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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-12390
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QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 94-2665054
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
<TABLE>
<CAPTION>
500 McCarthy Blvd., Milpitas, California 95035
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
(408) 894-4000
Registrant's telephone number, including area code:
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
PREFERRED STOCK PURCHASE RIGHTS
7% CONVERTIBLE SUBORDINATED NOTES DUE 2004
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 23, 1999: $2,662,658,878 based upon the closing price
reported for such date on the NASDAQ National Market System. For purposes of
this disclosure, shares of Common Stock held by persons who hold more than 5%
of the outstanding shares of Common Stock and shares held by officers and
directors of the Registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
The number of shares outstanding of the Registrant's Common Stock as of May
23, 1999, was 167,351,230.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1999 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part
III of this Form 10-K Report.
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PART I
ITEM 1. Business
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements usually
contain the words "estimate," "anticipate," "expect" or similar expressions.
All forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties. These
uncertainties could cause actual results to differ materially from those
expected for the reasons set forth below under Trends and Uncertainties.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Business Description
Quantum operates its business through two separate business groups: the DLT
and Storage Systems group and the Hard Disk Drive group. A description of each
of these businesses follows.
BUSINESS OF THE DLT & STORAGE SYSTEMS GROUP
The DLT & Storage Systems group designs, develops, manufactures, licenses
and markets DLTtape(TM) drives, DLTtape media cartridges and tape libraries
which are used to back-up large amounts of data stored on network servers.
Digital Linear Tape, or DLTtape, is the DLT & Storage Systems group's half-inch
tape technology that is the de facto industry standard for data back-up in the
mid-range network server market, which includes network servers priced between
$10,000 and $500,000. The DLT & Storage Systems group's DLTtape media
cartridges are manufactured primarily by licensed third party manufacturers.
Tape back-up is used as an efficient and cost-effective means to make back-
up and archive copies of large amounts of data often stored on network servers
which are high speed computers that allow many computer users to access shared
computer programs and data. Tape drives are devices that read and write data
typically stored on a network server's hard disk drive storage system to
magnetic tape that is stored on a reel housed within the media cartridges. Tape
drives provide relatively slower data access times when compared to hard disk
drives but tape drives are able to cost-effectively store larger quantities of
data that must be protected but infrequently accessed. Each tape drive reads
and writes data on multiple media cartridges to store data in the same way a
video cassette recorder is able to replay and record TV programs on multiple
video cassette tapes. Tape libraries are systems that allow for the automatic
functioning of multiple tape drives and media cartridges within a single
storage system.
According to International Data Corporation, the DLT & Storage Systems group
was the worldwide revenue leader for all categories of tape drives used for
data storage and back-up in calendar year 1997 and is projected to have been
the leader in calendar year 1998. According to Dataquest, DLTtape drives are
projected to have accounted for 24% of total tape drive market revenue in
calendar year 1998, up from 2% in calendar year 1994. The DLT & Storage Systems
group is also a leader in the tape library market for mid-range network
servers.
The DLT & Storage Systems group's acquisition of ATL Products, Inc. in
October 1998 allowed the DLT & Storage Systems group to become the first
provider of tape libraries that serve the entire tape library data storage
market from desktop computers to enterprise class computers. The DLT & Storage
Systems group also plans to enter the rapidly emerging market for network
attached storage appliances by offering products designed to meet the
requirements of workgroup computing environments where multiple computer users
access shared data files over a local area network. Network attached storage
appliances are storage devices which separately perform the storage function
for networks of computers.
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DLTtape drives require compatible DLTtape media cartridges. Historical use
of DLTtape drives has shown that each drive uses approximately 15-20 media
cartridges per year. Growth in the installed base of DLTtape drives will result
in increasing demand for DLTtape media cartridges.
The installed base of DLTtape drives at the beginning of fiscal year 1999
was approximately 600,000, and grew to over 1 million during the fiscal year.
The larger installed base resulted in shipments of approximately 14 million
DLTtape media cartridges in fiscal year 1999. The DLT & Storage Systems group
expects the installed base to grow at least by the same amount in fiscal year
2000. This expectation is a forward-looking statement and actual results may be
affected by the factors discussed in "--Trends and Uncertainties Relating to
the DLT & Storage Systems Group." In September 1998, in an effort to continue
to expand the installed base of DLTtape drives, the DLT & Storage Systems group
also began licensing a third party supplier to manufacture and sell DLTtape
drives. The DLT & Storage Systems group will receive a royalty fee on all sales
of DLTtape drives by this licensee.
Historically, the DLT & Storage Systems group derived revenue from the
direct sale of both DLTtape drives and DLTtape media cartridges. Beginning in
1998, the DLT & Storage Systems group's licensed third party DLTtape media
manufacturers began selling DLTtape media cartridges. The DLT & Storage Systems
group receives a royalty fee on all DLTtape media cartridges sold by its
licensees which, while resulting in lower revenue than DLTtape media sold
directly by the DLT & Storage Systems group, generates comparable income from
operations. The DLT & Storage Systems group prefers DLTtape media cartridge
sales to occur through its license model because this minimizes the DLT &
Storage Systems group's operational risks and expenses and provides a more
efficient distribution channel. The DLT & Storage Systems group believes that
the large installed base of DLTtape drives and its licensing of DLTtape drives
and media cartridges give the DLT & Storage Systems group a unique competitive
advantage.
Industry Background
The importance of stored digital content has moved from a peripheral concern
to the central issue in computing. This is a result of several factors
including:
. Growth in Digital Content. Digital content--data, graphics, video and
audio--is growing at an exponential rate. This growth has been made
possible by new technologies that make it easy and cost-effective to
transform, move, access and store mass amounts of digital content. When
one gets cash from an ATM machine, starts a personal computer, buys gas
with a charge card, goes to the doctor or dentist, makes a hotel or
airline reservation or checks a book out of the library--one is either
tapping into stored digital content, creating new digital content that
has to be stored somewhere, or both.
. Shift from Mainframe to Networked Server Computing. Within enterprises,
there has been a fundamental shift from mainframe to networked server
computing that allows many users to share data and applications stored on
a single high-speed computer or network of high-speed computers. This
shift has resulted in the distribution of mission critical information
from the mainframe to network servers. It has also contributed
significantly to the volume growth of digital content, and has
significantly increased the complexity of managing digital content.
. Dramatic Growth of Internet. The Internet has grown dramatically from a
relatively small research-based network to a worldwide network of
networks. The Internet has created greater volumes of stored digital
content, given further momentum to the growth of networked servers within
businesses, and created the entirely new medium of exchange known as
electronic commerce.
As businesses increasingly depend on stored digital content, it must be
secure from human or technical errors, available 24 hours a day, seven days a
week, and recoverable after a disaster. Storage system solutions must reliably
and efficiently capture, protect, manage, back up and archive stored content.
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Because digital content is growing so rapidly in volume and importance, the
demand for storage and back-up capacity is also growing rapidly. International
Data Corporation estimates that worldwide storage needs are growing by up to
100% per year. This rapid growth is providing many opportunities for products
and services that are integral to total storage solutions, including devices
such as tape drives; systems and subsystems such as tape libraries; storage
management software; and storage services such as data back-up, disaster
recovery, media management.
Overview of the Tape Storage Market. The rapid growth in mission-critical
digital content has created a demand for high reliability, high capacity, high
performance data back-up systems. Tape storage is the lowest cost means of
storing large quantities of digital content when compared with fixed or
removable digital storage devices, because tape allows for larger storage
surface areas. Tape storage also offers the lowest price/capacity ratio of any
removable storage technology. As a result, tape storage has been used for many
years to back up and archive mission critical data stored on hard disk drives
and data that is not frequently accessed but is retained for long periods of
time.
Historically, the tape storage market has tracked the evolution of the
computer systems market. Tape storage initially served the mainframe back-up
and archival market. As the workstation computing market began to grow at the
end of the 1980s and into the 1990s, new tape drives were designed to meet the
back-up and archival needs of the workstation market. These tape drives
included the 4mm and 8mm tape media, which offered the capacities and lower
price points required for this market. As the Unix and Windows NT network
server markets grew rapidly, the tape market for mid-range network servers
emerged. Unix and Windows NT are popular operating systems used for network
servers. The mid-range network server market requires tape storage solutions
with high capacity, high performance, high reliability and greater scalability.
The mid-range network server market is expected to continue to grow as a result
of the continued expansion of the Unix and Windows NT network server markets.
Emerging Storage Industry Trends. During the past ten years, the computer
industry has been transformed by the emergence of dominant platforms, networked
computing and plug-and-play ease of use. The storage industry is now beginning
to experience similar changes as a result of the following:
. Storage architectures. Enterprise-level storage architectures attempt to
solve a very complex problem for an entire enterprise--integrating
storage management across diverse, distributed computers, networks and
operating systems. These architectures are high-end solutions, designed
to meet enterprise-wide transaction processing needs, and may require the
installation of an entire proprietary data storage system.
. Storage area networks. Storage area networks are intended to function at
the high-end server level where most enterprise storage is based. Storage
area networks are dedicated high-speed networks that expedite the
movement of data from one part of the system to another without tying up
servers or clogging local area networks.
. Network attached storage appliances. Network attached storage appliances
help overcome difficulties in sharing and protecting data created in
workgroup computing environments where multiple users access shared data
files over a local area network. They allow users to easily add plug-and-
play storage capacity to networks without having to disable the network
server, an inconvenient and expensive task. Network attached storage
appliances and storage area networks are complementary because they focus
on different segments of an organization's total digital content storage
needs--workgroup vs. enterprise. The DLT & Storage Systems group expects
both approaches to co-exist for the foreseeable future.
. New storage intelligence. Storage area networks and network attached
storage appliances require intelligence at the storage system level, and
the performance of both can be substantially improved with intelligence
at the device and sub-system levels. System level intelligence allows for
plug-and-play installation of storage devices, communication between
storage devices, such automated data transfer from disk to tape.
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The DLT & Storage Systems Group Solution
The DLT & Storage Systems group designs and manufactures DLTtape drives,
DLTtape media cartridges and tape libraries that address many of the diverse
storage needs of workgroups and enterprises. The DLT & Storage Systems group
plans to enter the rapidly emerging market for network attached storage
appliances with products targeted at workgroup computing environments where
multiple users access shared data files over a local area network.
The DLT & Storage Systems group's DLTtape technology has emerged as the de
facto industry standard for data back-up in the mid-range network server market
primarily for the following reasons:
. Higher capacity/cost-effectiveness. More digital information can be
stored on DLTtape than 4mm or 8mm tape as a result of the greater media
recording area of half-inch tape, patented linear recording pattern and
single reel media cartridge design. As a result, DLTtape technology
compares favorably on a price-to-capacity basis.
. Higher performance. The time periods allocated for network servers to
back up and archive data are becoming shorter. DLTtape drive's faster
data transfer rates address this issue.
. Higher reliability. The DLT & Storage Systems group believes that DLTtape
technology has proven more reliable than 4mm or 8mm tape technology. This
high reliability is due in part to the DLTtape drive's patented head
guide assembly that reduces tape wear and ensures data tracking accuracy.
Specifically, when compared to 4mm and 8mm tape drives, DLTtape drives
have much lower tape-to-head friction and no contact between the rollers
and the tape media's magnetic coating.
. Greater scalability. DLTtape products have higher capacity and
compatibility to previous generations of DLTtape products, providing a
scalable data back-up solution that can cost-effectively grow with an
organization's data back-up needs.
The DLT & Storage Systems group's current storage solutions have the
following core strengths:
. Broad industry acceptance of DLTtape technology. The broad acceptance of
DLTtape technology in the mid-range network server market has resulted in
DLTtape becoming an industry platform for data protection. The DLT &
Storage Systems group maintains close relationships with leading computer
equipment manufacturers. The DLT & Storage Systems group believes these
computer equipment manufacturers will set the industry standards, drive
product volume and continue to advance the market position of DLTtape
technology. In addition, many companies, including the DLT & Storage
Systems group's customers and competitors, design products based on
DLTtape technology including storage sub-systems, network servers and
storage management software. The emergence of DLTtape also has enabled
the development of an entirely new market segment of mid-range tape
libraries. DLTtape products are incorporated into the DLT & Storage
Systems group's tape libraries as well as many of the DLT & Storage
Systems group's competitor's products. As a result, many companies base
significant portions of their business on DLTtape technology.
. A broad tape library family. The DLT & Storage Systems group's ATL
acquisition allowed it to become the first company in the industry to
provide tape libraries that serve the entire tape library market from
desktop to enterprise wide data storage. The DLT & Storage Systems
group's broad line of tape libraries is particularly attractive to
computer equipment manufacturers customers who often prefer to deal with
a limited number of suppliers.
. A unique storage system architecture. The DLT & Storage Systems group's
Prism Library Architecture(TM), on which many of the DLT & Storage
Systems group's tape libraries are built, is a unique architecture which
enables storage systems to incorporate both tape drives and hard disk
drives within the same tape library. This enables tape libraries to take
advantage of both the speed of hard disk drives and the cost-
effectiveness of tape storage.
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. Efficient storage management capabilities. The DLT & Storage Systems
group's WebAdmin(TM), the industry's first Internet browser-based tape
library management system, allows system administrators to monitor widely
distributed storage systems at remote locations with point-and-click
ease.
The DLT & Storage Systems Group Strategy
The DLT & Storage Systems group's strategy is to leverage its strength and
expertise in storage device technology and storage systems into broader
industry leadership in storage systems and services. The DLT & Storage Systems
group's goal is to develop not only the devices that store digital content, but
also the intelligence that adds performance and functionality to storage
devices and the systems that support network digital content storage.
The primary components of the DLT & Storage Systems group's business
strategy are:
. Extend the DLT & Storage Systems group's number one position in the tape
drive and media cartridge market. The DLT & Storage Systems group plans
to execute this strategy by:
1) introducing new products such as those based on Super DLTtape(TM)
technology, which has the potential to expand the DLT & Storage
Systems group's technology leadership in the mid-range tape market.
Super DLTtape technology will feature native data transfer rates of
10-40 gigabytes (GB) per second and native capacities of 100-500GB.
The DLT & Storage Systems group plans to introduce its first product
based on Super DLTtape technology in calendar year 1999.
2) leveraging its relationships with licensees of its DLTtape drives and
DLTtape media cartridges in order to expand the market for these
products. The DLT & Storage Systems group's strategy is to expand the
market for DLTtape drives, particularly the international market,
further increasing demand for compatible DLTtape media cartridges.
3) increasing the awareness of the need for data back-up. A research
study commissioned by the DLT & Storage Systems group found that an
estimated 88% of companies participating in the study did not have an
effective disaster recovery plan in place. The DLT & Storage Systems
group and 20 other companies have jointly launched the "Prove It"
campaign to help companies evaluate, improve and implement effective
disaster recovery plans.
. Expand into the network attached storage appliance market. The DLT &
Storage Systems group plans to introduce network attached storage
appliances designed to meet the requirements of workgroup computing where
multiple users access shared data files and data over a local area
network. The DLT & Storage Systems group is developing a tape-based
appliance featuring a fully integrated controller; pre-loaded back-up
software; a tape library incorporating standard DLTtape drives and media
cartridges; automatic connectivity for remote website management; and
plug-and-play installation capability. The DLT & Storage Systems group is
also developing a hard disk drive-based appliance featuring a fully
integrated controller, file system and hard disk drive(s), and plug-and-
play installation capability.
. Further expand into the enterprise storage market. The DLT & Storage
Systems group believes that the planned introduction of new products
based on Super DLTtape technology, with higher storage capacity, faster
data transfer rates, and the added benefits derived from the Prism
Library Architecture and WebAdmin, will enable the DLT & Storage Systems
group to further expand into the enterprise storage market. The DLT &
Storage Systems group believes that the introduction of its enterprise-
level P3000 series tape library in the fall of 1998 is the first step
towards this expansion.
. Expand storage services business. Through its acquisition of ATL, the
DLT & Storage Systems group believes that it is now in a position to
capitalize on the growing market opportunity to provide services for both
the management of data and storage systems and the protection of data.
The DLT & Storage Systems group believes that customers will increasingly
rely on third parties to provide storage management services such as
remote monitoring, trouble-shooting and maintenance of storage systems.
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Products
The DLT & Storage Systems group's products include:
. DLTtape drives. The DLT & Storage Systems group offers three tape drive
products--the DLT8000, the DLT7000 and the DLT4000. The DLT8000 provides
a combination of 40GB of native capacity (80GB compressed) and a
sustained data transfer rate of 6 megabytes (MB) per second (12MB
compressed). The DLT7000 provides a combination of 35GB of native
capacity (70GB compressed) and a sustained data transfer rate of 5MB per
second (10MB compressed). The DLT4000 provides a combination of 20GB of
native capacity (40GB compressed) and a sustained data transfer rate of
1.5MB per second (3MB compressed). The DLT & Storage Systems group
expects to introduce a next generation DLTtape drive in calendar year
1999.
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges are designed and formulated specifically for use with DLTtape
drives. The capacity of a DLTtape media cartridge is up to 40GB (80GB
compressed). The DLT & Storage Systems group's half-inch tape cartridges
take advantage of shorter wavelength recording schemes to enable read
compatibility with future generations of DLTtape drives such as those
based on Super DLTtape technology.
. Tape libraries. The DLT & Storage Systems group offers a broad line of
automated DLTtape libraries that support a wide range of back-up and
archival needs from workgroup servers to enterprise-class servers. The
DLT & Storage Systems group's tape libraries range from its tape
autoloaders which accommodate a single DLTtape drive and up to 280GB of
storage capacity to the P3000 series library which features Prism Library
Architecture and can be configured in multiple units to scale up to 11.4
Terabytes of storage capacity.
. Solid state storage systems. The DLT & Storage Systems group offers two
families of solid state storage systems that are available in capacities
ranging from 134MB to 3.2GB and have data access times that are up to 15
times faster than magnetic hard disk drives. Solid state storage systems
store data on memory chips rather than magnetic disks used in standard
hard disk drives. Solid state storage systems function within a computer
system as if they were hard disk drives and enable significantly faster
data access times.
Customers
The DLT & Storage Systems group's DLTtape drives have achieved broad market
acceptance in the mid-range network server market with leading computer
equipment manufacturers such as Compaq, Dell Computer Corporation, Hewlett-
Packard Company, IBM, StorageTek and Sun Microsystems, Inc. Customers for the
DLT & Storage Systems group's tape libraries include Compaq, Sun Microsystems,
Hewlett-Packard, IBM and EMC Corporation. To protect the competitive position
of its tape library customers, the DLT & Storage Systems group operates the
tape library portion of its business through its wholly owned ATL subsidiary
which maintains an arms-length relationship with the DLT & Storage Systems
group's DLTtape drive business.
Because the leading computer equipment manufacturers have a dominant market
share for the computer systems into which the DLT & Storage Systems group's
products are incorporated, the DLT & Storage Systems group's sales are
concentrated with several key customers. Sales to the DLT & Storage Systems
group's top five customers in fiscal year 1999 represented 53% of revenue,
compared to 63% of revenue in fiscal year 1998. These amounts reflected a
retroactive combination of the sales to Compaq and Digital Equipment as a
result of their merger in June 1998. Sales to Compaq were 25% of revenue in
fiscal year 1999, compared to 36% of revenue in fiscal year 1998, including
sales made to Digital Equipment. Sales to Hewlett-Packard were 13% of revenue
in fiscal year 1999, compared to 11% of revenue in fiscal year 1998.
Sales and Marketing
The DLT & Storage Systems group markets its products directly to
manufacturers of computer systems and workstations and to distributors,
resellers and systems integrators through its worldwide sales force. The DLT &
Storage Systems group also sells DLTtape media cartridges through its web site.
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The DLT & Storage Systems group supports international sales and operations
by maintaining a European headquarters in Neuchatel, Switzerland; a Japanese
headquarters in Tokyo; and additional sales offices in Singapore and throughout
the world. The DLT & Storage Systems group's international sales, including
sales to foreign subsidiaries of United States companies, were 29% of the DLT &
Storage Systems group's total revenue in fiscal year 1999, and 24% and 22% of
total revenue in fiscal years 1997 and 1998, respectively.
Strategic Licensing Partners
Fuji Photo Film Co., Ltd. and Hitachi Maxell, Ltd. have historically been
the primary manufacturers of DLTtape media cartridges for the DLT & Storage
Systems group. The DLT & Storage Systems group's license agreements with Fuji
and Maxell allow those companies to independently sell DLTtape media cartridges
for which the DLT & Storage Systems group receives royalty fees. The DLT &
Storage Systems group believes these strategic license agreements can expand
the market for DLTape technology and provide customers with multiple sources
for DLTtape media cartridges.
In September 1998, the DLT & Storage Systems group entered into a
manufacturing license and marketing agreement with Tandberg Data ASA, a
European-based data storage company, through which Tandberg can become an
independent manufacturer of DLTtape drives, as well as products currently under
development based on Super DLTtape technology. Under the terms of the
agreement, the DLT & Storage Systems group will receive royalties on all
DLTtape drives that Tandberg sells. Tandberg has indicated that it expects to
begin manufacturing DLTtape drives in the second half of calendar year 1999.
Tandberg has also agreed to market a full spectrum of DLTtape drives, DLTtape
media cartridges and tape libraries. With Tandberg's strong name recognition
and established distribution channels in the European market, the DLT & Storage
Systems group expects Tandberg to strengthen international sales of DLTtape
drives, DLT tape media cartridges and tape libraries. The DLT & Storage Systems
group also expects Tandberg to provide an alternative source of DLTtape drives
for the DLT & Storage Systems group's computer equipment manufacturer
customers.
Manufacturing
The DLT & Storage Systems group manufactures DLTtape drives, autoloaders and
solid state storage systems in its Colorado Springs, Colorado facility and tape
libraries in its Irvine, California facility. The DLT & Storage Systems group
also has a logistics site in Dundalk, Ireland. All of the DLT & Storage Systems
group's DLTtape media cartridges are manufactured by third parties--primarily
Fuji and Maxell.
Research and Development
The DLT & Storage Systems group invested approximately $30 million, $63
million and $99 million in research and development in fiscal years 1997, 1998
and 1999, respectively. The DLT & Storage Systems group is focusing its
research and development efforts on the development of new DLTtape drives,
autoloaders and libraries, solid state storage systems, network attached
storage appliances and software storage architectures. In particular, the DLT &
Storage Systems group is currently developing a tape drive based on Super
DLTtape technology. The DLT & Storage Systems group maintains research and
development facilities in Shrewsbury, Massachusetts; Irvine, California;
Boulder, Colorado; and Milpitas, California.
Competition
In the mid-range network server market for tape drives, the DLT & Storage
Systems group competes primarily with Exabyte Corporation, Hewlett-Packard,
Sony Corporation and StorageTek. In particular, Hewlett-Packard, IBM and
Seagate Technology, Inc. have formed a consortium to develop new tape drive
products using linear tape open technology. Such products will target the high-
capacity data storage market and are expected to compete with Super DLTtape
technology. Key competitive factors in the tape storage market include
capacity, reliability, durability, scalability, compatibility and cost.
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ADIC, Breece Hill, Exabyte, Hewlett-Packard, Overland Data and StorageTek
also offer tape libraries incorporating DLTtape technology. If DLTtape
continues to maintain broad market acceptance in the mid-range network server
market, the DLT & Storage Systems group believes many of these companies will
continue to improve the functionality and performance of their tape libraries
designed for DLTtape technology. The DLT & Storage Systems group also expects
increased competition from large integrated computer equipment companies, many
of whom have historically incorporated their own tape storage products into
their mainframe systems, and are broadening their focus on the enterprise-wide
computing market.
The DLT & Storage Systems group believes that, although there are several
start-up companies focusing on the development of workgroup-level network
attached storage appliances, it will be the first established storage company
to enter this market. In addition, several established competitors provide
department-level network attached storage appliances at higher price points
including Network Appliance, Inc. and Auspex Systems, Inc. Large traditional
suppliers of general purpose computer servers also offer specialized server
storage solutions. Any one of these companies, or any other company, could
introduce network attached storage appliances or another similar storage
solution targeted at workgroup-level applications that could result in
increased competition with the DLT & Storage Systems group's network attached
storage appliances.
Warranty and Service
The DLT & Storage Systems group generally warrants its products against
defects for a period of one to three years from the date of sale. The DLT &
Storage Systems group generally provides warranty service on DLTtape drives on
a return to factory basis. The DLT & Storage Systems group's tape libraries
generally have a warranty period of one year, with service agreements available
to customers for additional years of warranty service. The DLT & Storage
Systems group maintains in-house product repair facilities in Colorado Springs,
Colorado, and Dundalk, Ireland to support warranty and service obligations for
tape drives, libraries and solid state storage systems. The DLT & Storage
Systems group also performs tape library warranty service in its facility in
Irvine, California. In addition, third party service providers throughout the
world perform tape library warranty service.
Backlog
The DLT & Storage Systems group manufactures its products based upon
forecasts of customer demand. Orders are generally placed by customers on an
as-needed basis. In general, customers may cancel or reschedule orders without
penalty. For these reasons, the DLT & Storage Systems group does not believe
"orders" constitute a firm "backlog" and believes customer orders are not a
meaningful indicator of revenues nor material to an understanding of its
business.
Employees
At March 31, 1999, the DLT & Storage Systems group had approximately 1,950
regular employees. In addition, approximately 860 employees perform services
for both the DLT & Storage Systems group and the Hard Disk Drive group. In the
advanced electronics industry, competition for highly skilled employees is
intense. The DLT & Storage Systems group believes that a great part of its
future success will depend on the DLT & Storage Systems group's ability to
attract and retain highly skilled employees. None of the DLT & Storage Systems
group's employees are represented by a union, and the DLT & Storage Systems
group has experienced no work stoppages. The DLT & Storage Systems group
believes that its employee relations are favorable.
Management
The following table sets forth certain information with respect to the
executive officers of the DLT & Storage Systems group:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter van Cuylenburg.... 51 President
Kevin Daly, Ph.D........ 54 Chief Executive Officer of ATL
Ed Gardner.............. 48 Vice President, Human Resources
Brodie Keast............ 43 Vice President and General Manager, DLT
George Saliba........... 47 Chief Technology Officer and Vice President, Advanced Storage Products
Tex Schenkkan........... 42 Vice President and General Manager, New Businesses
</TABLE>
9
<PAGE>
Mr. van Cuylenburg has been President of the DLT & Storage Systems group
since joining Quantum in 1996. From 1993 to 1995, Mr. van Cuylenburg served as
Executive Vice President, responsible for the systems sector, at Xerox
Corporation. From 1992 to 1993, Mr. van Cuylenburg was President and Chief
Operating Officer at NeXT Computer Inc.
Dr. Daly has been Chief Executive Officer and Chairman of ATL since ATL's
formation in 1991. Since 1985, Dr. Daly was with ATL's former parent, Odetics,
Inc., most recently as Chief Technical Officer and a member of the Board of
Directors. From 1974 to 1985, he was Director of the Control and Dynamics
Division of the Charles Stark Draper Laboratory in Cambridge, Massachusetts.
During this time he was also Adjunct Professor at MIT. Dr. Daly is currently
chairman of the Industrial Advisory Board of the Center for Research on
Information Technology and Organizations at the University of California,
Irvine.
Mr. Gardner has been Vice President, Human Resources since 1997. Mr. Gardner
joined Quantum in 1996 as Director of Human Resources for the High-End Storage
Division and technology and engineering. Prior to joining Quantum, Mr. Gardner
served as Vice President of Human Resources and Facilities at Spectro Physics
Lasers Inc. for eight years.
Mr. Keast has been Vice President and General Manager of the DLT division
since 1997. Mr. Keast joined Quantum in 1996 as Vice President of Marketing for
the DLT division. Prior to joining Quantum, Mr. Keast spent 11 years at Apple
in a variety of marketing management positions.
Mr. Saliba has been Chief Technology Officer and Vice President of the
Advanced Storage Products division since 1998. From 1995 to 1998 Mr. Saliba
served as Vice President of Engineering for the DLT division. Following the
acquisition of certain businesses from Digital Equipment, Mr. Saliba joined the
Company in 1994 as Director of Engineering. Previously, he spent eight years as
Group Engineering Manager for Digital Equipment's tape products group.
Mr. Schenkkan has been Vice President and General Manager, New Businesses
since 1998. Before joining Quantum in 1996 as Vice President of Corporate
Development, Mr. Schenkkan spent 12 years at Hewlett-Packard where he held a
variety of marketing management and business development positions.
Technology
Both the DLT & Storage Systems group and the Hard Disk Drive group will have
access to all of Quantum's technology and know-how, excluding products and
services of the other group, that may be useful in that group's business. The
DLT & Storage Systems group and the Hard Disk Drive group will consult each
other on a regular basis concerning technology issues that affect both groups.
Quantum has been granted and/or owns by assignment 477 United States
patents. In general, these patents have 17-year terms from the date of
issuance. Quantum also has certain foreign patents and applications relative to
certain of the products and technologies. Although the DLT & Storage Systems
group believes that its patents and applications have significant value, the
rapidly changing computer industry technology makes the DLT & Storage Systems
group's future success dependent primarily upon the technical competence and
creative skills of our personnel rather than on patent protection.
Several companies and individuals have approached the DLT & Storage Systems
group concerning the need for a license under patented technology that the DLT
& Storage Systems group assertedly used, or is assertedly using, in the
manufacture and sale of one or more of its products. The DLT & Storage Systems
group conducts ongoing investigations into these assertions and presently
believes that any licenses ultimately determined to be required could be
obtained on commercially reasonable terms. However, the DLT & Storage Systems
group cannot assure you that such licenses are presently obtainable, or if
later determined to be required, could be obtained on commercially reasonable
terms or at all.
Quantum has signed cross-licensing agreements with Hewlett-Packard, IBM,
Seagate and others. These agreements enable the DLT & Storage Systems group to
use certain patents owned by these companies, and enables these companies to
use certain patents owned by Quantum.
10
<PAGE>
BUSINESS OF THE HARD DISK DRIVE GROUP
The Hard Disk Drive group designs, develops and markets a diversified
product portfolio of hard disk drives featuring leading-edge technology. A hard
disk drive is a storage device found in most computers that stores data on
multiple rotating magnetic disks that provide fast access to data that must be
readily available to computer users. The Hard Disk Drive group's hard disk
drives are designed for the desktop market and the high-end hard disk drive
market which requires faster and higher capacity disk drives--as well as the
emerging market for hard disk drives specially designed for consumer
electronics applications such as new TV recording devices. The Hard Disk Drive
group has been the leading volume supplier of hard disk drives for the desktop
market for each of the past six years. According to Dataquest, the Hard Disk
Drive group's market share in the desktop market has grown from 3% in 1990 to
an industry leading 22% in 1998.
The Hard Disk Drive group designs desktop hard disk drives to meet the
storage requirements of entry-level to high-performance desktop PCs in home and
business environments. The Hard Disk Drive group also designs high-end hard
disk drives to store data on large computing systems such as network servers.
These high-end hard disk drives are generally used for:
. dedicated sites that store large volumes of data;
. network servers such as those used for Internet and intranet services,
online transaction processing and enterprise wide applications;
. high-speed computers used for specialized engineering design software;
and
. computer systems incorporating a large number of shared hard disk drives.
The Hard Disk Drive group recently introduced two new hard disk drives
designed for the developing consumer electronics market. These hard disk drives
utilize Quantum QuickView(TM)--The Hard Disk Drive group's hard disk drive
technology designed for consumer electronics. The use of hard disk drive
technology makes it possible to simultaneously record and playback video
content and to rapidly and inexpensively access large amounts of video
content--capabilities that are not as well suited to competing technologies
such as video tape and digital video disk.
Industry Background
Market for Hard Disk Drives. The demand for hard disk drives continues to
grow due to:
. increasing demand for desktop computers, driven in part by continued
improvements in desktop computing price-to-performance ratios;
. the substantial growth of the sub-$1,000 PC market, particularly in the
home;
. the rapid accumulation of data resulting from the growth in digital
content--audio, video and data;
. the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of computing systems
accessed by multiple users;
. the growth of the server and workstation market due in large part to the
migration of
workstation and server applications to more cost-effective platforms; and
. the trend of consumer electronic content moving from analog to digital
form and the creation of a wide variety of new consumer electronic
applications such as new TV recording devices.
In December 1998, Dataquest forecasted that annual demand for the worldwide
desktop computer market would grow from approximately 78 million units in 1998
to 133 million units in 2002, reflecting a compound annual growth rate of
approximately 14%. International Data Corporation forecasts the annual demand
for both the desktop and high-end hard disk drive markets to grow at 15% over
the same period with the desktop disk drive market growing from approximately
111 million units to 194 million units and the high-end hard disk drive market
growing from approximately 15 million units to 27 million units.
11
<PAGE>
Hard Disk Drive Market Challenges. The growing demand for hard disk drives
has led to intensified competition. The hard disk drive market is characterized
by rapid technological change, increasing capacity and performance; rapid
product obsolescence; changing customer requirements; dramatic shifts in market
share; and significant erosion of average selling prices.
The Hard Disk Drive group, IBM, Seagate and Western Digital Corporation have
traditionally had the highest market share with leading computer equipment
manufacturers. Over the last two years, hard disk drive suppliers such as
Fujitsu Limited, Maxtor Corporation and Samsung Electronics Co., Ltd. have
introduced new hard disk drive products and gained market share with leading
computer equipment manufacturers. The competitive environment, together with
the growth of the sub-$1,000 PC market, has placed continuous downward pressure
on hard disk drive prices. This pressure, in turn, has reduced average gross
margins for hard disk drive suppliers.
In addition to increasing competition, the leading PC computer equipment
manufacturers have been gaining market share which has increased their
influence. In calendar year 1997 and 1998, the top ten PC computer equipment
manufacturers accounted for more than 50% of all PC shipments and most of the
growth in the PC market. In addition, the top four server and workstation
computer equipment manufacturers accounted for almost 50% of server and
workstation units shipped in calendar 1998. As a result, maintaining customer
satisfaction with these leading computer equipment manufacturers has become
even more critical.
Computer equipment manufacturers face substantial market pressures to lower
costs and improve customer satisfaction. Historically, hard disk drive failure
has been the leading cause for PC returns and end-user dissatisfaction. As a
result, computer equipment manufacturers place a high value on consistently
receiving reliable hard disk drives from their suppliers.
Hard disk drive suppliers have had to manage their businesses to meet these
challenges. Computer equipment manufacturers typically seek to qualify up to
three or four providers for each generation of hard disk drives. To achieve
consistent success with computer equipment manufacturers qualifications, a hard
disk drive supplier must be an early provider of next generation hard disk
drives featuring leading technology and high capacity per disk which increases
the storage capacities for hard disk drives. Suppliers must quickly achieve
volume production of high quality and reliable hard disk drives. To quickly
achieve high volume production, a disk drive supplier must have access to
flexible, high-capacity, high-quality and dedicated manufacturing capabilities.
Factors on which computer equipment manufacturers evaluate their hard disk
drive suppliers include ease of doing business, overall quality, storage
capacities, performance characteristics, price and the supplier's long-term
financial stability.
The Hard Disk Drive Group Solution
The Hard Disk Drive group offers one of the industry's most diversified hard
disk drive product portfolios featuring leading-edge technology and reliable
hard disk drives. The Hard Disk Drive group focuses on providing consistent,
high-quality products, quickly achieving high volume production and maintaining
excellent customer satisfaction. The Hard Disk Drive group continues to develop
new and improved hard disk drive technology for the desktop and high-end
markets and the emerging consumer electronics market.
The core strengths of the Hard Disk Drive group include:
. Strong Relationships with Computer Equipment Manufacturers. The Hard Disk
Drive group sells its hard disk drives to each of the top ten leading PC
computer equipment manufacturers including Acer America Corporation,
Apple Computer, Compaq, Dell, Fujitsu, Gateway, Inc., Hewlett-Packard,
IBM, Packard Bell/NEC, Inc. and Siemens AG. According to International
Data Corporation, the Hard Disk Drive group had the highest desktop hard
disk drive market share with leading computer equipment manufacturers for
each of the calendar years 1993-1998.
. Manufacturing Partnership with Matsushita-Kotobuki Electronics
Industries, Ltd. Matsushita-Kotobuki is the exclusive manufacturer of
the Hard Disk Drive group's hard disk drives. The Hard Disk Drive group
believes that it has been able to maintain a leadership position in the
hard disk drive market by integrating its engineering and design
expertise with Matsushita-Kotobuki's high-volume, highly
12
<PAGE>
automated manufacturing capabilities. This partnership gives the Hard Disk
Drive group the ability to quickly achieve high volume production of high-
quality and reliable hard disk drives without a significant ongoing
investment in manufacturing assets. As a result, the Hard Disk Drive group
has achieved higher inventory turnover and has the potential for higher
returns on invested capital than the industry average.
. Leading Customer Satisfaction. The Hard Disk Drive group ranked among the
best hard disk drive suppliers in customer satisfaction according to
quarterly business reviews summarizing the status of supplier
performance. The Hard Disk Drive group believes the following four
factors contribute to its high customer satisfaction ratings:
1) Quality and Reliability. The Hard Disk Drive group's focus on
providing high quality, reliable hard disk drives begins at the design
and development phase and continues through extensive pre-production
reliability testing, strategic use of Matsushita-Kotobuki's automated
manufacturing, long-term relationships with high-performing suppliers
and solid, consistent execution. In addition, the Hard Disk Drive
group has added two unique features to its hard disk drives: the Shock
Protection System(TM), which reduces potential damage to the hard disk
drive in the case of poor handling, and the Data Protection
System(TM), which is a diagnostic software application that reduces
the product return rate by allowing users to determine whether a
computer failure has resulted from a hard disk drive malfunction. The
Hard Disk Drive group's consistent execution and stringent quality
standards, along with the introduction of Shock Protection System and
Data Protection System, have resulted in the Hard Disk Drive group
having the lowest rate of defects per million at three leading PC
computer equipment manufacturers and two leading server and
workstation computer equipment manufacturers.
2) Time-to-Market/Time-to-Volume. The Hard Disk Drive group achieves a
leading position in time-to-market with each generation of hard disk
drives through internal technology development, relationships with key
component suppliers and an integrated design and development process
with Matsushita-Kotobuki. Demonstrating the Hard Disk Drive group's
time-to-market leadership, in March 1999, the Hard Disk Drive group
announced the introduction of Fireball(TM) CX which features industry
leading 6.8GB capacity per disk and is the first Hard Disk Drive group
hard disk drive to incorporate giant magneto-resistive heads. In
addition, the Hard Disk Drive group's technology advances in channels,
interface and cache architecture have led to consistently high
benchmark performances for its Fireball and Fireball Plus product
lines. The Hard Disk Drive group quickly achieves high volume
production by capitalizing on Matsushita-Kotobuki's highly automated
manufacturing facilities and manufacturing expertise. For example,
with Matsushita-Kotobuki, the Hard Disk Drive group completed one of
the fastest conversions to the latest generation of magneto-resistive
recording heads in the industry and quickly achieved volume
production. The Hard Disk Drive group expects to complete a similar
transition to giant magneto-resistive heads.
3) Competitive Cost. The Hard Disk Drive group focuses on providing the
lowest total cost of ownership through high quality, time-to-volume
products; high inventory turnover; and minimal infrastructure.
Matsushita-Kotobuki provides low cost and superior quality
manufacturing through a high-yielding automated process.
4) Ease of doing business. The Hard Disk Drive group focuses development
resources on features that provide tangible, practical benefits for
its customers--technology that enables its customers to provide
superior computer systems to their customers at the lowest total cost
of ownership. The Hard Disk Drive group provides worldwide logistics
capabilities, which include regional service delivery to support
customized production strategies and e-commerce capability with major
customers. In addition, the Hard Disk Drive group offers dedicated
support teams for all its major computer equipment manufacturers
customers. According to quarterly business reviews received from its
customers, the Hard Disk Drive group has been consistently ranked
among the best hard disk drive suppliers in delivery responsiveness.
13
<PAGE>
The Hard Disk Drive Group Strategy
The Hard Disk Drive group's objective is to be the number one supplier of
hard disk drives to each of the desktop, high-end and emerging markets in which
it competes. Key elements of the Hard Disk Drive group's strategy include:
. Maintaining Leadership Position in Desktop Market. The Hard Disk Drive
group has been the leading volume supplier of hard disk drives to the
desktop market over the past six years. The Hard Disk Drive group has
maintained this leadership position while several different competitors
have advanced and then declined in the desktop market. The foundation of
the Hard Disk Drive group's future success will be maintaining its strong
computer equipment manufacturer and distribution relationships to help
position the Hard Disk Drive group for long-term growth. The Hard Disk
Drive group is committed to maintaining its leadership position in the
desktop hard disk drive market by executing its strategy of maintaining
customer satisfaction by focusing on quality, reliability, time-to-
market, time-to-volume, competitive cost and ease of doing business.
. Establishing Leadership in the Computer Server and Workstation Market. In
the fall of 1997, the Hard Disk Drive group began to focus its high-end
business on the fast growing computer server and workstation market. To
execute on this strategy, the Hard Disk Drive group leverages its
capabilities to produce high quality, reliable hard disk drives and
quickly achieve high volume manufacturing in partnership with Matsushita-
Kotobuki. In addition, during the past year the Hard Disk Drive group has
simplified its high-end product development process by adopting a common
architecture for all its high-end hard disk drives to improve time-to-
market and time-to-volume. The Hard Disk Drive group has continued its
small computer system interface or SCSI interface leadership with the
introduction of its Ultra 160/m interface technology in its Atlas(TM) IV
drive and was the first to market with this interface technology. During
the past year, the Hard Disk Drive group has also expanded its customer
base to include each of the top four server and workstation computer
equipment manufacturers and has achieved high customer satisfaction
ratings as measured by customer field returns. In calendar year 1999, the
Hard Disk Drive group will, for the first time, have a complete high-end
product offering, and 7,200 RPM and 10,000 RPM hard disk drives with SCSI
and fibre channel interfaces, both of which are high-speed interfaces
used in the enterprise storage market.
. Offering Products That Meet Developing Consumer Electronic Storage
Needs. Consumer electronics applications such as new TV recording
devices represent a developing market opportunity for the Hard Disk Drive
group's hard disk drive technologies. The Hard Disk Drive group offers
customized design capabilities and unique hard disk drive technologies
for consumer applications. The Hard Disk Drive group is currently
developing hard disk drive storage applications in consumer electronics
with Sony, Panasonic Technologies, Inc. and TiVo, Inc., among others. In
December 1998, the Hard Disk Drive group announced a strategic alliance
with TiVo to incorporate Quantum QuickView hard disk drives into a TiVo
receiver and began shipping Quantum QuickView in March 1999. This
receiver will give customers an in-home personalized television service
with traditional recording capabilities as well as the ability to
simultaneously play and record the same TV program so that the viewer can
begin watching the TV program before it is finished being recorded. The
Hard Disk Drive group also intends to increase consumer awareness of the
Quantum brand name in the consumer electronics market.
Products
Desktop products. The Hard Disk Drive group offers three families of desktop
hard disk drives--the Quantum Bigfoot(TM), Quantum Fireball and Quantum
Fireball Plus. The Quantum Bigfoot family offers 5.25-inch hard disk drives for
PC users. The Quantum Fireball family offers 3.5-inch hard disk drives for
consumer and commercial PCs, as well as entry-level workstations and network
servers. Fireball Plus offers superior performance for power users. The Hard
Disk Drive group began offering its Shock Protection System and Data Protection
System with its recently released desktop products. These features
substantially reduce failure rates with customers and provide increased
reliability and performance.
14
<PAGE>
High-end products. The Hard Disk Drive group also offers a broad line of
high-end 3.5-inch hard disk drives--the Quantum Viking(TM), Quantum Atlas and
Quantum Atlas 10K families. The Quantum Viking II 3.5-inch hard disk drive is
designed for low-profile applications such as workgroup servers and desktop
workstations, while the Quantum Atlas family offers high-capacity hard disk
drives for high performance storage-intensive applications such as enterprise
servers and storage subsystems. The Hard Disk Drive group began offering the
Shock Protection System with its recently released high-end products.
The table below sets forth key performance characteristics for The Hard Disk
Drive group's current products:
<TABLE>
<CAPTION>
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
-------- -------- ----------- ---------- --------
<C> <C> <C> <C> <S>
Bigfoot TS 6.4 6.4 to 19.2 4,000 Desktop PCs--Value, with
Ultra ATA interface, 5.25-
inch media
Fireball EX 3.4 3.2 to 12.9 5,400 Desktop PCs--Performance,
with Ultra ATA interface,
Shock Protection System
Fireball CR 4.3 4.3 to 13.0 5,400 Desktop PCs--Value, with
Ultra ATA/66 interface, Shock
Protection System and Data
Protection System
Fireball Plus KA 4.5 6.4 to 18.2 7,200 Desktop PCs--Performance,
with Ultra ATA/66 interface,
Shock Protection System and
Data Protection System
Fireball CX 6.8 6.4 to 20.4 5,400 Desktop PCs--Value, with
Ultra ATA/66 interface, Shock
Protection System and Data
Protection System
Viking II 1.8 4.5 to 9.1 7,200 PC Servers and Workstations,
with Ultra2 SCSI Low Voltage
Differential (LVD) or Ultra
SCSI interface
Atlas III 1.8 4.5 to 18.2 7,200 Servers and Storage
Subsystems, Ultra2 SCSI Low
Voltage Differential/Ultra
SCSI interface
Atlas IV 4.5 9.1 to 36.4 7,200 Servers, Workstations and
Storage Subsystems, with
Ultra 160/m SCSI interface,
Shock Protection System
Atlas 10K 3.0 9.1 to 36.4 10,000 Enterprise Servers and
Storage Subsystems, with
Ultra 160/m SCSI interface or
Fibre Channel optional
interface, 3-inch media,
Shock Protection System
</TABLE>
Customers
The Hard Disk Drive group markets its products to leading computer equipment
manufacturers, including Acer, Apple, Compaq, Dell, Fujitsu, Gateway, Hewlett-
Packard, IBM, Packard Bell/NEC and Siemens. Because the leading computer
equipment manufacturers have a dominant market share for the computer systems
into which the Hard Disk Drive group's products are incorporated, the Hard Disk
Drive group's sales are concentrated with several key customers.
Sales to the Hard Disk Drive group's top five customers in fiscal year 1999
represented 43% of revenue, compared to 44% of revenue in fiscal year 1998.
These amounts reflected a retroactive combination of the sales to Compaq and
Digital Equipment as a result of their merger in June 1998. Sales to Hewlett-
Packard were 14% of revenue in both fiscal years 1999 and 1998. Sales to Compaq
were 10% of revenue in fiscal year 1999, compared to 12% of revenue in fiscal
year 1998, including sales to Digital Equipment.
Sales and Marketing
The Hard Disk Drive group markets its products directly to manufacturers of
desktop PCs, servers and workstations. Key domestic and international OEM
customers include Acer, Apple, Apricot Computers Limited, Compaq, Dell,
Fujitsu, Gateway, Hewlett-Packard, IBM, LG Electronics Inc., Packard Bell/NEC,
Samsung and Siemens.
15
<PAGE>
In addition to its strong base of computer equipment manufacturer customers,
the Hard Disk Drive group markets its products through a domestic and
international network of commercial and industrial distributors located in more
than 25 countries worldwide. This network includes Bell Microproducts, Inc.,
Computer 2000 AG, Ingram Micro Inc. and Wyle Electronics. Through this network,
the Hard Disk Drive group's hard disk drive products reach smaller computer
equipment manufacturers, systems integrators, value-added resellers, dealers
and retailers.
The Hard Disk Drive group supports international sales and operations by
maintaining regional European headquarters in Neuchatel, Switzerland; a
Japanese headquarters in Tokyo; and additional sales offices in Singapore and
throughout the world. The Hard Disk Drive group's international sales,
including sales to foreign subsidiaries of U.S. companies, were 55% of the Hard
Disk Drive group's revenue in fiscal year 1999, and 57% and 54% of revenue for
fiscal years 1997 and 1998, respectively.
Manufacturing
Matsushita-Kotobuki manufactures all of the Hard Disk Drive group's hard
disk drives at facilities located in Japan, Singapore and Ireland. Matsushita-
Kotobuki's state-of-the-art manufacturing process is highly automated,
employing integrated computer networks and advanced control systems.
Matsushita-Kotobuki's manufacturing expertise helps the Hard Disk Drive group
produce hard disk drives of exceptional quality and quickly achieve volume
production.
The Hard Disk Drive group's relationship with Matsushita-Kotobuki, which has
been continuous since 1984, is governed by a master agreement which continues
through 2007, unless terminated sooner as a result of certain specified events
including a change-in-control of either Quantum or Matsushita-Kotobuki. This
agreement gives Matsushita-Kotobuki the exclusive worldwide right to
manufacture and the Hard Disk Drive group the exclusive worldwide right to
design and market hard disk drives. The Hard Disk Drive group provides
Matsushita-Kotobuki with a forecast of its requirements and places purchase
orders approximately three months prior to scheduled delivery. The Hard Disk
Drive group works closely with Matsushita-Kotobuki to regularly adjust its
purchase orders as market requirements change.
The Hard Disk Drive group and Matsushita-Kotobuki work together to develop
strategic relationships with leading suppliers of many of the key hard disk
drive components. These relationships enable the Hard Disk Drive group to gain
early access to leading-edge hard disk drive technology and to actively manage
its supply chain to improve flexibility in choosing state-of-the-art components
and to reduce component, inventory and overall product costs.
In October 1998, the Hard Disk Drive group agreed with Matsushita-Kotobuki
to dissolve their recording heads joint venture. As a result, the Hard Disk
Drive group no longer develops or manufactures recording heads.
Research and Development
The Hard Disk Drive group's research and development expenses were $261
million, $259 million and $254 million in fiscal years 1997, 1998 and 1999,
respectively. The Hard Disk Drive group is currently concentrating its research
and development efforts on broadening its existing hard disk drive product
lines through the development and introduction of new hard disk drives. These
development efforts focus on developing desktop and high-end hard disk drives,
hard disk drives for consumer electronics and other hard disk drive
applications.
Competition
In the desktop product market, the Hard Disk Drive group competes primarily
with Fujitsu, IBM, Maxtor, Samsung, Seagate and Western Digital. In the high-
end market, the Hard Disk Drive group competes primarily with Fujitsu, Hitachi,
IBM, Seagate and Western Digital.
16
<PAGE>
The Hard Disk Drive group believes that important competitive factors in
the hard disk drive market are:
. quality;
. reliability;
. storage capacity;
. performance;
. price;
. time-to-market introduction;
. time-to-volume production;
. computer equipment manufacturer product qualifications;
. breadth of product lines; and
. technical service and support.
The Hard Disk Drive group believes that it competes favorably with respect
to these factors.
Warranty and Service
The Hard Disk Drive group generally warrants its products against defects
for a period of one to five years from the date of sale. The Hard Disk Drive
group generally provides warranty service on a return to factory basis. The
Hard Disk Drive group maintains in-house service facilities for refurbishment
or repair of its products in Milpitas, California; Dundalk, Ireland; and
Penang, Malaysia. The Hard Disk Drive group also utilizes third party
providers for warranty repairs.
Backlog
The Hard Disk Drive group manufactures its products based upon forecasts of
customer demand. Orders are generally placed by customers on an as-needed
basis. In general, customers may cancel or reschedule orders without penalty.
For these reasons, the Hard Disk Drive group does not believe "orders"
constitute a firm "backlog" and believes customer orders are not a meaningful
indicator of revenues nor material to an understanding of its business.
Employees
At March 31, 1999, the Hard Disk Drive group had approximately 3,800
regular employees. In addition, approximately 860 employees perform services
for both the Hard Disk Drive group and the DLT & Storage Systems group. In the
advanced electronics industry, competition for highly skilled employees is
intense. The Hard Disk Drive group believes that a great part of its future
success will depend on its ability to attract and retain highly skilled
employees. None of the Hard Disk Drive group's employees are represented by a
union, and the Hard Disk Drive group has experienced no work stoppages. The
Hard Disk Drive group believes that its employee relations are favorable.
Management
The following table sets forth certain information with respect to the
executive officers of the Hard Disk Drive group:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John B. Gannon.......... 52 President
Shyam C. Parikh......... 54 Chief Technology Officer
Debora C. Shoquist...... 44 Executive Vice President, Hard Disk Drive Operations
Barbara J. Baill........ 47 Vice President, Human Resources
John M. Cobb............ 42 Vice President, Finance
Anthony Francesca....... 42 Vice President and General Manager, New Businesses
Barbara H. Nelson....... 44 Vice President and General Manager, Desktop Storage Division
John S. Squire.......... 45 Chief Quality Officer
</TABLE>
17
<PAGE>
Mr. Gannon has been President of the Hard Disk Drive group since February
1999. From May 1998 to February 1999, Mr. Gannon was Executive Vice President
of Worldwide Sales. Prior to joining Quantum, Mr. Gannon spent seventeen years
with Hewlett-Packard from 1981 to 1998, last serving as General Manager of
Commercial Desktop Personal Computer Business from 1996 to 1998 and as General
Manager of Digital Audio Tape Business from 1993 to 1996.
Mr. Parikh has been Chief Technology Officer since August 1998. Mr. Parikh
joined Quantum in 1994, and served as Vice President of Technology and
Engineering from 1994 to August 1998. Prior to joining Quantum, Mr. Parikh was
employed by Digital Equipment for 18 years where he held positions in Advanced
Development, Product Development and Support Engineering.
Ms. Shoquist has been Executive Vice President of Hard Disk Drive Operations
since December 1996. Ms. Shoquist has served in a variety of manufacturing
management positions, most recently as Vice President of Product and Test
engineering for the High-End Storage Division. Prior to that, Ms. Shoquist was
Vice President of Worldwide Operations for the High-End Storage Division. Prior
to joining Quantum in 1991, Ms. Shoquist held a variety of operations
management positions at Hewlett-Packard.
Ms. Baill has been Vice President of Human Resources since 1997. From 1994
to 1997, Ms. Baill was Director of Human Resources. Prior to joining Quantum,
Ms. Baill spent 15 years with Hewlett-Packard where she held various positions
including human resource management in a regional sales organization and as the
Manager for Executive and Management Development.
Mr. Cobb has been the Vice President of Finance since 1998. Mr. Cobb joined
Quantum in 1990 as a Controller. From 1993 to 1995 Mr. Cobb was Director of
Finance for the High-End Storage Division. From 1995 to 1998 Mr. Cobb was Vice
President of Finance for the High-End Storage Division. Prior to joining
Quantum, Mr. Cobb was a Senior Manager at Ernst & Young LLP.
Mr. Francesca has been Vice President and General Manager, New Businesses
since 1998. From 1997 to 1998, Mr. Francesca was Vice President of Marketing of
the Desktop Storage Division and joined Quantum in 1997 as Vice President of
Mobile Business Unit. Prior to joining Quantum, Mr. Francesca was Vice
President of the OEM business unit for desktop and mobile communications at US
Robotics.
Ms. Nelson has been the Vice President and General Manager of the Desktop
Storage Division since November 1997. Ms. Nelson joined Quantum in January 1997
as Vice President of Marketing of the Desktop Storage Division. Prior to
joining Quantum, Ms. Nelson was at Lumina Office Products, Inc. where she was
responsible for sales and worldwide marketing. Ms. Nelson also spent four years
at Maxtor Corporation where she held a variety of positions, including Vice
President of Marketing and Sales and Director of Sales Management.
Mr. Squire has been the Chief Quality Officer since 1998. Mr. Squire has
held a variety of positions at Quantum since 1988, including most recently,
General Manager of the Desktop Storage Division from 1997 to 1998 and Vice
President of Development Engineering for Desktop Storage Division from 1995 to
1997.
Technology
Both the Hard Disk Drive group and the DLT & Storage Systems group will have
access to all of Quantum's technology and know-how, excluding products and
services of the other group, that may be useful in that group's business. The
Hard Disk Drive group and the DLT & Storage Systems group will consult each
other on a regular basis concerning technology issues that affect both groups.
18
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Quantum has been granted and/or owns by assignment 477 United States
patents. In general, these patents have 17-year terms from the date of
issuance. Quantum also has certain foreign patents and applications relative to
certain of the products and technologies. Although the Hard Disk Drive group
believes that its patents and applications have significant value, the rapidly
changing computer industry technology makes the Hard Disk Drive group's future
success dependent primarily upon the technical competence and creative skills
of our personnel rather than on patent protection.
Several companies and individuals have approached the Hard Disk Drive group
concerning the need for a license under patented technology that the Hard Disk
Drive group assertedly used, or is assertedly using, in the manufacture and
sale of one or more of its products. The Hard Disk Drive group conducts ongoing
investigations into these assertions and presently believes that any licenses
ultimately determined to be required could be obtained on commercially
reasonable terms. However, the Hard Disk Drive group cannot assure you that
such licenses are presently obtainable, or if later determined to be required,
could be obtained on commercially reasonable terms or at all.
Quantum has signed cross-licensing agreements with Hewlett-Packard, IBM,
Seagate and others. These agreements enable the Hard Disk Drive group to use
certain patents owned by these companies, and enables these companies to use
certain patents owned by Quantum.
ITEM 2. Properties
Quantum's headquarters is located in Milpitas, California. Quantum owns or
leases facilities in North America, Europe and Asia. The following is a summary
of the locations, functions and square footage:
<TABLE>
<CAPTION>
Location Function Square Feet
-------- -------- -----------
<C> <S> <C>
North America
Milpitas, CA Corporate headquarters; and hard drive
research and development (R&D),
configuration and distribution 1,260,000
Shrewsbury, MA Hard drive R&D and DLT tape R&D 670,000
Colorado Springs, CO DLT tape manufacturing 410,000
Other USA 9 Sales offices 75,000
Europe
Dundalk, Ireland Hard drive and DLTtape configuration and
distribution 110,000
Other Europe European headquarters, and 4 sales
offices 45,000
Asia
Singapore Hard drive and DLTtape configuration and
distribution 65,000
Penang, Malaysia Customer Service 158,000
Other Asia Asian headquarters and 7 Sales Offices 76,000
</TABLE>
ITEM 3. Legal Proceedings
For information regarding legal proceedings, refer to Part II, Item 8, Note
14 of the Notes to Consolidated Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
19
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Quantum Corporation's common stock has been traded in the over-the-counter
market under the Nasdaq symbol QNTM since Quantum's initial public offering on
December 10, 1982.
The prices per share reflected in the table represent the range of high and
low closing prices in the Nasdaq National Market System (adjusted to reflect a
two-for-one stock split in May 1997) for the quarter indicated.
<TABLE>
<CAPTION>
Fiscal Year 1998 High Low
---------------- -------- ---------
<S> <C> <C>
First quarter ended June 29, 1997....................... $24 9/16 $17 7/8
Second quarter ended September 28, 1997................. 42 7/16 20 5/16
Third quarter ended December 28, 1997................... 42 7/16 18 15/16
Fourth quarter ended March 31, 1998..................... 26 1/2 18 7/16
<CAPTION>
Fiscal Year 1999 High Low
---------------- -------- ---------
<S> <C> <C>
First quarter ended June 28, 1998....................... $25 3/4 $18
Second quarter ended September 27, 1998................. 22 1/8 11 7/16
Third quarter ended December 27, 1998................... 23 7/8 12 3/4
Fourth quarter ended March 31, 1999..................... 28 5/16 16 7/16
</TABLE>
Historically, Quantum has not paid cash dividends on its common stock.
As of May 23, 1999, there were approximately 7,500 shareholders of record.
ITEM 6. Selected Consolidated Financial Data
This summary of financial information of Quantum for fiscal years 1995 to
1999 should be read along with Quantum's audited consolidated financial
statements contained in this Annual Report on Form 10-K. The summarized
financial information, other than the statement of operations data for fiscal
years 1995 and 1996 and the balance sheet data at March 31, 1995, 1996 and
1997, was taken from these financial statements.
A number of items affect the comparability of this information:
. Through May 1997, we consolidated the results of a recording heads
business acquired in October 1994. Recording heads are disk drive
components that read and write data to the magnetic disks in a hard disk
drive. The recording heads business generated losses from operations of
$67 million, $70 million, $110 million and $9 million in fiscal years
1995 through 1998. In May 1997, we sold a 51% interest in these
operations to Matsushita-Kotobuki. Subsequent losses of this joint
venture using the equity method of accounting were $66 million in fiscal
year 1998 and $41 million in the first half of fiscal year 1999. In
October 1998, we and Matsushita-Kotobuki agreed to dissolve the joint
venture and, as a result, we recorded a $101 million loss from the
investment in the third quarter of fiscal year 1999.
. The results of operations for fiscal year 1998 include the effect of a
$103 million special charge, primarily for inventory write-offs and
losses on purchase commitments, related to our high-end hard disk drive
products.
20
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenue................. $3,367,984 $4,422,726 $5,319,457 $5,805,235 $4,902,056
Gross profit............ 563,713 542,417 768,741 875,521 871,338
Research and development
expenses............... 169,282 239,116 291,332 321,741 353,223
Sales and marketing,
general and
administrative
expenses............... 160,424 207,558 235,878 258,395 284,876
Restructuring and other
charges................ -- 209,122 -- -- --
Purchased in-process
research and
development expense.... 72,945 -- -- -- 89,000
Income (loss) from
operations............. 161,062 (113,379) 241,531 295,385 144,239
Loss from investee...... -- -- -- (66,060) (142,050)
Net income (loss)....... $ 81,591 $ (90,456) $ 148,515 $ 170,801 $ (29,535)
Net income (loss) per
share:
Basic.................. $ 0.90 $ (0.87) $ 1.27 $ 1.25 $ (0.18)
Diluted................ $ 0.76 $ (0.87) $ 1.04 $ 1.07 $ (0.18)
Balance Sheet Data
Property, plant and
equipment, net......... $ 280,099 $ 364,111 $ 407,206 $ 285,159 $ 271,928
Total assets............ 1,481,028 1,975,355 2,158,263 2,438,411 2,483,596
Total long-term debt,
convertible debt and
redeemable preferred
stock.................. 327,500 598,158 422,906 327,485 344,461
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Year 1999 Compared With Fiscal Year 1998
Revenue. Revenue in fiscal year 1999 was $4.9 billion, compared to $5.8
billion in fiscal year 1998, a decrease of 16%. The decrease in revenue
reflected lower revenue from sales of desktop and high-end hard disk drives,
partially offset by an increase in DLTtape drive revenue, total DLTtape media
cartridge revenue and consolidation of ATL's revenue effective September 28,
1998. We continued to experience favorable market conditions for DLTtape
products, and experienced strong demand and increased sales for these products
in the second half of fiscal year 1999 as compared to the second half of fiscal
year 1998. The decline in desktop hard disk drive revenue reflected a decline
in average unit prices and, to a lesser extent, a lower level of shipments to
leading computer equipment manufacturers. The decline in average unit prices
reflected the intense competitive pricing pressures in fiscal year 1999, and
the growth of the low cost PC market, which has become a higher proportion of
the overall desktop PC market. Although high-end hard disk drive shipments
increased in fiscal year 1999, increased competitive pricing pressures resulted
in reduced average unit prices and lower high-end hard disk drive revenue.
Sales to our top five customers in fiscal year 1999 represented 42% of
revenue, compared to 45% of revenue in fiscal year 1998. These amounts
reflected a retroactive combination of the sales to Compaq and Digital
Equipment as a result of their merger in June 1998. Sales to Compaq were 14% of
revenue in fiscal year 1999, compared to 18% of revenue in fiscal year 1998,
including sales made to Digital Equipment. Sales to Hewlett-Packard were 14% of
revenue in fiscal year 1999, compared to 13% of revenue in fiscal year 1998.
Sales to computer equipment manufacturers and distribution channel customers
were 63% and 34% of revenue, respectively, in fiscal year 1999 compared to 63%
and 37% of revenue in fiscal year 1998. The remaining revenue in fiscal year
1999 represented DLTtape media cartridge royalty revenue and sales to value
added resellers.
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<PAGE>
Gross Margin Rate. Our gross margin rate in fiscal year 1999 was 17.8%,
compared to 15.1% in fiscal year 1998. The gross margin rate in fiscal year
1998 reflected the impact of a $103 million special charge related to the
transition to a new generation of high-end disk drive products, and consisted
primarily of inventory write-offs and adjustments, and losses related to firm
inventory purchase commitments. Excluding the special charge, the gross margin
rate was 16.9% in fiscal year 1998. The 0.9 percentage point increase in fiscal
year 1999 reflected increased revenues from DLTtape media cartridge royalties,
as well as an increased proportion of revenue from higher margin DLTtape and
library products. This was partially offset by the decline in gross margins
earned on desktop hard disk drives as a result of intense competitive pricing
pressures in fiscal year 1999.
Research and Development Expenses. Research and development expenses in
fiscal year 1999 were $353 million, or 7.2% of revenue, compared to $322
million, or 5.5% of revenue, in fiscal year 1998. This increase reflected
higher expenses related to new tape drive products and new information storage
products and technologies, including Super DLTtape technology and, to a
significantly lesser extent, optical storage technology and the consolidation
of ATL's expenses.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1999 were $191 million, or 3.9% of revenue, compared to $169 million, or 2.9%
of revenue, in fiscal year 1998. This increase reflected the consolidation of
ATL's expenses and an increase in marketing and advertising costs associated
with DLTtape products.
General and Administrative Expenses. General and administrative expenses in
fiscal year 1999 were $94 million, or 1.9% of revenue, compared to $89 million,
or 1.5% of revenue, in fiscal year 1998. The increase in general and
administrative expenses reflected the expansion of the DLT & Storage Systems
group's infrastructure to support increased revenue and earnings growth and the
consolidation of ATL's expenses, partially offset by the impact of cost control
efforts.
Purchased In-process Research and Development Expense. We expensed purchased
in-process research and development costs of $89 million as a result of the ATL
acquisition in fiscal year 1999. For additional information regarding the ATL
acquisition and the costs associated with in-process research and development,
see Note 5 of the Notes to Consolidated Financial Statements.
Interest and Other Income/Expense. Net interest and other income and expense
in fiscal year 1999 was $2.4 million expense, compared to $1.5 million income
in fiscal year 1998. The expense in fiscal year 1999 reflected a $6.8 million
write-down of an equity investment.
Loss from Investee. Our investment and operating results related to our
recording heads business have resulted in significant losses. We acquired a
recording heads business from Digital Equipment in October 1994. In May 1997,
we sold a 51% majority interest in our recording heads operations to
Matsushita-Kotobuki, and formed a recording heads joint venture with
Matsushita-Kotobuki. On October 28, 1998, we and Matsushita-Kotobuki agreed to
dissolve the recording heads joint venture. In connection with the dissolution,
we recorded a $101 million loss in the third quarter of fiscal year 1999. This
loss included a write-off of our investment in the recording heads joint
venture, a write-down of our interest in facilities in Louisville, Colorado,
and Shrewsbury, Massachusetts that were occupied by the recording heads joint
venture, warranty costs resulting from magneto-resistive recording heads
manufactured by the recording heads joint venture, and our 49% pro rata share
in funding the recording heads joint venture's repayment of its obligations,
primarily bank debt, accounts payable and other liabilities. See Note 6 of the
Notes to Consolidated Financial Statements for additional discussion of the
dissolution of the recording heads joint venture.
Income Taxes. Our effective tax rate in fiscal year 1999, excluding the
write-off of the purchased in-process research and development, was 33%,
compared to 26% in fiscal year 1998. The higher effective tax rate was
primarily attributable to decreased benefits from foreign earnings taxed at
less than the U.S. rate, a lower research and development credit, and increased
state taxes. The remaining state valuation allowance was reversed in fiscal
year 1998 as a result of the realization of the state deferred tax assets
through tax planning. No tax benefit was currently recognizable for the charge
for purchased in-process research and development.
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<PAGE>
Net Income (Loss). We reported a net loss of $30 million in fiscal year
1999, compared to net income of $171 million in fiscal year 1998. The decrease
reflected the charge for purchased in-process research and development of $89
million, the $101 million loss related to the recording heads joint venture
dissolution and the increase in operating expenses.
Fiscal Year 1998 Compared With Fiscal Year 1997
Revenue. Revenue in fiscal year 1998 was $5.8 billion, compared to $5.3
billion in fiscal year 1997, an increase of 9%. The increase in revenue
reflected an increase in DLTtape drive and DLTtape media cartridge product
shipments, as well as an increase in shipments across our other key product
lines, including desktop and high-end hard disk drives. The increase in DLTtape
drive revenue reflected growth in market acceptance of DLTtape technology and a
shift in sales mix to higher storage capacity products which carry a higher per
unit price. However, the average price at each storage capacity level of
DLTtape drives and DLTtape media cartridges declined when compared with fiscal
year 1997.
The increase in DLTtape drive shipments reflected an increase in tape drive
production volume, which was at a level high enough to meet product demand
beginning in the third quarter of fiscal year 1998. However, the general
availability of DLTtape drives resulted in sequentially lower DLTtape drive
sales in the fourth quarter of fiscal year 1998 as a few large computer
equipment manufacturer customers reduced purchases in order to adjust their
inventory levels.
Declines in average unit prices for both desktop and high-end hard disk
drive products substantially offset the increase in disk drive shipments.
Oversupply and intensely competitive pricing, particularly in the second half
of fiscal year 1998 and more significantly for the high-end disk drive
products, caused such declines.
Sales to our top five customers were 45% of revenue in fiscal year 1998,
compared to 43% in fiscal year 1997. These amounts reflect a retroactive
combination of sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Compaq were 18% of revenue in fiscal year 1998,
compared to 16% of revenue in fiscal year 1997, including sales to Digital
Equipment. Sales to Hewlett-Packard were 13% of revenue in fiscal year 1998,
compared to 11% of revenue in fiscal year 1997.
Sales to computer equipment manufacturers and distribution channel customers
were 63% and 37% of revenue, respectively, for fiscal years 1998 and 1997.
Gross Margin Rate. Our gross margin rate increased 0.6 percentage points to
15.1% in fiscal year 1998, from 14.5% in fiscal year 1997. The increase in the
gross margin rate reflected an increase in the gross margin rate earned on
DLTtape drives and DLTtape media cartridges. In addition, DLTtape drive and
DLTtape media cartridge products, which achieved a significantly higher gross
margin rate than our other products, represented a higher proportion of our
overall revenue in fiscal year 1998. The erosion of gross margins earned on
hard disk drives, particularly in the second half of fiscal year 1998, and the
$103 million special charge in the third quarter of fiscal year 1998 largely
offset these increases. The special charge related to the transition to a new
generation of high-end disk drive products consisted primarily of inventory
write-offs and adjustments, and losses related to firm inventory purchase
commitments. Excluding the special charge, the gross margin rate was 16.9% in
fiscal year 1998. The erosion of gross margins earned on hard disk drives and
the special charge both reflected the oversupply and intensely competitive
pricing in the desktop and high- end disk drive markets, particularly in the
second half of fiscal year 1998.
Research and Development Expenses. Research and development expenses in
fiscal 1998 were $322 million, or 5.5% of revenue, compared with $291 million,
or 5.5% of revenue, in fiscal year 1997. The $31 million increase in research
and development expenses reflected higher expenses related to pre-production
activity on new products, as well as expenses related to new information
storage products and technologies, including Super DLTtape technology and, to a
significantly lesser extent, optical storage technology.
23
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1998 were $169 million, or 2.9% of revenue, compared with $149 million, or 2.8%
of revenue, in fiscal year 1997. This increase primarily reflected the
increased costs associated with supporting our higher sales volume.
General and Administrative Expenses. General and administrative expenses in
fiscal year 1998 were $89 million, or 1.5% of revenue, compared with $87
million, or 1.6% of revenue, in fiscal year 1997.
Interest and Other Income/Expense. Net interest and other income and expense
in fiscal year 1998 was income of $1 million, compared with expense of $41
million in fiscal year 1997. A decrease in interest expense, reflecting an
approximately $172 million year-over-year decrease in the average level of debt
used to finance operations, and an increase in the year-over-year average level
of cash, combined to cause this change.
Loss from Investee. The loss from investee reflected our equity share in the
operating losses of the recording heads joint venture since May 16, 1997, when
this joint venture was formed. Prior to May 16, 1997, we fully consolidated our
recording heads operations. Our total losses from recording heads operations
for fiscal year 1998 was $75 million, compared to $110 million for fiscal year
1997. The loss from investee for fiscal year 1998 included a charge of
approximately $5 million, which represented our share of a third quarter charge
in the recording heads joint venture's operating results for severance,
equipment write-offs, lease termination and other costs associated with the
recording heads joint venture's strategic actions. A combination of reduced
unit prices, operating costs, manufacturing yields, product transitions and
soft demand for certain recording heads programs, primarily those related to
high-end disk drive products, resulted in losses by the recording heads joint
venture.
Income Taxes. Our effective tax rate for fiscal years 1998 and 1997 was 26%.
The state valuation allowance was reversed in fiscal year 1998 as a result of
the realization of the state deferred tax assets through tax planning.
Net Income. We reported after-tax earnings of $171 million in fiscal year
1998, compared to $149 million in fiscal year 1997. The increase reflected
increased sales and margins on DLTtape products, increased interest income,
decreased interest expense, and lower net losses related to our involvement in
recording heads operations due to our reduced ownership of these operations.
Higher margins on DLTtape products, as compared with the eroded gross margins
on hard disk drives, resulted in tape drive and DLTtape media cartridge
products becoming a more significant source of our operating income in fiscal
year 1998, particularly during the second half of the fiscal year. Lower
margins on sales of desktop and high-end hard disk drives and the $103 million
special charge related to high-end hard disk drives partially offset these
increases.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which we implemented in fiscal year 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components--revenue, expenses, gains, and losses--in a full set of general-
purpose financial statements. The adoption of SFAS No. 130 changed our
financial statement presentation but does not have an impact on our financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires certain financial and
description information about a company's reportable operating segments. We
adopted SFAS No. 131 in fiscal year 1999. The adoption of SFAS No. 131 applies
solely to disclosure and does not have an impact on our financial position or
results of operations.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $797 million at March
31, 1999 compared to $714 million at March 31, 1998. We used cash in fiscal
year 1999 primarily to purchase $305 million of treasury stock,
24
<PAGE>
as discussed below, and to invest in property and equipment. Cash was provided
by operating activities, primarily sales, the collection of accounts
receivable, and a reduction in inventories.
In September 1998, we issued 16.9 million shares, including the reissuance
of treasury shares, to the shareholders of ATL to complete the acquisition of
ATL. The difference between the cost of the treasury stock and the value at
which we reissued the shares resulted in a $63 million reduction to retained
earnings in fiscal year 1999. For additional information regarding the ATL
acquisition, see Note 5 of the Notes to Consolidated Financial Statements.
During fiscal year 1999, we completed the share repurchase authorized by our
board of directors of a total of 15.5 million shares. The total cost of such
repurchases was $305 million. Our intent in effecting the repurchase was to
minimize the dilutive impact of the shares issued to complete the acquisition
of ATL.
In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is co-
terminous with our $500 million revolving credit line, expiring in June 2000.
At the option of ATL, borrowings under the revolving credit line bear interest
at either the London interbank offered rate plus a margin determined by our
total funded debt ratio, or at a base rate, with option periods of one to six
months. At March 31, 1999, $18 million was outstanding on ATL's revolving
credit line.
We filed a registration statement which became effective on July 24, 1997,
pursuant to which we may issue debt or equity securities, in one or more series
or issuances, limited to $450 million aggregate public offering price. Under
the registration statement, in July 1997, we issued $288 million of 7%
convertible subordinated notes. The notes mature on August 1, 2004, and are
convertible at the option of the holder at any time prior to maturity, unless
previously redeemed, into shares of our common stock at a conversion price of
$46.325 per share. We have the option to redeem the notes on or after August 1,
1999 and prior to August 1, 2001, under certain conditions related to the price
of our common stock. Subsequent to August 1, 2001, we may redeem the notes at
any time. In the event of certain changes involving all or substantially all of
our common stock, the holder would have the option to redeem the notes.
Redemption prices range from 107% of the principal to 100% at maturity. The
notes are unsecured obligations subordinated in right of payment to all of our
existing and future senior indebtedness.
In June 1997, we entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At our
option, borrowings under the revolving credit line bear interest at either the
London interbank offered rate plus a margin determined by our total funded debt
ratio, or at a base rate, with option periods of one to six months. At March
31, 1999, there was no outstanding balance drawn on this line.
In September 1996, we entered into a $42 million mortgage financing related
to certain domestic facilities at an effective interest rate of approximately
10.1%. The term of the mortgage is 10 years. We are required to make monthly
payments based on a 20-year amortization period, and a balloon payment at the
end of the 10-year term.
We expect to spend approximately $155 million in fiscal year 2000 for
capital equipment and leasehold improvements. These capital expenditures will
support the disk drive and tape drive businesses, research and development, and
general corporate operations.
We believe that our existing capital resources, including the credit
facility and any cash generated from operations, will be sufficient to meet all
currently planned expenditures and sustain operations for the next 12 months.
However, this belief assumes that operating results and cash flow from
operations will meet our expectations.
See Note 7 of the Notes to Consolidated Financial Statements for additional
information regarding long-term debt.
25
<PAGE>
In May 1999, we announced a definitive agreement to acquire Meridian Data,
Inc., pending approval of Meridian's stockholders, clearance under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, and certain other closing
conditions. Meridian is a developer and manufacturer of network attached
storage solutions utilizing both conventional hard disk drive and optical disk
technologies for the PC local area network environment.
Under the terms of the proposed agreement, Meridian's stockholders will
receive either our existing common stock or both DLT & Storage Systems Group
stock and Hard Disk Drive Group stock, depending on the timing and outcome of
the tracking stock proposal and the proposed Meridian acquisition, which is
expected to be completed by September 1999. If the acquisition is completed
prior to the implementation of the tracking stock proposal, each outstanding
share of Meridian's common stock will be converted into 0.489 of a share of our
existing common stock, subject to adjustment based on the trading range of our
existing common stock prior to the completion of the acquisition. If the
tracking stock proposal is implemented prior to the completion of the Meridian
acquisition, each outstanding share of Meridian's common stock will be
converted into 0.489 of a share of DLT & Storage Systems Group stock and 0.2445
of a share of Hard Disk Drive Group stock, subject to adjustment based on the
trading range of DLT & Storage Systems Group stock and Hard Disk Drive Group
stock prior to the completion of the acquisition. In addition, under the terms
of the proposed transaction, all Meridian stock options will be assumed by us.
The acquisition will be accounted for as a purchase, and we expect to recognize
a charge for purchased in-process research and development upon closing of the
acquisition.
Meridian had revenue of $4 million and $18 million in the quarter ended
March 31, 1999, and the year ended December 31, 1998, respectively. At March
31, 1999, Meridian had total cash and marketable securities of $15 million. At
December 31, 1998, Meridian had a net operating loss carryforward for U.S.
federal income tax purposes of approximately $32 million.
In May 1999, we announced that the Board of Directors authorized the
repurchase of up to $200 million of our existing common stock through open
market purchases made from time to time. In part, the intent of the repurchase
would be to offset the dilutive impact of the shares issued to complete the
Meridian acquisition. There are currently no other specific plans for shares
that might be repurchased.
Year 2000
The year 2000 computer issue refers to the possibility that computer systems
may not be able to distinguish the year 2000 from the year 1900. Two other
date-related issues may contribute to the year 2000 problem: (1) certain
systems have associated special values with date fields (for example, 9/9/99),
and (2) these same systems may fail to recognize that year 2000 is a leap year.
Because of the pervasive use and dependency on computer technology in all
facets of modern commerce, year 2000 issues present a potentially vast risk to
companies, including us. For example, there are potential disruptions or
failures of our products and operations and of the products and operations of
our suppliers, customers and service providers. Because the year 2000 issue can
impact us indirectly through our suppliers, service providers and customers, an
assessment and prediction of the impact of the year 2000 issue on our company
is difficult.
We are in the process of implementing plans to address year 2000 issues both
within and outside Quantum. In addressing the year 2000 issues and risks, we
have focused our efforts on our enterprise-wide and departmental operations,
products, critical suppliers (including service providers) and key customers.
Within Quantum, these efforts are intended to encompass all major categories of
computer systems and operating equipment used by us, including those utilized
in manufacturing, research and development, sales, finance and human resources.
To ensure year 2000 compliance for all of our systems, we have adopted an
approach based on the U.S. General Accounting Office Year 2000 Assessment
Guide. The approach utilizes a multi-phased model, with major phases consisting
of inventory, assessment, resolution, testing and certification:
. In the inventory phase we are listing and reviewing for criticality and
risk all hardware, software, equipment, infrastructure, and desktop tools
and applications.
26
<PAGE>
. In the assessment phase, we are determining whether we are converting,
replacing or eliminating the impacted system or application.
. In the resolution phase, we are developing and carrying out a formal
plan.
. Under stringent procedures in the testing phase, we are validating the
system and application on its functionality to perform seamlessly in the
year 2000.
. In the certification phase, we are documenting and verifying all test
results.
Within each of the major categories of computer systems and operating
equipment, we prioritize our year 2000 issues and risks on three levels:
. The critical level reflects short-term failure which would have a severe
impact on our business operations and result in significant downtime or a
manual effort to perform the required functions. Without this system or
application, our business could not function.
. Key level applications or systems, although required by us, are not
mandatory for business survival. We do not expect the failure of key
level applications to cause significant disruption to our operations. We
can defer the work or devise manual back-up procedures to handle the
interim needs.
. Active level applications, although currently in use, are not required
for our normal operations. We do not expect their failure to result in
any disruption to our business.
We have made significant progress in our preparedness for year 2000. We have
assessed and remedied all critical areas of our own operations, which include
information technology, operating equipment with embedded chips or software and
products. We have also certified readiness of these critical areas. We expect
to complete assessment, resolution, testing, and certification of critical and
key third parties by the end of May 1999.
We are currently addressing key level areas of our own operations, which
includes information technology, operating equipment with embedded chips or
software and products.
. The inventory phase is approximately 80% complete with an expected
completion date of May 31, 1999.
. The assessment phase is approximately 10% complete, with an expected
completion date of June 30, 1999.
. The resolution phase is expected to be complete by June 30, 1999.
. The testing and certification phases are expected to be complete by
August 31, 1999.
We are also developing contingency plans, based in part on the assessment
results. Development of contingency plans is expected to be complete by
August 31, 1999.
Our failure to complete critical readiness assessments, critical corrective
actions or implement viable contingency plans in a timely matter could have a
material adverse effect on our business, financial condition and operating
results.
As indicated above, our risk assessment includes understanding the year 2000
readiness of our suppliers. Our risk assessment process associated with
suppliers includes soliciting and analyzing responses to questionnaires
distributed to these suppliers, as well as onsite interviews with certain
critical suppliers. Critical suppliers include a number of suppliers with
operations in China, India and Mexico that are our sole source of certain
components for tape drives. We have received 100% of responses from an initial
survey sent to suppliers and have received 100% of responses from a second
follow-up survey sent to those identified as critical suppliers. To further
assess year 2000 readiness, we are conducting on-site visits of certain
critical suppliers and expect to complete these visits by the end of May 1999.
27
<PAGE>
The year 2000 readiness of Matsushita-Kotobuki, our hard disk drive
manufacturing partner, is of particular importance. Matsushita-Kotobuki
implemented a year 2000 compliance project plan in April 1998, similar in
content and structure to that employed by us. We have been informed that all of
Matsushita-Kotobuki's critical processes, applications and hardware have been
tested and certified for year 2000 compliance. Also, we understand that all key
and active processes, applications and hardware will be year 2000 compliant and
certified by the end of June 1999. We hold regular meetings to verify that
Matsushita-Kotobuki is, and will remain, on schedule. Additionally, we are
currently performing limited on-site evaluations of Matsushita-Kotobuki
operations in Japan, Singapore and Ireland, and expect completion by the end of
May 1999. Our reliance on Matsushita-Kotobuki and other critical suppliers, and
therefore, on the proper functioning of their information systems and software,
means that any failure by these critical suppliers to address year 2000 issues
could have a material adverse impact on our business, financial condition and
results of operations. Based on the level of risk assessed of critical
suppliers, we may develop contingency plans, including the possibility of a
planned increase in inventory or other measures.
We are also working closely with key customers to evaluate their readiness
for year 2000 and are currently performing on-site visits as deemed necessary.
The ability of customers to deal with year 2000 issues may affect their
operations and their ability to order and pay for products. Based on the level
of risk assessed, we may develop contingency plans to address possible changes
in customer order patterns.
We believe that third party factors, rather than our internal systems and
applications, would be the cause of our most reasonably likely worst case
scenario. For example, since we deal heavily with third parties to manufacture
and transport products and services, a failure of third party systems could
result in a disruption of service, which could result in delays in shipments of
our products. For internal systems, we are developing workarounds, which may
involve providing manual or other automated processes in lieu of normal
procedures.
Our products are inherently year 2000 compliant; our families of disk drive
products have no internal date clocks, and therefore are not impacted by the
year 2000 problem. Our DLT tape drives use a four-character string to describe
the year and will not be affected by the year 2000 problem. Additionally, we do
not need to make any modifications to any disk or tape drive's internal
firmware to accommodate the transition to the year 2000. We consider a disk
drive or tape product to be year 2000 compliant when used in accordance with
our product information. That product will not generate an error in data
related to the year change from December 31, 1999 to January 1, 2000.
Furthermore, year 2000 compliant products will correctly handle leap years,
including leap years beginning January 1, 2000 and thereafter. However, the
assessment of whether a complete computer system operates correctly depends on
factors such as the operating system, basic input/output systems, software and
components, which companies other than Quantum provide.
Costs incurred to date in addressing the year 2000 issue have been
approximately $8.2 million, with $5.5 million and $2.7 million of this cost in
the Hard Disk Drive group and the DLT & Storage Systems group, respectively.
Based on assessment and resolution projects underway, we currently expect that
the total cost of addressing the year 2000 issue, including both incremental
spending and redeployed resources, will not exceed $15 million, with $10.3
million and $4.7 million of this cost in the Hard Disk Drive group and the DLT
& Storage Systems group, respectively. We expect a majority of the cost to
relate to the redeployed resources. However, as the year 2000 efforts continue,
we may use third-party vendors or service providers as necessary to assure that
we successfully meet program milestones. The costs related to the year 2000
effort in fiscal year 1999 represented approximately 10% of our total
information technology budget for the fiscal year and are expected to represent
approximately 10% of our total information technology budget for fiscal year
2000. We have not deferred any significant system projects due to the year 2000
program. As our risk assessment and correction activities continue, these costs
may change. In addition, our total cost estimate does not include potential
costs related to any customer or other claims resulting from our failure to
adequately correct year 2000 issues.
Based on assessment and remediation completed to date, we do not expect any
significant disruption to our operations or operating results as a result of
year 2000 issues. We are taking all steps we believe are appropriate to
identify and resolve any year 2000 issues; however, the extent such issues may
affect us is uncertain. We
28
<PAGE>
cannot assure you that we will be able to assess, identify and correct year
2000 issues in a timely or successful manner. We also cannot assure you that
our suppliers, service providers, customers or other third parties will be year
2000 compliant.
The foregoing statements regarding our year 2000 plans and our expectations
for resolving these issues and the costs associated therewith are forward-
looking statements and actual results could vary. The severity of the problems
to be resolved within Quantum, the year 2000 issues affecting our suppliers and
service providers, and the costs associated with third party consultants and
software necessary to address these issues could affect our success in
addressing year 2000 issues.
Euro Impact
We believe that the adoption of a single currency, the Euro, by eleven
European countries will not materially affect our business, information systems
or consolidated financial position, operating results or cash flows.
29
<PAGE>
Trends and Uncertainties
The businesses of the DLT & Storage Systems group and the Hard Disk Drive
group are subject to a number of trends and uncertainties discussed below.
Trends and Uncertainties Relating to the DLT & Storage Systems Group
Competition may increase in the tape drive market as a result of large
competitors introducing tape drive products based on new technology standards
The DLT & Storage Systems group competes with companies that develop,
manufacture, market and sell tape drive products. The DLT & Storage Systems
group's principal competitors include Exabyte, Hewlett-Packard, Seagate, Sony
and StorageTek. These competitors are aggressively trying to develop new tape
drive technologies that compete more successfully with DLTtape technology.
Hewlett-Packard, IBM and Seagate have formed a consortium to develop new linear
tape drive products. The DLT & Storage Systems group expects products based on
this developing technology standard to target the high-capacity data back-up
market and to compete with the DLT & Storage Systems group's products based on
Super DLTtape technology. Such competition could have a material adverse impact
on the DLT & Storage Systems group's operating results.
The DLT & Storage Systems group's operating results depend on new product
introductions which may not be successful
To compete effectively, the DLT & Storage Systems group must improve
existing products and introduce new products, such as products based on Super
DLTtape technology and network attached storage appliances. The DLT & Storage
Systems group cannot assure you that:
. it will introduce any of these new products in the time frame the DLT &
Storage Systems group currently forecasts;
. it will not experience technical or other difficulties that could prevent
or delay the introduction of these new products;
. its new products will achieve market acceptance;
. its new products will be successfully or timely qualified with the DLT &
Storage Systems group's customers by meeting customer performance and
quality specifications. A successful and timely customer qualification
must occur before customers will place large product orders; or
. it will achieve high volume production of these new products in a timely
manner, if at all.
This risk is magnified because the DLT & Storage Systems group expects
technological changes, customer requirements and increasing competition could
result in declining sales and gross margins on its existing products.
Reliance on a limited number third-party suppliers could result in
significantly increased costs and delays in the event these suppliers
experience shortages or quality problems
The DLT & Storage Systems group depends on a limited number of suppliers for
components and sub-assemblies, including recording heads, media cartridges and
integrated circuits, all of which are essential to the manufacture of DLTtape
drives and tape libraries. The DLT & Storage Systems group currently purchases
the DLTtape media cartridges it sells primarily from Fuji and Maxell. The DLT &
Storage Systems group cannot assure you that Fuji or Maxell will continue to
supply adequate high quality media cartridges in the future. If component
shortages occur, or if the DLT & Storage Systems group experiences quality
problems with component suppliers, shipments of products could be significantly
delayed and/or costs significantly increased. In addition, the DLT & Storage
Systems group qualifies only a single source for many components and sub-
assemblies, which magnifies the risk of future shortages.
30
<PAGE>
The DLT & Storage Systems group's sole supplier of tape heads is located in
China and political instability, trade restrictions or currency fluctuations
in China could have an adverse impact on the DLT & Storage Systems group's
operating results.
The DLT & Storage Systems group's sole supplier of tape heads is located in
China and political instability, trade restrictions, changes in tariff or
freight rates or currency fluctuations in China could result in increased
costs, delays in shipment and could have an adverse impact on the DLT &
Storage Systems group's operating results.
The DLT & Storage Systems group's quarterly operating results could fluctuate
significantly and past quarterly operating results should not be used to
predict future performance
The DLT & Storage Systems group's quarterly operating results have
fluctuated significantly in the past and could fluctuate significantly in the
future. Quarterly operating results could be adversely affected by:
. an inadequate supply of DLTtape media cartridges;
. customers canceling, deferring or rescheduling significant orders as a
result of excess inventory levels or other factors;
. declines in network server demand; or
. failure to complete shipments in the last month of a quarter during which
a substantial portion of the DLT & Storage Systems group's products are
typically shipped.
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments
The DLT & Storage Systems group's sales are concentrated with a few
customers. Customers are not obligated to purchase any minimum product volume
and the DLT & Storage Systems group's relationships with its customers are
terminable at will. The loss of, or a significant change in demand from, one
or more key customers could materially adversely impact the DLT & Storage
Systems group's operating results.
Unpredictable end-user demand may cause excess or insufficient inventories
which could result in inventory write-downs or losses and an adverse impact
on the DLT & Storage Systems group's customer relationships
Unpredictable end-user demand, combined with the computer equipment
manufacturer trend toward carrying minimal inventory levels, increases the
risk that the DLT & Storage Systems group will manufacture and custom
configure too much or too little inventory for particular customers.
Significant excess inventory could result in inventory write-downs and losses
while inventory shortages could adversely impact the DLT & Storage Systems
group's relationship with its customers, either of which could adversely
impact the DLT & Storage Systems group's operating results.
The DLT & Storage Systems group does not control licensee pricing or licensee
sales of DLTtape media cartridges and as a result the DLT & Storage Systems
group's royalty revenue may decline
The DLT & Storage Systems group receives a royalty fee based on sales of
DLTtape media cartridges by Fuji and Maxell. Under the DLT & Storage Systems
group's license agreements with Fuji and Maxell, each of the licensees
determine the pricing and number of units of DLTtape media cartridges sold by
it. As a result, the DLT & Storage Systems group's royalty revenue will vary
depending upon the level of sales and prices set by Fuji and Maxell. In
addition, lower licensee pricing could require the DLT & Storage Systems group
to lower its prices on direct sales of DLTtape media cartridges which would
adversely impact the DLT & Storage Systems group's margins for this product.
31
<PAGE>
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege the DLT & Storage Systems group's
infringement of and need for a license under their patented or other
proprietary technology. Adverse resolution of any third party infringement
claim could subject the DLT & Storage Systems group to substantial liabilities
and require it to refrain from manufacturing and selling certain products. In
addition, the costs incurred in intellectual property litigation can be
substantial, regardless of the outcome.
Trends and Uncertainties Relating to the Hard Disk Drive Group
The Hard Disk Drive group's operating results depend on new product
introductions which may not be successful
To compete effectively, the Hard Disk Drive group must frequently introduce
new hard disk drives. The Hard Disk Drive group cannot assure you that:
. it will successfully or timely develop or market any new hard disk drives
in response to technological changes or evolving industry standards;
. it will not experience technical or other difficulties that could delay
or prevent the successful development, introduction or marketing of new
hard disk drives;
. it will successfully qualify new hard disk drives, particularly high-end
disk drives, with the Hard Disk Drive group's customers by meeting
customer performance and quality specifications. A successful and timely
customer qualification must occur before customers will place large
product orders;
. it will quickly achieve high volume production of new hard disk drives;
or
. its new products will achieve market acceptance.
These risks are magnified because the Hard Disk Drive group expects
technological changes, short product life cycles and intense competitive
pressures to result in declining sales and gross margins on its current
generation products.
The Hard Disk Drive group's inability to successfully incorporate giant
magneto-resistive recording heads into its hard disk drives would have an
adverse impact on product sales
In calendar year 1999, the Hard Disk Drive group expects increasing
industry-wide competition for hard disk drives that incorporate next generation
recording head technology known as giant magneto-resistive recording heads. IBM
has already commenced shipment of hard disk drives which incorporate giant
magneto-resistive recording heads. The Hard Disk Drive group cannot assure you
that it will be able to incorporate giant magneto-resistive recording heads
into its hard disk drives in a timely manner. If the Hard Disk Drive group is
successful in incorporating giant magneto-resistive recording heads into its
hard disk drives, the Hard Disk Drive group cannot assure you that such drives
will achieve market acceptance.
The Hard Disk Drive group's quarterly operating results could fluctuate
significantly and past quarterly operating results should not be used to
predict future performance
The Hard Disk Drive group's quarterly operating results have fluctuated
significantly in the past and may fluctuate significantly in the future. As a
result, you should not use the Hard Disk Drive group's past quarterly operating
results to predict future performance. Quarterly operating results could be
adversely affected by:
. the ability of Matsushita-Kotobuki, the Hard Disk Drive group's exclusive
manufacturer, to quickly achieve high volume production of the Hard Disk
Drive group's hard disk drives;
. customers canceling, deferring or rescheduling significant orders;
32
<PAGE>
. returns by customers of unsold hard disk drives for credit;
. decline in PC demand; or
. failure to complete shipments in the last month of a quarter during which
a substantial portion of the Hard Disk Drive group's products are
typically shipped.
The Hard Disk Drive group's prices and margins are subject to declines due to
unpredictable end-user demand and oversupply of hard disk drives
End-user demand for the computer systems which contain the Hard Disk Drive
group's hard disk drives has historically been subject to rapid and
unpredictable fluctuations. As a result, the hard disk drive market tends to
experience periods of excess capacity which typically lead to intense price
competition. If intense price competition occurs, the Hard Disk Drive group may
be forced to lower prices sooner and more than expected and transition to new
products sooner than expected. For example, in fiscal year 1999 and the second
half of fiscal year 1998, as a result of excess inventory in the desktop hard
disk drive market, aggressive pricing and corresponding margin reductions
materially adversely impacted the Hard Disk Drive group's operating results.
The Hard Disk Drive group experienced similar conditions in the high-end hard
disk drive market during most of fiscal years 1998 and 1999.
Growth of the lower priced PC markets is putting downward pressure on the Hard
Disk Drive group's desktop hard disk drive prices and margins
The recent growth of the lower priced PC market has led to a shift toward
lower priced desktop hard disk drives, and to significantly reduced gross
margins. The Hard Disk Drive group expects the trend toward lower prices and
margins on hard disk drives to continue. If the Hard Disk Drive group is unable
to lower the cost of its desktop hard disk drives accordingly, gross margins
will continue to decrease.
Intense competition in the desktop and high-end hard disk drive market could
adversely impact the Hard Disk Drive group's operating results
In the desktop hard disk drive market, the Hard Disk Drive group's primary
competitors are Fujitsu, IBM, Maxtor, Samsung, Seagate and Western Digital. The
desktop hard disk drive market is characterized by more competitiveness than
that seen in the computer industry in general. The Hard Disk Drive group's
operating results and competitive position could be negatively impacted by the
introduction of competitive products with higher performance, higher
reliability and/or lower cost than the Hard Disk Drive group's products.
In the high-end hard disk drive market, the Hard Disk Drive group's primary
competitors are Fujitsu, Hitachi, IBM, Seagate and Western Digital. Currently,
Seagate and IBM have the largest market share for high-end hard disk drives.
Intense technology and pricing competition has led to losses on the Hard Disk
Drive group's high-end hard disk drive products over the past eight quarters.
The Hard Disk Drive group does not anticipate that its high-end hard disk drive
products will return to profitability prior to shipping its next generation
products.
A majority of sales come from a few customers that have no minimum or long-
term purchase commitments
The Hard Disk Drive group's sales are concentrated with a few customers.
Customers are not obligated to purchase any minimum product volume and the Hard
Disk Drive group's customer relationships are terminable at will. The loss of,
or a significant change in demand from, one or more key the Hard Disk Drive
group customers could have a material adverse impact on the Hard Disk Drive
group's operating results.
33
<PAGE>
Because the Hard Disk Drive group depends on Matsushita-Kotobuki for the
manufacture of all hard disk drives, adverse material developments in this
critical manufacturing relationship would adversely impact the Hard Disk
Drive group's operating results
The Hard Disk Drive group's relationship with Matsushita-Kotobuki is
critical to the Hard Disk Drive group's operating results and overall business
performance. The Hard Disk Drive group's dependence on Matsushita-Kotobuki
includes the following principal risks:
. Quality and Delivery. The Hard Disk Drive group relies on Matsushita-
Kotobuki to quickly achieve volume production of new hard disk drives at
a competitive cost, to meet the Hard Disk Drive group's stringent quality
requirements and to respond quickly to changing product delivery
schedules. Failure of Matsushita-Kotobuki to satisfy these requirements
could have a material adverse impact on the Hard Disk Drive group's
operating results.
. Purchase Forecasts. Matsushita-Kotobuki's production schedule is based on
the Hard Disk Drive group's forecasts of its purchase requirements, and
the Hard Disk Drive group has limited rights to modify short-term
purchase orders. The failure of the Hard Disk Drive group to accurately
forecast its requirements or successfully adjust Matsushita-Kotobuki's
production schedule could lead to inventory shortages or surpluses.
. Pricing. The Hard Disk Drive group negotiates pricing arrangements with
Matsushita-Kotobuki on a quarterly basis. Any failure to reach
competitive pricing arrangements would have a material adverse impact on
the Hard Disk Drive group's operating results.
. Capital Commitment. The Hard Disk Drive group's future growth will
require that Matsushita-Kotobuki continue to devote substantial financial
resources to property, plant and equipment to support the manufacture of
the Hard Disk Drive group's products.
. Manufacturing Capacity. If Matsushita-Kotobuki is unable or unwilling to
meet the Hard Disk Drive group's manufacturing requirements, an
alternative manufacturing source may not be available in the near-term.
Matsushita-Kotobuki depends on a limited number of component and sub-assembly
suppliers and component shortages and quality problems or delays from these
suppliers could result in increased costs and reduced sales
Matsushita-Kotobuki depends on a limited number of qualified suppliers for
components and sub-assemblies, including recording heads, media and integrated
circuits, all of which are essential to the manufacture of the Hard Disk Drive
group's hard disk drives. Matsushita-Kotobuki may qualify only a single source
for certain components and sub-assemblies, which can magnify the risk of
component shortages. Component shortages have constrained the Hard Disk Drive
group's sales growth in the past, and the Hard Disk Drive group believes that
it will periodically experience component shortages. If Matsushita-Kotobuki
experiences quality problems with its component suppliers, the Hard Disk Drive
group's hard disk drive shipments could be significantly delayed or costs
could be significantly increased.
Unexpected warranty costs could have a material adverse impact on operating
results
The Hard Disk Drive group warrants its products against defects for a
period of one to five years. Actual warranty costs could have a material
adverse impact on the Hard Disk Drive group's operating results if the actual
unit failure rate or unit repair costs are greater than those for which the
Hard Disk Drive group established a warranty accrual.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege the Hard Disk Drive group's
infringement of and need for a license under their patented or other
proprietary technology. For example, in August 1998 Quantum was named as one
34
<PAGE>
of several defendants in a patent infringement lawsuit. The plaintiff, Papst
Licensing GmbH, owns at least 24 U.S. patents, which it asserts that the Hard
Disk Drive group has infringed. Adverse resolution of the Papst litigation or
any other third party infringement claim could subject the Hard Disk Drive
group to substantial liabilities and require it to refrain from manufacturing
and selling certain products. The Hard Disk Drive group cannot assure you that
licenses to any technology owned by Papst or any other third party alleging
infringement could be obtained on commercially reasonable terms, or at all. In
addition, the costs of litigation could be substantial, regardless of the
outcome.
The Hard Disk Drive group's foreign manufacturing costs could be adversely
impacted by fluctuations in currency exchange rates
Matsushita-Kotobuki generally purchases manufacturing components at prices
denominated in U.S. dollars. However, significant increases in currency
exchange rates against the U.S. Dollar could increase Matsushita-Kotobuki's
manufacturing costs and could result in higher product prices and/or declining
margins for the Hard Disk Drive group's products.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative information about market risk, refer to
Item 8, Notes 1 and 2 of the Notes to Consolidated Financial Statements.
35
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................... 37
Independent Auditors' Report............................................ 38
Consolidated Statements of Operations for the Years Ended March 31, 1997
and 1998, and 1999..................................................... 39
Consolidated Balance Sheets as of March 31, 1998 and 1999............... 40
Consolidated Statements of Cash Flows for the Years Ended March 31,
1997, 1998 and 1999.................................................... 41
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1997, 1998 and 1999.......................................... 42
Notes to Consolidated Financial Statements.............................. 43
Schedule II--Valuation and Qualifying Accounts. . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 63
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
36
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Quantum Corporation
We have audited the accompanying consolidated balance sheets of Quantum
Corporation (the "Company") as of March 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the consolidated
financial statements of MKE-Quantum Components LLC ("MKQC"), a forty-nine
percent equity investee of the Company, which statements reflect a net loss of
$134.8 million for the period from May 16, 1997 (inception) through March 31,
1998. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
MKQC, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Quantum Corporation at March
31, 1998 and 1999, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the financial information set forth therein.
/s/ Ernst & Young LLP
Palo Alto, California
April 26, 1999
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
MKE-Quantum Components LLC:
We have audited the consolidated balance sheet of MKE-Quantum Components LLC
and subsidiaries as of March 31, 1998 and the related consolidated statements
of operations, members' equity, and cash flows for the period from May 16, 1997
(Inception) through March 31, 1998 not included herein. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MKE-Quantum
Components LLC and subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the period from May 16, 1997 (Inception)
through March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Boston, Massachusetts
April 14, 1998, except for notes 6(b) and 12
which are as of June 5, 1998
38
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................... $5,319,457 $5,805,235 $4,902,056
Cost of revenue............................ 4,550,716 4,929,714 4,030,718
---------- ---------- ----------
Gross profit............................... 768,741 875,521 871,338
Operating expenses:
Research and development................. 291,332 321,741 353,223
Sales and marketing...................... 149,371 169,031 191,126
General and administrative............... 86,507 89,364 93,750
Purchased in-process research and
development............................. -- -- 89,000
---------- ---------- ----------
527,210 580,136 727,099
---------- ---------- ----------
Income from operations..................... 241,531 295,385 144,239
Interest income and other, net............. 7,047 34,243 25,107
Interest expense........................... (47,882) (32,753) (27,481)
Loss from investee......................... -- (66,060) (142,050)
---------- ---------- ----------
Income (loss) before income taxes.......... 200,696 230,815 (185)
Income tax provision ...................... 52,181 60,014 29,350
---------- ---------- ----------
Net income (loss).......................... $ 148,515 $ 170,801 $ (29,535)
========== ========== ==========
Net income (loss) per share:
Basic.................................... $ 1.27 $ 1.25 $ (0.18)
========== ========== ==========
Diluted.................................. $ 1.04 $ 1.07 $ (0.18)
========== ========== ==========
Weighted-average common shares:
Basic.................................... 117,218 136,407 160,670
========== ========== ==========
Diluted.................................. 153,287 166,016 160,670
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 642,150 $ 772,368
Marketable securities................................ 71,573 24,426
Accounts receivable, net of allowance for doubtful
accounts of $12,928 and $12,130 respectively........ 737,928 646,557
Inventories.......................................... 315,035 271,986
Deferred taxes....................................... 133,981 107,701
Other current assets................................. 124,670 104,835
---------- ----------
Total current assets.................................. 2,025,337 1,927,873
Property, plant and equipment, less accumulated
depreciation......................................... 285,159 271,928
Intangible assets, less accumulated amortization...... 24,490 225,567
Other assets.......................................... 103,425 58,228
---------- ----------
$2,438,411 $2,483,596
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable..................................... $ 446,243 $ 406,369
Accrued warranty..................................... 74,017 76,905
Accrued compensation................................. 60,344 73,605
Income taxes payable................................. 39,777 33,411
Current portion of long-term debt.................... 935 1,024
Other accrued liabilities............................ 78,920 90,691
---------- ----------
Total current liabilities............................. 700,236 682,005
Deferred taxes........................................ 38,668 67,340
Long-term debt........................................ 39,985 56,961
Convertible subordinated debt......................... 287,500 287,500
Commitments and contingencies.........................
Stockholders' equity:
Common stock, $.01 par value; authorized: 500,000,000
shares; issued and outstanding: 160,879,171 at March
31, 1998, and 167,406,738 at March 31, 1999......... 1,609 1,675
Capital in excess of par value....................... 774,682 884,759
Retained earnings.................................... 597,193 504,206
Accumulated other comprehensive loss................. (1,462) (850)
---------- ----------
Total stockholders' equity............................ 1,372,022 1,389,790
---------- ----------
$2,438,411 $2,483,596
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 148,515 $ 170,801 $ (29,535)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Loss from investee........................... -- 66,060 124,809
Purchased in-process research and
development................................. -- -- 89,000
Depreciation................................. 96,477 78,067 92,522
Amortization................................. 27,959 13,532 20,413
Deferred taxes............................... 9,081 (6,001) 22,904
Compensation related to stock incentive
plans....................................... 2,391 4,236 5,636
Changes in assets and liabilities:
Accounts receivable......................... (176,370) 149,549 114,792
Inventories................................. 206,736 (62,233) 67,149
Accounts payable............................ 3,240 (55,826) (56,211)
Income taxes payable........................ (9,841) 8,624 (6,367)
Accrued warranty............................ 32,700 (20,972) 2,037
Other assets and liabilities................ (28,189) (61,485) 16,740
--------- --------- ---------
Net cash provided by operating activities..... 312,699 284,352 463,889
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities........... -- (71,573) (78,145)
Maturities of marketable securities.......... -- -- 125,292
Purchases of equity securities/minority
interest.................................... (6,132) (15,000) (1,750)
Acquisition of intangible assets............. -- (25,850) --
Proceeds from sale of interest in recording
heads operations............................ -- 94,000 --
Investment in property and equipment......... (174,977) (149,749) (115,662)
Proceeds from disposition of property and
equipment................................... 9,665 5,962 143
Proceeds from repayment of note receivable... -- 18,000 --
--------- --------- ---------
Net cash used in investing activities......... (171,444) (144,210) (70,122)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities.... 330,091 -- 33,545
Proceeds from mortgage loan.................. 42,105 -- --
Purchase of treasury stock................... -- -- (305,287)
Principal payments on long-term credit
facilities.................................. (378,339) (180,977) (34,090)
Proceeds from issuance of common stock....... 45,261 50,360 42,283
Proceeds from issuance of convertible
subordinated notes.......................... -- 287,500 --
--------- --------- ---------
Net cash provided by (used in) financing
activities................................... 39,118 156,883 (263,549)
--------- --------- ---------
Increase in cash and cash equivalents......... 180,373 297,025 130,218
Cash and cash equivalents at beginning of
period....................................... 164,752 345,125 642,150
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 345,125 $ 642,150 $ 772,368
========= ========= =========
Supplemental disclosure of cash flow
information:
Conversion of debentures to common stock..... $ 132,893 $ 241,350 --
========= ========= =========
Note received on disposition of property and
equipment................................... $ 18,000 -- --
========= ========= =========
Issuance of redeemable preferred stock as
part of minority interest acquisition....... $ 3,888 -- --
========= ========= =========
Conversion of redeemable preferred stock to
common stock................................ -- $ 3,888 --
========= ========= =========
Cash paid during the year for:
Interest..................................... $ 48,500 $ 29,030 $ 26,721
========= ========= =========
Income taxes................................. $ 9,171 $ 62,615 $ 2,718
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other
--------------- Excess of Retained Comprehensive Treasury
Shares Amount Par Value Earnings Income (Loss) Stock Total
------- ------ ---------- -------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1996................... 108,392 $1,082 $265,864 $277,877 $ -- $ -- $ 544,823
Net income.............. -- -- -- 148,515 -- -- 148,515
Conversion of
subordinated
debentures............. 14,644 146 131,118 -- -- -- 131,264
Shares issued under
employee stock purchase
plan................... 3,216 32 17,370 -- -- -- 17,402
Shares issued under
employee stock option
plans, net............. 4,612 48 27,811 -- -- -- 27,859
Compensation expense and
other.................. -- -- 5,299 -- -- -- 5,299
Tax benefits related to
stock option plans..... -- -- 11,030 -- -- -- 11,030
------- ------ -------- -------- ------- --------- ----------
Balances at March 31,
1997................... 130,864 1,308 458,492 426,392 -- -- 886,192
Comprehensive income:
Net income............. -- -- -- 170,801 -- -- 170,801
Other comprehensive
loss--foreign currency
translation
adjustments........... -- -- -- -- (1,462) -- (1,462)
----------
Comprehensive income.... -- -- -- -- -- -- 169,339
Conversion of
subordinated
debentures............. 21,626 216 236,506 -- -- -- 236,722
Conversion of Series B
preferred shares....... 180 2 3,886 -- -- -- 3,888
Shares issued under
employee stock purchase
plan................... 3,454 35 21,442 -- -- -- 21,477
Shares issued under
employee stock option
plans, net............. 4,755 48 28,835 -- -- -- 28,883
Compensation expense and
other.................. -- -- 4,236 -- -- -- 4,236
Tax benefits related to
stock option plans..... -- -- 21,285 -- -- -- 21,285
------- ------ -------- -------- ------- --------- ----------
Balances at March 31,
1998................... 160,879 1,609 774,682 597,193 (1,462) -- 1,372,022
Comprehensive loss:
Net loss............... -- -- -- (29,535) -- -- (29,535)
Other comprehensive
income--foreign
currency translation
adjustments........... -- -- -- -- 612 -- 612
----------
Comprehensive loss...... -- -- -- -- -- -- (28,923)
Shares issued under
employee stock purchase
plan................... 2,555 26 24,014 -- -- -- 24,040
Shares issued under
employee stock option
plans, net............. 2,502 25 18,218 -- -- -- 18,243
Treasury shares
repurchased............ (15,477) -- -- -- -- (305,287) (305,287)
Treasury shares reissued
for ATL acquisition.... 15,477 -- -- (63,452) -- 305,287 241,835
New shares issued for
ATL acquisition........ 1,471 15 22,973 -- -- -- 22,988
Conversion of ATL stock
options................ -- -- 22,367 -- -- -- 22,367
Compensation expense and
other.................. -- -- 5,636 -- -- -- 5,636
Tax benefits related to
stock option plans..... -- -- 16,869 -- -- -- 16,869
------- ------ -------- -------- ------- --------- ----------
Balances at March 31,
1999................... 167,407 $1,675 $884,759 $504,206 $ (850) $ -- $1,389,790
======= ====== ======== ======== ======= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Nature of Business. Quantum operates its business through two separate
groups: the DLT & Storage Systems group and the Hard Disk Drive group as
described below.
The DLT & Storage Systems group designs, develops, manufactures, licenses
and markets DLTtape drives and media, tape libraries and solid state storage
systems. DLTtape is the DLT & Storage Systems group's half-inch tape technology
that is the de facto industry standard for data backup in the mid-range server
market.
The Hard Disk Drive Group designs desktop hard disk drives to meet the
storage requirements of entry-level to high-end desktop PCs in home and
business environments. The Hard Disk Drive Group also designs high-end hard
disk drives for the storage needs of network servers, workstations and storage
sub-systems.
Financial Statement Presentation. The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated. Certain amounts in prior periods have been reclassified to conform
to current presentation.
Use of Estimates. The preparation of the consolidated financial statements
of the Company in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the period. Actual results
may differ from the estimates and assumptions used in preparing the
consolidated financial statements.
Revenue Recognition. Revenue from sales of products is recognized on
shipment to customers, with provision made for estimated returns. The Company
accrues royalty revenue based on licensees' sales that incorporate certain
licensed technology.
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 the Company's material
foreign operations, the functional currency is the U.S. Dollar. The assets and
liabilities of foreign offices with a local functional currency are translated,
for consolidation purposes, at current exchange rates from the local currency
to the reporting currency, the U.S. Dollar. The resulting gains or losses are
reported as a component of other comprehensive income (loss) within
stockholders' equity. Although close to half of the Company's sales are made to
customers in non-U.S. locations and all of the Company's hard disk drive
products are manufactured in Japan, Singapore and Ireland by Matsushita-
Kotobuki Electronics Industries, Ltd. ("MKE"), a majority of the Company's
material transactions are denominated in U.S. dollars. Accordingly, transaction
gains or losses have been immaterial to the Company's consolidated financial
statements for all years presented. The effect of foreign currency exchange
rate fluctuations on cash was also immaterial for the years presented. Assets
and liabilities denominated in other than the functional currency are
remeasured each month with the remeasurement gain or loss recorded in other
income.
Foreign Exchange Contracts. The effect of foreign currency rate changes on
the remeasurement of certain assets and liabilities denominated in a foreign
currency are managed using foreign currency forward exchange contracts. Foreign
currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method. Foreign currency forward
exchange contracts are carried on the balance sheet at fair value, with changes
in that value recognized in other income.
43
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income (Loss) Per Share. The Company has adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No.
128 established new requirements for computing and presenting earnings per
share. Under the new requirements, the method previously used to compute
earnings per share is changed and all prior periods presented have been
restated to conform to the new requirements. The new requirements eliminate
primary and fully diluted earnings per share. As a result, under the new
requirements, basic net income (loss) per share excludes any dilutive effect of
stock options. Also, the dilutive effect of stock options used to compute
diluted net income (loss) per share is based on the average market price of the
Company's common stock for the period.
Cash Equivalents and Marketable Securities. The Company considers all highly
liquid debt instruments with a maturity of 90 days or less at the time of
purchase to be cash equivalents. Cash equivalents are carried at fair value,
which approximates cost. The Company's marketable securities have maturities of
more than 90 days at the time of purchase.
The Company has classified all cash equivalents and marketable securities as
available-for-sale. Securities classified as available-for-sale are carried at
fair value with material unrealized gains and losses reported in stockholders'
equity. The cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other-than-temporary are recorded in other income or expense. The cost of
securities sold is based on the specific identification method.
Concentration of Credit Risk. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses and such losses have historically been within management's
expectations.
The Company invests its excess cash in deposits with major banks and in
money market funds and short-term debt securities of companies with strong
credit ratings from a variety of industries. These securities generally mature
within 365 days and, therefore, bear minimal risk. The Company has not
experienced any material losses on its investments. The Company limits the
amount of credit exposure to any one issuer and to any one type of investment.
Investments in Joint Ventures and Other Entities. Investments in joint
ventures and other entities are recorded in other assets. Investments in joint
ventures are accounted for by the equity method. Dividends are recorded as a
reduction of the carrying value of the investment when received.
Investments in other entities (less-than-20-percent-owned companies) that
are not represented by marketable securities are carried at cost less write-
downs for declines in value that are judged to be other-than-temporary. These
valuation losses are recorded in other income when identified. Dividends are
recorded in other income when received.
Inventories. Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, Plant and Equipment. Property, plant and equipment are carried at
cost, less accumulated depreciation and amortization computed on a straight-
line basis over the lesser of the estimated useful lives of the assets
(generally three to ten years for machinery, equipment, furniture, and
leasehold improvements; and twenty-five years for buildings) or the lease term.
Acquired Intangibles. Goodwill and other acquired intangible assets are
being amortized over their estimated useful lives, which range from two to
fifteen years. The accumulated amortization at March 31, 1998
44
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and 1999 was $23 million and $18 million, respectively. Intangible assets are
reviewed for impairment whenever events or circumstances indicate impairment
might exist, or at least annually.
Warranty Expense. The Company generally warrants its products against
defects for a period of one to five years. A provision for estimated future
costs relating to warranty expense is recorded when products are shipped and
revenue recognized.
Advertising Expense. The Company accrues for co-operative advertising as the
related revenue is earned, and other advertising expense is recorded as
incurred. Advertising expense for the years ended March 31, 1997, 1998 and
1999, was $35 million, $41 million, and $46 million, respectively.
Stock-Based Compensation. The Company accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB Opinion No. 25").
Risks and Uncertainties. As is typical in the information storage industry,
a significant portion of the Company's customer base is concentrated with a
small number of OEMs, and the Company is not able to predict whether there will
be any significant change in the demand for its customers' products. The loss
of any one of the Company's more significant customers could have a material
adverse effect on the Company's results of operations. A limited number of disk
and tape drive storage products make up a significant majority of the Company's
sales, and due to increasingly rapid technological change in the industry, the
Company's future depends on its ability to develop and successfully introduce
new products. Quantum utilizes a third party, MKE, to manufacture all of the
products it sells. The Company relies on MKE's ability to bring new products
rapidly to volume production and to meet stringent quality standards. MKE
manufactures Quantum's drives in Japan, Singapore, and Ireland. If MKE were
unable to satisfy Quantum's production requirements, the Company would not have
an alternative source to meet the demand for its products without substantial
delay and disruption to its operations. The actual results with regard to
warranty expenditures could have a material unfavorable impact on the Company
if the actual rate of unit failure or the cost to repair a unit is greater than
what the Company has used in estimating the warranty expense accrual.
Comprehensive Income. In June 1997, the FASB released Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements and has
been implemented by the Company.
Segment Information. In June 1997, The FASB released Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS 131 changes the way companies report selected
segment information in annual financial statements and also requires companies
to report selected segment information in interim financial reports to
stockholders. SFAS 131 has been implemented by the Company.
45
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2 Financial Instruments
Available-For-Sale Securities
The following is a summary of available-for-sale securities, all of which
are classified as cash equivalents and marketable securities:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Certificates of deposit............ $411,700 $411,700 $499,400 $499,400
Money market funds................. -- -- 125,200 125,200
Corporate commercial paper and bank
notes............................. 103,346 103,339 58,484 58,486
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... 165,364 165,360 100,589 100,589
Other.............................. 4,613 4,613 5,121 5,121
-------- -------- -------- --------
$685,023 $685,012 $788,794 $788,796
======== ======== ======== ========
Included in cash and cash
equivalents....................... $613,450 $613,450 $764,368 $764,368
Included in marketable securities.. 71,573 71,562 24,426 24,428
-------- -------- -------- --------
$685,023 $685,012 $788,794 $788,796
======== ======== ======== ========
</TABLE>
The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1998 and 1999, and therefore no
gross unrealized gains or losses were recorded in stockholders' equity. The
estimated fair value of available-for-sale securities is based on market
quotations. There were no sales of available-for-sale securities in fiscal
years 1998 or 1999. At March 31, 1999, the average available-for-sale portfolio
duration was approximately 20 days, and no security had a maturity longer than
one year.
Derivative Financial Instruments
Foreign Exchange--Asset and Liability Management. During the periods covered
by the financial statements, the Company utilized foreign currency forward
exchange contracts to manage the effects of foreign currency remeasurement
arising from certain assets and liabilities denominated in a foreign currency.
The gains and losses from market rate changes on these contracts, which are
intended to offset the losses and gains on certain foreign currency denominated
assets and liabilities, are recorded monthly in other income.
46
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of foreign currency forward contracts held for
asset and liability management purposes:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1998 1999
----------------- -----------------
(In millions, except for forward
rates)
<S> <C> <C>
Currency to be sold................... Yen Yen
Maturity dates........................ April-May 1998 April-May 1999
Foreign currency notional amount...... 1,600 yen 2,900 yen
Weighted average forward rate......... 132.23 119.06
U.S. dollar notional amount........... $12.1 $24.4
U.S. dollar equivalent................ $12.3 $24.5
Fair value............................ $(0.2) $(0.1)
<CAPTION>
March 31,
-----------------------------------
1998 1999
----------------- -----------------
(In millions, except for forward
rates)
<S> <C> <C>
Currency to be purchased.............. Swiss Franc Swiss Franc
Maturity dates........................ April 1998 April 1999
Foreign currency notional amount...... 26.5 Swiss Francs 22.0 Swiss Francs
Weighted average forward rate......... 1.51 1.49
U.S. dollar notional amount........... $17.5 $14.8
U.S. dollar equivalent................ $17.4 $14.8
Fair value............................ $(0.1) $ --
</TABLE>
The fair values for foreign currency forward contracts represent the
difference between the contracted forward rate and the quoted fair value of the
underlying Yen or Swiss Francs at the balance sheet dates. The Company
generally does not require collateral from the counterparties to foreign
currency forward contracts.
Carrying Amount and Fair Values of Financial Instruments
The estimated fair value of the Company's borrowings are summarized as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1998 1999
-------------------------- --------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Convertible subordinated
debt................... $287.5 $281.8 $287.5 $254.6
Revolving credit line... -- -- 18.0 18.0
Mortgage loan........... 40.9 41.8 40.0 40.8
</TABLE>
The fair values for the convertible subordinated debt were based on the
quoted market price at the balance sheet dates. Fair value for the revolving
credit agreement approximated its carrying amount, since interest rates on
these borrowings are adjusted periodically to reflect market interest rates.
The fair values of the mortgage loan were based on the estimated present value
of the remaining payments, utilizing risk-adjusted market interest rates of
similar instruments at the balance sheet dates.
47
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3 Inventories
Inventories consisted of:
<TABLE>
<CAPTION>
March 31,
-----------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Materials and purchased parts........................... $ 53,894 $ 62,342
Work in process......................................... 44,303 27,531
Finished goods.......................................... 216,838 182,113
-------- --------
$315,035 $271,986
======== ========
</TABLE>
In fiscal year 1998, the Company recorded a $103 million charge to cost of
revenue related to the transition to a new generation of its high-end disk
drive products, primarily for inventory write-offs and adjustments and losses
related to firm inventory purchase commitments.
Note 4 Property, Plant and Equipment
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Machinery and equipment................................ $328,402 $365,795
Furniture and fixtures................................. 31,307 33,330
Buildings and leasehold improvements................... 140,629 159,470
Land................................................... 5,302 4,950
-------- --------
505,640 563,545
Less accumulated depreciation and amortization......... (220,481) (291,617)
-------- --------
$285,159 $271,928
======== ========
</TABLE>
Note 5 Business Combination
On September 28, 1998, the Company completed the acquisition of ATL. ATL
designs, manufactures, markets and services automated tape libraries for the
networked computer market. ATL's products incorporate DLTtape drives as well as
ATL's proprietary IntelliGrip(TM) automation technology. The acquisition has
been accounted for as a purchase with a total cost of $335 million. The
acquisition was completed with the issuance of 16.9 million shares of Quantum
common stock valued at $265 million on the date of acquisition in exchange for
all outstanding shares of ATL, the conversion of outstanding ATL stock options
into options valued at $22 million to purchase 1.8 million shares of Quantum
common stock and the assumption of $45 million of ATL liabilities. The Company
also recognized deferred tax liabilities of $33 million. ATL's results of
operations are included in the financial statements from the date of
acquisition, and the assets and liabilities acquired were recorded based on
their fair values as of the date of acquisition.
The excess of the purchase price over the fair value of the net tangible
assets acquired has been allocated to the following identifiable intangible
assets: goodwill, trademarks and trade names, original equipment manufacturer
and value added reseller customer relationships, non-compete agreements,
workforce in place, developed technology and in-process research and
development. As of the acquisition date, technological feasibility of the in-
process technology has not been established and the technology has no
alternative future
48
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
use. Therefore, the Company has expensed $89 million of the purchase price as
in-process research and development. The remaining identifiable intangible
assets will be amortized on a straight-line basis over periods ranging from two
to fifteen years.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects,
and discounting the net cash flows back to their present value using a discount
rate of 20%, which represents a premium to the Company's cost of capital. The
expected revenue assumes an average compound annual revenue growth rate of 37%
during fiscal years 1999 to 2007. Expected total revenue from the purchased in-
process projects peak in fiscal year 2002 and then begin to decline as other
new products are expected to be introduced. These projections were based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions. If products are not
successfully developed, the Company may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.
The following unaudited pro forma information has been prepared assuming
that the acquisition had taken place at the beginning of fiscal year 1998. The
pro forma financial information is not necessarily indicative of the combined
results that would have occurred had the acquisition taken place at the
beginning of the periods, nor is it necessarily indicative of results that may
occur in the future.
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, March 31,
1998 1999
---------- ----------
(In thousands)
<S> <C> <C>
Revenue.............................................. $5,866,237 $4,942,367
Net income .......................................... $ 152,345 $ 48,755
Net income per share:
Basic.............................................. $ 1.10 $ 0.30
Diluted............................................ $ 0.95 $ 0.28
</TABLE>
Note 6 Loss from Investee
On May 16, 1997, the Company sold a controlling interest in its recording
heads operations to MKE, thereby forming a recording heads joint venture with
MKE, MKE-Quantum Components LLC ("MKQC"). The operations were involved in the
research, development, and manufacture of MR recording heads used in the
Company's hard disk drive products manufactured by MKE.
Quantum contributed recording heads assets and operations, and leased
certain premises to MKQC. The recording heads assets that Quantum contributed
to MKQC consisted of inventory, equipment, accounts receivable, and
intangibles, which aggregated $211 million. MKQC assumed $51 million of debt
payable to Quantum and assumed $24 million of third-party liabilities. MKE paid
Quantum $94 million and contributed $110 million to MKQC in exchange for a 51%
majority ownership interest in MKQC. Quantum retained a 49% minority ownership
interest in MKQC. Quantum employees who were involved in the recording heads
operations became employees of MKQC.
MKE and the Company shared pro rata in MKQC's results of operations and
agreed to share pro rata in any capital funding requirements.
49
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to May 16, 1997, the Company accounted for its 49% interest in
MKQC using the equity method of accounting. The results of the Company's
involvement in recording heads through May 15, 1997, were consolidated.
The Company provided support services to MKQC. The support services were
mainly finance, human resources, legal, and computer support. MKQC reimbursed
the Company for the estimated cost of the services.
Summarized Financial Information
The following is summarized financial information for MKQC:
<TABLE>
<CAPTION>
Period from
May 16, 1997, to
March 31, 1998
----------------
(In thousands)
<S> <C>
Revenue................................................... $ 165,775
Gross profit (loss)....................................... (43,677)
Loss from operations...................................... (131,693)
Net loss.................................................. (134,816)
<CAPTION>
March 31, 1998
----------------
<S> <C>
Current assets............................................ $ 49,520
Noncurrent assets......................................... 213,230
Current liabilities....................................... 94,707
Note payable to Quantum................................... 50,823
Other noncurrent liabilities.............................. 14,964
</TABLE>
On October 28, 1998, the Company and MKE agreed to dissolve MKQC because
MKQC had not been able to produce MR recording heads on a cost-effective basis.
In connection with the dissolution, MKE has taken control and ownership of
MKQC's manufacturing operations in Batam, Indonesia; MKQC's domestic operations
have ceased; and its domestic assets are in liquidation. In the third quarter
of fiscal year 1999, the Company recorded a $101 million loss from investee
which includes a write-off of Quantum's investment in MKQC; a write-down of
Quantum's interest in facilities in Louisville, Colorado, and Shrewsbury,
Massachusetts that were occupied by MKQC; warranty costs resulting from MR
recording heads manufactured by MKQC; and Quantum's 49% pro rata share in
funding MKQC's repayment of its obligations, bank debt, accounts payable, and
other liabilities through June 1999 when the liquidation of MKQC is expected to
be completed.
MKQC's net loss for the six months ended September 27, 1998 was $84 million
on revenue of $62 million. The Company's 49% interest in this net loss was $41
million.
50
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt
Quantum's debt includes the following:
<TABLE>
<CAPTION>
March 31,
-----------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
7% convertible subordinated notes........................ $287,500 $287,500
Revolving credit line, 6.0% average rate, payable through
June 2000............................................... -- 18,000
Mortgage................................................. 40,920 39,985
-------- --------
328,420 345,485
Less short-term portion of debt.......................... 935 1,024
-------- --------
Total long-term debt and convertible subordinated debt... $327,485 $344,461
======== ========
</TABLE>
In June 1997, the Company entered into an unsecured senior credit facility
that provides a $500 million revolving credit line and expires in June 2000. At
the option of the Company, borrowings under the revolving credit line bear
interest at either LIBOR plus a margin determined by a total funded debt ratio,
or a base rate, with option periods of one to six months. As of March 31, 1998
and March 31, 1999, there was no outstanding balance drawn on this line.
In July 1997, the Company issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option of
the holder at any time prior to maturity, unless previously redeemed, into
shares of the Company's common stock at a conversion price of $46.325 per
share. The notes are redeemable at the Company's option on or after August 1,
1999, and prior to August 1, 2001, under certain conditions related to the
price of the Company's common stock. Subsequent to August 1, 2001, the notes
are redeemable at the Company's option at any time. In the event of certain
changes involving all or substantially all of the Company's common stock, the
notes would become redeemable at the option of the holder. Redemption prices
range from 107% of the principal to 100% at maturity. The notes are unsecured
obligations subordinated in right of payment to all existing and future senior
indebtedness of the Company.
In September 1996, the Company entered into a $42 million mortgage related
to certain domestic facilities at an effective interest rate of approximately
10.1%. The term of the mortgage is 10 years, with monthly payments based on a
20-year amortization period, and a balloon payment at the end of the 10-year
term. The debt is secured by specified real estate.
Payments required on long-term debt outstanding at March 31, 1999, are $1.0
million in fiscal year 2000, $1.1 million in fiscal year 2001, $1.2 million in
fiscal year 2002, $1.3 million in fiscal year 2003 and $1.5 million in fiscal
year 2004.
In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line. The revolving credit line is co-terminous
with the Company's $500 million revolving credit line, expiring in June 2000.
At the option of ATL, borrowings under the revolving credit line bear interest
at either LIBOR plus a margin determined by a total funded debt ratio of the
Company, or a base rate, with option periods of one to six months. At March 31,
1999, $18 million was outstanding on ATL's revolving credit line.
Note 8 Redeemable Preferred Stock
In fiscal year 1998, the holder of the 90,000 shares of Redeemable
Convertible Participating Series B Preferred Stock exercised its right to
convert the shares to Quantum common stock. The Company issued 180,000 shares
of its common stock pursuant to the conversion.
51
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9 Stock Incentive Plans
Long-Term Incentive Plan. The Company has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates of
the Company. The Plan has available and reserved for future issuance 19.2
million shares and allows for an annual increase in the number of shares
available for issuance, subject to a limitation. Available for grant as of
March 31, 1999, were 529,000 shares. Options under the Plan expire no later
than ten years from the grant date and generally vest over four years.
Restricted stock granted under the Plan generally vests over two to three
years. In fiscal years 1997, 1998 and 1999, the Company recorded compensation
expense of $1,916,000, $3,179,000 and $3,211,000, respectively, related to
restricted stock granted pursuant to stock purchase rights under the Plan. The
number of shares of restricted stock granted under the Plan were 354,290
shares, 65,500 shares and 157,200 shares in fiscal years 1997, 1998 and 1999,
respectively, at an exercise price of $.01.
Stock Option Plans. The Company has Stock Option Plans (the "Plans") under
which 5.1 million shares of common stock was reserved for future issuance at
March 31, 1999 to employees, officers and directors of the Company. Options
under the Plans are granted at prices determined by the Board of Directors, but
at not less than the fair market value, and accordingly no compensation
accounting has been required at the original date of grant. Options currently
expire no later than ten years from the grant date and generally vest ratably
over one to four years. At March 31, 1999, options with respect to 470,000
shares were available for grant.
Stock Option Summary Information. A summary of activity relating to the
Long-Term Incentive Plan and the Stock Option Plans follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1997 1998 1999
---------------------- --------------------- ---------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
------- ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 16,746 $6.75 16,354 $ 7.52 17,005 $12.09
Granted................. 5,850 $8.59 6,163 $19.80 10,781 $21.51
Canceled................ (1,564) $7.94 (718) $14.11 (1,880) $22.63
Exercised............... (4,678) $5.97 (4,794) $ 6.10 (2,530) $ 7.23
------ ------ ------
Outstanding at end of
period................. 16,354 $7.52 17,005 $12.09 23,376 $14.68
====== ====== ======
Exercisable at end of
period................. 8,514 $6.53 8,332 $ 8.84 11,786 $10.65
====== ====== ======
</TABLE>
The range of exercise prices for options outstanding at March 31, 1999 was
$2.17 to $30.81. Compensation expense of $475,000, $1,057,000 and $2,188,000
was recorded in fiscal years 1997, 1998 and 1999, respectively, on accelerated
stock options under the Plans.
52
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information about options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------------
Shares Outstanding at Weighted-Average
March 31, 1999 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ --------------------- ----------------- ----------------
<C> <C> <S> <C>
$ 2.17 -- $ 8.75 7,842 6.09 $ 6.23
$ 8.78 -- $19.81 7,816 7.88 $15.37
$20.19 -- $30.81 7,718 9.28 $22.56
------
23,376 7.74 $14.68
======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------------------------------
Shares
Exercisable at
March 31, 1999 Weighted-Average
Range of Exercise Prices (000s) Exercise Price
------------------------ -------------- ----------------
<C> <C> <S>
$ 2.17 -- $ 8.75 6,576 $ 6.24
$ 8.78 -- $19.81 4,095 $14.28
$20.19 -- $30.81 1,115 $23.30
------
11,786 $10.65
======
</TABLE>
Expiration dates ranged from May 8, 1999 to May 1, 2009 for options
outstanding at March 31, 1999. Prices for options exercised during the three-
year period ended March 31, 1999, ranged from $0.01 to $23.94. Proceeds
received by the Company from exercises are credited to common stock and capital
in excess of par value.
Completing the acquisition of ATL included the conversion of outstanding ATL
stock options into options to purchase 1.8 million shares of Quantum common
stock. These options relate to the Company's assumption of ATL's 1996 Stock
Incentive Plan and 1997 Stock Incentive Plan, collectively referred to as the
"ATL Plans." Under the terms of the ATL Plans, eligible key employees,
directors and consultants received options to purchase shares of ATL's
previously outstanding common stock at prices not less than 100% for incentive
stock options and not less than 85% for nonqualified stock options of the fair
value on the date of grant as determined by ATL's Board of Directors. Options
under ATL Plans vest over a three year period and expire ten years after date
of grant or 90 days after termination of employment. Subsequent to completing
the acquisition of ATL, no additional grants may be made from the ATL Plans.
See Note 5 for more information on the acquisition of ATL.
Stock Purchase Plan. The Company has an employee stock purchase plan (the
"Purchase Plan") that allows for the purchase of stock at 85% of fair market
value at the date of grant or the exercise date, whichever value is less. The
Purchase Plan is qualified under Section 423 of the Internal Revenue Code. Of
the 22.8 million shares authorized to be issued under the plan, 1,366,000
shares were available for issuance at March 31, 1999. Employees purchased
3,216,000 shares, 3,454,000 shares, and 2,555,000 shares under the Purchase
Plan in fiscal years 1997, 1998, and 1999, respectively. The weighted average
exercise price of stock purchased under the Purchase Plan was $5.41, $6.22 and
$9.41 in fiscal years 1997, 1998, and 1999, respectively.
Pro forma information. Pro forma information regarding net income and
earnings per share is required by SFAS No. 123. This information is required to
be determined as if the Company had accounted for its employee stock options
(including shares issued under the Long-Term Incentive Plan, Stock Option
Plans, and the Stock Purchase Plan, collectively called "options") granted
subsequent to March 31, 1995, under the fair value method of that statement.
53
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted in fiscal years 1997, 1998 and 1999
reported below have been estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Long-Term Incentive Plan
and Stock Option Plans Stock Purchase Plan
----------------------------------- -----------------------------------
Fiscal 1997 Fiscal 1998 Fiscal 1999 Fiscal 1997 Fiscal 1998 Fiscal 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years).. 2.9 2.9 3.1 0.8 1.6 1.4
Risk-free interest
rate................... 6.0% 6.25% 5.52% 6.0% 6.13% 5.85%
Stock price volatility.. .50 .56 .61 .50 .53 .56
Dividend yield.......... -- -- -- -- -- --
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of the options.
The following is a summary of weighted-average grant date fair values:
<TABLE>
<CAPTION>
Weighted-Average Grant Date Fair
Value
-----------------------------------
Fiscal 1997 Fiscal 1998 Fiscal 1999
----------- ----------- -----------
<S> <C> <C> <C>
Options granted under the Long-Term
Incentive
Plan and Stock Option Plans......... $ 3.67 $ 8.39 $ 9.86
Restricted stock granted under the
Long-Term
Incentive Plan...................... $14.28 $23.68 $22.40
Shares granted under the Stock
Purchase Plan....................... $ 2.46 $ 3.56 $ 4.86
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma net income (loss) and net income (loss) per share follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) (in thousands).............. $132,678 $139,907 $(83,964)
======== ======== ========
Net income (loss) per share:
Basic....................................... $ 1.13 $ 1.03 $ (0.52)
======== ======== ========
Diluted..................................... $ 0.93 $ 0.88 $ (0.52)
======== ======== ========
</TABLE>
As SFAS No. 123 is applicable only to options granted subsequent to March
31, 1995, its pro forma effect will not be fully reflected until fiscal year
2001.
54
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10 Common Stock and Stockholder Rights Plan
Effective April 28, 1997, the number of authorized shares of common stock
increased to 500,000,000 from 150,000,000. The number of authorized shares of
Preferred Stock is 4,000,000.
The Company has a stockholder rights plan (the "Rights Plan") that provides
existing stockholders with the right to purchase 1/1000 preferred share for
each common share held in the event of certain changes in Quantum's ownership.
Subject to certain exceptions, if any person or group becomes the beneficial
owner of 20% or more of the outstanding common stock each right will entitle
its holder to purchase 1/1000 preferred share or, under certain circumstances,
shares of common stock with a market value twice the exercise price of the
right. The Rights Plan may serve as a deterrent to takeover tactics that are
not in the best interests of stockholders. There are 1,000,000 preferred shares
reserved for issuance under the Rights Plan.
Note 11 Earnings Per Share
SFAS No. 128 replaced the previously reported primary and fully diluted net
income (loss) per share with basic and diluted net income (loss) per share.
Unlike primary net income (loss) per share, basic net income (loss) per share
excludes any dilutive effects of options and convertible securities. Diluted
net income (loss) per share is very similar to the previously reported fully
diluted net income (loss) per share.
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1997 1998 1999
-------- -------- --------
(In thousands, except per
share data)
<S> <C> <C> <C>
Numerator:
Numerator for basic net income (loss) per share--
income (loss) available to common stockholders.. $148,515 $170,801 $(29,535)
Effect of dilutive securities:
6 3/8% convertible subordinated debentures....... 3,135 -- --
5% convertible subordinated debentures........... 7,240 6,668 --
-------- -------- --------
Numerator for diluted net income (loss) per
share--income (loss) available to common
stockholders.................................... $158,890 $177,469 $(29,535)
======== ======== ========
Denominator:
Denominator for basic net income (loss) per
share--weighted average shares.................. 117,218 136,407 160,670
Effect of dilutive securities:
Outstanding options.............................. 5,388 9,600 --
Series B preferred stock......................... 23 90 --
6 3/8% convertible subordinated debentures....... 9,032 -- --
5% convertible subordinated debentures........... 21,626 19,919 --
-------- -------- --------
Denominator for diluted net income (loss) per
share--adjusted weighted average shares and
assumed conversions.............................. 153,287 166,016 160,670
======== ======== ========
Basic net income (loss) per share................ $ 1.27 $ 1.25 $ (0.18)
======== ======== ========
Diluted net income (loss) per share.............. $ 1.04 $ 1.07 $ (0.18)
======== ======== ========
</TABLE>
55
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The computation of diluted net income (loss) per share in fiscal years 1998
and 1999 excluded the effect of the 7% convertible subordinated notes issued in
July 1997, which are convertible into 6,206,152 shares at a conversion price of
$46.325 per share, because the effect would have been anti-dilutive.
Options to purchase 23,376,499 shares of common stock were outstanding at
March 31,1999. However, the corresponding weighted average outstanding options
were not included in the computation of diluted net loss per share for the
fiscal year ended March 31, 1999, because the effect would have been anti-
dilutive.
Note 12 Savings and Investment Plan
Substantially all of the regular domestic employees are eligible to make
contributions to the Company's 401(k) savings and investment plan. The Company
matches a percentage of the employees' contributions and may also make
additional discretionary contributions to the plan. Company contributions were
$5 million, $6 million and $7 million, in fiscal years 1997, 1998 and 1999,
respectively.
Note 13 Income Taxes
The income tax provision consists of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
<C> <S> <C> <C> <C>
Federal: Current........................... $ 13,344 $ 19,343 $(15,431)
Deferred.......................... (10,289) 12,396 26,392
-------- -------- --------
3,055 31,739 10,961
-------- -------- --------
State: Current........................... 9,669 19,814 3,856
Deferred.......................... 1,441 (17,803) 22
-------- -------- --------
11,110 2,011 3,878
-------- -------- --------
Foreign: Current........................... 20,088 26,857 18,021
Deferred.......................... 17,928 (593) (3,510)
-------- -------- --------
38,016 26,264 14,511
-------- -------- --------
Income tax provision........................ $ 52,181 $ 60,014 $ 29,350
======== ======== ========
</TABLE>
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of incentive stock options, and employee stock purchase plan
shares reduce taxes currently payable as shown above by $11 million,
$21 million, and $17 million in fiscal years 1997, 1998, and 1999,
respectively. Such benefits are credited to capital in excess of par value when
realized.
56
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's income tax provision differs from the amount computed by
applying the federal statutory rate of 35% to income before income taxes as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1997 1998 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate................. $70,243 $80,788 $ (65)
State income tax, net of federal benefit...... 7,222 1,307 2,521
Research and development credit............... -- (7,680) (2,265)
Foreign earnings taxed at less than U.S.
rates........................................ (17,169) (15,813) (5,004)
Valuation allowance........................... (8,431) -- --
Acquired ATL in-process research and
development.................................. -- -- 31,150
Other items................................... 316 1,412 3,013
------- ------- -------
$52,181 $60,014 $29,350
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended March
31,
--------------------
1998 1999
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods...................... $ 57,630 $ 39,770
Accrued warranty expense......................... 33,824 24,041
Allowance for doubtful accounts.................. 4,563 3,379
Distribution reserves............................ 7,002 10,363
Restructuring charges............................ 20,422 4,331
Other accruals and reserves not currently
deductible for tax purposes..................... 27,927 39,627
Depreciation methods............................. 24,634 47,429
Amortization methods............................. 30,711 31,448
--------- ---------
206,713 200,388
--------- ---------
Deferred tax liabilities:
Foreign inventory valuation methods.............. (17,322) (13,810)
Tax on unremitted foreign earnings net of foreign
tax credits and foreign deferred taxes.......... (77,180) (97,817)
Acquired ATL intangibles......................... -- (33,602)
Other............................................ (16,899) (14,798)
--------- ---------
(111,401) (160,027)
--------- ---------
Net deferred tax asset............................. $ 95,312 $ 40,361
========= =========
</TABLE>
Pretax income from foreign operations was $241 million, $139 million, and
$120 million for the fiscal years ended March 31, 1997, 1998, and 1999,
respectively. U.S. taxes have not been provided for unremitted foreign earnings
of $354 million. The residual U.S. tax liability if such amounts were remitted
would be approximately $87 million.
57
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's federal income tax returns have been examined by the Internal
Revenue Service (IRS) for all years through 1993. All issues have been resolved
with no material effect, and the IRS has closed those years. The Company's
federal tax returns for the years 1994-1996 are presently under examination by
the IRS. Management believes sufficient accruals have been provided in prior
years for any adjustments that may result for the years under examination.
Note 14 Litigation
The Company and certain of its current and former officers and directors
have been named as defendants in two class-action lawsuits, one filed on August
28, 1996, in the Superior Court of Santa Clara County, California, and one
filed on August 30, 1996, in the U.S. District Court of the Northern District
of California. The plaintiff in both class actions purports to represent a
class of all persons who purchased the Company's common stock between February
26, 1996, and June 13, 1996. The complaints allege that the defendants violated
various federal securities laws and California statutes by concealing and/or
misrepresenting material adverse information about the Company and that
individual defendants sold shares of the Company's stock based on material
nonpublic information.
On February 25, 1997, in the Santa Clara County action, the Court sustained
defendants' demurrer to most of the causes of action in the complaint, with
leave to amend. At a June 12, 1997 demurrer hearing in state court, the judge
dismissed the action as to four of the individual defendants with prejudice and
as to three of the individual defendants without prejudice. The demurrer as to
the Company was overruled. The Court heard oral argument on plaintiffs' motion
for class certification on November 4, 1997. On March 4, 1998, the Court
entered an order denying plaintiffs' motion without prejudice. Limited
discovery is proceeding.
With respect to the federal action, defendants filed their motion to dismiss
on April 16, 1997. On August 14, 1997, the Court granted defendants' motion to
dismiss without prejudice. On September 11, 1997, plaintiff filed an amended
complaint. Defendants filed a motion to dismiss the amended complaint on
October 24, 1997. The hearing on defendants' motion took place on February 3,
1998. On April 16, 1998, the Court granted defendants' motion to dismiss with
prejudice. On May 19, 1998, plaintiff filed a notice of appeal of the District
Court's dismissal in the United States Court of Appeals for the Ninth Circuit.
On September 25, 1998, plaintiff filed his opening appellate brief. Defendants
filed their answering brief on November 30, 1998. Plaintiff's reply brief was
filed on January 14, 1999.
Certain of the Company's current and former officers and directors were also
named as defendants in a derivative lawsuit, which was filed on November 8,
1996, in the Superior Court of Santa Clara County. The derivative complaint was
based on factual allegations substantially similar to those alleged in the
class-action lawsuits. Defendants' demurrer to the derivative complaint was
sustained without prejudice on April 14, 1997. Plaintiffs did not file an
amended complaint. On August 7, 1997, the Court issued an order of dismissal
and entered final judgment dismissing the complaint.
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. On Quantum's motion, the suit has been
moved to the Northern District of California. The plaintiff, Papst Licensing
GmbH, owns at least 24 U.S. patents which it asserts that the Company has
infringed. The Company has studied many of these patents before and, of the
patents it has studied, believes that defenses of patent invalidity and non-
infringement can be asserted. However, Quantum has not yet had time to make a
complete study of all the patents asserted by Papst and there can be no
assurance that the Company has not infringed on these or other patents owned by
Papst. The final results of this litigation, as with any litigation, are
uncertain. If required, there can be no assurance that licenses to any
technology owned by Papst or any other third party alleging infringement could
58
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be obtained on commercially reasonable terms if at all. Adverse resolution of
the Papst litigation or any other intellectual property litigation could
subject the Company to substantial liabilities and require it to refrain from
manufacturing certain products which could have a material adverse effect on
the Company's business, financial condition or results of operations. In
addition, the costs of engaging in the Papst litigation or other intellectual
property litigation could be substantial, regardless of the outcome.
The Company is also subject to other legal proceedings and claims that arise
in the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity
of the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
Note 15 Commitments
The Company leases its present facilities under non-cancelable operating
lease agreements for periods of up to 15 years. Some of the leases have renewal
options ranging from one to ten years and contain provisions for maintenance,
taxes, or insurance.
Rent expense was $26 million, $27 million, and $32 million for the fiscal
years ended March 31, 1997, 1998, and 1999, respectively.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ended March 31, (In thousands)
<S> <C>
2000...................................................... $ 27,697
2001...................................................... 26,265
2002...................................................... 25,667
2003...................................................... 24,726
2004...................................................... 21,550
Thereafter................................................ 81,369
--------
Total future minimum lease payments....................... $207,274
========
</TABLE>
Note 16 Business Segment and Geographic Information
Quantum Corporation's reportable segments are its two business groups, the
Hard Disk Drive group and the DLT & Storage Systems group. The Hard Disk Drive
Group consists of desktop and high-end hard disk drives. The DLT & Storage
Systems group consists of DLTtape drives and media, autoloaders and libraries,
and solid state storage systems. The Company directly markets its products to
computer manufacturers and through a broad range of distributors, resellers,
and systems integrators.
59
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates segment performance based on net profit or loss not including non-
recurring gains or losses. Segment assets include those items that can be
specifically identified with or reasonably allocated to a particular segment.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------
1997 1998 1999
--------------------------- --------------------------- ---------------------------
The DLT & The DLT & The DLT &
The Hard Storage The Hard Storage The Hard Storage
Disk Drive Systems Disk Drive Systems Disk Drive Systems
Group Group Total Group Group Total Group Group Total
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $4,591 $728 $5,319 $4,615 $1,190 $5,805 $3,599 $1,303 $4,902
Interest and other
income/
(expense).............. (15) (26) (41) 4 (3) 1 10 (12) (2)
Depreciation and
amortization........... 109 15 124 68 24 92 71 42 113
Loss from investee...... -- -- -- (66) -- (66) (142) -- (142)
Income tax expense
(benefit).............. (19) 72 52 (83) 143 60 (112) 141 29
Segment profit (loss)... 41 107 149 (53) 224 171 (153) 123 (30)
Segment assets.......... 1,721 438 2,159 1,646 792 2,438 1,470 1,014 2,484
Expenditures for long-
lived assets........... 164 11 175 129 47 176 83 33 116
</TABLE>
Product Information
Revenue for reportable segments is composed of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1998 1999
------ ------ ------
(In millions)
<S> <C> <C> <C>
Hard Disk Drive group:
Desktop hard disk drives........................... $4,004 $3,981 $3,079
High-end hard disk drives.......................... 587 634 520
------ ------ ------
Total.............................................. $4,591 $4,615 $3,599
====== ====== ======
DLTtape & Storage Systems group:
DLTtape drives..................................... $ 392 $ 784 $ 872
DLTtape media cartridge product.................... 221 284 195
DLTtape media cartridge royalties.................. 8 27 122
Tape libraries and service......................... 96 87 148
Solid state storage systems........................ 11 8 6
Intra-group elimination............................ -- -- (40)
------ ------ ------
Total.............................................. $ 728 $1,190 $1,303
====== ====== ======
</TABLE>
Intra-group elimination represents intra-group sales of DLTtape drives
incorporated into the DLT & Storage Systems group's tape libraries.
60
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Information
Revenue and long-lived assets by region are as follows (revenue is
attributed to regions based on the location of customers):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1997 1998 1999
------------------ ------------------ ------------------
Long-Lived Long-Lived Long-Lived
Revenue Assets Revenue Assets Revenue Assets
------- ---------- ------- ---------- ------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States.... $2,513 $374 $3,048 $271 $2,552 $457
Europe........... 1,620 13 1,689 13 1,315 12
Asia-Pacific..... 1,082 62 993 25 930 28
Latin America.... 104 -- 75 -- 105 --
------ ---- ------ ---- ------ ----
Total.......... $5,319 $449 $5,805 $309 $4,902 $497
====== ==== ====== ==== ====== ====
</TABLE>
One customer of both of the Company's reportable segments accounted for 10%
or more of the Company's consolidated revenue in fiscal years 1997, 1998 and
1999. Revenue from this customer represented $856 million, $1,036 million and
$704 million of the Company's consolidated revenue in the respective periods.
Another customer of both of the Company's reportable segments accounted for 10%
or more of the Company's consolidated revenue in fiscal years 1997, 1998 and
1999. Revenue from this customer represented $562 million, $759 million and
$678 million of the Company's consolidated revenue in the respective periods.
61
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17 Unaudited Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended March 31, 1999
-------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue................. $1,103,023 $1,164,711 $1,325,581 $1,308,741
Gross profit............ 166,373 191,889 239,089 273,987
Net income (loss)....... 3,010 17,264 (106,551) 56,742
Net income (loss) per
share:
Basic................. 0.02 0.11 (0.64) .34
Diluted............... 0.02 0.11 (0.64) .33
<CAPTION>
Year Ended March 31, 1998
-------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue................. $1,446,144 $1,553,491 $1,519,881 $1,285,719
Gross profit............ 275,934 298,084 135,673 165,831
Net income (loss)....... 96,514 103,778 (32,183) 2,692
Net income (loss) per
share:
Basic................. 0.74 0.77 (0.24) 0.02
Diluted............... 0.61 0.63 (0.24) 0.02
</TABLE>
The results of operations for the third quarter of fiscal year 1999 included
the effect of a $101 million charge related to the dissolution of MKQC, and
an $89 million charge related to purchased in-process research and
development related to the acquisition of ATL.
The results of operations for the third quarter of fiscal year 1998 included
the effect of a $103 million special charge related to the Company's high-
end hard disk drive products.
The results of operations for the fourth quarter of fiscal year 1998 were
impacted by the reduction in estimated bonus accrued earlier in the fiscal
year.
62
<PAGE>
QUANTUM CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at (reductions) Balance at
Classification (In beginning of charged to end of
thousands) period expense Deductions (i) period
- ------------------ ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts year ended:
March 31, 1997.......... $ 10,497 $7,165 $ (7,052) $10,610
March 31, 1998.......... $ 10,610 $5,142 $ (2,824) $12,928
March 31, 1999.......... $ 12,928 $9,481 $ (10,279) $12,130
Accrued restructuring and
exit costs year ended:
(ii)
March 31, 1997.......... $115,537 $ -- $(109,554) $ 5,983
March 31, 1998.......... $ 5,983 $ -- $ (5,983) $ --
March 31, 1999.......... $ -- $ -- $ -- $ --
</TABLE>
- --------
(i) For the allowance for doubtful accounts, deductions represent write-offs;
and for the accrued restructuring and exit costs, deductions represent
usage of the accrual.
(ii) Relates to the restructuring charge resulting from the transition of the
high-capacity product manufacturing to MKE.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
63
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to directors is incorporated by reference from
Quantum's Proxy Statement. Set forth below are the names, ages (as of March 31,
1999), positions and offices held by, and a brief account of the business
experience of, each executive officer. The information required by this item is
incorporated by reference to Part I, Item 1 of this document and to the Proxy
Statement.
<TABLE>
<CAPTION>
Name Age Position with Quantum
---- --- ---------------------
<C> <C> <S>
Michael A. Brown............ 40 Chairman of the Board and Chief Executive
Officer
Richard L. Clemmer.......... 47 Executive Vice President, Finance, Chief
Financial Officer, and Secretary
W. Curt Francis............. 49 Vice President, Corporate Development
John J. Gannon.............. 52 President, Hard Disk Drive Group
Jerald L. Maurer............ 56 Executive Vice President, Human Resources,
Real Estate, and Corporate Services
Peter van Cuylenburg........ 51 President, DLT & Storage Systems Group
</TABLE>
Mr. Brown was elected Chairman of the Board in May 1998, and will continue
as Chief Executive Officer, a position held since 1995. Earlier, he served as
President of the Desktop Storage Division from 1993 to 1995, as Executive Vice
President from 1992 to 1993, and as Vice President of Marketing from 1990 to
1992. Previously, Mr. Brown held positions in product and marketing management
since joining Quantum's marketing organization in August 1984. Before joining
Quantum, Mr. Brown served in the marketing organization at Hewlett-Packard and
provided management consulting services at Braxton Associates.
Mr. Clemmer has been Executive Vice President of Finance and Chief Financial
Officer since joining Quantum in August 1996. Prior to joining Quantum, Mr.
Clemmer was Chief Financial Officer of Texas Instruments' Semiconductor Group
from 1989 to 1996. Previously, he held a variety of senior finance positions
with Texas Instruments.
Mr. Francis joined Quantum as Vice President of Strategic Developments in
May 1998. Prior to joining Quantum, Mr. Francis was Vice President of Corporate
Planning and Development with Advanced Micro Devices from 1995 to 1998. Mr.
Francis was the Vice President of Corporate Development at Sun Microsystems
from 1993 to 1995. He was also with Advanced Micro Devices from 1980 to 1993,
last serving as Vice President of Corporate Operational Planning during this
period, and previously was a consultant with the Boston Consulting Group.
Mr. Gannon has been President of the Hard Disk Drive Group since February
1999. From May 1998 to February 1999, Mr. Gannon was Executive Vice President
of Worldwide Sales. Prior to joining Quantum, Mr. Gannon spent seventeen years
with Hewlett Packard from 1981 to 1998, last serving as General Manager of
Commercial Desktop Personal Computer Business from 1996 to 1998 and its Digital
Audio Tape business from 1993 to 1996.
Mr. Maurer joined Quantum as Executive Vice President of Human Resources,
Real Estate and Corporate Services in December 1998. Prior to joining Quantum,
Mr. Maurer was Senior Vice President of Human Resources at Seagate Technology
from 1996 to 1998. Previously, he was Senior Vice President of Human Resources
for Melville Corporation and spent more than 25 years in a variety of
management and human resources positions with companies such as Illinois Bell
Telephone CO., AT&T and Aetna Life & Casualty.
Mr. van Cuylenburg has been President of the DLT & Storage Systems group
since joining Quantum in 1996. From 1993 to 1995, Mr. Van Cuylenburg served as
Executive Vice President, responsible for the systems sector, at Xerox
Corporation. From 1992 to 1993, Mr. van Cuylenburg was President and Chief
Operating Officer at NeXT Computer Inc.
64
<PAGE>
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference to
Quantum's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
Quantum's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
Quantum's Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and
13 of this Form 10-K Annual Report, Quantum's definitive Proxy Statement for
its 1999 Annual Meeting of Shareholders is not deemed "filed" as part of this
Form 10-K Annual Report.
65
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements--See Index to Consolidated Financial Statements at
Item 8 on page 36 of this report.
2. Financial Statement Schedule--See Index to Consolidated Financial
Statements at Item 8 on page 36 of this report.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
3.1(a)(2) Certificate of Incorporation of Registrant
3.1(b)(3) Certificate of Amendment of Certificate of Incorporation of
Registrant
3.1(c)(19) Certificate of Amendment of Certificate of Incorporation of
Quantum Corporation, dated April 29, 1997
3.2(3) By-laws of Registrant, as amended
3.3(21) Amended Certificate of Designation of Rights, Preferences, and
Privileges of Series A Junior Participating Preferred Stock of
Quantum Corporation
3.4(25) Form of Restated Certificate of Incorporation
3.5(25) Form of Certificate of Designations for the Series B Participating
Junior Preferred Stock and Series C Participating Junior Preferred
Stock
4.2(4) Shareholder Rights Plan
4.3(22) Preferred Shares Rights Agreement, dated July 28, 1998 between
Quantum Corporation and Harris Savings and Trust Bank, as Rights
Agent
4.4(25) Form of Restated Preferred Shares Rights Agreement between Quantum
Corporation and Harris Trust and Savings Bank
10.9(5) Registrant's Employee Stock Purchase Plan and form of Subscription
Agreement, as amended
10.10(6) Form of Indemnification Agreement between Registrant and Certain
Officers and Directors
10.13(9) Lease (dated October 13, 1989) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.14(10) Lease (dated September 17, 1990) between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.15(3) Lease (dated April 10, 1992) between Registrant and John Arrillaga
and Richard T. Perry, Separate Property Trusts
10.17(11) Form of Statement of Employment Terms executed by Stephen M.
Berkley, David A. Brown and William J. Miller, directors of
Registrant, and Joseph T. Rodgers, William F. Roach and Michael A.
Brown, executive officers of Registrant
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.18(7) Lease (dated November 13, 1992) and First Amendment to Lease
(dated November 17, 1992) between Registrant and Milpitas Realty
Delaware, Inc.
10.21(12) 1993 Long-Term Incentive Plan
10.23(13) Second Amendment (dated April 15, 1993) to Lease (dated November
13, 1992) between Registrant and Milpitas Realty Delaware, Inc.
10.24(13) Lease (dated April 14, 1993) between Registrant and Milpitas
Realty Delaware, Inc.
10.25(1) Patent Assignment and License Agreement, dated as of October 3,
1994, by and between Digital Equipment Corporation and Quantum
Corporation
10.27(8)(14) Supply Agreement between Digital Equipment Corporation (Buyer)
and Quantum Corporation (Seller) for Storage Devices, as dated as
of October 3, 1994
10.32(15) Credit Agreement dated September 22, 1995, among Quantum
Corporation and the Banks named therein and THE SUMITOMO BANK,
LIMITED, acting through its San Francisco branch, as Agent for
the Banks and as Issuer
10.40(16) Mortgage and Security Agreement made as of the 10th day of
September 1996, by Quantum Peripherals Realty Corporation, as
Mortgagor, to CS First Boston Mortgage Capital Corporation, as
Mortgagee
10.41(16) Deed of Trust and Security Agreement dated: As of September 10,
1996, by Quantum Peripherals Realty Corporation (Grantor) to
Public Trustee of Boulder County, Colorado, as Trustee for the
benefit of CS First Boston Mortgage Capital Corp. (Beneficiary)
10.42(16) Master Lease between Quantum Peripherals Realty Corporation,
Lessor, and Quantum Corporation, Lessee, dated as of September
10, 1996
10.43(16) 1996 Board of Directors Stock Option Plan and Form of Option
Agreement, as amended
10.44(17) Stock Purchase Agreement dated as of February 13, 1997 among
Registrant, Quantum Peripherals Colorado, Inc. and Storage
Technology Corporation
10.45(18) Indenture, dated August 1, 1997, between the Registrant and La
Salle National Bank as trustee ("Trustee") related to the
Registrants subordinated debt securities
10.46(18) Supplemental Indenture, dated August 1, 1997, between the
Registrant and Trustee, relating to the Notes (including the form
of Note)
10.47(19) Lease (dated April 16, 1997) between Registrant and John
Arrillaga, Trustee
10.48(19) Credit Agreement dated June 6, 1997, among Quantum Corporation
and the Banks Named Herein and ABN AMRO BANK N.V., San Francisco
International Branch and CIBC INC. as Co-Arrangers for the Banks
and CANADIAN IMPERIAL BANK OF COMMERCE, as Administrative Agent
for the Banks and ABN AMRO BANK N.V., San Francisco International
Branch, as Syndication Agent for the Banks and BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION as Documentation Agent for
the Banks
10.49(19) Amended and Restated Master Agreement, dated April 30, 1997
between Registrant and MKE
10.50(19) Amended and Restated Purchase Agreement, dated April 30, 1997
between Registrant and MKE
10.51(19) License Agreement, effective January 1, 1996, dated April 17,
1997, between International Business Machines Corporation and
Quantum Corporation
10.52(20) MASTER LEASE dated as of August 22, 1997 between LEASE PLAN NORTH
AMERICA, INC., as the Lessor and Quantum Corporation, as the
Lessee
10.53(20) PARTICIPATION AGREEMENT dated as of August 22, 1997 among Quantum
Corporation, as Lessee, LEASE PLAN NORTH AMERICA, INC., as Lessor
and as a Participant, ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as a Participant, and ABN AMRO BANK N.V.,
SAN FRANCISCO INTERNATIONAL BRANCH, as Agent
10.54(20) APPENDIX 1 to Participation Agreement, Master Lease and
Construction Deed of Trust each dated as of August 22, 1997
(Specialty Storage Product Group Facilities)
10.55(20) Second Extension and Modification of Credit Agreement, dated
September 18, 1997, among Quantum Corporation and the Banks and
THE SUMITOMO BANK, LIMITED, acting through its San Francisco
Branch, as agent for the Banks and as Issuer
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.56(21) AGREEMENT AND PLAN OF REORGANIZATION, dated May 18, 1998, among
Quantum Corporation, Quick Acquisition Corporation, a wholly-owned
subsidiary of Quantum Corporation, and ATL Products, Inc.
10.57(21) FIRST AMENDMENT TO CREDIT AGREEMENT, dated June 26, 1998, among
Quantum Corporation, certain financial institutions (collectively,
the "Banks"), and CANADIAN IMPERIAL BANK OF COMMERCE, as
administrative agent for the Banks
10.58(23) REIMBURSEMENT AGREEMENT, dated September 14, 1998, between Quantum
Peripherals (Europe) S.A. and The Sumitomo Bank, Limited, London
Branch
10.59(23) THIS CHARGE, dated September 14, 1998, between Quantum Peripherals
(Europe) S.A. and The Sumitomo Bank, Limited
10.60(24) SECOND AMENDMENT TO CREDIT AGREEMENT, dated December 18, 1998, among
Quantum Corporation, certain financial institutions (collectively,
the "Banks"), Canadian Imperial Bank of Commerce, as administrative
agent for the Banks, ABN AMRO Bank, N.V., as syndication agent for
the Banks and Bank of America National Trust & Savings Association,
as documentation agent for the Banks
10.61(24) CREDIT AGREEMENT, dated December 18, 1998, among ATL Products, Inc.,
certain financial institutions (collectively, the "Banks") and Fleet
National Bank as agent for the Banks
10.62(24) INDUSTRIAL LEASE, dated July 17, 1998, between The Irvine Company as
lessor, and ATL Products, Inc. as lessee
10.63(25) Quantum Corporation Employee Stock Purchase Plan, as amended
12 Statement of Computation of Ratios of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
24 Power of Attorney (see signature page)
27 Financial Data Schedule
</TABLE>
- --------
<TABLE>
<C> <S>
(1) Incorporated by reference from Form 8-K filed with the Securities and
Exchange Commission on October 17, 1994.
(2) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1987.
(3) Incorporated by reference from exhibits filed with Registrant's Annual
Report on Form 10-K for fiscal year ended March 31, 1992.
(4) Incorporated by reference from Form 8-A filed with the Securities and
Exchange Commission on August 5, 1988.
(5) Incorporated by reference from exhibits filed with Registrant's Form S-8,
No. 33-52192 filed with the Securities and Exchange Commission on
September 21, 1992.
(6) Incorporated by reference to the Registrant's Definitive Special Meeting
Proxy Statement filed with the Securities and Exchange Commission on
March 24, 1987.
(7) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended December 27, 1989, filed with the
Securities and Exchange Commission on February 10, 1993.
(8) Confidential Treatment Requested. Granted by the Securities and Exchange
Commission.
(9) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended December 31, 1989, filed with the
Securities and Exchange Commission on February 14, 1990.
(10) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended December 30, 1990, filed with the
Securities and Exchange Commission on February 13, 1991.
(11) Incorporated by reference to the Registrant's Amendment No. 1 to Form 10-
Q for the quarter ended June 30, 1991.
(12) Incorporated by reference from Registration Statement No. 33-72222 on
Form S-8 filed with the Securities and Exchange Commission on November
30, 1993.
(13) Incorporated by reference from exhibits filed with Registrant's Annual
Report on Form 10-K for fiscal year ended March 31, 1994.
</TABLE>
68
<PAGE>
<TABLE>
<C> <S>
(14) Incorporated by reference from Form 8-K/A-1 filed with the Securities and
Exchange Commission on January 31, 1995.
(15) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended October 1, 1995, filed with the Securities
and Exchange Commission on November 20, 1995.
(16) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended September 29,1996 filed with the
Securities and Exchange Commission on November 13, 1996.
(17) Incorporated by reference from exhibits filed with Registrant's Annual
Report on Form 10-K for fiscal year ended March 31, 1997.
(18) Incorporated by reference from Form 8-K filed with the Securities and
Exchange Commission, dated August 6, 1997.
(19) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended June 29, 1997 filed with the Securities
and Exchange Commission on August 13, 1997.
(20) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended September 28, 1997 filed with the
Securities and Exchange Commission on October 29, 1997.
(21) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended June 28, 1998 filed with the Securities
and Exchange Commission on August 12, 1998.
(22) Incorporated by reference to the Form 8-A filed with the Securities and
Exchange Commission on August 4, 1998.
(23) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended September 27, 1998 filed with the
Securities and Exchange Commission on October 15, 1998.
(24) Incorporated by reference from exhibits filed with Registrant's Form 10-Q
for the quarterly period ended December 27, 1998 filed with the
Securities and Exchange Commission on February 9, 1999.
(25) Incorporated by reference from Form S-4 filed with the Securities and
Exchange Commission on June 10, 1999.
</TABLE>
(b) Reports on Form 8-K: None.
(c) Exhibits: See Item 14(a) above.
(d) Financial Statement Schedules: See Item 14(a) above.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
QUANTUM CORPORATION
Dated: June 14, 1999 /s/ Richard L. Clemmer
_____________________________________
Richard L. Clemmer
Executive Vice President, Finance
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard L. Clemmer and Andrew Kryder, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
June 14, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Michael A. Brown Chairman of the Board, and
____________________________________ Chief Executive Officer
Michael A. Brown (Principal Executive
Officer)
/s/ Richard L. Clemmer Executive Vice President,
____________________________________ Finance, Chief Financial
Richard L. Clemmer Officer (Principal
Financial and Accounting
Officer)
/s/ Stephen M. Berkley Director
____________________________________
Stephen M. Berkley
/s/ David A. Brown Director
____________________________________
David A. Brown
/s/ Robert J. Casale Director
____________________________________
Robert J. Casale
/s/ Edward M. Esber, Jr. Director
____________________________________
Edward M. Esber, Jr.
/s/ Steven C. Wheelwright Director
____________________________________
Steven C. Wheelwright
</TABLE>
70
<PAGE>
QUANTUM CORPORATION
EXHIBIT 12
STATEMENT OF COMPUTATION OF RATIOS
OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
1995 1996 1997 1998 1999
-------- --------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Income (loss) before income
taxes........................ $145,305 $(141,338) $200,696 $230,814 $ (185)
Add fixed charges............. 29,277 48,226 56,669 41,711 38,117
-------- --------- -------- -------- -------
Earnings (as defined)....... $174,582 $ (93,112) $257,365 $272,525 $37,932
======== ========= ======== ======== =======
Fixed charges
Interest expense............ $ 21,557 $ 35,904 $ 47,882 $ 32,753 $27,481
Amortization of debt
issuance costs 1,458 2,427 (i) (i) (i)
Estimated interest component
of rent expenses........... 6,262 9,895 8,787 8,958 10,636
-------- --------- -------- -------- -------
Total fixed charges........... $ 29,277 $ 48,226 $ 56,669 $ 41,711 $38,117
======== ========= ======== ======== =======
Ratio of earnings to fixed
charges 6.0 (ii) 4.5 6.5 (iii)
======== ======== ========
</TABLE>
- --------
(i) In 1997, 1998, and 1999 the amortization of debt issuance costs is
included in interest expense.
(ii) Earnings (as defined) for fiscal year 1996 were insufficient to cover
fixed charges by $141.3 million.
(iii) Earnings (as defined) for fiscal year 1999 were insufficient to cover
fixed charges by $0.2 million.
<PAGE>
QUANTUM CORPORATION
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
1. Quantum International Inc., a California corporation
2. Quantum International DISC Inc., a California corporation
3. Quantum Foreign Sales Corporation, a Barbados corporation
4. Quantum GmbH, a German corporation
5. Quantum Peripheral Products Ltd., a United Kingdom corporation
6. Quantum France SARL, a French corporation
7. Quantum Asia Pacific Pte. Ltd., a Singapore corporation
8. Quantum Peripherals Japan Corporation, a Japanese corporation
9. Quantum Data Storage B.V., a Netherlands corporation
10. Quantum Peripheral Products (Ireland) Ltd., an Ireland corporation
11. Quantum Peripherals (Europe) S.A., a Swiss corporation
12. Quantum Singapore Pte. Ltd., a Singapore corporation
13. Quantum Korea Corporation, a Korean corporation
14. Quantum Hong Kong Ltd., a Hong Kong corporation
15. Quantum Peripherals (Malaysia) Sdn. Bhd., a Malaysian corporation
16. Quantum Storage (Malaysia) Sdn. Bhd., a Malaysian corporation
17. Quantum Peripherals Realty Corporation, a Delaware corporation
18. ATL Products, Inc., a Delaware Corporation
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-09983, 333-30623, 333-30627, 333-32691, 333-58193, 333-
65043) pertaining to the 1996 Board of Directors Stock Option Plan, the 1993
Long-Term Incentive Plan, Employee Stock Purchase Plan of Quantum Corporation
and the 1996 and 1997 ATL Products, Inc. Stock Incentive Plan, and the
Registration Statement (Form S-3, No. 333-29525) filed June 19, 1997, as
amended on July 24, 1997, and related prospectus pertaining to the registration
of debt securities, common stock, and rights of our report dated April 26,
1999, with respect to the consolidated financial statements and schedule of
Quantum Corporation included in it Annual Report (Form 10-K) for the year ended
March 31, 1999.
/s/ Ernst & Young LLP
Palo Alto, California
June 14, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
MKE Quantum Components LLC:
We consent to the incorporation by reference in the Annual Report on Form
10-K of Quantum Corporation of our report dated April 14, 1998, except for
notes 6(b) and 12, which are as of June 5, 1998, with respect to the
consolidated balance sheet of MKE Quantum Components, LLC and subsidiaries as
of March 31, 1998, and the related consolidated statements of operations,
members' equity, and cash flows for the period from May 16, 1997 (inception)
through March 31, 1998, which report appears in Form 8-K of Quantum Corporation
dated March 26, 1999.
/s/ KPMG LLP
Boston, Massachusetts
June 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION.
</LEGEND>
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<S> <C> <C> <C>
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<PERIOD-END> MAR-31-1999 MAR-31-1998 MAR-31-1997
<CASH> 772,368 642,150 345,125
<SECURITIES> 24,426 71,573 0
<RECEIVABLES> 658,687 750,856 898,087
<ALLOWANCES> 12,130 12,928 10,610
<INVENTORY> 271,986 315,035 252,802
<CURRENT-ASSETS> 1,927,873 2,025,337 1,688,419
<PP&E> 563,545 505,640 633,897
<DEPRECIATION> 291,617 220,481 226,691
<TOTAL-ASSETS> 2,483,596 2,438,411 2,158,263
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<TOTAL-REVENUES> 4,902,056 5,805,235 5,319,457
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION.
</LEGEND>
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<S> <C> <C> <C>
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<DEPRECIATION> 278,922 256,909 236,967
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0 0 0
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<TOTAL-REVENUES> 3,593,315 2,267,734 1,103,023
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<INTEREST-EXPENSE> 20,136 13,227 6,502
<INCOME-PRETAX> (84,873) 28,964 4,301
<INCOME-TAX> 1,403 8,689 1,291
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUANTUM CORPORATION.
</LEGEND>
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<S> <C> <C> <C>
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<PP&E> 484,550 447,090 409,802
<DEPRECIATION> 202,705 188,231 177,957
<TOTAL-ASSETS> 2,627,503 2,651,698 2,113,430
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