decreased $8.2 million to $156.5 million in fiscal 2010
compared to fiscal 2009 primarily due to reduced service revenues from our OEM
customers. Although service revenue related to our branded products increased
slightly in fiscal 2010, this increase was tempered in the first half of fiscal
2010 due to several changes in customer trends during this period. These
included customers renewing their service contracts for shorter periods,
choosing lower cost and slower response time service levels and waiting longer
periods after a contract lapsed to renew. It appears these changed trends for
the first half of fiscal 2010 were in response to the recession and reduced IT
budgets. Service revenue increased $3.7 million to $164.7 million in fiscal 2009
compared to fiscal 2008 primarily due to increased service contract revenues
from branded customers due to an increase in our installed base.
33
Royalty revenue
Royalty revenue declined
$19.0 million to $68.8 million in fiscal 2010 primarily due to $11.0 million in
royalty revenue recorded in connection with a settlement agreement in the prior
year that was not repeated. Tape media royalties decreased $8.0 million in
fiscal 2010 compared to fiscal 2009 primarily due to lower media unit sales of
DLT media and, to a lesser extent, LTO media. The recession decreased demand for
media and was reflected in lower quarterly tape media royalties in each of the
first three quarters of fiscal 2010 compared to the respective prior year
periods. Royalties related to LTO media were higher in the fourth quarter of
fiscal 2010 compared to the fourth quarter of fiscal 2009 from increased LTO
media unit sales. We believe this result is due to purchases delayed in the
first half of fiscal 2010 until the second half of fiscal 2010 as IT budgets
became less constrained.
Royalty revenue declined
$12.1 million to $87.8 million in fiscal 2009 primarily due to a decrease in
tape media royalties partially offset by royalty revenue recorded in connection
with a settlement agreement. Tape media royalties decreased $23.1 million in
fiscal 2009 compared to fiscal 2008 primarily due to lower media unit sales.
Royalties related to newer LTO media increased year-over-year, but at a slower
rate than declines in royalties from the maturing DLT media products, where we
experienced a net reduction in the installed base of DLT tape drives. By the
fourth quarter of fiscal 2009, LTO media unit sales decreases had caused a
decline in LTO royalty revenue, reflecting customer responses to the global
recession. In addition, a scheduled royalty rate decline on certain LTO media
contributed to decreased LTO media royalties during the fourth quarter of fiscal
2009. Partially offsetting the tape media royalty decrease was $11.0 million in
royalty revenue recorded in connection with a settlement agreement with Riverbed
Technology, Inc. that contains a mutual covenant not to sue related to the
parties’ data deduplication patents. The covenant not to sue is similar to a
cross-license. This $11.0 million was based on prior sales of the parties’ data
deduplication products. See Note 14, “Litigation” to the Consolidated Financial
Statements for additional information.
Looking Forward
For fiscal 2011, we
anticipate execution of our plans will result in revenue growth to $700.0
million to $750.0 million for the fiscal year. To achieve this revenue growth,
we plan to increase our market share in the tape automation systems market and
to increase sales of disk backup systems and software solutions. Newly
introduced products and the dynamics of the tape automation market are expected
to drive revenue growth for tape automation systems in fiscal 2011. Revenue
growth in disk backup systems and software solutions is expected from our
recently expanded product portfolio, software upgrades and increased sales
velocity with our channel partners. In addition, we anticipate additional new
products and enhancements across our portfolio will contribute to increased
revenue in fiscal 2011.
Gross Margin
| For the year ended March 31, | Change | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||||||||||||||
| Margin | Margin Rate |
Margin | Margin
Rate |
Margin | Margin
Rate |
||||||||||||||||||||||||||||
| Product gross margin | $ | 155,533 | 34.1 | % | $ | 176,889 | 31.8 | % | $ | 182,900 | 25.6 | % | $ | (21,356 | ) | (12.1 | )% | $ | (6,011 | ) | (3.3 | )% | |||||||||||
| Service gross margin | 55,655 | 35.6 | % | 39,601 | 24.0 | % | 36,496 | 22.7 | % | 16,054 | 40.5 | % | 3,105 | 8.5 | % | ||||||||||||||||||
| Royalty gross margin | 68,849 | 100.0 | % | 87,824 | 100.0 | % | 99,945 | 100.0 | % | (18,975 | ) | (21.6 | )% | (12,121 | ) | (12.1 | )% | ||||||||||||||||
| Gross margin | $ | 280,037 | 41.1 | % | $ | 304,314 | 37.6 | % | $ | 319,104 | * | 32.7 | % | $ | (24,277 | ) | (8.0 | )% | $ | (14,790 | ) | (4.6 | )% | ||||||||||
|
* Fiscal year ending
March 31, 2008 includes $0.2 million of restructuring charges related to
cost of revenue.
|
|||||||||||||||||||||||||||||||||
Fiscal 2010 Compared to Fiscal 2009
The 350 basis point
increase in gross margin percentage in fiscal 2010 compared to fiscal 2009 was
largely due to a shift in our revenue mix as we emphasized sales of our disk
backup systems and software solutions and branded revenues. Gross margin rates
were also favorably impacted by cost-saving initiatives implemented in the
current and prior years. Revenues from branded products and services in fiscal
2010 comprised 74% of non-royalty revenue compared to 67% of non-royalty revenue
in fiscal 2009. Sales of branded products typically generate higher gross
margins than sales to our OEM customers; however, OEM DXi software revenue
provides one of our highest product margins.
34
Product gross margin
Product gross margin
dollars decreased $21.4 million or 12% on a product revenue decrease of 18% in
fiscal 2010 compared to fiscal 2009 while our product gross margin percentage
improved approximately 230 basis points in fiscal 2010 compared to fiscal 2009.
The increased product gross margin percentage was primarily due to the
combination of a continued shift in our product revenue mix to higher margin
products and improvements in our manufacturing cost structure. The mix shift
includes a greater proportion of branded products, including increased branded
disk backup systems and software solutions. Although OEM DXi software revenue
decreased in fiscal 2010, product revenue from disk backup systems and software
solutions increased to 18% of product revenue in fiscal 2010 compared to 16% in
fiscal 2009. Cost-cutting measures and manufacturing efficiencies implemented in
the current and prior year also contributed to improved product gross margin
rates compared to the prior year.
Service gross margin
Service gross margin
dollars increased $16.1 million, or approximately 41%, despite a 5% reduction in
service revenue in fiscal 2010 compared to the prior year. Additionally, our
service gross margin percentage increased to 35.6% in fiscal 2010 from 24.0% in
fiscal 2009. These increases were primarily due to cost reductions in our
service delivery model and reduced lower-margin OEM repair activities.
Efficiencies in our service delivery model that contributed to the increased
service gross margin percentage included streamlining processes, consolidating
service inventory locations, reducing headcount and decreasing third party
external service providers and freight vendors as well as related expenses. In
addition, we had decreased lower of cost or market inventory charges related to
imminent end of service life dates on certain product families and planned
product roadmap transitions compared to the prior year.
Fiscal 2009 Compared to Fiscal 2008
The 490 basis point
increase in gross margin percentage in fiscal 2009 compared to fiscal 2008 was
largely due to a shift in our revenue mix as we emphasized sales of our disk
backup systems and software solutions and branded revenues. Gross margins were
also favorably impacted by cost-saving initiatives implemented in the current
and prior years. Revenues from branded products and services in fiscal 2009
comprised 67% of non-royalty revenue compared to 62% of non-royalty revenue in
fiscal 2008.
Product gross margin
Product gross margin
dollars decreased $6.0 million or approximately 3% on a product revenue decrease
of 22% in fiscal 2009 compared to fiscal 2008 while our product gross margin
percentage improved approximately 620 basis points in fiscal 2009 compared to
fiscal 2008. The increased product margin percentage was primarily attributable
to a shift in our product revenue mix to higher margin products in addition to
an increased percentage of branded product sales. Our disk backup systems and
software solutions, which include our OEM DXi software revenue, increased to 16%
of product revenue in fiscal 2009 compared to 7% in fiscal 2008. The addition of
the OEM DXi software revenue in fiscal 2009 contributed approximately half of
the product margin rate increase. In fiscal 2009 we continued to streamline
production methods, increase purchasing efficiencies and reduce the number of
outsource vendors for our entry-level and midrange product offerings. These
actions combined to reduce the cost of product revenue for most all branded and
OEM products in fiscal 2009 compared to fiscal 2008.
Service gross margin
Service gross margin
dollars increased $3.1 million or approximately 9% and service gross margin
increased by approximately 130 basis points compared to fiscal 2008. We
increased our service revenues in fiscal 2009 while service costs were
approximately the same as fiscal 2008. As noted earlier, service revenues
increased in fiscal 2009 due to increased service contract revenues from branded
customers.
35
Looking Forward
In fiscal 2011, we
anticipate a modest increase in gross margin rates compared to fiscal 2010 as we
continue to shift our revenue mix toward more profitable products and solutions.
We believe our planned revenue increases in disk backup systems and software
solutions as well as branded tape automation systems will result in an improved
revenue mix in fiscal 2011. In addition, we continue to closely manage our
manufacturing, service and repair costs.
Research and Development Expenses
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| % of revenue |
%
of revenue |
%
of revenue |
||||||||||||||||||
| Research and development | $69,949 | 10.3% | $70,537 | 8.7% | $89,563 | 9.2% | $(588) | (0.8)% | $(19,026) | (21.2)% | ||||||||||
Fiscal 2010 Compared to Fiscal 2009
Research and development
expenses decreased slightly during fiscal 2010 compared to fiscal 2009 largely
due to cost-cutting initiatives and efforts to streamline processes that reduced
expenses. These cost reductions were largely offset by increased research and
development activities in strategic areas of our business, including the release
of several new products. Depreciation expense decreased $1.0 million due to a
number of assets supporting our research and development efforts becoming fully
depreciated during the past year. Salaries and benefits decreased $0.4 million
primarily due to lower headcount compared to the prior year. A $0.3 million
decrease in project materials was primarily due to reduced tape automation
system development material needs compared to fiscal 2009. These decreases were
partially offset by a $1.2 million increase in external service providers
expense in support of a number of new products under development in fiscal
2010.
Fiscal 2009 Compared to Fiscal 2008
Research and development
expenses decreased during fiscal 2009 compared to fiscal 2008 primarily from
reductions in salaries and benefits, external service providers, depreciation,
facilities and project materials costs. Salaries and benefits decreased $6.8
million due to cost-savings initiatives which reduced headcount during the
fiscal year as well as a six day operational shutdown in North America during
the third quarter of fiscal 2009. External service provider costs decreased $4.5
million and project material costs decreased $1.7 million primarily due to
completion of DXi7500 development and new projects underway that did not require
significant outside resources. Depreciation expense decreased $3.1 million due
to a number of assets supporting our research and development efforts becoming
fully depreciated during fiscal 2009. Facilities expenses decreased $2.1 million
due to reductions in the scope of research and development operations during
fiscal 2009.
Sales and Marketing Expenses
| For the year ended March 31, | Change | ||||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||
| %
of revenue |
%
of revenue |
%
of revenue |
|||||||||||||||||||
| Sales and marketing | $114,612 | 16.8% | $141,250 | 17.5% | $149,367 | 15.3% | $(26,638) | (18.9)% | $(8,117) | (5.4)% | |||||||||||
36
Fiscal 2010 Compared to Fiscal
2009
Sales and marketing
expenses decreased during fiscal 2010 compared to fiscal 2009 due to continued
cost-saving initiatives and efforts to continue to align our sales and marketing
resources with market conditions and opportunities. Salaries and benefits
decreased $13.6 million due to reduced headcount in fiscal 2010.
Marketing-related expenses, such as marketing materials and trade shows,
decreased $4.7 million, travel expenses decreased $3.1 million and external
service providers expense decreased $1.1 million in fiscal 2010 compared to the
prior year. In addition, amortization expense decreased $1.5 million during
fiscal 2010 compared to fiscal 2009 due to certain intangible assets related to
the ADIC acquisition becoming fully amortized during fiscal 2009.
Fiscal 2009 Compared to Fiscal
2008
Sales and marketing
expenses decreased during fiscal 2009 compared to fiscal 2008 primarily due to
cost-saving initiatives and efforts implemented in the second half of the fiscal
year to align our sales and marketing resources with market conditions and
opportunities. Travel expenses decreased by $1.7 million, marketing support and
tools including promotions decreased by $1.3 million and advertising decreased
by $0.9 million due to cost-saving initiatives implemented in response to the
recession. Amortization expense decreased by $1.7 million during fiscal 2009
compared to fiscal 2008 due to intangible assets related to the ADIC acquisition
becoming fully amortized during fiscal 2009 and 2008. Facilities expense
decreased by $1.2 million due to headcount reductions during fiscal 2009 as well
as a reduction in the space allocated to sales and marketing
efforts.
Looking Forward
In fiscal 2011, we
anticipate increased sales and marketing expenses from demand generation
activities and sales commissions commensurate with revenue growth.
General and Administrative
Expenses
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| %
of revenue |
%
of revenue |
%
of revenue |
||||||||||||||||||
| General and administrative | $61,372 | 9.0% | $76,645 | 9.5% | $78,789 | 8.1% | $(15,273) | (19.9)% | $(2,144) | (2.7)% | ||||||||||
Fiscal 2010 Compared to Fiscal 2009
The $15.3 million
decrease in general and administrative expenses during fiscal 2010 compared to
fiscal 2009 was primarily due to decreases of $6.1 million in legal expenses,
$3.4 million in salaries and benefits, $1.6 million in external service
providers expense and $1.0 million in bad debt expense. Legal expenses decreased
primarily due to intellectual property protection efforts in fiscal 2009 that
did not reoccur in fiscal 2010 in addition to company-wide cost-savings
initiatives. Salaries and benefits decreased in fiscal 2010 compared to fiscal
2009 due to reduced headcount, and external service providers expense decreased
as a result of cost-savings initiatives. Bad debt expense decreased due to net
recoveries from collection efforts and continued close monitoring of credit
worthiness of customers in fiscal 2010.
Fiscal 2009 Compared to Fiscal
2008
The decrease in general
and administrative expenses during fiscal 2009 compared to fiscal 2008 was the
net result of several items. Depreciation expense decreased by $3.7 million from
fiscal 2009 compared to fiscal 2008 due to a number of assets becoming fully
depreciated during the past year. Salaries and benefits decreased by $3.5
million primarily due to reduced headcount and a six day operational shutdown in
North America during the third quarter of fiscal 2009. Audit and accounting
related services decreased $1.0 million compared to the prior year. These
decreases were partially offset by a $3.6 million increase in facilities
expenses and a $3.0 million increase in legal expenses. During fiscal 2009, a
higher proportion of our facilities costs were attributable to general corporate
operations as a result of consolidation and outsourcing of certain manufacturing
operations and reductions in the scope of research and development
operations.
37
Increased legal expenses
related to our activities to protect our intellectual property. See Note 14
“Litigation” to the Consolidated Financial Statements for additional information
related to legal actions.
Restructuring Charges
| For the year ended March 31, | Change | |||||||||||||||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||||||
| % of revenue |
% of revenue |
% of revenue |
||||||||||||||||||||||||||||||
| Restructuring charges related to cost | ||||||||||||||||||||||||||||||||
| of revenue | $ | — | — | % | $ | — | — | % | $ | 237 | — | % | $ | — | — | % | $ | (237 | ) | (100.0 | )% | |||||||||||
| Restructuring charges in operating | ||||||||||||||||||||||||||||||||
| expenses | 4,795 | 0.7 | % | 6,807 | 0.8 | % | 9,482 | 1.0 | % | (2,012 | ) | (29.6 | )% | (2,675 | ) | (28.2 | )% | |||||||||||||||
| Total restructuring charges | $ | 4,795 | 0.7 | % | $ | 6,807 | 0.8 | % | $ | 9,719 | 1.0 | % | $ | (2,012 | ) | (29.6 | )% | $ | (2,912 | ) | (30.0 | )% | ||||||||||
Our restructuring
actions are steps undertaken to reduce costs in an effort to return to
consistent profitability. In fiscal 2010 and 2009, restructuring actions to
consolidate operations supporting our business were primarily in response to the
global recession. In fiscal 2008, our restructuring actions were primarily the
result of partnering with a third party and right-sizing our operations
following acquisitions. For additional information and disclosure of
restructuring charges refer to Note 9 “Restructuring” to the Consolidated
Financial Statements. Until we achieve consistent and sustainable levels of
profitability, we may incur restructuring charges in the future from additional
cost reduction efforts.
Fiscal 2010 Compared to Fiscal 2009
Restructuring charges
decreased in fiscal 2010 compared to fiscal 2009 primarily due to reduced
severance activities. We responded to the global recession by decreasing
headcount in the second half of fiscal 2009 to realign our cost structure with
market opportunities. Although the recession continued to impact our business in
fiscal 2010, we were better aligned with market opportunities as a result of
these prior year severance actions. This was reflected in $0.6 million in
severance costs in fiscal 2010 compared to $8.0 million in fiscal 2009. In
addition, we negotiated a settlement for contract termination fees that resulted
in a restructuring benefit of $0.6 million for other restructuring activities in
fiscal 2010. Partially offsetting these decreases was an increase in facility
restructuring charges as a result of $4.8 million in facility restructuring
expense for vacating portions of four locations in the U.S. during fiscal 2010
compared to net facility restructuring benefits of $1.2 million in the prior
year from negotiating settlements for amounts lower than the outstanding lease
contracts.
Fiscal 2009 Compared to Fiscal 2008
The decrease in
restructuring charges in fiscal 2009 compared to fiscal 2008 was primarily due
to negotiating settlements for lease liabilities on vacated facilities in Europe
for amounts lower than the outstanding lease contracts in fiscal 2009. In fiscal
2009, we reversed $1.2 million of facility accruals compared to incurring $3.0
million in facility restructuring charges in fiscal 2008. Partially offsetting
this decrease was an increase in severance restructuring charges, primarily
related to restructuring actions in the second half of fiscal 2009 in response
to the global economic downturn to realign our cost structure with market growth
opportunities. The majority of the impacted employees were U.S. sales and
marketing and research and development employees; however, all areas of the
business, including international operations, were impacted by these
restructuring actions.
38
Goodwill Impairment
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| %
of revenue |
%
of revenue |
%
of revenue |
||||||||||||||||||
| Goodwill impairment | $— | —% | $339,000 | 41.9% | $— | —% | ($339,000) | (100.0)% | $339,000 | n/m | ||||||||||
We evaluate goodwill for
impairment annually in the fourth quarter of our fiscal year or more frequently
when indicators of impairment are present. We had no goodwill impairment in
fiscal 2010 or fiscal 2008 compared to a $339.0 million impairment in fiscal
2009. We were not at risk of failing step one of the fiscal 2010 annual goodwill
impairment test. The fiscal 2009 impairment evaluation began in the third
quarter of fiscal 2009 due to the following impairment indicators:
|
•
|
a significant decline in our
stock price, bringing market capitalization below book
value;
|
|
•
|
a significant adverse change
in the business climate;
|
|
•
|
negative current events and
changed long-term economic outlook as a result of the financial market
collapse that started at the end of the second quarter of fiscal 2009;
and
|
|
•
|
our need to test long-lived
assets for recoverability under applicable accounting
rules.
|
As a result of the
presence of these indicators of impairment, during the third quarter of fiscal
2009, we performed an interim test to determine if our goodwill was impaired and
recorded an estimated impairment of $339.0 million. We completed our goodwill
impairment evaluation in the fourth quarter of fiscal 2009 and concluded no
adjustments were needed to the $339.0 million impairment. The goodwill
impairment did not impact our cash or cash equivalents balances, cash flows from
operations, liquidity or compliance with debt covenants. For further
information, see Note 5 “Goodwill and Intangible Assets” to the Consolidated
Financial Statements.
Interest Income and Other,
Net
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| %
of revenue |
%
of revenue |
%
of revenue |
||||||||||||||||||
| Interest income and other, net | $1,255 | 0.2% | $41 | 0.0% | $6,008 | 0.6% | $1,214 | n/m | $(5,967) | (99.3)% | ||||||||||
Interest income and
other, net includes unrealized and realized foreign exchange gains and losses as
well as unrealized gains and losses due to the change in market value of
interest rate collars.
Fiscal 2010 Compared to Fiscal 2009
Interest income and
other, net increased $1.2 million primarily due to a net decrease in foreign
exchange losses due to smaller losses during fiscal 2010 compared to fiscal
2009. The decrease in foreign exchange losses was primarily due to the U.S.
dollar weakening against the British pound and the Australian dollar in fiscal
2010 compared to fiscal 2009. Two other items in interest income and other, net
mostly offset each other. Investment gains increased $1.0 million due to gains
on investments within the deferred compensation plan in fiscal 2010 compared to
losses in fiscal 2009. Interest income decreased $0.9 million due to lower
market interest rates in fiscal 2010 than in fiscal 2009.
39
Fiscal 2009 Compared to Fiscal 2008
The $6.0 million
decrease in interest income and other, net in fiscal 2009 compared to fiscal
2008 was primarily due to the net impact of four items. We had a $3.8 million
net decrease related to foreign exchange gains and losses due to losses during
fiscal 2009 compared to gains in fiscal 2008 as a result of the U.S. dollar
strengthening during fiscal 2009 and weakening during fiscal 2008. Interest
income decreased $3.1 million in fiscal 2009 compared to fiscal 2008 due to
lower average balances of interest-earning assets and lower market interest
rates. An additional $2.1 million of the decrease relates to a realized gain in
the first quarter of fiscal 2008 on the sale of Data Domain shares we sold in
its initial public offering in July 2007. These decreases were partially offset
by a $3.1 million increase in other income resulting from gains in fiscal 2009
on the change in market value of interest rate collars required by the CS credit
agreement compared to losses on these collars in fiscal 2008.
Interest Expense
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| %
of revenue |
%
of revenue |
%
of revenue |
||||||||||||||||||
| Interest expense | $25,515 | 3.7% | $29,261 | 3.6% | $46,025 | 4.7% | $(3,746) | (12.8)% | $(16,764) | (36.4)% | ||||||||||
Fiscal 2010 Compared to Fiscal 2009
Interest expense
decreased in fiscal 2010 compared to fiscal 2009 primarily due to reducing our
outstanding term debt balance under the CS credit agreement by $61.9 million. In
addition we refinanced $137.9 million of our outstanding convertible
subordinated notes with $121.7 million in term loans, reducing our debt
liability an additional $16.2 million in fiscal 2010. Partially offsetting this
decrease was higher interest expense related to this refinancing because the
replacement term debt carries a higher fixed interest rate. As a result, our
weighted average interest rate increased approximately 100 basis points in
fiscal 2010 compared to fiscal 2009.
In addition to the items
noted above, interest expense includes the amortization of debt issuance costs
for debt facilities and also included prepayment fees in fiscal 2009. For
further information, refer to Note 7 “Convertible Subordinated Debt and
Long-Term Debt” and Note 8 “Derivatives” to the Consolidated Financial
Statements.
Fiscal 2009 Compared to Fiscal 2008
Interest expense
decreased in fiscal 2009 compared to fiscal 2008 primarily due to a reduction of
our outstanding term debt balance. Decreased interest rates also contributed to
lower interest expense in fiscal 2009. Interest rate decreases were attributable
to market interest rate decreases on the LIBOR rate along with refinancing our
debt at more favorable terms in July 2007. Our weighted average interest rate
decreased to 5.91% for fiscal 2009, inclusive of our interest rate collars that
fix the interest rate in a specified range for a portion of the term debt. This
compares to a weighted average interest rate of 7.77% for fiscal
2008.
Gain (Loss) on Debt Extinguishment,
Net
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| %
of revenue |
%
of revenue |
%
of revenue |
||||||||||||||||||
| Gain (loss) on debt | ||||||||||||||||||||
| extinguishment, net | $12,859 | 1.9% | $— | —% | $(12,602) | 1.3% | $12,859 | n/m | $12,602 | (100.0)% | ||||||||||
During fiscal 2010, we
refinanced $137.9 million aggregate principal amount of our convertible
subordinated debt, consisting of $87.2 million through a tender offer and $50.7
million in a private transaction. In connection with these transactions, we
recorded a gain on debt extinguishment, net of costs, of $12.9 million comprised
of the gross gain of $15.6 million, reduced by $2.1 million in expenses and $0.6
million of unamortized debt costs related to the refinanced notes.
40
During fiscal 2008, we
recorded a $12.6 million loss due to retiring a prior debt facility. The costs
to retire this prior debt facility included $8.1 million of unamortized debt
costs related to the prior debt facility and $4.5 million in prepayment
fees.
Income Taxes
| For the year ended March 31, | Change | |||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| %
of pre-tax income |
%
of pre-tax loss |
%
of pre-tax loss |
||||||||||||||||||
| Income tax provision (benefit) | $1,274 | 7.1% | $(881) | 0.2% | $(482) | 0.8% | $2,155 | n/m | $(399) | (82.8)% | ||||||||||
We recorded income tax
expense of $1.3 million in fiscal 2010 compared to tax benefits of $0.9 million
in fiscal 2009 and $0.5 million in fiscal 2008. Tax expense in fiscal 2010 was
primarily comprised of foreign income taxes and state taxes. The tax benefit for
fiscal 2009 was from the release of $3.4 million in tax liabilities due to a
favorable settlement and expiration of their respective statutes of limitation
partially offset by foreign income taxes and state taxes of $2.5 million. The
tax benefit for fiscal 2008 was from the release of $2.3 million in tax
liabilities due to a favorable settlement and expiration of their respective
statutes of limitation partially offset by foreign income taxes and state taxes
of $1.8 million.
In connection with the
disposition of our hard-disk drive business, HDD, to Maxtor Corporation
(“Maxtor”), we entered into a Tax Sharing and Indemnity Agreement with Maxtor,
dated as of April 2, 2001 (the “Tax Sharing Agreement”) that, among other
things, defined each company’s responsibility for taxes attributable to periods
prior to April 2, 2001. Pursuant to a settlement agreement entered into between
the companies dated as of December 23, 2004, Maxtor’s remaining tax indemnity
liability under the Tax Sharing Agreement was limited to $8.8 million. As of
March 31, 2010, $6.0 million remains as the indemnity liability. We believe that
this amount is sufficient to cover the remaining potential tax liabilities under
the Tax Sharing Agreement.
Amortization of Intangible
Assets
The following table
details intangible asset amortization expense by classification within our
Consolidated Statements of Operations (in thousands):
| For the year ended March 31, | Change | ||||||||||||||||
| 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||
| Cost of revenue | $ | 22,069 | $ | 24,668 | $ | 30,825 | $ | (2,599 | ) | $ | (6,157 | ) | |||||
| Research and development | 400 | 400 | 1,032 | — | (632 | ) | |||||||||||
| Sales and marketing | 13,575 | 15,035 | 16,754 | (1,460 | ) | (1,719 | ) | ||||||||||
| General and administrative | 100 | 100 | 100 | — | — | ||||||||||||
| $ | 36,144 | $ | 40,203 | $ | 48,711 | $ | (4,059 | ) | $ | (8,508 | ) | ||||||
The decreased
intangible asset amortization in fiscal 2010 compared to fiscal 2009 and in
fiscal 2009 compared to fiscal 2008 was primarily due to purchased technology
intangible assets related to the ADIC acquisition becoming fully amortized
during fiscal 2009 and 2008.
41
Intangible assets are
amortized over their estimated useful lives, which range from one to eight
years. Amortizable intangible and other long-lived assets are reviewed for
impairment whenever events or circumstances indicate impairment might exist.
Projected undiscounted net cash flows expected to be derived from the use of
those assets are compared to the respective net carrying amounts to determine
whether any impairment exists. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets. We had no amortizable
intangible asset or long-lived asset impairments in fiscal 2010, 2009 or 2008.
Refer to Note 5 “Goodwill and Intangible Assets” to the Consolidated Financial
Statements for further information regarding our amortizable intangible
assets.
Share-Based Compensation
The following table
summarizes share-based compensation within our Consolidated Statements of
Operations (in thousands):
| For the year ended March 31, | Change | ||||||||||||||||
| 2010 | 2009 | 2008 | 2010 to 2009 | 2009 to 2008 | |||||||||||||
| Cost of revenue | $ | 1,366 | $ | 1,419 | $ | 1,929 | $ | (53 | ) | $ | (510 | ) | |||||
| Research and development | 2,373 | 2,722 | 3,778 | (349 | ) | (1,056 | ) | ||||||||||
| Sales and marketing | 2,581 | 2,695 | 3,269 | (114 | ) | (574 | ) | ||||||||||
| General and administrative | 3,469 | 3,756 | 5,022 | (287 | ) | (1,266 | ) | ||||||||||
| $ | 9,789 | $ | 10,592 | $ | 13,998 | $ | (803 | ) | $ | (3,406 | ) | ||||||
The decrease in
share-based compensation was due to cancellation of rights to purchase shares
under our employee stock purchase plan (“ESPP”) for three six-month cycles as
well as the type of share-based grants in fiscal 2010 compared to fiscal 2009.
Share-based compensation related to the ESPP was $0.4 million lower in fiscal
2010 than in fiscal 2009 due to the timing of the cancellation and reinstatement
of the ESPP relative to our fiscal year. We granted significantly more options
than restricted stock units in fiscal 2010 compared to more restricted stock
units granted than options in fiscal 2009. In general, a single option had lower
share-based compensation expense than a single restricted stock unit in each of
fiscal 2010, 2009 and 2008. In addition, more restricted stock vested in fiscal
2010, especially grants to our research and development employees, than was
replaced by new restricted stock unit grants. This also contributed to decreased
share-based compensation expense.
The decrease in
share-based compensation in fiscal 2009 compared to fiscal 2008 was primarily
due to a decrease in options granted year over year. In addition, our Board of
Directors cancelled rights to purchase shares under our employee stock purchase
plan in the fourth quarter of fiscal 2009. During fiscal 2008, there were
modifications to the vesting and exercise periods of stock awards held by
certain employees that were not repeated in fiscal 2009, decreasing general and
administrative share-based compensation expense in fiscal 2009.
Recent Accounting
Pronouncements
See Recent Accounting
Pronouncements in Note 2 “Financial Statement Presentation and Summary of
Significant Accounting Policies” to the Consolidated Financial Statements for a
full description of recent accounting pronouncements including the respective
expected dates of adoption and effects on our results of operations and
financial condition.
LIQUIDITY AND CAPITAL
RESOURCES
| As of or for the year ended March 31, | |||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | ||||||||||
| Cash and cash equivalents | $ | 114,947 | $ | 85,532 | $ | 92,150 | |||||||
| Net income (loss) | $ | 16,634 | $ | (358,264 | ) | $ | (60,234 | ) | |||||
| Net cash provided by operating activities | $ | 100,164 | $ | 89,100 | $ | 24,182 | |||||||
| Net cash provided by (used in) investing activities | $ | (8,541 | ) | $ | (4,680 | ) | $ | 21,158 | |||||
| Net cash used in financing activities | $ | (62,398 | ) | $ | (90,041 | ) | $ | (13,531 | ) | ||||
42
Fiscal 2010
The $83.5 million
difference between reported net income and cash provided by operating activities
in fiscal 2010 was primarily due to $71.8 million of non-cash expenses comprised
of $38.5 million in amortization, $12.1 million in depreciation, $11.4 million
in service parts lower of cost or market adjustment and $9.8 million in
share-based compensation. These non-cash expenses were partially offset by a
$15.6 million non-cash gain on debt extinguishment. Cash provided by operating
activities was also due to an $11.5 million increase in accounts payable from
the timing of payments and from increased purchases at the end of the fourth
quarter of fiscal 2010. In addition, we had a $9.5 million increase in deferred
revenue primarily from prepaid license fees under an OEM agreement.
Cash used in investing
activities during fiscal 2010 was primarily due to $8.6 million in purchases of
property and equipment. Equipment purchases were comprised of engineering, IT
and marketing equipment to support product development initiatives. We also
upgraded a data center and invested in leasehold improvements in another
facility in fiscal 2010.
Cash used in financing
activities during fiscal 2010 was primarily due to repaying $61.9 million of the
CS credit agreement term debt. We refinanced a majority of our convertible
subordinated debt during the first half of fiscal 2010, and repayments of these
notes were mostly offset by borrowings of long-term debt, net, under two loan
agreements with EMC International Company. For additional information regarding
this refinancing, see Note 7 “Convertible Subordinated Debt and Long-Term Debt”
to the Consolidated Financial Statements.
Fiscal 2009
The $447.4 million
difference between reported net loss and cash provided by operating activities
in fiscal 2009 was primarily due to $427.7 million of non-cash items including a
$339.0 million goodwill impairment charge, $42.3 million of amortization, $20.7
million of service parts lower of cost or market adjustment, $15.5 million of
depreciation and $10.6 million of share-based compensation. Cash provided by
operations during the fiscal year was primarily due to a decrease in accounts
receivable and an increase in deferred revenue, largely offset by the uses of
cash in operations from decreased accounts payable. The $75.1 million decrease
in accounts receivable was primarily due to lower sales and strong collections
during fiscal 2009. The $11.5 million increase in deferred revenue was related
to increased sales of service contracts. The $52.7 million decrease in accounts
payable was largely due to lower expenditures for inventories and other
operating costs.
Cash used in investing
activities during fiscal 2009 reflects $5.4 million in purchases of property and
equipment, partially offset by a $1.0 million return of principal from our
private technology venture limited partnership investments. Equipment purchases were primarily the result
of maintaining our day to day business operations infrastructure and included
voice communication system upgrades, hardware and software to equip our
consolidated data center and leasehold improvements. We also purchased
development equipment to support disk product releases during the fiscal
year.
Cash used in financing
activities during fiscal 2009 was primarily related to $92.0 million of
principal payments on our term loan under the CS credit agreement.
Fiscal 2008
The difference between
reported net loss and cash provided by operating activities was primarily due to
non-cash items such as amortization, depreciation, service parts lower of cost
or market adjustment, share-based compensation and loss on debt extinguishment.
The cash used to fund operations during the period was primarily due to an
increase in accounts receivable and a decrease in accrued warranty. This was
partially offset by increases in deferred revenue and accounts payable, net of
the sale of a subsidiary. Accounts receivable increased primarily due to slower
collections in fiscal 2008 after particularly strong collections during the
fourth quarter of fiscal 2007. Accrued warranty decreased primarily due to
decreases in our installed base of products under warranty in addition to
improved quality and lower failure rates on certain products. Increases in
deferred revenue are primarily related to increased sales of service contracts.
Accounts payable increased primarily due to the timing of payments to our
vendors.
43
Cash provided by
investing activities during fiscal 2008 reflects proceeds from the sale of
marketable securities and investments of $105.4 million offset in part by $65.0
million in purchases of marketable securities. In addition, we purchased $21.1
million of property and equipment during fiscal 2008 primarily comprised of
hardware and software related to our computer system conversions to bring us
onto a single platform for our enterprise resource planning system and
engineering test equipment for our DXi-Series products. We received $2.2 million
in net proceeds from the sale of a Malaysia subsidiary in the second quarter of
fiscal 2008.
Cash used in financing
activities during fiscal 2008 was primarily related to repayment of our August
2006 credit facility in addition to principal payments on both the August 2006
credit facility and the CS credit agreement. The repayment of the August 2006
credit facility was largely offset by borrowings on the CS credit agreement net
of loan fees. Additionally, we received $18.4 million in net proceeds from the
issuance of common stock related to employee stock incentive and stock purchase
plans.
Capital Resources and Financial Condition
We have made progress in
reducing operating costs, and continue to focus on improving our operating
performance, including increasing revenue in higher margin areas of the business
and continuing to improve margins in an effort to return to consistent
profitability and to generate positive cash flows from operating activities. In
addition, we may explore refinancing opportunities that reduce interest expense
on our debt or provide other favorable terms. We believe that our existing cash
and capital resources will be sufficient to meet all currently planned
expenditures, debt repayments, contractual obligations and sustain operations
for at least the next 12 months. This belief is dependent upon our ability to
maintain revenue and gross margin and to continue to control operating expenses
in order to provide positive cash flow from operating activities. Should any of
the above assumptions prove incorrect, either in combination or individually, it
would likely have a material negative effect on our cash balances and capital
resources.
The following is a
description of our existing capital resources including outstanding balances,
funds available to borrow, and primary repayment terms including interest rates.
For additional information, see Note 7 “Convertible Subordinated Debt and
Long-Term Debt” to the Consolidated Financial Statements.
Under the CS credit
agreement, we have the ability to borrow up to $50.0 million under a senior
secured revolving credit facility which expires July 12, 2012. As of March 31,
2010, we have letters of credit totaling $1.4 million reducing the amounts
available to borrow on this revolver to $48.6 million. Quarterly, we are
required to pay a 0.5% commitment fee on undrawn amounts under the revolving
credit facility.
Our outstanding term
debt under the CS credit agreement was $186.1 million at March 31, 2010. This
loan matures on July 12, 2014 and has a variable interest rate. The interest
rate on the term loan was 3.79% at March 31, 2010. We are required to make
quarterly interest and principal payments on the term loan. In addition, on an
annual basis, we are required to perform a calculation of excess cash flow which
may require an additional payment of the principal amount in certain
circumstances. The annual calculations of excess cash flow have not required
additional payments. There is a blanket lien on all of our assets under the CS
credit agreement in addition to certain financial and reporting covenants. As of
March 31, 2010, we were in compliance with all debt covenants.
We have $121.7 million
in term loans under two credit agreements with EMC International Company (“EMC
credit agreements”), of which $21.7 million matures on December 31, 2011 and
$100.0 million matures on September 30, 2014. These loans have similar terms,
including a 12.0% fixed interest rate. We are required to make quarterly
interest payments on these loans.
We also have $22.1
million aggregate principal amount of convertible subordinated notes that carry
a 4.375% interest rate which is payable semi-annually. The notes mature on
August 1, 2010 and we intend to redeem the notes with cash at
maturity.
44
Generation of positive
cash flow from operating activities has historically been and will continue to
be an important source of our cash to fund operating needs and meet our current
and long-term obligations. In addition, we believe generation of positive cash
flow from operating activities will provide us with improved financing capacity.
We have taken many actions to offset the negative impact of the recent economic
downturn and continued competition within the backup, archive and recovery
market. We cannot provide assurance that the actions we have taken in the past
or any actions we may take in the future will ensure a consistent, sustainable
and sufficient level of net income and positive cash flow from operating
activities to fund, sustain or grow our businesses. Certain events that are
beyond our control, including prevailing economic, competitive and industry
conditions, as well as various legal and other disputes, may prevent us from
achieving these financial objectives. Any inability to achieve consistent and
sustainable net income and cash flow could result in:
| (i) | Restrictions on our ability to manage or fund our existing operations, which could result in a material and adverse effect on our future results of operations and financial condition. | |
| (ii) | Unwillingness on the part of the group lenders that provide our CS credit agreement to do any of the following: | |
|
•
|
Provide a waiver or amendment
for any covenant violations we may experience in future periods, thereby
triggering a default under, or termination of, the revolving credit line
and term loan, or
|
|
•
|
Approve any other amendments
to the CS credit agreement we may seek to obtain in the
future.
|
| Any lack of renewal, waiver, or amendment, if needed, could result in the revolving credit line and CS term loan becoming unavailable to us and any amounts outstanding becoming immediately due and payable. In addition, the EMC credit agreements contain cross-default provisions. In the case of our borrowings at March 31, 2010, this would mean $307.8 million could become immediately payable. | ||
| (iii) | Further impairment of our financial flexibility, which could require us to raise additional funding in the capital markets sooner than we otherwise would, and on terms less favorable to us, if available at all. |
Any of the above
mentioned items, individually or in combination, would have a material and
adverse effect on our results of operations, available cash and cash flows,
financial condition, access to capital and liquidity.
Off Balance Sheet
Arrangements
Lease Commitments
We lease certain
facilities under non-cancelable lease agreements. Some of the leases have
renewal options ranging from one to ten years and others contain escalation
clauses and provisions for maintenance, taxes or insurance. We also have
equipment leases for computers and other office equipment. Future minimum lease
payments under these operating leases are shown below in the “Contractual
Obligations” section.
Commitments for Additional Investments
As of March 31, 2010, we
had commitments to provide an additional $1.1 million in capital funding towards
investments we currently hold in two limited partnership venture capital funds.
If the limited partnership venture capital funds make a capital call, we will
invest funds as required until our remaining commitments are
satisfied.
Commitments to Purchase Inventory
We use contract
manufacturers for certain manufacturing functions. Under these arrangements, the
contract manufacturer procures inventory to manufacture products based upon our
forecast of customer demand. We are responsible for the financial impact on the
contract manufacturer of any reduction or product mix shift in the forecast
relative to materials that the contract manufacturer had already purchased under
a prior forecast. Such a variance in forecasted demand could require a cash
payment for finished goods in excess of current customer demand or for costs of
excess or obsolete inventory. As of March 31, 2010, we had issued non-cancelable
purchase commitments for $40.3 million to purchase finished goods from our
contract manufacturers.
45
Stock Repurchases
As of March 31, 2010,
there was approximately $87.9 million remaining under our authorization to
repurchase Quantum common stock. No stock repurchases were made during the
fiscal years ended March 31, 2010, 2009 and 2008. Our ability to repurchase
common stock is restricted under the terms of our CS credit
agreement.
Contractual Obligations
The table below
summarizes our contractual obligations as of March 31, 2010 (in
thousands):
| Payments Due by Period | |||||||||||||||
| Less than 1 year |
1 – 3 years | 3 – 5 years | More than 5 years |
Total | |||||||||||
| Convertible subordinated debt | $ | 22,422 | $ | — | $ | — | $ | — | $ | 22,422 | |||||
| Long-term debt, including current portion | 23,542 | 65,303 | 307,142 | — | 395,987 | ||||||||||
| Purchase obligations | 40,303 | — | — | — | 40,303 | ||||||||||
| Operating leases | 14,214 | 18,258 | 9,715 | 21,159 | 63,346 | ||||||||||
| Total contractual cash obligations | $ | 100,481 | $ | 83,561 | $ | 316,857 | $ | 21,159 | $ | 522,058 | |||||
The contractual
commitments shown above include $88.5 million in interest payments on our
various debt obligations based on interest rates as of March 31, 2010. Due to
the nature of our agreements, the interest rate can vary over the terms of
certain loans.
As of March 31, 2010, we
had $5.9 million of long-term tax liabilities for uncertain tax positions, for
which we cannot make a reasonably reliable estimate of the amount and period of
payment.
CRITICAL ACCOUNTING ESTIMATES AND
POLICIES
Our discussion and
analysis of the financial condition and results of operations is based on the
accompanying Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these statements requires us to make significant estimates and
judgments about future uncertainties that affect reported assets, liabilities,
revenues and expenses and related disclosures. We base our estimates on
historical experience and on various other assumptions believed to be reasonable
under the circumstances. Our significant accounting policies are presented
within Note 2 to the Consolidated Financial Statements. Our critical accounting
estimates require the most difficult, subjective or complex judgments and are
described below. An accounting estimate is considered critical if it requires
estimates about the effect of matters that are inherently uncertain when the
estimate is made, if different estimates reasonably could have been used or if
changes in the estimate that are reasonably possible could materially impact the
financial statements. We have discussed the development, selection and
disclosure of our critical accounting policies with the Audit Committee of our
Board of Directors. We believe the assumptions and estimates used and the
resulting balances are reasonable; however, actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition
Application of the
various accounting principles related to measurement and recognition of revenue
requires us to make judgments and estimates in the following related areas:
determining fair value in arrangements with multiple deliverables, the amount of
revenue allocated to undelivered elements in software arrangements using
vendor-specific objective evidence (“VSOE”), the interpretation of non-standard
terms and conditions in sales agreements, assessments of future price
adjustments, such as rebates, price protection and future product returns and
estimates for contractual licensee fees.
When we enter into sales
arrangements with customers that contain multiple deliverables such as hardware,
software and services, these arrangements require us to determine fair value of
the undelivered elements. Additionally, we sometimes use judgment in determining
whether any undelivered elements are essential to the functionality of the
delivered elements in order to determine the appropriate timing of revenue
recognition. If fair value does not exist for undelivered elements, then revenue
for the entire arrangement is deferred until all elements have been
delivered.
46
For any undelivered
elements in multiple element software arrangements we determine fair value based
on VSOE, which consists of the prices charged when these services are sold
separately or, for new software products, the price established by management.
If VSOE does not exist for undelivered elements, then revenue for the entire
arrangement is deferred until all elements have been delivered.
While the majority of
our sales arrangements contain standard terms and conditions, we sometimes apply
judgment when interpreting complex arrangements with non-standard terms and
conditions to determine the appropriate accounting. An example of such a
judgment is deferring revenue related to significant post-delivery obligations
and customer acceptance criteria until such obligations are
fulfilled.
We record reductions to
revenue for estimated future price adjustments, such as rebates, price
protection and future product returns. These allowances are based on programs in
existence at the time revenue is recognized, plans regarding future price
adjustments, the customers’ master agreements and historical product return
rates. We have historically been able to reliably estimate the amount of
allowances required and recognize revenue, net of these projected allowances,
upon shipment to our customers. If allowances cannot be reliably estimated in
any specific reporting period, revenue would be deferred until the rights have
lapsed and we are no longer under obligation to reduce the price or accept the
return of the product.
We license certain
software to customers under licensing agreements that allow those customers to
embed the software into specific products they offer. As consideration,
licensees pay us a fee based on the amount of sales of their products that
incorporate our software. On a periodic and timely basis, the licensees provide
us with reports listing their sales to end users for which they owe us license
fees. Similarly, royalty revenue is estimated from licensee reports of units
sold to end users subject to royalties under master contracts. In both cases,
these reports are used to substantiate delivery and we recognize revenue based
on the information in these reports or when amounts can be reasonably
estimated.
Inventory Allowances
Our manufacturing and
service parts inventories are stated at the lower of cost or market, with cost
computed on a first-in, first-out (“FIFO”) basis. Adjustments to reduce the
carrying value of both manufacturing and service parts inventories to their net
realizable value are made for estimated excess, obsolete or impaired balances.
Factors influencing these adjustments include significant estimates and
judgments about the future of product life cycles, product demand, rapid
technological changes, development plans, product pricing, physical
deterioration, quality issues, end of service life plans and volume of enhanced
or extended warranty service contracts.
Impairment of Long-lived Assets and
Goodwill
We apply judgment when
reviewing amortizable intangible and other long-lived assets (“long-lived
assets”) and goodwill for impairment. We apply judgment when evaluating
potential impairment indicators. Indicators we consider include adverse changes
in the business climate that could affect the value of our long-lived assets or
goodwill, changes in our stock price and resulting market capitalization
relative to book value, changed long-term economic outlook including downward
revisions in our revenue projections, negative current events, decreases or
slower than expected growth in sales of products and relative weakness in
customer channels.
When an impairment
indicator exists, we then evaluate long-lived assets or goodwill or both for
impairment as appropriate. Because we operate as a single reporting unit, we
consider the company as a whole when evaluating both our long-lived assets and
goodwill for impairment. If our business operations were to change and revenue
streams related to long-lived assets or to goodwill were to become identifiable
at a lower level, we would apply significant judgment to determine the
appropriate grouping of these assets for impairment testing.
We use an undiscounted
cash flow approach to evaluate our long-lived assets for recoverability when
there are impairment indicators. Estimates of future cash flows require
significant judgments about the future and include company forecasts and our
expectations of future use of our long-lived assets, both of which may be
impacted by market conditions. Other critical estimates include determining the
asset group or groups within our long-lived assets, the primary asset of an
asset group and the primary asset’s useful life.
47
For our annual goodwill
impairment testing, or if a goodwill impairment indicator exists in an interim
period, we compare the fair value of the company to its carrying value. Because
we have significant debt, we may also compare the carrying value to business
enterprise value. Estimates to determine the fair value and the business
enterprise value of the company require significant judgment. If the results
indicate our fair value is less than our carrying value then a second step must
be performed to quantify the amount of goodwill impairment.
If a step two test is
required, a number of assumptions are used, whether an income or other
reasonable approach is applied. Additional estimates and judgments are required
in the step two test to allocate the fair value of the company to all tangible
and intangible assets and liabilities in a hypothetical sale transaction to
determine the implied fair value of our goodwill. Such assumptions require
judgment and variations in any of the assumptions or rates could result in
materially different calculations of impairment amounts, if any.
The following types of
assumptions and estimates may be used by management when the income approach is
used in a goodwill impairment test. We derive discounted cash flows using
estimates and assumptions about the future. Other significant assumptions may
include: expected future revenue growth rates, operating profit margins, working
capital levels, asset lives used to generate future cash flows, a discount rate,
a terminal value multiple, income tax rates and utilization of net operating
loss tax carryforwards. These assumptions are developed using current market
conditions as well as internal projections. The discount rate considers market
conditions and other relevant factors as well as the rate of return an outside
investor would expect to earn. In step two, a hypothetical sale transaction may
be assumed to be taxable or nontaxable based on the current tax situation of the
company and other relevant market conditions. We perform a sensitivity analysis
regarding the reasonableness of the concluded fair value of equity of the
reporting unit by reviewing the concluded per share stock price and implied
control premium.
Inherent in our
development of cash flow projections for the income approach used in an
impairment test are assumptions and estimates derived from a review of our
operating results, approved business plans, expected growth, cost of capital and
income tax rates. We also make certain assumptions about future economic
conditions, applicable interest rates and other market data. Many of the factors
used in assessing fair value are outside of our control. Future period results
could differ from these estimates and assumptions, which could materially affect
the determination of fair value of the company and future amounts of potential
impairment.
Accrued Warranty
We estimate future
product failure rates based upon historical product failure trends as well as
anticipated future failure rates if believed to be significantly different from
historical trends. Similarly, we estimate future costs of repair based upon
historical trends and anticipated future costs if they are expected to
significantly differ, for example due to negotiated agreements with third
parties. We use a consistent model and exercise considerable judgment in
determining the underlying estimates. Our model requires an element of
subjectivity for all of our products. For example, historical return rates are
not completely indicative of future return rates and we must therefore exercise
judgment with respect to future deviations from our historical return rates.
When actual failure rates differ significantly from our estimates, we record the
impact of these unforeseen costs or cost reductions in subsequent periods and
update our assumptions and forecasting models accordingly. As our newer products
mature, we are able to improve our estimates with respect to these
products.
Income Taxes
Deferred tax assets and
liabilities are recognized for the effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. In addition, deferred tax assets are
reduced by a valuation allowance if it is more likely than not that some or all
of the deferred tax asset will not be realized. A number of estimates and
judgments are necessary to determine deferred tax assets, deferred tax
liabilities and valuation allowances.
48
We recognize the benefit
from a tax position only if it is more-likely-than-not that the position would
be sustained upon audit based solely on the technical merits of the tax
position. The calculation of our tax liabilities requires judgment related to
uncertainties in the application of complex tax regulations. We recognize
liabilities for uncertain tax positions based on a two-step process. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we have to determine the probability of various
possible outcomes. We reevaluate these uncertain tax positions on a quarterly
basis. This evaluation is based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, effectively settled
issues under audit and new audit activity.
We have provided a full
valuation allowance against our U.S. net deferred tax assets due to our history
of net losses, difficulty in predicting future results and our conclusion that
we cannot rely on projections of future taxable income to realize the deferred
tax assets. In addition, we have provided a full valuation allowance against
certain of our international net deferred tax assets. Due to reorganizations in
these jurisdictions, it is unclear whether we will be able to realize a benefit
from these deferred tax assets. Also, certain changes in stock ownership could
result in a limitation on the amount of net operating loss and tax credit
carryovers that can be utilized each year. Should we undergo such a change in
stock ownership, it would severely limit the usage of these carryover tax
attributes against future income, resulting in additional tax
charges.
Significant management
judgment is required in determining our deferred tax assets and liabilities and
valuation allowances for purposes of assessing our ability to realize any future
benefit from our net deferred tax assets. We intend to maintain this valuation
allowance until sufficient positive evidence exists to support the reversal of
the valuation allowance. Future income tax expense will be reduced to the extent
that we have sufficient positive evidence to support a reversal or decrease in
this allowance. We also have deferred tax assets and liabilities due to prior
business acquisitions with corresponding valuation allowances after assessing
our ability to realize any future benefit from these acquired net deferred tax
assets.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
We are exposed to a
variety of market risks, including changes in interest rates and foreign
currency fluctuations.
Market Interest Rate Risk
Changes in interest
rates affect interest income earned on our cash equivalents. In addition,
changes in interest rates affect interest expense on our borrowings under the CS
credit agreement and affected interest expense if interest rates were not within
the floor and cap on our interest rate collars. Our outstanding convertible
subordinated notes and our term loans under the EMC credit agreements have fixed
interest rates, thus a hypothetical 100 basis point increase in interest rates
would not impact interest expense on these borrowings.
Our cash equivalents
consisted solely of money market funds at March 31, 2010 and 2009. During fiscal
2010, interest rates on these funds were under 1.0% and we earned approximately
$0.2 million in interest income. A hypothetical decrease in interest rates would
cause an immaterial decrease in interest income for fiscal 2010. A hypothetical
100 basis point decrease in interest rates would have resulted in an
approximately $0.4 million decrease in interest income in fiscal
2009.
Interest accrues on our
CS credit agreement term loan at our option, based on either a prime rate plus a
margin of 2.5% or a three month LIBOR rate plus a margin of 3.5%. Under the
terms of our CS credit agreement, we were required to hedge floating interest
rate exposure on 50% of our funded debt balance through December 31, 2009. We
had two interest rate collars during fiscal 2009 and one during fiscal 2010 to
meet this requirement. We had an interest rate collar that fixed the interest
rate on $87.5 million of our variable rate term loan between a three month LIBOR
rate floor of 4.64% and a cap of 5.49% through December 31, 2008. We had another
interest rate collar that fixed the interest rate on $12.5 million of our
variable rate term loan between a three month LIBOR rate floor of 2.68% and a
cap of 5.25% through December 31, 2008 and fixed the interest rate on $100.0
million of our variable rate term loan between the same floor and cap from
December 31, 2008 through December 31, 2009.
49
During fiscal 2010, we
did not draw from our revolving line of credit under the CS credit agreement. We
drew and repaid $31.0 million from our revolving credit facility during fiscal
2009. The following table shows the total impact to interest expense from a
hypothetical 100 basis point increase and decrease in interest rates (in
thousands):
| Hypothetical 100 basis point increase in interest rates |
Hypothetical 100 basis point decrease in interest rates |
||||||||||||||
| 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Interest expense increase (decrease) on CS term debt | $ | 1,948 | $ | 2,196 | $ | (1,948 | ) | $ | (2,196 | ) | |||||
| Interest expense increase (decrease) from collars | (774 | ) | (893 | ) | 450 | 950 | |||||||||
| Interest expense increase (decrease) on line of credit | — | 44 | — | (44 | ) | ||||||||||
| Net interest expense increase (decrease) | $ | 1,174 | $ | 1,347 | $ | (1,498 | ) | $ | (1,290 | ) | |||||
Foreign Currency Exchange Rate
Risk
As a multinational
corporation, we are exposed to changes in foreign exchange rates. The assets and
liabilities of many of our non-U.S. subsidiaries have functional currencies
other than the U.S. dollar and are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income and expense items are
translated at the average exchange rates prevailing during the period. A 10%
appreciation of the U.S. dollar would have resulted in a $2.3 million decrease
in income before income taxes in fiscal 2010 and $1.2 million increase in loss
before income taxes in fiscal 2009. Conversely, a 10% depreciation of the U.S. dollar would have resulted in
an approximately $2.3 million increase in income before income taxes in fiscal
2010 and an approximately $1.2 million decrease in loss before income taxes in
fiscal 2009. Such a change would have resulted from applying a different
exchange rate to translate and revalue the financial statements of our
subsidiaries with a functional currency other than the U.S. dollar.
50
ITEM 8. Financial Statements and Supplementary
Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
| Quantum Corporation – Financial Statements | |
| Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | 52 |
| Report of Ernst & Young LLP, Independent Registered Public Accounting Firm | 53 |
| Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008 | 54 |
| Consolidated Balance Sheets as of March 31, 2010 and 2009 | 55 |
| Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008 | 56 |
| Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended March 31, 2010, 2009 and 2008 | 57 |
| Notes to Consolidated Financial Statements | 58 |
| Schedule II – Consolidated Valuation and Qualifying Accounts | 90 |
51
Report of Independent Registered Public Accounting
Firm
To the Board of
Directors and
Stockholders of Quantum
Corporation:
In our opinion, the
accompanying consolidated balance sheets and the related consolidated statement
of operations, stockholders' deficit, and cash flows present fairly, in all
material respects, the financial position of Quantum Corporation and its
subsidiaries at March 31, 2010 and March 31 2009, and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 2010 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule for the years ended March 31, 2010 and March 31, 2009 listed
in the index appearing under item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2010, based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal
Control over Financial Reporting appearing under Item 9A. Our responsibility is
to express opinions on these financial statements, on the financial statement
schedule, and on the Company's internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Seattle, Washington
June 11, 2010
52
Report of Independent Registered Public
Accounting Firm
To the Board of
Directors and Stockholders of Quantum Corporation
We have audited the
accompanying consolidated statement of operations, stockholders’ equity and cash
flows of Quantum Corporation for the year ended March 31, 2008. Our audit also
included the financial statement schedule listed in the index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit
in accordance with the standards of the Public Company Accounting Oversight
Board (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 audit provides a reasonable basis
for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the consolidated results of operations and cash flows of Quantum Corporation for
the year ended March 31, 2008, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG
LLP
Palo Alto, California
June 11, 2008
53
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Product revenue | $ | 456,101 | $ | 556,484 | $ | 714,837 | |||||
| Service revenue | 156,477 | 164,664 | 160,920 | ||||||||
| Royalty revenue | 68,849 | 87,824 | 99,945 | ||||||||
| Total revenue | 681,427 | 808,972 | 975,702 | ||||||||
| Product cost of revenue | 300,568 | 379,595 | 531,937 | ||||||||
| Service cost of revenue | 100,822 | 125,063 | 124,424 | ||||||||
| Restructuring charges related to cost of revenue | — | — | 237 | ||||||||
| Total cost of revenue | 401,390 | 504,658 | 656,598 | ||||||||
| Gross margin | 280,037 | 304,314 | 319,104 | ||||||||
| Operating expenses: | |||||||||||
| Research and development | 69,949 | 70,537 | 89,563 | ||||||||
| Sales and marketing | 114,612 | 141,250 | 149,367 | ||||||||
| General and administrative | 61,372 | 76,645 | 78,789 | ||||||||
| Restructuring charges | 4,795 | 6,807 | 9,482 | ||||||||
| Goodwill impairment | — | 339,000 | — | ||||||||
| 250,728 | 634,239 | 327,201 | |||||||||
| Income (loss) from operations | 29,309 | (329,925 | ) | (8,097 | ) | ||||||
| Interest income and other, net | 1,255 | 41 | 6,008 | ||||||||
| Interest expense | (25,515 | ) | (29,261 | ) | (46,025 | ) | |||||
| Gain (loss) on debt extinguishment, net of costs | 12,859 | — | (12,602 | ) | |||||||
| Income (loss) before income taxes | 17,908 | (359,145 | ) | (60,716 | ) | ||||||
| Income tax provision (benefit) | 1,274 | (881 | ) | (482 | ) | ||||||
| Net income (loss) | $ | 16,634 | $ | (358,264 | ) | $ | (60,234 | ) | |||
| Net income (loss) per share: | |||||||||||
| Basic | $ | 0.08 | $ | (1.71 | ) | $ | (0.30 | ) | |||
| Diluted | 0.02 | (1.71 | ) | (0.30 | ) | ||||||
| Income (loss) for purposes of computing net income (loss) per share: | |||||||||||
| Basic | $ | 16,634 | $ | (358,264 | ) | $ | (60,234 | ) | |||
| Diluted | 5,024 | (358,264 | ) | (60,234 | ) | ||||||
| Weighted average common and common equivalent shares: | |||||||||||
| Basic | 212,672 | 209,041 | 202,432 | ||||||||
| Diluted | 223,761 | 209,041 | 202,432 | ||||||||
The accompanying notes
are an integral part of these Consolidated Financial Statements.
54
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| March 31, 2010 |
March 31, 2009 |
||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 114,947 | $ | 85,532 | |||
| Restricted cash | 1,896 | 1,773 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $798 and $1,999, respectively | 103,397 | 107,851 | |||||
| Manufacturing inventories, net | 54,080 | 61,237 | |||||
| Service parts inventories, net | 53,217 | 63,029 | |||||
| Deferred income taxes | 7,907 | 9,935 | |||||
| Other current assets | 14,500 | 24,745 | |||||
| Total current assets | 349,944 | 354,102 | |||||
| Long-term assets: | |||||||
| Property and equipment, less accumulated depreciation | 24,528 | 28,553 | |||||
| Intangible assets, less accumulated amortization | 73,092 | 109,236 | |||||
| Goodwill | 46,770 | 46,770 | |||||
| Other long-term assets | 9,809 | 10,708 | |||||
| Total long-term assets | 154,199 | 195,267 | |||||
| $ | 504,143 | $ | 549,369 | ||||
| Liabilities and Stockholders’ Deficit | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 56,688 | $ | 45,182 | |||
| Accrued warranty | 5,884 | 11,152 | |||||
| Deferred revenue, current | 94,921 | 84,079 | |||||
| Current portion of long-term debt | 1,884 | 4,000 | |||||
| Current portion of convertible subordinated debt | 22,099 | — | |||||
| Accrued restructuring charges | 3,795 | 4,681 | |||||
| Accrued compensation | 31,237 | 27,334 | |||||
| Income taxes payable | 2,594 | 4,752 | |||||
| Other accrued liabilities | 23,555 | 34,550 | |||||
| Total current liabilities | 242,657 | 215,730 | |||||
| Long-term liabilities: | |||||||
| Deferred revenue, long-term | 30,724 | 32,082 | |||||
| Deferred income taxes | 8,676 | 11,190 | |||||
| Long-term debt | 305,899 | 244,000 | |||||
| Convertible subordinated debt | — | 160,000 | |||||
| Other long-term liabilities | 7,444 | 6,326 | |||||
| Total long-term liabilities | 352,743 | 453,598 | |||||
| Commitments and contingencies | |||||||
| Stockholders’ deficit: | |||||||
| Preferred stock: | |||||||
| Preferred stock, 20,000 shares authorized; no shares issued as of March 31, 2010 and | |||||||
| March 31, 2009 | — | — | |||||
| Common stock: | |||||||
| Common stock, $0.01 par value; 1,000,000 shares authorized; 214,946 and 210,231 | |||||||
| shares issued and outstanding as of March 31, 2010 and 2009, respectively | 2,149 | 2,102 | |||||
| Capital in excess of par value | 361,374 | 349,850 | |||||
| Accumulated deficit | (461,129 | ) | (477,763 | ) | |||
| Accumulated other comprehensive income | 6,349 | 5,852 | |||||
| Stockholders’ deficit | (91,257 | ) | (119,959 | ) | |||
| $ | 504,143 | $ | 549,369 | ||||
The accompanying notes
are an integral part of these Consolidated Financial Statements.
55
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 16,634 | $ | (358,264 | ) | $ | (60,234 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating | |||||||||||
| activities: | |||||||||||
| Depreciation | 12,098 | 15,452 | 25,184 | ||||||||
| Amortization | 38,461 | 42,291 | 50,516 | ||||||||
| Service parts lower of cost or market adjustment | 11,424 | 20,691 | 16,106 | ||||||||
| (Gain) loss on debt extinguishment | (15,613 | ) | — | 8,091 | |||||||
| Goodwill impairment | — | 339,000 | — | ||||||||
| Deferred income taxes | (466 | ) | (352 | ) | (181 | ) | |||||
| Share-based compensation | 9,789 | 10,592 | 13,998 | ||||||||
| Realized gain on sale of investment | — | — | (2,122 | ) | |||||||
| Fixed assets written off in restructuring | — | — | 568 | ||||||||
| Changes in assets and liabilities, net of effects of acquisition and sale of | |||||||||||
| subsidiary: | |||||||||||
| Accounts receivable, net | 4,454 | 75,132 | (31,655 | ) | |||||||
| Manufacturing inventories, net | 2,328 | 6,591 | (4,169 | ) | |||||||
| Service parts inventories, net | 3,217 | 1,658 | 1,238 | ||||||||
| Accounts payable | 11,495 | (52,692 | ) | 13,661 | |||||||
| Accrued warranty | (5,268 | ) | (8,710 | ) | (10,823 | ) | |||||
| Deferred revenue | 9,484 | 11,515 | 18,571 | ||||||||
| Accrued restructuring charges | (917 | ) | 968 | (9,114 | ) | ||||||
| Accrued compensation | 3,824 | (4,335 | ) | (82 | ) | ||||||
| Income taxes payable | (2,239 | ) | 1,794 | (439 | ) | ||||||
| Other assets and liabilities | 1,459 | (12,231 | ) | (4,932 | ) | ||||||
| Net cash provided by operating activities | 100,164 | 89,100 | 24,182 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of marketable securities | — | — | (65,000 | ) | |||||||
| Proceeds from sale of marketable securities | — | — | 100,000 | ||||||||
| Purchases of property and equipment | (8,595 | ) | (5,423 | ) | (21,110 | ) | |||||
| Increase in restricted cash | (112 | ) | (295 | ) | (349 | ) | |||||
| Return of principal from other investments | 166 | 1,038 | — | ||||||||
| Proceeds from sale of investment | — | — | 5,441 | ||||||||
| Net proceeds from sale of subsidiary, net of cash sold | — | — | 2,176 | ||||||||
| Net cash provided by (used in) investing activities | (8,541 | ) | (4,680 | ) | 21,158 | ||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings of long-term debt, net | 120,042 | — | 441,953 | ||||||||
| Repayments of long-term debt | (61,934 | ) | (92,000 | ) | (472,500 | ) | |||||
| Repayments of convertible subordinated debt | (122,288 | ) | — | — | |||||||
| Payment of taxes due upon vesting of restricted stock | (1,069 | ) | (779 | ) | (1,343 | ) | |||||
| Proceeds from issuance of common stock | 2,851 | 2,738 | 18,359 | ||||||||
| Net cash used in financing activities | (62,398 | ) | (90,041 | ) | (13,531 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 190 | (997 | ) | 1,497 | |||||||
| Net increase (decrease) in cash and cash equivalents | 29,415 | (6,618 | ) | 33,306 | |||||||
| Cash and cash equivalents at beginning of period | 85,532 | 92,150 | 58,844 | ||||||||
| Cash and cash equivalents at end of period | $ | 114,947 | $ | 85,532 | $ | 92,150 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid (received) during the year for: | |||||||||||
| Interest | $ | 24,781 | $ | 26,606 | $ | 46,323 | |||||
| Income taxes, net of refunds | $ | 1,856 | $ | (926 | ) | $ | (4,273 | ) | |||
The accompanying notes
are an integral part of these Consolidated Financial Statements.
56
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
|
Common Stock |
Capital in Excess of Par Value |
Retained Deficit |
Accumulated
Other Comprehensive Income |
Total | ||||||||||||||||
| Shares | Amount | |||||||||||||||||||
| Balances as of March 31, 2007 | 197,817 | $ | 1,978 | $ | 306,409 | $ | (60,472 | ) | $ | 6,526 | $ | 254,441 | ||||||||
| Comprehensive loss: | ||||||||||||||||||||
| Net loss | — | — | — | (60,234 | ) | — | (60,234 | ) | ||||||||||||
| Other comprehensive income: | ||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 1,576 | 1,576 | ||||||||||||||
| Comprehensive loss | (58,658 | ) | ||||||||||||||||||
| Impact of adoption of tax contingency | ||||||||||||||||||||
| accounting standard | — | — | — | 1,207 | — | 1,207 | ||||||||||||||
| Shares issued under employee stock purchase | ||||||||||||||||||||
| plan | 2,615 | 26 | 5,409 | — | — | 5,435 | ||||||||||||||
| Shares issued under employee stock incentive | ||||||||||||||||||||
| plans, net | 6,495 | 65 | 11,516 | — | — | 11,581 | ||||||||||||||
| Share-based compensation expense | — | — | 13,998 | — | — | 13,998 | ||||||||||||||
| Balances as of March 31, 2008 | 206,927 | 2,069 | 337,332 | (119,499 | ) | 8,102 | 228,004 | |||||||||||||
| Comprehensive loss: | ||||||||||||||||||||
| Net loss | — | — | — | (358,264 | ) | — | (358,264 | ) | ||||||||||||
| Other comprehensive loss: | ||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (2,850 | ) | (2,850 | ) | ||||||||||||
| Net unrealized gain on revaluation of long-term | ||||||||||||||||||||
| intercompany balance, net of tax of $160 | — | — | — | — | 600 | 600 | ||||||||||||||
| Comprehensive loss | (360,514 | ) | ||||||||||||||||||
| Shares issued under employee stock purchase | ||||||||||||||||||||
| plan | 1,938 | 19 | 2,633 | — | — | 2,652 | ||||||||||||||
| Shares issued under employee stock incentive | ||||||||||||||||||||
| plans, net | 1,366 | 14 | (707 | ) | — | — | (693 | ) | ||||||||||||
| Share-based compensation expense | — | — | 10,592 | — | — | 10,592 | ||||||||||||||
| Balances as of March 31, 2009 | 210,231 | 2,102 | 349,850 | (477,763 | ) | 5,852 | (119,959 | ) | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||
| Net income | — | — | — | 16,634 | — | 16,634 | ||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 459 | 459 | ||||||||||||||
| Net unrealized gain on revaluation of long-term | ||||||||||||||||||||
| intercompany balance, net of tax of $10 | — | — | — | — | 38 | 38 | ||||||||||||||
| Comprehensive income | 17,131 | |||||||||||||||||||
| Shares issued under employee stock incentive | ||||||||||||||||||||
| plans, net | 4,715 | 47 | 1,735 | — | — | 1,782 | ||||||||||||||
| Share-based compensation expense | — | — | 9,789 | — | — | 9,789 | ||||||||||||||
| Balances as of March 31, 2010 | 214,946 | $ | 2,149 | $ | 361,374 | $ | (461,129 | ) | $ | 6,349 | $ | (91,257 | ) | |||||||
The accompanying notes
are an integral part of these Consolidated Financial Statements.
57
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Description of
Business
Quantum Corporation
(“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a leading global
storage company specializing in backup, recovery and archive solutions.
Combining focused expertise, customer-driven innovation, and platform
independence, we provide a comprehensive, integrated range of disk, tape and
software solutions supported by our sales and service organization. We work
closely with a broad network of distributors, value-added resellers (“VARs”),
original equipment manufacturers (“OEMs”) and other suppliers to meet customers’
evolving data protection needs. Our stock is traded on the New York Stock
Exchange.
Note 2: Financial Statement Presentation and Summary
of Significant Accounting Policies
Financial Statement
Presentation
The accompanying
Consolidated Financial Statements include the accounts of Quantum and our
wholly-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated. Loss on debt extinguishment has been separated from
interest expense in prior year periods to conform to current period presentation
in the Consolidated Statements of Operations. Restricted cash has been separated
from cash and cash equivalents in the prior periods to conform to current period
presentation in the Consolidated Balance Sheets. Prior period impacts of foreign
exchange rate changes on cash and cash equivalents and changes in restricted
cash have been reclassified to conform to current period presentation in the
Consolidated Statements of Cash Flows. These reclassifications had no impact on
income (loss) from operations, net income (loss) or total assets. The impact to
cash provided by operating activities was not significant.
Use of Estimates
The preparation of our
Consolidated Financial Statements in conformity with generally accepted
accounting principles (“GAAP”) in the U.S. 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. We base estimates on historical experience and on
various assumptions about the future that are believed to be reasonable based on
available information. Our reported financial position or results of operations
may be materially different under different conditions or when using different
estimates and assumptions, particularly with respect to significant accounting
policies, which are discussed below. In the event that estimates or assumptions
prove to differ from actual results, adjustments are made in subsequent periods
to reflect more current information.
Revenue Recognition
Revenue consists of
sales of hardware, software and services, as well as royalties we earn for the
license of certain intellectual property. Revenue is recognized from the sale of
products and services when it is realized or realizable and earned. Revenue is
considered realized and earned 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 when collectibility is reasonably assured.
Royalty revenue is recognized when earned or amounts can be reasonably
estimated.
Product Revenue — Hardware
Revenue for hardware
products sold to distributors, VARs, OEMs and end users is generally recognized
upon shipment. When significant post-delivery obligations exist, the related
revenue is deferred until such obligations are fulfilled. If there are customer
acceptance criteria in the contract, we recognize revenue upon end user
acceptance, which typically occurs after delivery and installation are
completed.
58
In the period revenue is
recognized, allowances are provided for estimated future price adjustments, such
as rebates, price protection and future product returns. These allowances are
based on programs in existence at the time revenue is recognized, plans
regarding future price adjustments, the customers’ master agreements and
historical product return rates. Since we have historically been able to
reliably estimate the amount of allowances required, we recognize revenue, net
of projected allowances, upon shipment to our customers. If we were unable to
reliably estimate the amount of revenue adjustments in any specific reporting
period, then we would be required to defer recognition of the revenue until the
rights had lapsed and we were no longer under any obligation to reduce the price
or accept the return of the product.
Product Revenue — Software
Software revenue is
generally recognized upon shipment or electronic delivery and when
vendor-specific objective evidence (“VSOE”) of fair value for the undelivered
elements exists. For arrangements with multiple elements, the residual method is
used to determine the amount of product revenue to be recognized. Under the
residual method, the VSOE of fair value for the undelivered elements is deferred
and the remaining portion of the arrangement is recognized as product revenue,
assuming all other revenue recognition criteria of appropriate revenue guidance
have been met. Revenue from post-contract customer support agreements, which
entitle customers to both telephone support and any unspecified upgrades and
enhancements during the term of the agreement, is recognized ratably over the
term of the support agreement.
We license certain
software to customers under licensing agreements that allow those customers to
embed this software into specific products they offer. As consideration,
licensees pay us a fee based on the amount of sales of their products that
incorporate our software. On a periodic and timely basis, the licensees provide
us with reports listing their sales to end users for which they owe us license
fees. As the reports substantiate delivery has occurred, we recognize revenue
based on the information in these reports or when amounts can be reasonably
estimated.
Service Revenue
Revenue for service is
generally recognized upon services being rendered. Service revenue consists of
customer field support agreements for our hardware products, installation and
professional services and out-of-warranty repairs. For customer field support
agreements, revenue equal to the separately stated price of these service
contracts for our hardware products is initially deferred and recognized as
revenue ratably over the contract period. Installation and professional services
are not considered essential to the functionality of our products as these
services do not alter the product capabilities and do not require specialized
skills and may be performed by our customers or other vendors. Installation and
professional services are recognized upon completion. Out-of-warranty repair
revenue is recognized upon completion of the repair.
Royalty Revenue
We license certain
intellectual property to third party manufacturers under arrangements that are
represented by master contracts. The master contracts give the third party
manufacturers rights to the intellectual property which include allowing them to
either manufacture or include the intellectual property in products for resale.
As consideration, the licensees pay us a per-unit royalty for sales of their
products that incorporate our intellectual property. On a periodic and timely
basis, the licensees provide us with reports listing units sold to end users
subject to the royalties. As the reports substantiate delivery has occurred, we
recognize revenue based on the information in these reports or when amounts can
be reasonably estimated.
Multiple Element Arrangements
When elements such as
hardware, software and services are contained in a single arrangement, or in
related arrangements with the same customer, we allocate revenue to the separate
elements based on relative fair value, provided we have fair value for all
elements of the arrangement. If in an arrangement we have fair value for the
undelivered elements but not the delivered element, we defer the fair value of
the undelivered elements and the residual revenue is allocated to the delivered
elements. If fair value does not exist for undelivered elements, then revenue
for the entire arrangement is deferred until all elements have been
delivered.
59
Service Cost of Revenue
We classify expenses as
service cost of revenue by estimating the portion of our total cost of revenue
that relates to providing field support to our customers under contract,
installation, integration and repair services. These estimates are based upon a
variety of factors, including the nature of the support activity and the level
of infrastructure required to support the activities from which we earn service
revenue. In the event our service business changes, our estimates of cost of
service revenue may be impacted. Service cost of revenue excludes costs
associated with basic warranty support on new products.
Shipping and Handling Fees
Shipping and handling
fees are included in cost of revenue and were $26.1 million, $36.3 million and
$42.6 million in fiscal 2010, 2009 and 2008, respectively.
Research and Development
Costs
Expenditures relating to
the development of new products and processes are expensed as incurred. These
costs include expenditures for employee compensation, materials used in the
development effort, other internal costs, as well as expenditures for third
party professional services. We have determined that technological feasibility
for our software products is reached shortly before the products are released to
manufacturing. Costs incurred after technological feasibility is established
have not been material. We have expensed all software-related research and
development costs when incurred.
Advertising Expense
We expense advertising
costs as incurred. Advertising expense for the years ended March 31, 2010, 2009
and 2008 was $3.9 million, $3.2 million and $4.1 million,
respectively.
Restructuring Charges
In recent periods and
over the past several years, we have recorded significant restructuring charges
related to the realignment and restructuring of our business operations. These
charges represent expenses incurred in connection with certain cost reduction
programs and acquisition integrations that we have implemented and consist of
the cost of involuntary termination benefits, facilities charges, asset
write-offs and other costs of exiting activities or geographies.
The charges for
involuntary termination costs and associated expenses often require the use of
estimates, primarily related to the number of employees to be paid severance and
the amounts to be paid, largely based on years of service and statutory
requirements. Assumptions to estimate facility exit costs include the ability to
secure sublease income largely based on market conditions, the likelihood and
amounts of a negotiated settlement for contractual lease obligations and other
exit costs. Other estimates for restructuring charges consist of the realizable
value of fixed assets including associated disposal costs and termination fees
with third parties for other contractual commitments.
Share-Based Compensation
We account for
share-based compensation using the Black-Scholes option pricing model to
estimate the fair value of share-based awards at the date of grant. The
Black-Scholes model requires the use of highly subjective assumptions, including
expected life, expected volatility and expected risk-free rate of return. Other
reasonable assumptions could provide differing results. We calculate a
forfeiture rate to estimate the share-based awards that will ultimately vest
based on types of awards and historical experience. Additionally, for awards
which are performance based, we make estimates as to the probability of the
underlying performance being achieved.
60
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 our 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 within stockholders’
equity (deficit). Assets and liabilities denominated in other than the
functional currency are remeasured each month with the remeasurement gain or
loss recorded in interest income and other, net in the Consolidated Statements
of Operations. Foreign exchange gains and losses from changes in the exchange
rates underlying intercompany balances that are of a long-term investment nature
are reported in accumulated other comprehensive income in our Consolidated
Balance Sheets. Foreign currency gains and losses recorded in interest income
and other, net were a $0.6 million loss in fiscal 2010, a $2.1 million loss in
fiscal 2009 and a $1.8 million gain in fiscal 2008.
Income Taxes
We recognize deferred
tax assets and liabilities due to the effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. We also reduce deferred tax assets
by a valuation allowance if it is more likely than not that some or all of the
deferred tax asset will not be realized.
We recognize the benefit
from a tax position only if it is more-likely-than-not that the position would
be sustained upon audit based solely on the technical merits of the tax
position. The calculation of our tax liabilities requires judgment related to
uncertainties in the application of complex tax regulations. We recognize
liabilities for uncertain tax positions based on a two-step process. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we have to determine the probability of various
possible outcomes. We reevaluate these uncertain tax positions on a quarterly
basis. This evaluation is based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, effectively settled
issues under audit and new audit activity. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional
tax charge to the provision.
We recognize interest
and penalties related to uncertain tax positions in income tax provision
(benefit) in the Consolidated Statements of Operations. To the extent accrued
interest and penalties do not become payable, amounts accrued will be reduced
and reflected as a reduction of the overall income tax provision in the period
that such determination is made.
Cash Equivalents, Restricted Cash and Other
Investments
We consider 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 their cost.
Restricted cash is
comprised of bank guarantees and similar required minimum balances that serve as
cash collateral in connection with various items including insurance
requirements, value added taxes and leases in certain countries.
We also hold investments
in private technology venture limited partnerships. These investments
individually represent voting ownership interests of less than 20%. Ownership
interests in these limited partnerships are accounted for under the equity
method unless our interest is so minor (typically less than 5%) that we have
virtually no influence over the partnership operating and financial policies, in
which case the cost method is used. Currently, our investments in these limited
partnerships are accounted for using the equity method.
Investments in other
privately held companies are accounted for under the cost method unless we hold
a significant stake. We review non-marketable equity investments on a regular
basis to determine if there has been any impairment of value which is other than
temporary by reviewing their financial information, gaining knowledge of any new
financing or other business agreements and assessing their operating viability.
61
Allowance for Doubtful
Accounts
We perform ongoing
credit evaluations of our customers’ financial condition and generally require
no collateral from our customers. These evaluations require significant judgment
and are based on multiple sources of information and analyze such factors as our
historical bad debt experience, industry and geographic concentrations of credit
risk, current economic trends and changes in customer payment terms. We maintain
an allowance for doubtful accounts based on historical experience and expected
collectibility of outstanding accounts receivable. We record bad debt expense in
general and administrative expenses.
Manufacturing Inventories
Our manufacturing
inventory is stated at the lower of cost or market, with cost computed on a
first-in, first-out (“FIFO”) basis. Adjustments to reduce the cost of
manufacturing inventory to its net realizable value, if required, are made for
estimated excess, obsolete or impaired balances. Factors influencing these
adjustments include declines in demand, rapid technological changes, product
life cycle and development plans, component cost trends, product pricing,
physical deterioration and quality issues. Revisions to these adjustments would
be required if these factors differ from our estimates.
Service Parts Inventories
Our service parts
inventories are stated at the lower of cost or market. We carry service parts
because we generally provide product warranty for 12 to 36 months and earn
revenue by providing enhanced and extended warranty and repair service during
and beyond this warranty period. Service parts inventories consist of both
component parts, which are primarily used to repair defective units, and
finished units, which are provided for customer use permanently or on a
temporary basis while the defective unit is being repaired. Defective parts
returned from customers that can be repaired are repaired and put back into
service parts inventories at their fair value. We record adjustments to reduce
the carrying value of service parts inventory to its net realizable value, and
we dispose of parts with a net realizable value of zero. Factors influencing
these adjustments include product life cycles, end of service life plans and
volume of enhanced or extended warranty service contracts. Estimates of net
realizable value involve significant estimates and judgments about the future,
and revisions would be required if these factors differ from our estimates.
Property and Equipment
Property and equipment
are carried at cost, less accumulated depreciation and amortization, computed on
a straight-line basis over the estimated useful lives of the assets as follows:
| Machinery and equipment | 3 to 5 years |
| Computer equipment | 3 to 5 years |
| ERP software | 10 years |
| Other software | 3 years |
| Furniture and fixtures | 5 years |
| Other office equipment | 5 years |
| Leasehold improvements | Life of lease |
Amortizable Intangible and Other Long-lived
Assets
We review amortizable
intangible and other long-lived assets (“long-lived assets”) for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. Indicators we consider include adverse changes in
the business climate that could affect the value of our long-lived assets,
changes in our stock price and resulting market capitalization relative to book
value, downward revisions in our revenue outlook, decreases or slower than
expected growth in sales of products and relative weakness in customer
channels.
A long-lived asset or
asset group that is held for use is required to be grouped with other assets and
liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. When an asset or
asset group does not have identifiable cash flows that are largely independent
of the cash flows of other assets and liabilities, the asset group for that
long-lived asset includes all assets and liabilities of the entity.
62
We evaluate the company
as a single reporting unit for business and operating purposes. We have
attempted to identify cash flows at levels lower than the consolidated company;
however, this is not possible because many of our revenue streams are generated
by technology related to more than a single long-lived asset, and individual
long-lived assets support more than one of our three reported revenue
categories. In addition, the majority of our costs are, by their nature, shared
costs that are not specifically identifiable with a particular long-lived asset
or product line but relate to multiple products. As a result, there is a high
degree of interdependency among our cash flows for levels below the consolidated
company, and we do not have identifiable cash flows for an asset group separate
from the consolidated company. Therefore, we consider the consolidated company
as a single asset group for purposes of impairment testing.
We evaluate the
recoverability of the asset group using an undiscounted cash flow approach.
Estimates of future cash flows incorporate company forecasts and our
expectations of future use of our long-lived assets, and these factors are
impacted by market conditions. We determine the remaining useful life of an
asset group based on the remaining useful life of the primary asset of the
group, where the primary asset is defined as the asset with the greatest cash
flow generating ability. Our primary long-lived asset is an intangible
technology asset supporting disk products and software license revenue. If the
primary asset of the asset group does not have the longest remaining life in the
group, then a sale of the asset group is assumed at the end of life of the
primary asset. Our primary long-lived asset does not have the longest remaining
life of long-lived assets in our asset group; therefore, for purposes of
impairment testing, we assume the asset group is sold after the end of the
primary asset’s useful life, or our first quarter of fiscal 2015.
If the undiscounted cash
flows, including residual value, exceed the carrying value of the consolidated
company asset group we conclude no impairment of our long-lived assets exists.
If the carrying value of the consolidated company asset group exceeds the
undiscounted cash flows, including residual value, then we measure the
impairment charge for the excess of the carrying value over the fair value of
the asset group. We monitor relevant market and economic conditions on a
quarterly basis, and perform impairment reviews when there are indicators of
impairment.
Goodwill
We evaluate goodwill for
impairment annually during the fourth quarter of our fiscal year, or more
frequently when indicators of impairment are present. Some of the impairment
indicators we consider include changes in our stock price and resulting market
capitalization relative to book value, changes in the business climate, negative
current events, changed long-term economic outlook and testing long-lived assets
for recoverability. Because we operate as a single reporting unit, we consider
the company as a whole when reviewing these factors.
We use a two-step method
for determining goodwill impairment. In step one, the fair value of the company
is compared to its carrying value. Because we have significant debt, we may also
compare the carrying value to business enterprise value. If the results indicate
the fair value of the company is equal to or greater than its carrying value no
further steps are performed. If the results indicate our fair value is less than
our carrying value then a second step is performed to quantify the amount of
goodwill impairment, if any.
In step two, we allocate
the fair value of the company to all tangible and intangible assets and
liabilities in a hypothetical sale transaction to determine the implied fair
value of our goodwill. The implied fair value of goodwill is compared to its
respective carrying value and any excess carrying value is recorded as a
non-cash goodwill impairment charge.
We typically determine
fair value using the income approach. For purposes of establishing inputs for
the fair value calculations related to a goodwill impairment test under the
income approach, we derive discounted cash flows, using necessary estimates and
assumptions about the future. Significant estimates and assumptions used in this
analysis may include: expected future revenue growth rates, operating profit
margins, working capital levels, asset lives used to generate future cash flows,
a discount rate, a terminal value multiple, income tax rates and utilization of
net operating loss tax carryforwards. These assumptions are developed using
current market conditions as well as internal projections. The discount rate
considers market conditions and other relevant factors as well as the rate of
return an outside investor would expect to earn. In step two, the hypothetical
sale transaction may be assumed to be taxable or nontaxable based on the current
tax situation of the company and other relevant market conditions. We perform a
sensitivity analysis regarding the reasonableness of the concluded fair value of
equity of the reporting unit by reviewing the concluded per share stock price
and implied control premium.
63
Unanticipated changes in
revenue growth rates, operating profit margins, working capital levels, asset
lives used to generate cash flows, discount rates, cost of capital or income tax
rates could result in a material impact on the estimated fair values of our
reporting unit. We believe that the assumptions and rates used in impairment
testing are reasonable, but they require judgment and variations in any of the
assumptions or rates could result in materially different calculations of
impairment amounts.
Accrued Warranty
We generally warrant our
hardware products against defects for periods ranging from 12 to 36 months from
the date of sale. Our tape automation systems and disk backup systems may carry
service agreements with customers that choose to extend or upgrade the warranty
service. We provide repair services from our facility in Colorado Springs,
Colorado as well as multiple third party providers inside and outside of the
U.S. We use a combination of internal resources and third party service
providers to supply field service and support. We continue to evaluate repair
sites, and any resulting actions taken may affect the future costs of repair. If
the actual costs were to differ significantly from our estimates, we would
record the impact of these unforeseen costs or cost reductions in subsequent
periods.
We estimate future
failure rates based upon historical product failure trends as well as
anticipated future failure rates if believed to be significantly different from
historical trends. Similarly, we estimate future costs of repair based upon
historical trends and anticipated future costs if they are expected to
significantly differ, for example due to negotiated agreements with third
parties. We use a consistent model and exercise considerable judgment in
determining the underlying estimates. Our model requires an element of
subjectivity for all of our products. For example, historical rates of return
are not completely indicative of future return rates and we must therefore
exercise judgment with respect to future deviations from our historical return
rate. When actual failure rates differ significantly from our estimates, we
record the impact of these unforeseen costs or cost reductions in subsequent
periods and update our assumptions and forecasting models accordingly. As our
newer products mature, we are able to improve our estimates with respect to
these products. It is reasonably likely that assumptions will be updated for
failure rates and, therefore, our accrued warranty estimate could change in the
future.
Derivative Financial
Instruments
We recognize all
derivatives, whether designated in hedging relationships or not, on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and the hedged item are recognized
in earnings. If the derivative is designated as a cash flow hedge, changes in
the fair value of the derivative are recorded in other comprehensive income and
are recognized in the income statement when the hedged item affects earnings.
Derivatives not designated or qualifying as a hedging instrument are adjusted to
fair value through earnings. We may, from time to time, enter into derivative
instruments to hedge against known or forecasted market exposures. From the
third quarter of fiscal 2007 until December 31, 2009, we held derivative
instruments to meet the requirements of credit agreements.
Accumulated Other Comprehensive
Income
Accumulated other
comprehensive income, net of related tax effects, as of March 31, 2010 and 2009
was (in thousands):
| As of March 31, | |||||
| 2010 | 2009 | ||||
| Net unrealized gains on revaluation of long-term intercompany balance | $ | 638 | $ | 600 | |
| Foreign currency translation adjustment | 5,711 | 5,252 | |||
| Accumulated other comprehensive income | $ | 6,349 | $ | 5,852 | |
64
Common Stock Repurchases
During fiscal 2000, the
Board of Directors authorized us to repurchase up to $700 million of our common
stock in open market or private transactions. As of March 31, 2010 and 2009,
there was approximately $87.9 million remaining on our authorization to
repurchase Quantum common stock. Our ability to repurchase our common stock is
restricted under our credit facility covenants.
Fair Value of Financial
Instruments
We use exit prices, that
is the price to sell an asset or transfer a liability, to measure assets and
liabilities that are within the scope of the fair value measurements guidance.
We classify these assets and liabilities based on the following fair value
hierarchy:
| Level 1: | Level 1: Quoted (observable) market prices in active markets for identical assets or liabilities. | |
| Level 2: |
Observable inputs
other than Level 1, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
|
|
| Level 3: |
Prices or
valuations that require inputs that are both significant to the fair value
measurement and unobservable.
|
Following is a summary
table of assets and liabilities measured and recorded at fair value on a
recurring basis (in thousands):
| As of March 31, 2010 | As of March 31, 2009 | |||||
| Assets: | ||||||
| Money market funds | $ | 108,485 | $ | 75,350 | ||
| Deferred compensation investments | 1,154 | 910 | ||||
| Liabilities: | ||||||
| Deferred compensation liabilities | 1,154 | 910 | ||||
| Derivatives | — | 1,175 | ||||
Following are the fair
values of assets and liabilities measured and recorded at fair value on a
recurring basis by input level as of March 31, 2010 (in thousands):
| Fair Value Measurements Using Input Levels: | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| Assets: | ||||||||||||
| Money market funds | $ | — | $ | 108,485 | $ | — | $ | 108,485 | ||||
| Deferred compensation investments | — | 1,154 | — | 1,154 | ||||||||
| Liabilities: | ||||||||||||
| Deferred compensation liabilities | — | 1,154 | — | 1,154 | ||||||||
The above fair values
are based on quoted market prices for similar assets and liabilities at the
respective balance sheet dates.
We have certain
non-financial assets that are measured at fair value on a non-recurring basis
when there is an indicator of impairment, and they are recorded at fair value
only when an impairment is recognized. These assets include property and
equipment, purchased technology, other intangible assets and goodwill. We did
not record impairments to any non-financial assets fiscal 2010 or fiscal 2009,
except for a goodwill impairment in fiscal 2009. We do not have any
non-financial liabilities measured and recorded at fair value on a non-recurring
basis.
65
We have financial
liabilities for which we are obligated to repay the carrying value, unless the
holder agrees to a lesser amount. The carrying value and fair value of these
financial liabilities at March 31, 2010 and March 31, 2009 were as follows (in
thousands):
| As of March 31, 2010 | As of March 31, 2009 | |||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||
| Credit Suisse term loan(1) | $ | 186,066 | $ | 175,832 | $ | 248,000 | $ | 155,000 | ||||
| EMC term loans(2) | 121,717 | 138,301 | — | — | ||||||||
| Convertible subordinated debt(3) | 22,099 | 21,547 | 160,000 | 108,051 | ||||||||
| (1) | Fair value based on non-binding broker quotes using current market information. | |
| (2) | Fair value based on publicly traded debt with comparable terms. | |
| (3) | Fair value based on quoted market prices. |
Risks and Uncertainties
As is typical in the
information storage industry, a significant portion of our customer base is
concentrated among a small number of OEMs, distributors and large VARs. The loss
of any one of our more significant customers, or a significant decrease in the
sales volume with one of these significant customers, could have a material
adverse effect on our results of operations and financial condition.
Furthermore, if general economic conditions were to worsen, the resulting effect
on IT spending could also have a material adverse effect on our results of
operations and financial condition. We also face additional competitive pressure
since our competitors in one area may be customers or suppliers in another.
A limited number of tape
automation systems and storage products comprise a significant majority of our
sales, and due to increasingly rapid technological change in the industry, our
future operating results depend on our ability to develop and successfully
introduce new products. For additional information regarding risks and
uncertainties, refer to the “Risk Factors” in Item 1A.
Concentration of Credit
Risk
We currently invest our
excess cash in deposits with major banks and in money market funds. In the past,
we have also held investments in short-term debt securities of companies with
strong credit ratings from a variety of industries, and we may make investments
in these securities in the future. We have not experienced any material losses
on these investments and limit the amount of credit exposure to any one issuer
and to any one type of investment.
We sell products to
customers in a wide variety of industries on a worldwide basis. In countries or
industries where we are exposed to material credit risk, we may require
collateral, including cash deposits and letters of credit prior to the
completion of a transaction. We do not believe we have significant credit risk
beyond that provided for in the financial statements in the ordinary course of
business.
Sales to our top five
customers represented 37% of revenue in fiscal 2010 compared to 42% of revenue
in both fiscal 2009 and 2008. Sales to our largest customer, Dell, were 13% of
revenue in fiscal 2010 compared to 14% of revenue in fiscal 2009 and 16% of
revenue in fiscal 2008. These sales concentrations do not include revenues from
sales of media that were sold directly to these customers by our licensees, for
which we earn royalty revenue, or revenues from sales of products sold directly
to these customers by our other customers.
66
Recent Accounting
Pronouncements
In October 2009, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging
Issues Task Force (“ASU
2009-13”). ASU 2009-13 changes accounting for certain multiple deliverable
arrangements. ASU 2009-13 addresses the separation of deliverables and how to
measure and allocate the arrangement consideration to one or more units of
accounting in multiple deliverable arrangements. Currently, under the residual
method of allocation, we use objective and reliable evidence of the fair value
of the undelivered elements to separate deliverables in multiple deliverable
arrangements. ASU 2009-13 eliminates the residual method and requires that
consideration from the arrangement be allocated to all deliverables using the
relative selling price method. ASU 2009-13 requires additional disclosures
related to multiple deliverable revenue arrangements upon adoption and is
effective for fiscal years beginning after June 15, 2010, or the beginning of
our fiscal 2012. In addition, ASU 2009-13 may be early adopted. It may be
implemented with either prospective or retrospective application; however, if
early adoption is chosen, the entity must either adopt at the beginning of its
fiscal year, or adopt using retrospective application. We are still evaluating
the impact of adoption; however, based on a preliminary assessment, we do not
expect the adoption of this guidance to have a material impact on our
Consolidated Financial Statements. We are considering early adoption of this
pronouncement in the first quarter of fiscal 2011.
In October 2009, the
FASB issued ASU 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software
Elements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 changes the
accounting for revenue arrangements that include both tangible products and
software elements. Tangible products containing software components and
non-software components that function together to deliver the tangible product’s
essential functionality are no longer within the scope of the software revenue
guidance. Under prior guidance such arrangements were accounted for as software
if the software was determined to be more than incidental. ASU 2009-14 requires
that any hardware components of such arrangements be excluded from software
revenue guidance and that any essential software that is sold with or embedded
within the product also be excluded from software revenue guidance. This ASU is
effective for fiscal years beginning after June 15, 2010, or the beginning of
our fiscal 2012. In addition, ASU 2009-14 may be early adopted. ASU 2009-14 may
be implemented with either prospective or retrospective application; however, if
early adoption is chosen, the entity must either adopt at the beginning of its
fiscal year, or adopt using retrospective application. Further, ASU 2009-14 must
be adopted in the same period and with the same implementation method as ASU
2009-13. We are still evaluating the impact of adoption; however, based on a
preliminary assessment, we do not expect the adoption of this guidance to have a
material impact on our Consolidated Financial Statements. We are considering
early adoption of this pronouncement in the first quarter of fiscal 2011.
In August 2009, the FASB
issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities
at Fair Value (“ASU
2009-05”). ASU 2009-05 clarifies that in circumstances in which a quoted price
in an active market for the identical liability is not available, an entity must
measure fair value using either the quoted price of the identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
when traded as assets or another valuation technique consistent with fair value
measurements such as an income approach or a market approach. ASU 2009-05
clarifies that no separate input, or adjustment to other inputs, must be made
for the existence of a restriction that prevents the transfer of a liability
when measuring fair value of a liability. We adopted ASU 2009-05 on October 1,
2009 and it did not have an impact on our consolidated financial position or
results of operations.
In January 2010, the
FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures
about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 increased disclosures to include transfers
in and out of Levels 1 and 2 and clarified inputs, valuation techniques and the
level of disaggregation to be disclosed. We adopted ASU 2010-06 on January 1,
2010 and it did not have an impact on our consolidated financial position or
results of operations.
67
Note 3: Cash, Cash Equivalents, Restricted Cash and
Other Investments
Cash, Cash Equivalents and Restricted
Cash
The following is a
summary of our cash, cash equivalents and restricted cash (in
thousands):
| As of March 31, | ||||||
| 2010 | 2009 | |||||
| Cash | $ | 7,276 | $ | 10,995 | ||
| Certificates of deposit | 1,082 | 960 | ||||
| Money market funds | 108,485 | 75,350 | ||||
| $ | 116,843 | $ | 87,305 | |||
Other Investments
Other investments
consist of private technology venture limited partnerships and privately held
technology companies that are recorded in other long-term assets on the
Consolidated Balance Sheets. At March 31, 2010 and March 31, 2009, we held $1.8
million and $1.6 million, respectively, of investments in private technology
venture limited partnerships that are accounted for under the equity method. We
recorded a $0.4 million net gain for each of fiscal 2010, 2009 and 2008 related
to our investments in these limited partnerships. These gains were primarily
based on the general partners’ estimates of the fair value of non-marketable
securities held by the partnerships and realized gains and losses from the
partnerships’ disposal of securities.
At March 31, 2010 and
2009, we did not hold any investments in privately held technology companies.
During fiscal 2008, we recognized a net gain of $2.1 million from the sale of
shares in a privately held technology company that completed an initial public
offering during June 2007. Additionally, during fiscal 2008, we recognized a net
$0.3 million loss due to an other-than-temporary impairment of an investment in
a privately held technology company that had been accounted for under the cost
method. In fiscal 2010, we realized $0.4 million in net gains from deferred
compensation investments compared to $0.6 million in net losses in fiscal 2009
and immaterial losses in fiscal 2008.
Gains and losses
realized from these investments are included in interest and other income, net
on the Consolidated Statements of Operations. During fiscal 2010, 2009 and 2008,
gross realized gains and losses from other investments were as follows (in
thousands):
| Gross Realized Gains |
Gross
Realized Losses |
Net Gains (Losses) |
|||||||||
| 2010 | $ | 938 | $ | (206 | ) | $ | 732 | ||||
| 2009 | 1,099 | (1,319 | ) | (220 | ) | ||||||
| 2008 | 2,990 | (706 | ) | 2,284 | |||||||
Note 4: Manufacturing Inventories, Service Parts
Inventories and Property and Equipment
Manufacturing
inventories, net consisted of (in thousands):
| As of March 31, | ||||||
| 2010 | 2009 | |||||
| Finished goods | $ | 24,040 | $ | 29,468 | ||
| Work in process | 3,869 | 3,669 | ||||
| Materials and purchased parts | 26,171 | 28,100 | ||||
| $ | 54,080 | $ | 61,237 | |||
68
Service parts
inventories, net consisted of (in thousands):
| As of March 31, | ||||||
| 2010 | 2009 | |||||
| Finished goods | $ | 30,073 | $ | 36,422 | ||
| Component parts | 23,144 | 26,607 | ||||
| $ | 53,217 | $ | 63,029 | |||
Property and equipment
consisted of (in thousands):
| As of March 31, | ||||||||
| 2010 | 2009 | |||||||
| Machinery and equipment | $ | 151,952 | $ | 149,321 | ||||
| Furniture and fixtures | 7,365 | 7,948 | ||||||
| Leasehold improvements | 22,354 | 22,519 | ||||||
| $ | 181,671 | $ | 179,788 | |||||
| Less: accumulated depreciation | (157,143 | ) | (151,235 | ) | ||||
| $ | 24,528 | $ | 28,553 | |||||
Asset Retirement
Obligations
We have asset retirement
obligations related to certain leased facilities where we have contractual
commitments to remove leasehold improvements in certain cases and return the
property to a specified condition when the lease terminates. At March 31, 2010
and 2009, the estimated value of these obligations was $1.8 million and $1.9
million, respectively, and is classified in other accrued liabilities and other
long-term liabilities in the Consolidated Balance Sheets. At March 31, 2010 the
net book value of the asset related to our asset retirement obligation was
approximately $0.5 million compared to $0.7 million at March 31, 2009. The
accretion associated with our asset retirement obligations for the years ended
March 31, 2010, 2009 and 2008 was $0.2 million, $0.4 million, and $1.1 million
respectively.
Note 5: Goodwill and Intangible
Assets
Net goodwill and
intangible assets as of March 31, 2010 and 2009 represented approximately 24%
and 28% of total assets, respectively. The goodwill and intangible asset
balances, net of amortization, as of March 31, 2010 and 2009 were $119.9 million
and $156.0 million, respectively.
Goodwill
The following table
presents goodwill balances and the activity during the fiscal years ended March
31, 2010 and 2009 (in thousands):
| Goodwill Amount | Accumulated Impairment |
Total | ||||||||||
| Balance at March 31, 2008 | $ | 390,776 | $ | — | $ | 390,776 | ||||||
| Adjustments | (5,006 | ) | — | (5,006 | ) | |||||||
| Impairments | — | (339,000 | ) | (339,000 | ) | |||||||
| Balance at March 31, 2009 | 385,770 | (339,000 | ) | 46,770 | ||||||||
| Balance at March 31, 2010 | $ | 385,770 | $ | (339,000 | ) | $ | 46,770 | |||||
There were no changes to
goodwill in fiscal 2010. The goodwill adjustment of $5.0 million in fiscal 2009
was due to settlement of acquisition-related tax contingencies.
69
Our annual impairment
evaluation for goodwill in the fourth quarter of fiscal 2010 and fiscal 2008 did
not indicate any impairment of our goodwill for fiscal 2010 or fiscal 2008. We
were not at risk of failing step one of the fiscal 2010 annual impairment test.
During the third quarter of fiscal 2009, we noted the presence of several
indicators of impairment and performed an interim test to determine if our
goodwill was impaired and recorded an estimated impairment charge of $339.0
million. Due to the complexity of goodwill impairment testing, our impairment
analysis was completed in the fourth quarter of fiscal 2009 and we determined no
additional impairment charges were required.
The interim impairment
evaluation began in the third quarter of fiscal 2009 due to the following
impairment indicators:
|
•
|
a significant decline in our
stock price, bringing market capitalization below book
value;
|
|
•
|
a significant adverse change
in the business climate;
|
|
•
|
negative current events and
changed long-term economic outlook as a result of the financial market
collapse that started at the end of the second quarter of fiscal 2009;
and
|
|
•
|
our need to test long-lived
assets for recoverability under applicable accounting
rules.
|
Significant assumptions
used in this impairment test to determine fair value under the income approach
were:
|
•
|
expected future revenue
growth rates ranging from -3% to 9%;
|
|
•
|
operating profit margins
ranging from 7% to 21%;
|
|
•
|
working capital
levels;
|
|
•
|
asset lives used to generate
future cash flows;
|
|
•
|
a discount rate of 24% which
is the rate of return an investor would expect to earn considering the
relatively higher risk of newer hardware and software
products;
|
|
•
|
a terminal value multiple of
3%;
|
|
•
|
a 38% income tax rate;
and
|
|
•
|
utilization of net operating
loss carryforwards.
|
When measuring for possible
impairment, future cash flows were discounted at a rate that was consistent with
a weighted average cost of capital for a potential market participant. The
weighted average cost of capital was an estimate of the total after-tax rate of
return required by debt and equity holders of a business enterprise. In
developing our discount rate assumption, we first considered a single discount
rate for the whole business. Then we determined the relative risk of our newer
hardware and software products should be factored into the required rate of
return of a potential market participant, which increased the discount rate. A
growth rate, or terminal value multiple, was used to calculate the terminal
value of the business. The growth rate was the expected rate at which the income
stream was projected to grow beyond the specified term used in projecting cash
flows.
We assumed a 38 percent
tax rate, adjusted for partial utilization of net operating loss carryforwards
based on application of Internal Revenue Code Section 382. For our step two
valuation, we measured the income tax impact by considering both a taxable and a
nontaxable hypothetical sale transaction. Based on prior actual transactions, we
concluded that a nontaxable sale to a potential market participant was more
likely to occur. We recognized the associated fair value of deferred tax assets
and liabilities assuming a nontaxable sale.
Intangible Assets
Acquired intangible
assets are amortized over their estimated useful lives, which generally range
from one to eight years. In estimating the useful lives of intangible assets, we
considered the following factors:
|
•
|
The cash flow projections
used to estimate the useful lives of the intangible assets showed a trend
of growth that was expected to continue for an extended period of time;
|
|
•
|
Our tape automation products,
disk backup products and software, in particular, have long development
cycles; these products have experienced long product life cycles; and
|
|
•
|
Our ability to leverage core
technology into backup, recovery and archive solutions and, therefore, to
extend the lives of these
technologies.
|
70
Following is the
weighted average amortization period for our intangible assets:
| Amortization (Years) |
|
| Purchased technology | 6.2 |
| Trademarks | 7.5 |
| Non-compete agreements | 5.0 |
| Customer lists | 7.0 |
| All intangible assets | 6.6 |
Intangible amortization
within our Consolidated Statements of Operations for the years ended March 31,
2010, 2009 and 2008 follows (in thousands):
| For the year ended March 31, | |||||||||
| 2010 | 2009 | 2008 | |||||||
| Purchased technology | $ | 22,469 | $ | 25,067 | $ | 31,857 | |||
| Trademarks | 810 | 2,018 | 3,457 | ||||||
| Non-compete agreements | 100 | 100 | 100 | ||||||
| Customer lists | 12,765 | 13,018 | 13,297 | ||||||
| $ | 36,144 | $ | 40,203 | $ | 48,711 | ||||
The following tables
provide a summary of the carrying amount of intangible assets that will continue
to be amortized (in thousands):
| As of March 31, 2010 | As of March 31, 2009 | |||||||||||||||||||
| Gross Amount |
Accumulated Amortization |
Net Amount |
Gross Amount |
Accumulated Amortization |
Net Amount |
|||||||||||||||
| Purchased technology | $ | 188,167 | $ | (161,488 | ) | $ | 26,679 | $ | 188,167 | $ | (139,019 | ) | $ | 49,148 | ||||||
| Trademarks | 27,260 | (25,506 | ) | 1,754 | 27,260 | (24,696 | ) | 2,564 | ||||||||||||
| Non-compete agreements | 500 | (368 | ) | 132 | 500 | (268 | ) | 232 | ||||||||||||
| Customer lists | 106,419 | (61,892 | ) | 44,527 | 108,219 | (50,927 | ) | 57,292 | ||||||||||||
| $ | 322,346 | $ | (249,254 | ) | $ | 73,092 | $ | 324,146 | $ | (214,910 | ) | $ | 109,236 | |||||||
The total expected
future amortization related to intangible assets is provided in the table below
(in thousands):
| Amortization | |||
| Fiscal 2011 | $ | 28,381 | |
| Fiscal 2012 | 20,385 | ||
| Fiscal 2013 | 12,834 | ||
| Fiscal 2014 | 8,400 | ||
| Fiscal 2015 | 3,092 | ||
| Total as of March 31, 2010 | $ | 73,092 | |
We did not have
impairment indicators for our long-lived assets in fiscal 2010 and fiscal 2008.
In fiscal 2009, we had impairment indicators and performed an impairment
analysis of our long-lived assets. The result of our fiscal 2009 impairment
analysis was that the undiscounted cash flows exceeded the carrying value of the
asset group and we concluded no impairment of our long-lived assets.
71
Note 6: Accrued Warranty and
Indemnifications
Accrued Warranty
The following table
details the change in the accrued warranty balance (in thousands):
| For the year ended March 31, |
||||||||
| 2010 | 2009 | |||||||
| Balance as of April 1 | $ | 11,152 | $ | 19,862 | ||||
| Additional warranties issued | 8,993 | 13,533 | ||||||
| Adjustments for warranties issued in prior fiscal years | (2,887 | ) | (2,257 | ) | ||||
| Settlements | (11,374 | ) | (19,986 | ) | ||||
| Balance as of March 31 | $ | 5,884 | $ | 11,152 | ||||
We generally warrant our
products against defects from 12 to 36 months. A provision for estimated future
costs and estimated returns for credit relating to warranty is recorded when
products are shipped and revenue recognized. Our estimate of future costs to
satisfy warranty obligations is primarily based on historical trends and, if
believed to be significantly different from historical trends, estimates of
future failure rates and future costs of repair including materials consumed in
the repair, labor and overhead amounts necessary to perform the repair.
If future actual failure
rates differ from our estimates, we record the impact in subsequent periods. If
future actual costs to repair were to differ significantly from our estimates,
we would record the impact of these unforeseen cost differences in subsequent
periods.
Indemnifications
We have certain
financial guarantees, both express and implied, related to product liability and
potential infringement of intellectual property. Other than certain product
liabilities recorded as of March 31, 2010 and 2009, we did not record a
liability associated with these guarantees, as we have little or no history of
costs associated with such indemnification requirements. Contingent liabilities
associated with product liability may be mitigated by insurance coverage that we
maintain.
In the normal course of
business to facilitate transactions of our services and products, we indemnify
certain parties with respect to certain matters. We have agreed to hold certain
parties harmless against losses arising from a breach of representations or
covenants, or out of intellectual property infringement or other claims made
against certain parties. These agreements may limit the time within which an
indemnification claim can be made and the amount of the claim. In addition, we
have entered into indemnification agreements with our officers and directors,
and our bylaws contain similar indemnification obligations to our agents.
It is not possible to
determine the maximum potential amount under these indemnification agreements
due to the limited history of prior indemnification claims and the unique facts
and circumstances involved in each particular agreement. Historically, payments
made by us under these agreements have not had a material impact on our
operating results, financial position or cash flows.
72
Note 7: Convertible Subordinated Debt and Long-Term
Debt
Our debt consists of the
following (in thousands):
| As of March 31, | ||||||
| 2010 | 2009 | |||||
| Convertible subordinated debt | $ | 22,099 | $ | 160,000 | ||
| Credit Suisse term loan | 186,066 | 248,000 | ||||
| EMC term loans | 121,717 | — | ||||
| $ | 329,882 | $ | 408,000 | |||
Convertible Subordinated
Debt
On July 30, 2003, we
issued 4.375% convertible subordinated notes (“the notes”) in the aggregate
principal amount of $160 million in a private placement transaction. The notes
are unsecured obligations subordinated in right of payment to all of our
existing and future senior indebtedness. The notes mature on August 1, 2010, and
are convertible at the option of the holders at any time prior to maturity into
shares of Quantum common stock at a conversion price of $4.35 per share. As of
March 31, 2010, the notes are included in current liabilities and as of March
31, 2009 in long-term liabilities in the Consolidated Balance
Sheets.
On June 3, 2009, $87.2
million of aggregate principal of the notes were tendered in exchange for $850
per $1,000 principal amount, or $74.1 million. We also paid $1.3 million of
accrued and unpaid interest on the notes tendered. This transaction was funded
by a loan from EMC International Company described below.
On June 26, 2009, we
entered into a private transaction with a noteholder to purchase $50.7 million
of aggregate principal amount of notes for $48.2 million. We also paid $0.9
million in accrued and unpaid interest on the notes. We funded this transaction
with $2.8 million of our own funds and the remaining $46.3 million with loans
from EMC International Company, described below.
Gain (Loss) on Debt Extinguishment, Net of
Costs
In connection with the
tender offer and private transaction in fiscal 2010, we recorded a gain on debt
extinguishment, net of costs, of $12.9 million comprised of the gross gain of
$15.6 million, reduced by $2.1 million in expenses and $0.6 million of
unamortized debt costs related to the refinanced notes.
In fiscal 2008, we
recorded a $12.6 million loss on debt extinguishment due to retiring a prior
credit facility with the proceeds from the term loan under the Credit Suisse
credit agreement. The $12.6 million loss on debt extinguishment was comprised of
$8.1 million of unamortized debt costs related to the prior credit facility and
$4.5 million in prepayment fees.
Long-Term Debt
Credit Suisse Credit
Agreement
On July 12, 2007, we
refinanced a prior credit facility by entering into a senior secured credit
agreement with Credit Suisse (“CS credit agreement”) providing a $50 million
revolving credit facility and a $400 million term loan. We borrowed $400 million
on the term loan to repay all borrowings under a prior credit facility used to
fund the Advanced Digital Information Corporation (“ADIC”) acquisition. We
incurred and capitalized $8.1 million of loan fees related to the CS credit
agreement which are included in other long-term assets in our Consolidated
Balance Sheets. These fees are being amortized to interest expense over the
respective loan terms.
73
Under the CS credit
agreement, the $400 million term loan matures on July 12, 2014, but was subject
to accelerated maturity on February 1, 2010 if we did not repay, refinance to
extend the maturity date, or convert into equity at least $135 million of the
$160 million convertible subordinated debt prior to February 1, 2010. We are no
longer at risk of acceleration of the maturity date related to this refinancing
requirement as a result of the tender offer and private transaction described
above. Interest accrues on the term loan at our option based on either, a prime
rate plus a margin of 2.5%, or a LIBOR rate plus a margin of 3.5%. The interest
rate on the term loan was 3.79% at March 31, 2010.
We make required
quarterly principal payments on the term loan based on a formula in the CS
credit agreement and we will make a final payment of all outstanding principal
and interest at maturity. The term loan may be prepaid at any time; however, for
any prepayments made before July 12, 2008 a prepayment fee of 1% of the
principal amount being prepaid was assessed on such prepayments. In addition, on
an annual basis, we are required to perform a calculation of excess cash flow
which may require an additional payment of the principal amount if the excess
cash flow requirements are not met. The fiscal 2010 and 2009 calculations of
excess cash flow did not require additional principal payments. During fiscal
2010 and 2009, we made principal payments of $61.9 and $92.0 million,
respectively on the CS credit agreement term loan. During fiscal 2009, we also
incurred $0.5 million in prepayment fees.
Under the CS credit
agreement we have the ability to borrow up to $50 million under a senior secured
revolving credit facility which expires July 12, 2012. As of March 31, 2010, we
have letters of credit totaling $1.4 million, reducing the amounts available to
borrow on the revolver to $48.6 million. Interest accrues on the revolving
credit facility at our option based on either, a prime rate plus a margin of
2.5%, or a LIBOR rate plus a margin of 3.5%. Quarterly, we are required to pay a
0.5% commitment fee on undrawn amounts under the revolving credit facility. We
did not borrow from the revolving credit facility during fiscal 2010. We drew
and repaid $31.0 million from our revolving credit facility during fiscal
2009.
There is a blanket lien
on all of our assets under the CS credit agreement in addition to certain
financial and reporting covenants which we are required to satisfy as a
condition of the credit line and term loan including a limitation on issuing
dividends or repurchasing our stock. As of March 31, 2010, we were in compliance
with all covenants.
Amendment to Credit Suisse Credit
Agreement
We amended our CS credit
agreement on April 15, 2009 (the “Amendment”). The Amendment permitted us to
refinance through issuance of equity or repurchase with our or any other funds
the final $25.0 million outstanding convertible debt. As a condition of the
Amendment, we made a prepayment of $40.0 million on the term loan on April 22,
2009. We funded this $40.0 million prepayment with $20.0 million of our cash on
hand and $20.0 million from prepaid license fees under an OEM agreement. In
addition, we agreed to prepay another $20.0 million of principal on the CS
credit agreement upon refinancing a total of $135.0 million aggregate principal
amount of the notes. We made this $20.0 million principal prepayment on July 6,
2009, which was funded from additional prepaid license fees under an OEM
agreement.
EMC Credit Agreements
On June 3, 2009, we
entered into an initial term loan agreement with EMC International Company
(“initial EMC loan agreement”) and on June 5, 2009 we borrowed $75.4 million, of
which $74.1 million was used to purchase the convertible notes tendered and $1.3
million was used for payment of accrued interest on the notes tendered. We
incurred and capitalized $1.5 million of loan fees related to the initial EMC
loan agreement which are included in other long-term assets in our Consolidated
Balance Sheets. These fees are being amortized to interest expense over the loan
term.
The initial EMC loan
agreement requires quarterly interest payments and bears a 12.0% fixed interest
rate. Borrowings under the initial EMC loan agreement are junior to borrowings
under our CS credit agreement and senior to all other indebtedness. There are no
financial covenants and it is not secured by any collateral. Under the initial
EMC loan agreement, the $75.4 million term loan matures on September 30, 2014
and allows prepayments to the extent not prohibited under our CS credit
agreement. In the event we replace or refinance our CS credit agreement, the
term loan matures the later of August 1, 2010 or one day after such replacement
or refinancing. In the event that we use cash on hand to repay all amounts
outstanding under the CS credit agreement, we have the right to exchange the
initial EMC term loan for a senior secured term loan with terms substantially
the same as the initial EMC loan agreement but with security, covenants and
events of default similar to those contained in the CS credit agreement.
74
On June 29, 2009, we
entered into a subsequent term loan agreement with EMC International Company
(“subsequent EMC loan agreement”) and on July 1, 2009 we borrowed $46.3 million
to fund the purchase of additional convertible notes in the private transaction
described above. We incurred and capitalized $0.2 million of loan fees related
to the subsequent EMC loan agreement which are being amortized to interest
expense over the loan terms. Borrowings under the subsequent EMC loan agreement
have terms substantially similar to borrowings under the initial EMC loan
agreement, including quarterly interest payments at a 12.0% fixed interest rate.
The subsequent EMC loan agreement has two tranches of borrowings, with Tranche A
having a scheduled maturity date of September 30, 2014 and Tranche B having a
scheduled maturity date of December 31, 2011. On July 1, 2009 we drew $24.6
million on the Tranche A Term Loan and $21.7 million on the Tranche B Term Loan
under the subsequent EMC loan agreement.
Debt Maturities
A summary of the
scheduled maturities for our convertible subordinated debt and outstanding term
loans as of March 31, 2010 follows (in thousands):
| Fiscal 2011 | $ | 23,983 | |
| Fiscal 2012 | 23,602 | ||
| Fiscal 2013 | 1,884 | ||
| Fiscal 2014 | 1,884 | ||
| Fiscal 2015 | 278,529 | ||
| Total as of March 31, 2010 | $ | 329,882 | |
Note 8: Derivatives
We do not engage in
hedging activity for speculative or trading purposes. From the third quarter of
fiscal 2007 through December 31, 2008, we had an interest rate collar instrument
with a financial institution that fixed the interest rate on $87.5 million of
our variable rate term loan between a three month LIBOR rate floor of 4.64% and
a cap of 5.49% (“Collar 1”) to minimize our exposure to interest rate changes.
Under the terms of the CS credit agreement, we were required to hedge floating
interest rate exposure on 50% of our funded debt balance through December 31,
2009. We entered into a separate interest rate collar instrument effective as of
December 31, 2007 with another financial institution that fixed the interest
rate on an additional $12.5 million of our variable rate term loan between a
three month LIBOR rate floor of 2.68% and a cap of 5.25% through December 2008
and fixed the interest rate on $100.0 million of our variable rate term loan
between the same floor and cap from December 31, 2008 through December 31, 2009
(“Collar 2”). Whenever the three month LIBOR rate was greater than the cap, we
received from the financial institution the difference between the cap and the
three month LIBOR rate on the notional amount. Conversely, whenever the three
month LIBOR rate was lower than the floor, we remitted to the financial
institution the difference between the floor and the three month LIBOR rate on
the notional amount.
For Collar 1, during
fiscal 2009, we incurred $1.0 million in additional interest expense because the
three month LIBOR rate was below the floor. The three month LIBOR rate was
within the floor and cap of Collar 1 during fiscal 2008. For Collar 2, we
incurred $1.5 million and $0.3 million in additional interest expense in fiscal
2010 and 2009, respectively, because the three month LIBOR rate was below the
floor of Collar 2. The three month LIBOR rate was within the floor and cap of
Collar 2 during fiscal 2008.
Our interest rate
collars did not meet all of the criteria necessary for hedge accounting. We
recorded the fair market value in other accrued liabilities in the Consolidated
Balance Sheets and the change in fair market value in interest income and other,
net in the Consolidated Statements of Operations. We had a cumulative loss on
the interest rate collar of $1.2 million as of March 31, 2009. In the
Consolidated Statement of Operations we recognized gains of $1.2 million and
$1.0 million in fiscal 2010 and 2009, respectively, and recognized loss of $2.1
million in fiscal 2008. As of March 31, 2010, both interest rate collars had
expired.
75
| For the year ended March 31, 2010 | |||||||||
| (In thousands) | Location of Gain Recognized in Income
on Derivative |
Amount of Gain Recognized in Income on Derivatives |
Location of Gain
on Hedged Item
|
Amount of Gain Recognized in Income Attributable to Risk Being Hedged |
|||||
| Interest Rate Collar Derivatives | Interest Income and Other, Net | $ | 1,175 | — | — | ||||
Note 9: Restructuring
Charges
In fiscal 2009 and
continuing in fiscal 2010, restructuring actions that consolidated operations
supporting the business were undertaken to improve operational efficiencies and
to adapt our operations in recognition of economic conditions. In fiscal 2008,
restructuring actions were primarily due to restructuring portions of our
research and development operations by partnering with a third party on certain
research and development efforts. In addition, we also had restructuring actions
in fiscal 2009 and 2008 that consolidated operations supporting our business as
a result of right-sizing our operations following acquisitions. The following
tables show the type of restructuring expense (reversal) for fiscal 2010, 2009
and 2008 (in thousands):
| For the year ended March 31, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||
| By expense type | ||||||||||
| Severance and benefits | $ | 602 | $ | 8,015 | $ | 5,778 | ||||
| Facilities | 4,792 | (1,229 | ) | 2,957 | ||||||
| Fixed assets | — | — | 568 | |||||||
| Other | (599 | ) | 21 | 416 | ||||||
| Total | $ | 4,795 | $ | 6,807 | $ | 9,719 | ||||
| By cost reduction action | ||||||||||
| Consolidate operations supporting our business | $ | 4,795 | $ | 6,394 | $ | 4,155 | ||||
| Partner with third party on certain research and development efforts | — | 413 | 5,564 | |||||||
| Total | $ | 4,795 | $ | 6,807 | $ | 9,719 | ||||
Fiscal 2010
For fiscal 2010,
restructuring charges were due to $4.8 million in remaining contractual lease
payments for facilities vacated in the U.S. during fiscal 2010. We also vacated
a facility in India and negotiated a settlement for an amount lower than the
outstanding lease contract. Severance and benefits restructuring charges for
fiscal 2010 were due largely to eliminating additional positions in the U.S. and
changes in our estimates, primarily in Europe, as we completed settlement
negotiations with various local authorities. The other restructuring reversal in
fiscal 2010 was due to negotiating a settlement for contract termination fees
related to a program cancelled in a prior year.
Fiscal 2009
During fiscal 2009, our
restructuring severance and benefits resulted in a net expense of $8.0 million
due primarily to our actions to consolidate operations supporting our business.
The majority of our severance and benefits restructuring actions occurred in the
second half of fiscal 2009 in response to the global economic downturn to
realign our cost structure with market growth opportunities. The majority of the
impacted employees were U.S. sales and marketing and research and development
employees; however, all areas of the business, including international
operations, were impacted by these restructuring actions. Severance and benefits
charges accrued in fiscal 2009 were paid to the impacted employees during fiscal
2009 and 2010.
76
The net reversal of
facility restructuring charges in fiscal 2009 was primarily due to negotiating
settlements for lease liabilities on vacated facilities in Europe for amounts
lower than the outstanding lease contracts.
Fiscal 2008
During fiscal 2008, our
restructuring severance and benefits resulted in a net expense of $5.8 million
primarily due to our decision to partner with a third party on certain research
and development efforts and to a lesser extent actions to improve efficiencies
in operations. The net restructuring expense was offset in part by reversals,
primarily due to severance and benefits costs for employees whose positions were
retained in a variety of functions throughout the world. Severance and benefit
restructuring charges accrued in fiscal 2008 were paid to the impacted employees
during fiscal 2008 and 2009.
We continued activities
to consolidate our operations into fewer locations during fiscal 2008. Our
facility restructuring charges were the result of consolidation actions in
Boulder, Colorado and consolidating our European locations and service
operations as well as early termination fees on telephone and data services. We
also recorded $0.6 million in fixed asset write-offs in fiscal 2008 related to
disposal of fixed assets due to consolidating operations within our European
locations. Other restructuring charges were generally moving costs to
consolidate inventory into fewer locations.
In addition to the
restructuring charges incurred in fiscal 2008, we had $0.5 million in net
reversals related to restructuring costs associated with exiting activities of
pre-merger ADIC in the first quarter of fiscal 2008. These reversals were
primarily due to severance and benefits costs for employees whose positions were
retained in a variety of functions throughout the world. These reversals were
recognized in the first quarter of fiscal 2008 as a reduction of the liability
assumed in the purchase business combination that had been included in the
allocation of the cost to acquire ADIC and, accordingly, resulted in a decrease
to goodwill rather than an expense reduction.
The following tables
show the activity and the estimated timing of future payouts for accrued
restructuring (in thousands):
| Severance
and benefits |
Facilities | Fixed Assets |
Other | Total | |||||||||||||||
| Balance as of March 31, 2007 | $ | 10,747 | $ | 792 | $ | — | $ | 1,750 | $ | 13,289 | |||||||||
| Restructuring costs | 9,110 | 3,368 | 568 | 562 | 13,608 | ||||||||||||||
| Restructuring charge reversal | (3,834 | ) | (411 | ) | — | (146 | ) | (4,391 | ) | ||||||||||
| Cash payments | (15,619 | ) | (1,023 | ) | — | (755 | ) | (17,397 | ) | ||||||||||
| Non-cash charges and other | 99 | 6 | (568 | ) | (812 | ) | (1,275 | ) | |||||||||||
| Balance as of March 31, 2008 | 503 | 2,732 | — | 599 | 3,834 | ||||||||||||||
| Restructuring costs | 8,567 | 26 | — | 21 | 8,614 | ||||||||||||||
| Restructuring charge reversal | (552 | ) | (1,255 | ) | — | — | (1,807 | ) | |||||||||||
| Cash payments | (5,105 | ) | (615 | ) | — | (21 | ) | (5,741 | ) | ||||||||||
| Non-cash charges and other | 41 | (260 | ) | — | — | (219 | ) | ||||||||||||
| Balance as of March 31, 2009 | 3,454 | 628 | — | 599 | 4,681 | ||||||||||||||
| Restructuring costs | 1,182 | 5,047 | — | — | 6,229 | ||||||||||||||
| Restructuring charge reversal | (580 | ) | (255 | ) | — | (599 | ) | (1,434 | ) | ||||||||||
| Cash payments | (3,597 | ) | (2,124 | ) | — | — | (5,721 | ) | |||||||||||
| Non-cash charges and other | 35 | 5 | — | — | 40 | ||||||||||||||
| Balance as of March 31, 2010 | $ | 494 | $ | 3,301 | $ | — | $ | — | $ | 3,795 | |||||||||
| Estimated timing of future payouts: | |||||||||||||||||||
| Fiscal 2011 | $ | 494 | $ | 1,597 | $ | — | $ | — | $ | 2,091 | |||||||||
| Fiscal 2012 to 2013 | — | 1,704 | — | — | 1,704 | ||||||||||||||
| $ | 494 | $ | 3,301 | $ | — | $ | — | $ | 3,795 | ||||||||||
The $3.8 million
restructuring accrual as of March 31, 2010 is primarily comprised of obligations
for vacant facilities in addition to severance and benefits. The amounts accrued
for vacant facilities in the U.S. will be paid over their respective lease
terms, which continue through fiscal 2013. The amounts accrued for severance and
benefits will be paid to impacted employees during the first half of fiscal
2011.
77
Additional charges may
be incurred in the future related to these restructurings, particularly if the
actual costs associated with restructured activities are higher than estimated.
Until we achieve sustained profitability, we may incur additional charges in the
future related to additional cost reduction steps. Future charges that we may
incur associated with future cost reductions are not estimable at this
time.
Note 10: Stock Incentive Plans and Share-Based
Compensation
Description of Stock Incentive
Plans
Long-Term Incentive Plan
We have 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 to our employees, officers and affiliates. The Plan has authorized 76.5
million shares of stock of which 13.3 million shares of stock were available for
grant as of March 31, 2010. There are 29.7 million options and restricted shares
outstanding under the Long-Term Incentive Plan.
Beginning in the first
quarter of fiscal 2007, under the Plan we began granting restricted stock units
with a zero purchase price in place of stock options in most cases to our
existing employees. We continued to grant stock options to our existing
employees in certain circumstances. Newly hired employees are typically granted
stock options under the Plan. In fiscal 2010, due to a combination of factors
including our share price at the beginning of the fiscal year, we primarily
granted stock options to our existing employees. Stock options granted to
existing employees in fiscal 2010 and fiscal 2009 generally vest annually over
three years and have contractual terms of seven years. Stock options granted to
newly hired employees in fiscal 2010 and fiscal 2009 generally vest 25% on the
first anniversary of the grant date with the remainder vesting monthly at the
rate of 1/48th
over the following three years
and have contractual terms of seven years. Grants in prior fiscal years
typically had four year vesting terms and contractual terms of seven years while
grants prior to fiscal 2004 had contractual terms of ten years. Options under
the Plan are granted at prices determined by the Board of Directors, but at not
less than the fair market value. The majority of restricted stock units granted
in fiscal 2010 and 2009 vest over two years and restricted stock awards and
units (“restricted stock”) granted prior to fiscal 2009 generally vest over two
to four years. Both options and restricted stock granted under the Plan are
subject to forfeiture if employment terminates. In fiscal 2007, we granted
restricted stock with both market and service vesting conditions that, upon
meeting certain market conditions over one and two year periods from initial
grant, vested over the two years following the grant date.
Supplemental Stock Plan
We have a Supplemental
Stock Plan (the “SSOP”), which was not approved by our stockholders, that
provided for the issuance of stock options and stock purchase rights to our
employees and consultants. The SSOP was terminated effective April 1, 2003, from
which time no new stock options or stock purchase rights have been or will be
granted under the SSOP. Outstanding stock options and stock purchase rights
granted under the SSOP prior to April 1, 2003 remained outstanding and continue
to be governed by the terms and conditions of the SSOP. Options under the SSOP
generally vested over two to four years and expire ten years after the grant
date. Options granted under the SSOP are subject to forfeiture if employment
terminates. There are 0.9 million options outstanding under the SSOP as of March
31, 2010, which expire at various times through January 2013.
Assumed Stock Option Plans
During the second
quarter of fiscal 2007, in connection with our acquisition of ADIC, we assumed
14.7 million outstanding stock options granted under the four stock option plans
of ADIC (“assumed option plans”). Outstanding options are governed by the
Agreement and Plan of Merger (“Merger Agreement”) and generally vest over four
years from initial ADIC grant. No additional options will be granted under these
assumed option plans. There are 4.3 million options outstanding under the
assumed stock option plans as of March 31, 2010 which expire at various times
through May 2015.
78
Other Stock Option Plans
We have other stock
option plans (the “Other Plans”) under which stock options, stock appreciation
rights, stock purchase rights, restricted stock awards and long-term performance
awards to our employees, consultants, officers and affiliates have been
authorized. Restricted stock granted under the Other Plans generally vests over
two to three years. Options granted under the Other Plans generally vest over
one to four years and expire seven years after the grant date. Many of the Other
Plans have been terminated. Outstanding stock options and stock purchase rights
granted under those certain Other Plans that have been terminated remain
outstanding and continue to be governed by the terms and conditions of the
respective other stock option plan. Terminated plans included in Other Plans
typically granted options which generally expire ten years from grant date.
Options and restricted stock granted under all of the Other Plans are subject to
forfeiture if employment terminates. Options under the Other Plans are granted
at prices determined by the Board of Directors, but at not less than the fair
market value. We have 6.1 million shares authorized under the Other Plans, of
which 1.5 million options and restricted shares are outstanding, and 1.1 million
shares were available for grant.
Stock Purchase Plan
We have 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. Under the Purchase Plan, rights to purchase shares are granted
during the second and fourth quarter of each fiscal year. There were 9.2 million
shares available for issuance as of March 31, 2010.
During fiscal 2009, our
Board of Directors cancelled rights to purchase shares under our Purchase Plan
for the fourth quarter of fiscal 2009 and for fiscal 2010. On January 1, 2010,
the Purchase Plan was reinstated and amended to set the maximum number of shares
available in any one offering period to no more than two million shares.
Employees purchased 1.9 million shares and 2.6 million shares of common stock
under the Purchase Plan in fiscal 2009 and 2008, respectively. The
weighted-average price of stock purchased under the Purchase Plan was $1.37 and
$2.08 in fiscal 2009 and 2008, respectively.
Determining Fair Value
Stock Options
We use the Black-Scholes
option valuation model for estimating fair value of stock options granted under
our plans and rights to acquire stock granted under our Purchase Plan. We
amortize the fair value of stock options on a ratable basis over the requisite
service periods, which are generally the vesting periods. The expected life of
awards granted represents the period of time that they are expected to be
outstanding. We determine the expected life based on historical experience with
similar awards, giving consideration to the contractual terms, exercise patterns
and post-vesting forfeitures. We estimate volatility based on the historical
volatility of our common stock over the most recent period corresponding with
the estimated expected life of the award. We base the risk-free interest rate
used in the Black-Scholes option valuation model on the implied yield currently
available on U.S. Treasury zero-coupon issues with an equivalent term equal to
the expected life of the award. We have not paid any cash dividends on our
common stock and do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero. We use
historical data to estimate pre-vesting option forfeitures and record
share-based compensation for those awards that are expected to vest. We adjust
share-based compensation for changes to the estimate of expected equity award
forfeitures based on actual forfeiture experience. The effect of adjusting the
forfeiture rate is recognized in the period the forfeiture estimate is
changed.
The weighted-average
estimated fair values and the assumptions used in calculating such values for
stock options during each fiscal period are as follows:
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Option life (in years) | 3.9 | 4.0 | 3.8 | ||||||||
| Risk-free interest rate | 2.05 | % | 2.54 | % | 4.51 | % | |||||
| Stock price volatility | 107.67 | % | 56.59 | % | 44.54 | % | |||||
| Dividend yield | — | — | — | ||||||||
| Weighted-average grant date fair value | $ | 0.73 | $ | 0.66 | $ | 1.24 | |||||
79
The above assumptions
were used to calculate the fair value of options granted under the Long-Term
Incentive Plan and Other Plans.
Restricted Stock
The fair value of our
restricted stock is the intrinsic value as of the grant date.
Stock Purchase Plan
Under the Purchase Plan,
rights to purchase shares are granted during the second and fourth quarter of
each fiscal year. Due to reinstatement of the Purchase Plan on January 1, 2010,
rights to purchase shares were granted in February 2010 and such shares will be
purchased in August 2010, or the second quarter of fiscal 2011. The
weighted-average fair values and the assumptions used in calculating fair values
during each fiscal period are as follows:
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Option life (in years) | 0.50 | 0.50 | 0.50 | ||||||||
| Risk-free interest rate | 0.15 | % | 2.84 | % | 3.93 | % | |||||
| Stock price volatility | 69.14 | % | 60.98 | % | 48.49 | % | |||||
| Dividend yield | — | — | — | ||||||||
| Weighted-average grant date fair value | $ | 0.82 | $ | 0.81 | $ | 0.79 | |||||
Share-Based Compensation
Expense
The following tables
summarize share-based compensation expense (in thousands):
| For the year ended March 31, | ||||||||
| 2010 | 2009 | 2008 | ||||||
| Share-based compensation expense included in operations: | ||||||||
| Cost of revenue | $ | 1,366 | $ | 1,419 | $ | 1,929 | ||
| Research and development | 2,373 | 2,722 | 3,778 | |||||
| Sales and marketing | 2,581 | 2,695 | 3,269 | |||||
| General and administrative | 3,469 | 3,756 | 5,022 | |||||
| Total share-based compensation expense | $ | 9,789 | $ | 10,592 | $ | 13,998 | ||
| For the year ended March 31, | ||||||||
| 2010 | 2009 | 2008 | ||||||
| Share-based compensation by type of award: | ||||||||
| Stock options | $ | 3,633 | $ | 3,450 | $ | 5,911 | ||
| Restricted stock | 5,878 | 6,447 | 6,318 | |||||
| Stock purchase plan | 278 | 695 | 1,769 | |||||
| Total share-based compensation expense | $ | 9,789 | $ | 10,592 | $ | 13,998 | ||
The total share-based
compensation cost capitalized as part of inventory as of March 31, 2010 and 2009
was not material. During fiscal 2010, 2009 and 2008, no tax benefit was realized
for the tax deduction from option exercises and other awards due to our net
operating losses and tax benefit carryforwards.
As of March 31, 2010,
there was $6.9 million of total unrecognized compensation cost related to stock
options granted under our plans. This unrecognized compensation cost is expected
to be recognized over a weighted-average period of 2.0 years. Total intrinsic
value of options exercised for the years ended March 31, 2010, 2009 and 2008 was
$1.9 million, $26,000 and $5.4 million, respectively. We settle stock option
exercises by issuing additional common shares.
80
As of March 31, 2010,
there was $4.3 million of total unrecognized compensation cost related to
nonvested restricted stock granted under our plans. The unrecognized
compensation cost for restricted stock is expected to be recognized over a
weighted-average period of 1.0 years. Total fair value of awards released during
the years ended March 31, 2010, 2009 and 2008 was $3.1 million, $2.6 million and
$4.3 million, respectively, based on the fair value of our common stock on the
date of award release. We issue additional common shares upon vesting of
restricted stock units.
Stock Activity
Stock Options
A summary of activity
relating to all of our stock option plans is as follows (options and intrinsic
value in thousands):
| Options | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||
| Outstanding as of March 31, 2007 | 36,259 | $ | 3.62 | |||||||
| Granted | 4,985 | 3.15 | ||||||||
| Exercised | (5,847 | ) | 2.21 | |||||||
| Forfeited | (6,947 | ) | 5.54 | |||||||
| Expired | (283 | ) | 11.42 | |||||||
| Outstanding as of March 31, 2008 | 28,167 | 3.27 | ||||||||
| Granted | 2,597 | 1.60 | ||||||||
| Exercised | (61 | ) | 1.41 | |||||||
| Forfeited | (4,159 | ) | 3.28 | |||||||
| Expired | (918 | ) | 5.64 | |||||||
| Outstanding as of March 31, 2009 | 25,626 | 3.02 | ||||||||
| Granted | 9,655 | 1.01 | ||||||||
| Exercised | (1,883 | ) | 1.51 | |||||||
| Forfeited | (1,778 | ) | 3.32 | |||||||
| Expired | (291 | ) | 11.08 | |||||||
| Outstanding as of March 31, 2010 | 31,329 | $ | 2.40 | 4.11 | $ | 23,624 | ||||
| Vested and expected to vest at March 31, 2010 | 30,008 | $ | 2.46 | 4.02 | $ | 21,544 | ||||
| Exercisable as of March 31, 2010 | 20,049 | $ | 3.02 | 3.10 | $ | 7,952 | ||||
The following table
summarizes information about options outstanding and exercisable as of March 31,
2010 (options in thousands):
| Range of Exercise Prices | Options Outstanding |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (Years) |
Options Exercisable |
Weighted- Average Exercise Price |
|||||||||||
| $ | 0.11 | - | $ | 0.75 | 150 | $ | 0.32 | 5.74 | 41 | $ | 0.31 | |||||
| $ | 0.77 | - | $ | 1.13 | 8,793 | 0.98 | 6.13 | 263 | 0.90 | |||||||
| $ | 1.14 | - | $ | 1.68 | 3,725 | 1.40 | 3.39 | 3,078 | 1.44 | |||||||
| $ | 1.69 | - | $ | 2.53 | 7,513 | 2.08 | 3.58 | 6,628 | 2.07 | |||||||
| $ | 2.54 | - | $ | 3.80 | 9,189 | 3.21 | 3.37 | 8,179 | 3.21 | |||||||
| $ | 3.82 | - | $ | 5.70 | 326 | 3.99 | 4.34 | 227 | 3.99 | |||||||
| $ | 6.70 | - | $ | 8.55 | 604 | 6.76 | 2.07 | 604 | 6.76 | |||||||
| $ | 8.72 | - | $ | 12.82 | 963 | 10.40 | 0.93 | 963 | 10.40 | |||||||
| $ | 13.25 | - | $ | 15.00 | 66 | 13.46 | 0.72 | 66 | 13.46 | |||||||
| 31,329 | $ | 2.40 | 4.11 | 20,049 | $ | 3.02 | ||||||||||
81
Expiration dates ranged
from May 2010 to March 2017 for options outstanding at March 31, 2010. Prices
for options exercised during the three-year period ended March 31, 2010, ranged
from $0.11 to $3.44.
Restricted Stock
A summary of activity
relating to our restricted stock follows (shares in thousands):
| Shares | Weighted- Average Grant Date Fair Value |
||||
| Nonvested at March 31, 2007 | 3,714 | $ | 1.69 | ||
| Granted | 3,471 | 3.01 | |||
| Vested | (1,355 | ) | 2.28 | ||
| Forfeited | (922 | ) | 1.61 | ||
| Nonvested at March 31, 2008 | 4,908 | 2.48 | |||
| Granted | 3,870 | 1.41 | |||
| Vested | (1,887 | ) | 2.71 | ||
| Forfeited | (633 | ) | 2.17 | ||
| Nonvested at March 31, 2009 | 6,258 | 1.78 | |||
| Granted | 2,526 | 1.45 | |||
| Vested | (2,853 | ) | 2.01 | ||
| Forfeited | (796 | ) | 0.83 | ||
| Nonvested at March 31, 2010 | 5,135 | $ | 1.64 | ||
Note 11: 401K Plan
Substantially all of the
U.S. employees are eligible to make contributions to our 401(k) savings and
investment plan. We matched a percentage of our employees’ contributions through
December 31, 2008 and could make discretionary contributions to the plan.
Commencing in the fourth quarter of fiscal 2009, the plan was amended to remove
automatic matching contributions and retain discretionary contributions. We made
discretionary contributions in fiscal 2010 and in the fourth quarter of fiscal
2009 in an amount approximating our prior matching contribution rate. Employer
contributions were $2.5 million, $2.9 million and $3.3 million in fiscal 2010,
2009 and 2008, respectively.
82
Note 12: Income Taxes
Income tax provision
(benefit) consists of the following (in thousands):
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Federal: | |||||||||||
| Current | $ | (465 | ) | $ | (3,205 | ) | $ | 150 | |||
| Deferred | — | — | — | ||||||||
| (465 | ) | (3,205 | ) | 150 | |||||||
| State: | |||||||||||
| Current | (361 | ) | 321 | 699 | |||||||
| Deferred | — | — | — | ||||||||
| (361 | ) | 321 | 699 | ||||||||
| Foreign: | |||||||||||
| Current | 2,577 | 2,319 | (1,191 | ) | |||||||
| Deferred | (477 | ) | (316 | ) | (140 | ) | |||||
| 2,100 | 2,003 | (1,331 | ) | ||||||||
| Income tax provision (benefit) | $ | 1,274 | $ | (881 | ) | $ | (482 | ) | |||
The income tax provision
(benefit) differs from the amount computed by applying the federal statutory
rate of 35% to income (loss) before income taxes as follows (in
thousands):
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Expense (benefit) at federal statutory rate | $ | 6,268 | $ | (125,701 | ) | $ | (21,251 | ) | |||
| State taxes | 340 | 312 | 641 | ||||||||
| Unbenefited losses and credits | (5,591 | ) | 127,695 | 21,836 | |||||||
| Net accrual (release) of contingent tax reserves | 315 | (3,154 | ) | (1,558 | ) | ||||||
| Other | (58 | ) | (33 | ) | (150 | ) | |||||
| $ | 1,274 | $ | (881 | ) | $ | (482 | ) | ||||
Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of deferred tax
assets and liabilities are as follows (in thousands):
83
| For the year ended March 31, | |||||||
| 2010 | 2009 | ||||||
| Deferred tax assets: | |||||||
| Inventory valuation method | $ | 15,254 | $ | 20,262 | |||
| Accrued warranty expense | 2,383 | 4,516 | |||||
| Distribution reserves | 1,785 | 2,906 | |||||
| Loss carryforwards | 46,270 | 42,921 | |||||
| Foreign tax and research and development credit carryforwards | 236,472 | 243,407 | |||||
| Restructuring charge accruals | 1,537 | 1,565 | |||||
| Other accruals and reserves not currently deductible for tax purposes | 31,505 | 31,260 | |||||
| Depreciation and amortization methods | 14,448 | 19,886 | |||||
| 349,654 | 366,723 | ||||||
| Less valuation allowance | (255,356 | ) | (270,403 | ) | |||
| Deferred tax asset | $ | 94,298 | $ | 96,320 | |||
| Deferred tax liabilities: | |||||||
| Acquired intangibles | $ | (28,881 | ) | $ | (43,062 | ) | |
| Tax on unremitted foreign earnings | (18,053 | ) | (18,951 | ) | |||
| Other | (48,133 | ) | (35,562 | ) | |||
| Deferred tax liability | $ | (95,067 | ) | $ | (97,575 | ) | |
| Net deferred tax liability | $ | (769 | ) | $ | (1,255 | ) | |
Pre-tax income (loss)
reflected in the consolidated statements of operations for the years ended March
31, 2010, 2009 and 2008 are as follows (in thousands):
| For the year ended March 31, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||
| U.S. | $ | 16,374 | $ | (361,178 | ) | $ | (48,806 | ) | ||
| Foreign | 1,534 | 2,033 | (11,910 | ) | ||||||
| $ | 17,908 | $ | (359,145 | ) | $ | (60,716 | ) | |||
A reconciliation of the
gross unrecognized tax benefits follows (in thousands):
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Balance at April 1 | $ | 32,210 | $ | 22,572 | $ | 26,010 | |||||
| Settlement and effective settlements with tax authorities and related remeasurements | — | (3,136 | ) | (2,926 | ) | ||||||
| Lapse of statute of limitations | (290 | ) | (2,430 | ) | (631 | ) | |||||
| Increase in balances related to tax positions taken in prior period | 800 | — | 631 | ||||||||
| Decreases for tax positions taken in prior year | — | (807 | ) | (512 | ) | ||||||
| Increases in balances related to tax positions taken during current period | 572 | 16,011 | — | ||||||||
| Balance at March 31 | $ | 33,292 | $ | 32,210 | $ | 22,572 | |||||
During fiscal 2010, we
recorded a net increase in our unrecognized tax benefits. Including interest and
penalties, the total unrecognized tax benefit at March 31, 2010 was $34.0
million. Of this total, $34.0 million, if recognized, would favorably affect the
effective tax rate.
84
We recognize interest
and penalties related to uncertain tax positions in income tax expense. To the
extent accrued interest and penalties do not become payable, amounts accrued
will be reduced and reflected as a reduction of the overall income tax provision
in the period that such determination is made. At March 31, 2010 accrued
interest and penalties totaled $1.0 million.
We file our tax returns
as prescribed by the laws of the jurisdictions in which we operate. Our U.S. tax
returns have been audited for years through 2002 by the Internal Revenue
Service. In other major jurisdictions, we are generally open to examination for
the most recent three to five fiscal years. Although timing of the resolution
and closure on audits is highly uncertain, we do not believe it is likely that
the unrecognized tax benefits would materially change in the next 12 months.
In connection with the
disposition of our hard-disk drive business, HDD, to Maxtor, we entered into a
Tax Sharing and Indemnity Agreement with Maxtor, dated as of April 2, 2001 (the
“Tax Sharing Agreement”) that, among other things, defined each company’s
responsibility for taxes attributable to periods prior to April 2, 2001.
Pursuant to a settlement agreement entered into between the companies dated as
of December 23, 2004, Maxtor’s remaining tax indemnity liability under section
3(a) of the Tax Sharing Agreement was limited to $8.8 million. As of March 31,
2010, $6.0 million remains as the indemnity liability. We believe that this
amount is sufficient to cover the remaining potential tax liabilities under this
section of the Tax Sharing Agreement.
As of March 31, 2010, we
had federal net operating loss and tax credit carryforwards of approximately
$176.9 million and $174.0 million, respectively. Our federal net operating loss
carryforwards include $28.3 million attributable to excess tax deductions from
stock option exercises, and are not included in the deferred tax assets shown
above. The benefit of these loss carryforwards will be credited to equity when
realized. The net operating loss and tax credit carryforwards expire in varying
amounts beginning in fiscal 2011 if not previously utilized, the utilization of
which is limited under the tax law ownership change provision. These
carryforwards include $11.9 million of acquired net operating losses and $9.9
million of credits.
Our manufacturing
operations in Malaysia operated under a tax holiday which expires in fiscal
2016. We sold this Malaysia subsidiary in fiscal 2008 and had no material tax
holiday benefits in fiscal 2010, 2009 or 2008.
Due to our history of
net losses, and the difficulty in predicting future results, we believe that we
cannot rely on projections of future taxable income to realize the deferred tax
assets. Accordingly, we have established a full valuation allowance against our
U.S. net deferred tax assets. Significant management judgment is required in
determining our deferred tax assets and liabilities and valuation allowances for
purposes of assessing our ability to realize any future benefit from our net
deferred tax assets. We intend to maintain this valuation allowance until
sufficient positive evidence exists to support the reversal of the valuation
allowance. Our income tax expense recorded in the future will be reduced to the
extent that sufficient positive evidence materializes to support a reversal of,
or decrease in, our valuation allowance.
Certain changes in stock
ownership could result in a limitation on the amount of net operating loss and
tax credit carryovers that can be utilized each year. Should the company undergo
such a change in stock ownership, it would severely limit the usage of these
carryover tax attributes against future income, resulting in additional tax
charges.
Note 13: Net Income (Loss) Per
Share
Equity Instruments
Outstanding
We have granted stock
options and restricted stock units under our Plans that, upon exercise and
vesting, respectively, would increase shares outstanding. We issued 4.375%
convertible subordinated notes which are convertible at the option of the
holders at any time prior to maturity into shares of Quantum common stock at a
conversion price of $4.35 per share. These notes, if converted, would increase
shares outstanding.
On June 3, 2009, we
entered into an agreement with EMC Corporation ("EMC”) which provides for the
issuance of certain warrants. On June 23, 2009, we issued a warrant to EMC to
purchase 10 million shares of our common stock at a $0.38 per share exercise
price. Only in the event of a change of control of Quantum will this warrant
vest and be exercisable. It expires either seven years from the date of issuance
or three years after a change of control, whichever occurs first. Due to these
terms, no share-based compensation expense related to this warrant has been
recorded to date.
85
In addition, under the
June 3, 2009 agreement, as amended, we will grant additional warrants to EMC if
certain DXi software revenue amounts are reached by specific dates. The
necessary revenue amounts are not forecasted to be reached by the specific dates
to cause additional warrants to be earned. If additional warrants are earned,
they are issuable to EMC within 30 days following August 31, 2010 and August 31,
2011 with the same vesting and exercise conditions as the warrant issued June
23, 2009. In no event shall warrants be issued or exercisable to the extent that
issuance or exercise would result in EMC holding, or being deemed to hold, more
than 15% of our issued and outstanding capital stock. Upon exercise, warrants
would increase shares outstanding.
Net Income (Loss) per
Share
The following table set
forth the computation of basic and diluted net income (loss) per share (in
thousands, except per-share data):
| For the year ended March 31, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| Net income (loss) | $ | 16,634 | $ | (358,264 | ) | $ | (60,234 | ) | |||
| Interest on dilutive notes | 1,249 | — | — | ||||||||
| Net gain on extinguishment of dilutive notes | (12,859 | ) | — | — | |||||||
| Net income (loss) for purposes of computing net income (loss) per diluted share | $ | 5,024 | $ | (358,264 | ) | $ | (60,234 | ) | |||
| Weighted average shares and common share equivalents (“CSE”): | |||||||||||
| Basic | 212,672 | 209,041 | 202,432 | ||||||||
| Dilutive CSE from stock plans | 4,056 | — | — | ||||||||
| Dilutive CSE from purchase plan | 471 | ||||||||||
| Dilutive CSE from convertible notes | 6,562 | — | — | ||||||||
| Diluted | 223,761 | 209,041 | 202,432 | ||||||||
| Basic net income (loss) per share | $ | 0.08 | $ | (1.71 | ) | $ | (0.30 | ) | |||
| Diluted net income (loss) per share | $ | 0.02 | $ | (1.71 | ) | $ | (0.30 | ) | |||
The computations of
diluted net income (loss) per share for the periods presented excluded the
following because the effect would have been antidilutive:
|
•
|
4.375% convertible
subordinated notes issued in July 2003, which are convertible into shares
of Quantum common stock
(229.885 shares per $1,000 note) at a conversion price of $4.35 per share.
For fiscal 2010, 5.1 million weighted equivalent shares were excluded. For fiscal 2009
and 2008, 36.8 million weighted equivalent shares were
excluded.
|
|
•
|
For fiscal 2010, options to
purchase 18.8 million weighted average shares were excluded. Options to
purchase 25.6 million
shares and 28.2 million shares were excluded for fiscal 2009 and 2008,
respectively.
|
|
•
|
Unvested restricted stock
units of 0.2 million weighted average shares for fiscal 2010 were
excluded. Unvested restricted stock units of 6.3 million shares and 4.9 million shares
outstanding at March 31, 2009 and 2008, respectively, were
excluded.
|
86
Note 14: Litigation
On October 9, 2007, we
filed a lawsuit against Riverbed Technology, Inc. (“Riverbed”) in the U.S.
District Court in the Northern District of California, alleging Riverbed’s prior
and continuing infringement of a patent held by Quantum related to data
deduplication technology. On November 13, 2007, Riverbed filed a countersuit
against Quantum alleging our infringement of a data deduplication patent held by
Riverbed. On September 30, 2008, Quantum and Riverbed settled their mutual
patent infringement lawsuits that were pending. The settlement agreement
included a mutual covenant not to sue related to the parties’ data deduplication
patents and a one-time $11.0 million payment from Riverbed to Quantum. The
mutual covenant not to sue provided for in the settlement agreement operates
similarly to a cross license. This $11.0 million was based on prior sales of the
parties’ data deduplication products. In addition, the parties agreed, for a
period of three years, not to file any patent infringement lawsuits against the
other party. The $11.0 million settlement was recorded in royalty revenue for
the second quarter of fiscal 2009.
Note 15: Sale of Malaysia
Subsidiary
On July 1, 2007 we sold
a Malaysia subsidiary to a third party contract manufacturer (“the Purchaser”)
for approximately $8.3 million in cash. We effectively sold the assets of our
Malaysian manufacturing operation, including the facility, inventory and other
assets, and the Purchaser assumed certain liabilities in the sale. There was no
gain or loss from this sale. We received net proceeds of $2.2 million, net of
cash sold. In connection with the sale agreement, a workforce of approximately
600 employees employed by us at June 30, 2007 transferred their employment to
the Purchaser on July 1, 2007. The value of assets sold to and liabilities
assumed by the Purchaser on July 1, 2007 was as follows (in
thousands):
| Amount | ||||
| Cash and cash equivalents | $ | 6,140 | ||
| Inventories | 7,031 | |||
| Property and equipment, net | 5,111 | |||
| Other assets | 422 | |||
| Accounts payable | (8,305 | ) | ||
| Other accrued liabilities | (2,083 | ) | ||
| $ | 8,316 | |||
Note 16: Commitments and
Contingencies
Lease Commitments
We lease certain
facilities under non-cancelable lease agreements. We also have equipment leases
for various office equipment. Some of the leases have renewal options ranging
from one to ten years and others contain escalation clauses and provisions for
maintenance, taxes or insurance. These leases are operating leases.
In February 2006, we
leased a campus facility in Colorado Springs, Colorado, comprised of three
buildings in three separate operating leases with initial terms of five, seven
and 15 years. We negotiated a reduced lease term through November 2009 for a
portion of one building, which we subleased to a third party. The future minimum
lease payment schedule below includes $33.0 million for this Colorado Springs
campus.
Rent expense was $13.8
million, $15.5 million and $17.3 million for fiscal 2010, 2009 and 2008,
respectively. Sublease income was $0.7 million, $1.3 million and $1.2 million
for fiscal 2010, 2009 and 2008, respectively.
87
Future minimum lease
payments under operating leases and sublease income are as follows (in
thousands):
| Lease Payments | Sublease Income | |||||
| For the year ending March 31, | ||||||
| 2011 | $ | 14,214 | $ | 107 | ||
| 2012 | 11,237 | 44 | ||||
| 2013 | 7,021 | — | ||||
| 2014 | 4,972 | — | ||||
| 2015 | 4,743 | — | ||||
| Thereafter | 21,159 | — | ||||
| $ | 63,346 | $ | 151 | |||
Commitments for Additional
Investments
As of March 31, 2010, we
had commitments to provide an additional $1.1 million in capital funding towards
investments we currently hold in two limited partnership venture capital funds.
If the limited partnership venture capital funds make a capital call, we will
invest funds as required until our remaining commitments are
satisfied.
Commitments to Purchase
Inventory
We use contract
manufacturers for certain manufacturing functions. Under these arrangements, the
contract manufacturer procures inventory to manufacture products based upon our
forecast of customer demand. We are responsible for the financial impact on the
contract manufacturer of any reduction or product mix shift in the forecast
relative to materials that the contract manufacturer had already purchased under
a prior forecast. Such a variance in forecasted demand could require a cash
payment for finished goods in excess of current customer demand or for costs of
excess or obsolete inventory. As of March 31, 2010 and 2009, we had issued
non-cancelable purchase commitments for $40.3 million and $48.4 million,
respectively, to purchase finished goods from our contract manufacturers and had
accrued $0.7 million and $0.5 million as of March 31, 2010 and 2009,
respectively, for finished goods in excess of current customer demand or for the
costs of excess or obsolete inventory.
Note 17: Geographic and Customer
Information
Revenue, attributed to
regions based on the location of customers, and long-lived assets, comprised of
property and equipment, by region were as follows (in thousands):
| For the year ended March 31, | ||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||
| Revenue | Long-Lived Assets |
Revenue | Long-Lived Assets |
Revenue | Long-Lived Assets |
|||||||||||||
| Americas | $ | 448,830 | $ | 22,522 | $ | 533,000 | $ | 25,787 | $ | 645,264 | $ | 35,580 | ||||||
| Europe | 188,367 | 1,099 | 218,157 | 1,610 | 263,624 | 2,417 | ||||||||||||
| Asia Pacific | 44,230 | 907 | 57,815 | 1,156 | 66,814 | 1,274 | ||||||||||||
| $ | 681,427 | $ | 24,528 | $ | 808,972 | $ | 28,553 | $ | 975,702 | $ | 39,271 | |||||||
88
We had one customer that
accounted for 10% or more of our revenue in current and prior years (revenue in
millions):
| For the year ended March 31, | |||||||||||||||
| 2010 | 2009 | 2008 | |||||||||||||
| Revenue | % of Revenue | Revenue | % of Revenue | Revenue | % of Revenue | ||||||||||
| Dell | $ | 86.5 | 13% | $ | 116.6 | 14% | $ | 155.5 | 16% | ||||||
Following are revenues
attributable to each of our product groups, services and royalties (in
thousands):
| For the year ended March 31, | |||||||||
| 2010 | 2009 | 2008 | |||||||
| Disk backup systems and software solutions | $ | 83,508 | $ | 87,574 | $ | 49,226 | |||
| Tape automation systems | 263,977 | 317,907 | 425,795 | ||||||
| Devices and non-royalty media | 108,616 | 151,003 | 239,816 | ||||||
| Service | 156,477 | 164,664 | 160,920 | ||||||
| Royalty | 68,849 | 87,824 | 99,945 | ||||||
| Total Revenue | $ | 681,427 | $ | 808,972 | $ | 975,702 | |||
Note 18: Unaudited Quarterly Financial
Data
(In thousands, except
per-share data)
| For the year ended March 31, 2010 | ||||||||||||||||
| 1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
|||||||||||||
| Revenue | $ | 160,340 | $ | 174,926 | $ | 181,710 | $ | 164,451 | ||||||||
| Gross margin | $ | 61,643 | $ | 76,629 | $ | 74,716 | $ | 67,049 | ||||||||
| Net income (loss) | $ | 5,008 | $ | 11,355 | $ | 4,636 | $ | (4,365 | ) | |||||||
| Basic net income (loss) per share | $ | 0.02 | $ | 0.06 | $ | 0.02 | $ | (0.02 | ) | |||||||
| Diluted net income (loss) per share | $ | (0.02 | ) | $ | 0.04 | $ | 0.02 | $ | (0.02 | ) | ||||||
| For the year ended March 31, 2009 | ||||||||||||||||
| 1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
|||||||||||||
| Revenue | $ | 221,791 | $ | 215,390 | $ | 203,668 | $ | 168,123 | ||||||||
| Gross margin | $ | 74,839 | $ | 82,875 | $ | 85,786 | $ | 60,814 | ||||||||
| Net loss | $ | (14,338 | ) | $ | (3,264 | ) | $ | (328,776 | ) | $ | (11,886 | ) | ||||
| Basic and diluted net loss per share | $ | (0.07 | ) | $ | (0.01 | ) | $ | (1.58 | ) | $ | (0.05 | ) | ||||
Net income for fiscal
2010 included a $12.9 million gain on debt extinguishment, net of costs, of
which $11.3 million and $1.6 million were recorded in the first and second
quarters of fiscal 2010, respectively. The results of operations for fiscal 2009
included a $339.0 million goodwill impairment charge which was recorded in the
third quarter of fiscal 2009.
89
QUANTUM CORPORATION
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS
Allowance for doubtful
accounts (in thousands):
| Balance at beginning of period |
Additions (Releases) charged to expense |
Deductions (i) | Balance at end of period |
|||||||||||
| For the year ended: | ||||||||||||||
| March 31, 2008 | $ | 6,431 | $ | 444 | $ | (1,129 | ) | $ | 5,746 | |||||
| March 31, 2009 | 5,746 | 569 | (4,316 | ) | 1,999 | |||||||||
| March 31, 2010 | 1,999 | (453 | ) | (748 | ) | 798 | ||||||||
(i) Uncollectible
accounts written off, net of recoveries.
90
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and
Procedures
Attached as exhibits to
this Annual Report on Form 10-K are certifications of our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required pursuant
to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). This “Controls and Procedures” section of this Annual Report on Form 10-K
includes information concerning the controls and controls evaluation referenced
in the certifications. This section of the Annual Report on Form 10-K should be
read in conjunction with the certifications and the report of
PricewaterhouseCoopers LLP (“PwC”) as described below, for a more complete
understanding of the matters presented.
Evaluation of Disclosure Controls and
Procedures
We evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form
10-K. This control evaluation was performed under the supervision and with the
participation of management, including our CEO and CFO. Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934, or the Exchange
Act, such as this Annual Report on Form 10-K is recorded, processed, summarized
and reported within the time periods specified by the Securities and Exchange
Commission, or the SEC. Disclosure controls are also designed to ensure that
such information is accumulated and communicated to our management, including
the CEO and CFO, as appropriate, to allow timely decisions regarding required
disclosure.
Based on the controls
evaluation, our CEO and CFO have concluded that, subject to the inherent
limitations noted below, as of the end of the period covered by this Annual
Report on Form 10-K, our disclosure controls were effective to provide
reasonable assurance that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified by the SEC, and that material information relating to us is
made known to management, including the CEO and the CFO, particularly during the
time when our periodic reports are being prepared.
Management Report on Internal Control over
Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management,
including our CEO and CFO, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of March 31, 2010 based on the
guidelines established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on the results of our
evaluation, our management concluded that our internal control over financial
reporting was effective as of March 31, 2010 to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial
statements for external reporting purposes in accordance with generally accepted
accounting principles.
PwC, our independent
registered public accounting firm, has issued an attestation report regarding
its assessment of the Company’s internal control over financial reporting as of
March 31, 2010, as set forth at the beginning of Part II, Item 8 of this Annual
Report on Form 10-K.
91
Limitations on Effectiveness of
Controls
Our management,
including our CEO and CFO, does not expect that our disclosure controls or our
internal control over financial reporting will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additional controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override
of the controls. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Changes in Internal Controls over Financial
Reporting
There was no change in
our internal control over financial reporting during the fourth quarter of
fiscal 2010 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
Non-Audit Services of Independent
Auditors
Sections 201 and 202 of
the Sarbanes-Oxley Act of 2002 (“the Act”), signed into law on July 30, 2002,
require that all audit services and non-audit services by our independent
auditors must be pre-approved by our Audit Committee. Furthermore, the Act
prohibits an auditor from performing certain non-audit services for an audit
client regardless of the Audit Committee’s approval, subject to certain
exceptions issued by the Public Company Accounting Oversight Board. All services
performed by PwC during fiscal 2010 were approved by our Audit Committee,
consistent with our internal policy.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and
Corporate Governance
The information required
by this item with respect to our directors, audit committee and audit committee
financial expert is incorporated by reference to the information set forth in
our proxy statement for the 2010 Annual Meeting of Stockholders to be filed with
the Commission within 120 days after the end of our fiscal year ended March 31,
2010. For information pertaining to our executive officers, refer to the
“Executive Officers of Quantum Corporation” section of Part I, Item 1 of this
Annual Report on Form 10-K.
We have adopted a code
of ethics that applies to our principal executive officer and all members of our
finance department, including the principal financial officer and principal
accounting officer. This code of ethics is posted on our website. The Internet
address for our website is: http://www.quantum.com, and the code of ethics may be found by
clicking “About Us” from the home page and then choosing “Corporate Governance.”
Copies of the code are available free upon request by a
stockholder.
We intend to satisfy the
disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or
waiver from, a provision of this code of ethics by posting such information on
our website, at the address and location specified above.
92
We have adopted
Corporate Governance Principles, which are available on our website at
http://www.quantum.com, where they may be found by clicking “About Us” from the home page and
then choosing “Corporate Governance.” Copies of our Corporate Governance
Principles are available free upon request by a stockholder. The charters of our
Audit Committee, Leadership and Compensation Committee and Corporate Governance
and Nominating Committee are also available on our website at http://www.quantum.com, where they may be found by clicking “About Us” from the home page and
then choosing “Corporate Governance.” Copies of these committee charters are
available free upon request by a stockholder.
ITEM 11. Executive
Compensation
The information required
by this item is incorporated by reference to the information set forth in our
proxy statement for the 2010 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended March 31,
2010.
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
The following discloses
our equity compensation plan information (securities in thousands):
| Year ended March 31, 2010 | |||||||
| (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted- average exercise price of outstanding options, warrants and rights |
Number
of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) |
|||||
| Equity Compensation Plans approved by stockholders (1) | 31,179 | $ | 2.00 | 14,417 | |||
| Equity Compensation Plans not approved by stockholders (2), (3) | 5,264 | $ | 2.60 | — | |||
| 36,443 | $ | 2.09 | 14,417 | ||||
| (1) | Included in the stockholder approved plans are 5.1 million restricted stock units with a zero purchase price. The weighted average exercise price of outstanding options for stockholder approved plans is $2.39. | ||
| (2) | The Supplemental Stock Option Plan (“SSOP”) was terminated April 1, 2003, from which time no new stock options or stock purchase rights will be granted. Outstanding stock options granted under the SSOP prior to April 1, 2003, remain outstanding and continue to be governed by the terms and conditions of the SSOP. | ||
| (3) | Advanced Digital Information Corporation’s 1999 Stock Incentive Compensation Plan and 1996 Stock Option Plan were assumed by Quantum on August 22, 2006 according to the terms detailed in the Agreement and Plan of Merger dated May 2, 2006 (“Merger Agreement”). Such outstanding options granted under these plans continue to be governed by the terms and conditions of the respective plan; however, the number of options and exercise prices of the outstanding options were changed in accordance with the formula in the Merger Agreement for the right to purchase Quantum common stock. | ||
We also have an employee
stock purchase plan with 9.2 million shares available for issuance that has been
approved by stockholders.
The remaining
information required by this item is incorporated by reference to the
information set forth in our proxy statement for the 2010 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year ended March 31, 2010.
93
ITEM 13. Certain Relationships and Related
Transactions, and Director Independence
The information required
by this item is incorporated by reference to the information set forth in our
proxy statement for the 2010 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended March 31,
2010.
ITEM 14. Principal Accounting Fees and
Services
The information required
by this item is incorporated by reference to the information set forth in our
proxy statement for the 2010 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended March 31,
2010.
PART IV
ITEM 15. Exhibits, Financial Statement
Schedules
Upon written request, we
will provide, without charge, a copy of our Annual Report on Form 10-K,
including the Consolidated Financial Statements, financial statement schedules
and any exhibits for our most recent fiscal year. All requests should be sent
to:
Investor Relations
Quantum Corporation
1650 Technology Drive, Suite 800
San Jose, California 95110
(408) 944-4450
Quantum Corporation
1650 Technology Drive, Suite 800
San Jose, California 95110
(408) 944-4450
(a) The following documents are
filed as a part of this Report:
| 1. | Financial Statements—Our Consolidated Financials Statements are listed in the Index to Consolidated Financial Statements. | ||
| 2. | Financial Statement Schedules — Our consolidated valuation and qualifying accounts (Schedule II) financial statement schedule is listed in the Index to Consolidated Financial Statements. All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or the notes hereto. | ||
(b) Exhibits
94
| Incorporated by Reference | ||||||||||
| Exhibit Number |
Exhibit Description | Form | File No. | Exhibit(s) | Filing Date | |||||
| 3.1 | Amended and Restated Certificate of Incorporation of Registrant. | 8-K | 001-13449 | 3.1 | August 16, 2007 | |||||
| 3.2 | Amended and Restated By-laws of Registrant, as amended. | 8-K | 001-13449 | 3.1 | December 5, 2008 | |||||
| 3.3 | Certificate of Designation of Rights, Preferences and Privileges of Series B Junior Participating Preferred Stock. | S-3 | 333-109587 | 4.7 | October 9, 2003 | |||||
| 3.4 | Certification of Amendment to the Bylaws of Quantum Corporation, as adopted on January 20, 2010. | 8-K | 001-13449 | 3.1 | January 26, 2010 | |||||
| 4.1 | Stockholder Agreement, dated as of October 28, 2002, by and between Registrant and Private Capital Management. | 10-Q | 001-13449 | 4.2 | November 13, 2002 | |||||
| 4.2 | Indenture, dated as of July 30, 2003, between Registrant and U.S. Bank National Association, related to the Registrant’s convertible debt securities. | S-3 | 333-109587 | 4.1 | October 9, 2003 | |||||
| 10.1 | Form of Indemnification Agreement between Registrant and the Named Executive Officers and Directors. * | 8-K | 001-13449 | 10.4 | April 4, 2007 | |||||
| 10.2 | Form of Amended and Restated Officer Change of Control Agreement between Registrant and the Executive Officers (other than the Chief Executive Officer). * | 8-K | 001-13449 | 10.4 | November 15, 2007 | |||||
| 10.3 | Form of Amended and Restated Chief Executive Officer Change of Control Agreement, between Registrant and the Chief Executive Officer. * | 8-K | 001-13449 | 10.3 | November 15, 2007 | |||||
| 10.4 | Form of Amended and Restated Director Change of Control Agreement, between Registrant and the Directors. (Other than the Chairman and the CEO). * | 8-K | 001-13449 | 10.5 | November 15, 2007 | |||||
| 10.5 | Amended and Restated 1993 Long-Term Incentive Plan effective November 10, 2007. * | 8-K | 001-13449 | 10.1 | November 15, 2007 | |||||
| 10.6 | Form of Restricted Stock Unit Agreement. For U.S. employees under the Amended and Restated 1993 Long-Term Incentive Plan. * | 10-Q | 001-13449 | 10.3 | November 7, 2008 | |||||
| 10.7 | Form of Restricted Stock Unit Agreement. For non-U.S. employees under the Amended and Restated 1993 Long-Term Incentive Plan. * | 10-Q | 001-13449 | 10.4 | November 7, 2008 | |||||
| 10.8 | 1993 Long-Term Incentive Plan Form of Stock Option Agreement. * | Schedule TO | 005-35818 | 99(d)(5) | June 4, 2001 | |||||
| 10.9 | Amended and Restated Nonemployee Director Equity Incentive Plan effective November 10, 2007. * | 8-K | 001-13449 | 10.2 | November 15, 2007 | |||||
| 10.10 | Form of Director Grant Agreement under the Amended and Restated Nonemployee Director Equity Incentive Plan, effective November 10, 2007. * | 8-K | 001-13449 | 10.2 | August 23, 2007 | |||||
| 10.11 | Form of Restricted Stock Unit Agreement under the Amended and Restated Nonemployee Director Equity Incentive Plan, effective November 10, 2007. * | 10-Q | 001-13449 | 10.2 | November 7, 2008 | |||||
95
| Incorporated by Reference | ||||||||||
| Exhibit Number |
Exhibit Description | Form | File No. | Exhibit(s) | Filing Date | |||||
| 10.12 | Amended and Restated Employee Stock Purchase Plan, dated August 18, 2008. * | 8-K | 001-13449 | 10.1 | August 22, 2008 | |||||
| 10.13 | Employment Offer Letter, dated August 31, 2006, between Registrant and William C. Britts. * | 8-K | 001-13449 | 10.1 | September 7, 2006 | |||||
| 10.14 | Amendment to Employment Offer Letter between Registrant and William C. Britts. * | 10-Q | 001-13449 | 10.6 | November 7, 2008 | |||||
| 10.15 | Amendment to Employment Offer Letter between Registrant and William C. Britts.* | 10-Q | 001-13449 | 10.3 | February 5, 2010 | |||||
| 10.16 | Employment Offer Letter, dated August 28, 2006, between Registrant and Jon W. Gacek. * | 8-K | 001-13449 | 10.3 | September 7, 2006 | |||||
| 10.17 | Amendment to Employment Offer Letter between Registrant and Jon W. Gacek. * | 10-Q | 001-13449 | 10.7 | November 7, 2008 | |||||
| 10.18 | Amendment to Employment Offer Letter between Registrant and Jon W. Gacek.* | 10-Q | 001-13449 | 10.4 | February 5, 2010 | |||||
| 10.19 | Amendment to Employment Offer Letter between Registrant and Richard E. Belluzzo. * | 10-Q | 001-13449 | 10.5 | November 7, 2008 | |||||
| 10.20 | Amendment to Employment Offer Letter between Registrant and Richard E. Belluzzo.* | 10-Q | 001-13449 | 10.2 | February 5, 2010 | |||||
| 10.21 | Offer Letter, dated May 25, 2007, between Registrant and Joseph A. Marengi. * | 8-K | 001-13449 | 10.1 | May 25, 2007 | |||||
| 10.22 | Senior Secured Credit Agreement, dated July 12, 2007, by and among the Registrant, Credit Suisse, as Collateral Agent, Administrative Agent, Swing Line Lender and an L/C Issuer, and the other Lenders party thereto. | 10-Q | 001-13449 | 10.8 | August 9, 2007 | |||||
| 10.23 | Security Agreement, dated July 12, 2007, among the Registrant and the other Grantors referred to therein. | 10-Q | 001-13449 | 10.9 | August 9, 2007 | |||||
| 10.24 | Amendment No. 1, dated as of April 15, 2009, to Senior Secured Credit Agreement, dated July 12, 2007, by and among the Registrant, Credit Suisse, as Administrative Agent, and the Lenders thereto. | 8-K | 001-13449 | 10.1 | April 16, 2009 | |||||
| 10.25 | Offer Letter of Mr. Bruce A. Pasternack, dated July 12, 2007. * | 8-K | 001-13449 | 10.1 | July 18, 2007 | |||||
| 10.26 | Offer Letter of Mr. Dennis P. Wolf, dated July 12, 2007. * | 8-K | 001-13449 | 10.2 | July 18, 2007 | |||||
| 10.27 | Agreement for Purchase and Sale of Real Property, dated as November 18, 2005, among Registrant, SELCO Service Corporation and CS/Federal Drive LLC, as amended by Amendments 1 through 6. | 8-K | 001-13449 | 10.1 | February 10, 2006 | |||||
| 10.28 | Lease Agreement, dated February 6, 2006, between Registrant and CS/Federal Drive AB LLC (for Building A). | 8-K | 001-13449 | 10.2 | February 10, 2006 | |||||
| 10.29 | Lease Agreement, dated February 6, 2006, between Registrant and CS/Federal Drive AB LLC (for Building B). | 8-K | 001-13449 | 10.3 | February 10, 2006 | |||||
96
| Incorporated by Reference | ||||||||||
| Exhibit Number |
Exhibit Description | Form | File No. | Exhibit(s) | Filing Date | |||||
| 10.30 | Lease Agreement, dated February 6, 2006, between Registrant and CS/Federal Drive AB LLC (for Building C). | 8-K | 001-13449 | 10.4 | February 10, 2006 | |||||
| 10.31 | Patent Cross License Agreement, dated February 27, 2006, between Registrant and Storage Technology Corporation. | 8-K | 001-13449 | 10.1 | March 3, 2006 | |||||
| 10.32 | Tax Sharing and Indemnity Agreement by and among Registrant, Maxtor Corporation and Insula Corporation, dated April 2, 2001. | 8-K | 001-13449 | 10.1 | December 29, 2004 | |||||
| 10.33 | Mutual General Release and Global Settlement Agreement, dated as of December 23, 2004, between Maxtor Corporation and Registrant. | 10-Q | 001-13449 | 10.4 | February 2, 2005 | |||||
| 10.34 | Offer Letter, dated August 20, 2007, between Registrant and Paul Auvil. * | 8-K | 001-13449 | 10.1 | August 29, 2007 | |||||
| 10.35 | Senior Subordinated Term Loan Agreement, dated as of June 3, 2009, by and between Quantum Corporation and EMC International Company. | 8-K | 001-13449 | 10.1 | June 9, 2009 | |||||
| 10.36 | Warrant Purchase Agreement, dated as of June 3, 2009, by and between Quantum Corporation and EMC Corporation. | 8-K | 001-13449 | 10.1 | June 9, 2009 | |||||
| 10.37 | First Amendment to the Purchase Agreement, dated as of June 17, 2009, by and between Quantum Corporation and EMC Corporation. | 8-K | 001-13449 | 10.1 | June 23, 2009 | |||||
| 10.38 | Supplemental Senior Subordinated Term Loan Agreement dated as of June 29, 2009, by and between Quantum Corporation and EMC International Company. | 8-K | 001-13449 | 10.1 | July 1, 2009 | |||||
| 10.39 | Note Purchase Agreement, dated as of June 26, 2009, by and between Quantum Corporation and Tennenbaum Multi-Strategy Master Fund. | 8-K | 001-13449 | 10.2 | July 1, 2009 | |||||
| 10.40 | Amended and Restated Employee Stock Purchase Plan, dated January 1, 2010. | 8-K | 001-13449 | 10.1 | January 6, 2010 | |||||
| 12.1 | Ratio of Earnings to Fixed Charges. ‡ | |||||||||
| 21 | Quantum Subsidiaries. ‡ | |||||||||
| 23.1 | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP. ‡ | |||||||||
| 23.2 | Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP. ‡ | |||||||||
97
| Incorporated by Reference | ||||||||||
| Exhibit Number |
Exhibit Description | Form | File No. | Exhibit(s) | Filing Date | |||||
| 24 | Power of Attorney (see signature page). | |||||||||
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. ‡ | |||||||||
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. ‡ | |||||||||
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. † | |||||||||
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. † | |||||||||
* Indicates management
contract or compensatory plan, contract or arrangement.
‡ Filed herewith.
† Furnished
herewith.
98
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| QUANTUM CORPORATION |
| /s/ JON W. GACEK |
| Jon W. Gacek |
| Executive Vice President, Chief Financial Officer |
| and Chief Operating Officer |
Dated: June 11,
2010
99
POWER OF ATTORNEY
KNOW ALL PERSONS BY
THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Richard E. Belluzzo and Jon W. Gacek, 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 Annual 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 11,
2010.
| Signature | Title | ||
| /s/ | RICHARD E. BELLUZZO | Chairman of the Board and Chief Executive Officer | |
| Richard E. Belluzzo | (Principal Executive Officer) | ||
| /s/ | JON W. GACEK | Executive Vice President, Chief Financial Officer | |
| Jon W. Gacek | and Chief Operating Officer | ||
| (Principal Financial and Accounting Officer) | |||
| /s/ | PAUL R. AUVIL III | Director | |
| Paul R. Auvil III | |||
| /s/ | MICHAEL A. BROWN | Director | |
| Michael A. Brown | |||
| /s/ | THOMAS S. BUCHSBAUM | Director | |
| Thomas S. Buchsbaum | |||
| /s/ | EDWARD M. ESBER, JR. | Director | |
| Edward M. Esber, Jr. | |||
| /s/ | ELIZABETH A. FETTER | Director | |
| Elizabeth A. Fetter | |||
| /s/ | JOSEPH A. MARENGI | Director | |
| Joseph A. Marengi | |||
| /s/ | BRUCE A. PASTERNACK | Director | |
| Bruce A. Pasternack | |||
| /s/ | DENNIS P. WOLF | Director | |
| Dennis P. Wolf | |||
100