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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, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12390
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QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2665054
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 McCarthy Blvd., Milpitas, 95035
California
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
Registrant's telephone number, including area code: (408) 894-4000
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
QUANTUM CORPORATION--DLT & STORAGE SYSTEMS GROUP
COMMON STOCK......................................... NEW YORK STOCK EXCHANGE
QUANTUM CORPORATION--HARD DISK DRIVE GROUP COMMON
STOCK................................................ NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES B JUNIOR PARTICIPATING
PREFERRED STOCK...................................... NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES C JUNIOR PARTICIPATING
PREFERRED STOCK...................................... NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED NOTES DUE 2004
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 28, 2000 was $1,382,985,380. For purposes of this
disclosure, shares of Common Stock held by persons who hold more than 5% of
the outstanding shares of Common Stock and shares held by officers and
directors of the Registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
As of the close of business on May 28, 2000, the registrant had 150,467,252
shares of DLT & Storage Systems group common stock outstanding and 82,602,426
shares of Hard Disk Drive group common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part
III of this Form 10-K Report. Form 8-K of Quantum Corporation dated March 26,
1999, is incorporated by reference into Part II, Item 8 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 under Trends and Uncertainties in Annex II
and Annex III of this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
Business Description
Founded in 1980, Quantum Corporation ("Quantum" or "the Company") is a
diversified data storage company. Quantum operates its business through two
separate business groups: the DLT & Storage Systems group ("DSSG") and the
Hard Disk Drive group ("HDDG"). On July 23, 1999, Quantum's stockholders
approved a tracking stock proposal creating two new classes of Quantum common
stock, DSSG common stock and HDDG common stock, intended to track separately
the performance of the DLT & Storage Systems group and the Hard Disk Drive
group. On August 3, 1999, each authorized share of Quantum common stock was
exchanged for one share of DSSG common stock and one-half share of HDDG common
stock. A description of each of the 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 storage systems.
DSSG's storage systems consist of DLTtape libraries, solid state storage
systems, network attached storage appliances and service.
DLTtape products are used to back up large amounts of data stored on
network servers. Digital Linear Tape, or DLTtape, is DSSG's half-inch tape
technology that is the de facto industry standard for data back-up in the mid-
range network server market.
According to International Data Corporation, DSSG was the worldwide revenue
leader for tape drives used for data storage and back-up in calendar year
1999. DLTtape drives accounted for 30% of total tape drive market revenue in
calendar year 1999, up from 24% in calendar year 1998 and 2% in calendar year
1994. The DLT & Storage Systems group is also a leader in the tape library
market for mid-range network servers. DLTtape library products represented an
estimated 46% of total tape automation revenue in calendar year 1999, up from
38% in calendar year 1998 and 29% in calendar year 1997.
DSSG's tape libraries serve the entire tape library data storage market
from desktop computers to enterprise class computers. With the acquisition of
Meridian Data, Inc. ("Meridian") in September 1999, DSSG formed the Snap
division, which has become a leader in the rapidly emerging market for network
attached storage appliances with products which incorporate hard disk drives
and an operating system designed to meet the requirements of entry and
workgroup level computing environments, where multiple computer users access
shared data files over a local area network.
DLTtape drives store data on DLTtape media cartridges. Historical use of
DLTtape drives has shown that drives use many media cartridges per year.
Growth in the installed base of DLTtape drives is expected to result in
increasing demand for DLTtape media cartridges. DSSG's DLTtape media
cartridges are manufactured and sold by licensed third party manufacturers.
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The installed base of DLTtape drives resulted in shipments of approximately
16 million DLTtape media cartridges in fiscal year 2000. The installed base of
DLTtape drives includes the more than 1.4 million DLTtape drives that have
been shipped to date. DSSG expects the installed base to increase from DLTtape
drive shipments in fiscal year 2001 and to generate increased DLTtape media
cartridge sales. These expectations are forward-looking statements and actual
results may be affected by the factors discussed in "--Trends and
Uncertainties Relating to the DLT & Storage Systems Group," in Annex II of
this report.
Prior to 1998, DSSG's DLTtape media cartridge revenue was derived from
direct sales. Beginning in 1998, DSSG's licensed third party DLTtape media
manufacturers also began selling DLTtape media cartridges. DSSG receives a
royalty fee on DLTtape media cartridges sold by its licensees which, while
resulting in lower revenue than DLTtape media sold directly by DSSG, generates
comparable income from operations. DSSG prefers to have a substantial portion
of DLTtape media cartridge sales occur through its license model because this
minimizes DSSG's operational risks and expenses and provides an efficient
distribution channel. Currently, approximately 80% of media sales occur
through this license model. DSSG believes that the large installed base of
DLTtape drives and its licensing of DLTtape media cartridges give DSSG a
unique competitive advantage.
In the fourth quarter of fiscal year 2000, Quantum announced the formation
of Quantum Technology Ventures ("QTV"), an investment arm for Quantum. QTV
will be used to explore, develop and invest in new storage technologies,
storage businesses and applications for storage. QTV will be managed as a
wholly-owned subsidiary of Quantum Corporation with the results of its
operations shared 50/50 between DSSG and HDDG. Quantum has committed $100
million of funding to QTV over the next two years.
Products
The DLT & Storage Systems group's products include:
DLT:
. Super DLTtape(TM) drives. DSSG recently introduced a new family of tape
drive products based on Super DLTtape technology, targeted to serve
workgroup, mid-range and enterprise business needs. For workgroup and
departmental servers, the Super DLTtape drive will deliver a native
capacity of 80 gigabytes ("GB") (160GB compressed) and a sustained
transfer rate of 8 megabytes ("MB") per second (16MB compressed). The
mid-range market including large corporate departments and mid-size
automated libraries will see a drive with a native capacity of 110GB
(220GB compressed) and a sustained transfer rate of 11MB per second
(22MB compressed). In response to high performance enterprise needs,
DSSG will also offer a Super DLTtape drive with a sustained transfer
rate of greater than 16MB per second (32MB compressed). Super DLTtape
drives are expected to begin volume shipment in the second half of
calendar year 2000.
. DLTtape drives. DSSG currently 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 6MB per second (12MB compressed). The DLT7000 provides
a combination of 35GB of native capacity (70GB compressed) and a
sustained data transfer rate of 5MB per second (10MB compressed). The
DLT4000 provides a combination of 20GB of native capacity (40GB
compressed) and a sustained data transfer rate of 1.5MB per second (3MB
compressed).
. DLTtape media cartridges. The DLTtape family of half-inch tape media
cartridges is designed and formulated specifically for use with DLTtape
drives. The capacity of a DLTtape media cartridge is up to 40GB (80GB
compressed). DSSG's half-inch tape cartridges take advantage of shorter
wavelength recording schemes to ensure read compatibility with future
generations of DLTtape drives. The tape itself features a special high-
grade metal particle formula that reduces tape and head wear. The result
is tape that delivers a proven one million passes with a negligible
impact on soft error rates and a 30-year archival life.
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Storage Systems:
. Tape libraries. DSSG offers a broad line of automated DLTtape libraries
that support a wide range of back-up and archival needs from workgroup
servers to enterprise-class servers. DSSG's tape libraries range from
its tape autoloaders which accommodate a single DLTtape drive and up to
280GB of storage capacity to the P6000 series library which features
Prism Library Architecture(TM) and can be configured in multiple units
to scale up to 22.8 terabytes of storage capacity. In addition, DSSG
offers WebAdmin(TM), the industry's first Internet browser-based tape
library management system, allowing system administrators to monitor
widely distributed storage systems at remote locations with point-and-
click ease.
. Solid state storage systems. DSSG offers two families of solid state
storage systems--the Rushmore(TM) Ultra series and the Rushmore eSystem
Accelerators. The Rushmore Ultra Solid State Disks are available in
capacities ranging from 268MB to 3.2GB and have data access times of
less than 50 microseconds, 100 to 200 times faster than magnetic hard
disk drives. Solid state storage systems store data on memory chips
which enable significantly faster data access times than magnetic disks
used in standard hard disk drives. DSSG recently introduced the next
generation solid state storage product, Rushmore eSystem Accelerator, a
comprehensive set of hardware, tools, services and consulting bundled
into one inclusive package. With breakthrough semiconductor and
controller technology, the Rushmore eSystem Accelerator dramatically
increases system performance in e-commerce infrastructures. With
capacities ranging from 536MB to 3.2GB, the Rushmore eSystem Accelerator
delivers data access times of less than 25 microseconds, more than
18,000 accesses to information per second for time-critical
applications.
. Network attached storage systems. DSSG's Snap! Server(TM) family of
network attached storage appliances offers options ranging from 10GB to
120GB of network storage. These products incorporate hard disk drives
and an operating system, provide the ease of plug-and-play features and
can be directly attached to workgroup-level networks, providing instant
additional network storage capacity. No special configurations are
needed for ordinary use and advanced configuration options enable added
value features.
. LANvault(TM) tape backup appliance. LANvault is a backup appliance with
a DLTtape library, a central management console and a customer service
Web portal. This product is intended to meet the requirements for remote
site backup and is designed as a work group backup solution appliance
preloaded with industry-standard backup software for ease of
installation and use.
Customers
DSSG's DLTtape drives have achieved broad market acceptance in the mid-
range network server market with leading computer equipment manufacturers such
as Compaq Computer Corporation, Dell Computer Corporation, Hewlett-Packard
Company, IBM, StorageTek and Sun Microsystems, Inc. Customers for DSSG's tape
libraries include Compaq, EMC Corporation, Hewlett-Packard, IBM and Sun
Microsystems. DSSG operates the tape library portion of its business through
its wholly-owned ATL subsidiary.
Because the leading computer equipment manufacturers have a dominant market
share for the computer systems into which DSSG's products are incorporated,
DSSG's sales are concentrated with several key customers. Sales to DSSG's top
five customers in fiscal year 2000 represented 47% of revenue, compared to 53%
of revenue in fiscal year 1999. These amounts reflected a retroactive
combination of the sales to Compaq and Digital Equipment as a result of their
merger in June 1998. Sales to Compaq were 20% of revenue in fiscal year 2000,
compared to 25% of revenue in fiscal year 1999, including sales to Digital
Equipment. Sales to Hewlett-Packard were 13% of revenue in both fiscal years
2000 and 1999.
Sales and Marketing
DSSG markets its products directly to manufacturers of computer systems and
workstations and to distributors, resellers and systems integrators through
its worldwide sales force. DSSG also sells DLTtape drives,
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media cartridges and network attached storage appliances through the
www.quantum.com website, targeted primarily at small and medium sized
businesses and independent end users.
DSSG supports international sales and operations by maintaining a European
headquarters in Neuchatel, Switzerland; a Japanese headquarters in Tokyo; an
Asia Pacific headquarters in Singapore and additional sales offices throughout
the world. DSSG's international sales, including sales to foreign subsidiaries
of United States companies, were 35% of DSSG's total revenue in fiscal year
2000, and 22% and 29% of total revenue in fiscal years 1998 and 1999,
respectively.
Strategic Licensing Partners
Fuji Photo Film Co., Ltd. and Hitachi Maxell, Ltd. have historically been
the primary manufacturers of DLTtape media cartridges for DSSG. DSSG's license
agreements with Fuji and Maxell allow those companies to independently sell
DLTtape media cartridges for which DSSG receives royalties. DSSG believes
these strategic license agreements can expand the market for DLTtape
technology and provide customers with multiple sources for DLTtape media
cartridges.
In fiscal year 1999, DSSG entered into a manufacturing license and
marketing agreement with Tandberg Data ASA, a European-based data storage
company, through which Tandberg has become an independent manufacturer of
DLTtape drives, and can manufacture products currently under development such
as those based on Super DLTtape technology. Under the terms of the agreement,
DSSG receives royalties on all DLTtape drives that Tandberg manufactures and
sells. Tandberg also markets a full spectrum of DLTtape drives, DLTtape media
cartridges and tape libraries.
In fiscal year 2000, DSSG entered into a manufacturing license agreement
with Benchmark Tape Systems Corporation, a company dedicated to the
development of tape backup and archive systems, through which Benchmark can
manufacture and sell certain versions of DLTtape drives based on Quantum
technology.
Manufacturing
DSSG manufactures DLTtape drives, autoloaders, network attached storage
appliances and solid state storage systems in its Colorado Springs, Colorado
facility. Network attached storage appliances are also manufactured by two
third parties. As a result of DSSG's strategy to reduce manufacturing costs,
DSSG has begun the process of moving high volume DLTtape drive production from
its Colorado facility to Quantum's facility in Penang, Malaysia. DSSG expects
to continue to manufacture the DLT4000 tape drive in its Colorado facility as
well as the recently introduced Super DLTtape drives and other new products.
DSSG manufactures tape libraries in its Irvine, California facility. DSSG also
has a logistics site in Dundalk, Ireland. All of DSSG's DLTtape media
cartridges are manufactured by third parties--Fuji and Maxell.
Research and Development
DSSG invested approximately $63 million, $99 million and $123 million in
research and development in fiscal years 1998, 1999 and 2000, respectively.
DSSG 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, DSSG is currently developing a family of tape drives based on
Super DLTtape technology. DSSG maintains research and development facilities
in Shrewsbury, Massachusetts; Boulder, Colorado; Irvine, California; and San
Jose, California.
Competition
In the mid-range network server market for tape drives, DSSG 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
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technology. Such products will target the high-capacity data storage market
and are expected to compete with products based on Super DLTtape technology.
Key competitive factors in the tape storage market include capacity,
reliability, durability, scalability, compatibility and cost.
ADIC, Breece Hill Technologies, Inc., Exabyte, Hewlett-Packard, Overland
Data Inc. and StorageTek also offer tape libraries incorporating DLTtape
technology. If DLTtape continues to maintain broad market acceptance in the
mid-range network server market, DSSG believes many of these companies will
continue to improve the functionality and performance of their tape libraries
designed for DLTtape technology. DSSG also expects increased competition from
large integrated computer equipment companies, many of whom have historically
incorporated their own tape storage products into their computer systems, and
are broadening their focus on the enterprise-wide computing market.
In the market for network attached storage appliances, DSSG competes with
Hewlett Packard, Intel Corporation, Maxtor Corporation and Nortel Networks
Corporation. Large traditional suppliers of general purpose computer servers
also offer specialized server storage solutions. Any one of these companies,
or any other company, could introduce network attached storage appliances or
another similar storage solution targeted at workgroup-level applications that
could result in increased competition with DSSG's network attached storage
appliances.
Warranty and Service
DSSG generally warrants its products against defects for a period of one to
three years from the date of sale. DSSG generally provides warranty service on
DLTtape drives on a return-to-factory basis. DSSG's tape libraries generally
have a warranty period of one year, with service agreements available to
customers for additional years of warranty service. DSSG 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. DSSG also performs tape library warranty service
in its facility in Irvine, California. In addition, third party service
providers throughout the world perform tape library service.
Backlog
DSSG 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,
DSSG 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, 2000, DSSG had approximately 2,300 regular employees. In
addition, approximately 800 Quantum employees perform services for both DSSG
and HDDG. In the advanced electronics industry, competition for highly skilled
employees is intense. DSSG believes that a great part of its future success
will depend on DSSG's ability to attract and retain highly skilled employees.
None of DSSG's employees are represented by a union, and DSSG has experienced
no work stoppages. DSSG believes that its employee relations are favorable.
Technology
Both DSSG and HDDG 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. DSSG and HDDG consult each other on a regular basis
concerning technology issues that affect both groups.
Quantum has been granted and/or owns by assignment 464 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 DSSG believes that its
patents and applications have
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significant value, the rapidly changing computer industry technology makes
DSSG's future success dependent primarily upon the technical competence and
creative skills of its personnel rather than on patent protection.
Several companies and individuals have approached DSSG concerning the need
for a license under patented technology that DSSG assertedly used, or is
assertedly using, in the manufacture and sale of one or more of its products.
DSSG 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, DSSG 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 Fujitsu, Hewlett-
Packard, IBM, Seagate, Western Digital and others. These agreements enable
DSSG to use certain patents owned by these companies and enable these
companies to use certain patents owned by Quantum.
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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.
HDDG's hard disk drives are designed for the desktop market which requires
economy and reliability and the high-end market which requires faster and
higher capacity disk drives--as well as the emerging market for hard disk
drives specially designed for consumer electronics devices such as personal
video recorders, personal audio recorders, cable and set-top boxes, Internet
appliances and digital video editing. HDDG has been the leading volume
supplier of hard disk drives for the desktop market for each of the past seven
years. According to Dataquest, HDDG's market share in the desktop market has
grown from 3% in calendar year 1990 to an industry leading 22% in calendar
year 1999.
HDDG designs desktop hard disk drives to meet the storage requirements of
entry-level to high-performance desktop PCs in home and business environments.
HDDG also designs high-end hard disk drives to store data on large computing
systems such as network servers. These high-end hard disk drives are generally
used for:
. dedicated sites that store large volumes of data;
. network servers such as those used for Internet and intranet services,
online transaction processing and enterprise wide applications;
. high-speed computers used for specialized engineering design software;
and
. computer systems incorporating a large number of shared hard disk
drives.
HDDG also pioneered hard disk drive applications for the developing
consumer electronics market. These hard disk drive applications utilize
Quantum QuickView(TM)--HDDG's hard disk drive technology designed especially
for consumer electronics. Quantum QuickView technology makes it possible to
simultaneously record and play back audio and video content and to instantly
and inexpensively access large amounts of audio and video content--
capabilities that are not as well suited to competing technologies such as
video tape and optical media.
In the fourth quarter of fiscal year 2000, Quantum announced the formation
of Quantum Technology Ventures, an investment arm for Quantum. QTV will be
used to explore, develop and invest in new storage technologies, storage
businesses and applications for storage. QTV will be managed as a wholly owned
subsidiary of Quantum Corporation with the results of its operations shared
50/50 between HDDG and DSSG. Quantum has committed $100 million of funding to
QTV over the next two years.
Products
Desktop products. HDDG offers two families of desktop hard disk drives--the
Quantum Fireball(TM) and Quantum Fireball Plus. The Quantum Fireball family
offers 3.5-inch hard disk drives for consumer and commercial PCs, as well as
entry-level workstations and network servers. Fireball Plus offers superior
performance for power users. HDDG offers the Shock Protection System(TM),
Shock Protection System II and Data Protection System(TM) with its desktop
products. These features substantially reduce failure rates and provide
increased reliability and performance. Shock Protection System II provides
enhanced protection against both operating and non-operating shock. Along with
providing enhanced protection against shock during handling and integration,
Shock Protection System II guards against kicks and jolts while the PC is
running to reduce field failures. HDDG has also incorporated feature
enhancements of the Quiet Drive Technology into recently introduced Quantum
desktop drives. This technology has been pioneered through a combination of
proprietary design innovations and unique drive features that enable Quantum
to develop drives that emit dramatically reduced levels of noise. It was first
introduced over a year ago in Quantum QuickView drives targeted for the noise-
sensitive consumer electronics market and has continued to be refined with
technology and feature enhancements.
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High-end products. HDDG also offers a broad line of high-end 3.5-inch hard
disk drives--the Quantum Atlas(TM) and Quantum Atlas 10K families. The Quantum
Atlas families offer high-capacity hard disk drives for high performance
storage-intensive applications such as enterprise servers and storage
subsystems. HDDG also offers the Shock Protection System, Shock Protection
System II and Data Protection System with its high-end products, and has
incorporated the Quiet Drive Technology into its recently introduced Atlas 10K
II.
The table below sets forth key performance characteristics for HDDG's
current products:
<TABLE>
<CAPTION>
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
-------- -------- ------------ ---------- --------
<C> <C> <C> <C> <S>
Fireball lct 08... 8.7 4.3 to 26.0 5,400 Desktop PCs--Value, with
Ultra ATA/66 interface,
Shock Protection System
II, Data Protection System
and Quiet Drive Technology
Fireball lct 10... 10.3 5.0 to 30.0 5,400 Desktop PCs--Value, with
Ultra ATA/66 interface,
Shock Protection System
II, Data Protection System
and Quiet Drive Technology
Fireball lct 15... 15.0 7.5 to 30.0 4,400 Desktop PCs--Value, with
Ultra ATA/66 interface,
Shock Protection System
II, Data Protection System
and Quiet Drive Technology
Fireball Plus KX.. 6.8 6.8 to 27.3 7,200 Desktop PCs--Performance,
with Ultra ATA/66
interface, Shock
Protection System and Data
Protection System
Fireball Plus LM.. 10.3 10.2 to 30.0 7,200 Desktop PCs--Performance,
with Ultra ATA/66
interface, Shock
Protection System and Data
Protection System
Atlas IV.......... 4.5 9.1 to 36.4 7,200 Servers, Workstations and
Storage Subsystems, with
Ultra 160 SCSI interface,
Shock Protection System
Atlas V........... 9.1 9.1 to 36.7 7,200 Servers, Workstations and
Storage Subsystems, with
Ultra 160 SCSI interface,
Shock Protection System II
and Data Protection System
Atlas 10K......... 3.0 9.1 to 36.4 10,000 Enterprise Servers,
Workstations and Storage
Subsystems, with Ultra 160
SCSI interface, Shock
Protection System II and
Data Protection System
Atlas 10K II...... 7.3 9.2 to 73.4 10,000 Enterprise Servers,
Workstations and Storage
Subsystems, with Ultra 160
SCSI interface, Shock
Protection System II, Data
Protection System and
Quiet Drive Technology
</TABLE>
Customers
HDDG markets its products to leading computer equipment manufacturers,
including Acer, Apple Computer, Inc., Compaq, Dell, Fujitsu Limited, Gateway
Inc., Hewlett-Packard, IBM, Packard Bell/NEC and Siemens AG. Because the
leading computer equipment manufacturers have a dominant market share for the
computer systems into which HDDG's products are incorporated, HDDG's sales are
concentrated with several key customers.
Sales to HDDG's top five customers in fiscal year 2000 represented 50% of
revenue, compared to 47% of revenue in fiscal year 1999. These amounts
reflected a retroactive combination of sales to Ingram Micro and Electronic
Resources as a result of the completion of their merger in July 1999 as well
as a retroactive combination of sales to Compaq and Digital Equipment as a
result of their merger in June 1998. Sales to Ingram
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Micro were 13% of revenue in fiscal year 2000, compared to 10% of revenue in
fiscal year 1999, including sales to Electronic Resources. Sales to Hewlett-
Packard were 12% of revenue in fiscal year 2000, compared to 14% of revenue in
fiscal year 1999. Sales to Compaq were less than 10% of revenue in fiscal year
2000, compared to 10% of revenue in fiscal year 1999, including sales to
Digital Equipment.
Sales and Marketing
HDDG markets its products directly to manufacturers of desktop PCs, servers
and workstations. Key domestic and international computer equipment
manufacturer customers include Acer, Apple, Apricot Computers Limited, Compaq,
Dell, Fujitsu, Gateway, Hewlett-Packard, IBM, LG Electronics Inc., Packard
Bell/NEC, Samsung and Siemens.
In addition to its strong base of computer equipment manufacturer
customers, HDDG 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, HDDG's hard disk drive products reach smaller computer equipment
manufacturers, systems integrators, value-added resellers, dealers and
retailers.
HDDG also sells its hard disk drive products through the www.quantum.com
web site, targeted primarily at small and medium sized businesses and
independent end users.
HDDG supports international sales and operations by maintaining a regional
European headquarters in Neuchatel, Switzerland; a Japanese headquarters in
Tokyo; an Asia Pacific headquarters in Singapore and additional sales offices
throughout the world. HDDG's international sales, including sales to foreign
subsidiaries of U.S. companies, were 56% of HDDG's revenue in fiscal year
2000, and 54% and 55% of revenue for fiscal years 1998 and 1999, respectively.
Manufacturing
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") manufactures all
of HDDG's hard disk drives at facilities located in Japan, Singapore and
Ireland. During the fourth quarter of fiscal year 2000, MKE decided to
discontinue production at its Ireland facility and began to transition desktop
drive production from its Ireland facility to its lower cost facility in
Singapore. MKE's state-of-the-art manufacturing process is highly automated,
employing integrated computer networks and advanced control systems. MKE's
manufacturing expertise helps HDDG produce hard disk drives of exceptional
quality and quickly achieve volume production.
HDDG's relationship with MKE, 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 MKE. This agreement gives MKE the exclusive worldwide
right to manufacture and HDDG the exclusive worldwide right to design and
market hard disk drives. HDDG provides MKE with a forecast of its requirements
and places purchase orders monthly. HDDG works closely with MKE to regularly
adjust its purchase orders as market requirements change.
HDDG and MKE work together to develop strategic relationships with leading
suppliers of many of the key hard disk drive components. These relationships
enable HDDG 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 fiscal year 1999, HDDG agreed with MKE to dissolve their recording heads
joint venture. As a result, HDDG no longer develops or manufactures recording
heads.
9
<PAGE>
Research and Development
HDDG's research and development expenses were $259 million, $254 million
and $242 million in fiscal years 1998, 1999 and 2000, respectively. HDDG is
currently concentrating its research and development efforts on developing new
desktop and high-end hard disk drives, hard disk drives for the consumer
electronics market and other hard disk drive applications. HDDG maintains
research and development facilities in Shrewsbury, Massachusetts and Milpitas,
California.
Competition
In the desktop product market, HDDG competes primarily with Fujitsu, IBM,
Maxtor, Samsung, Seagate and Western Digital. In the high-end market, HDDG
competes primarily with Fujitsu, Hitachi, IBM and Seagate.
HDDG 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.
HDDG believes that it competes favorably with respect to these factors.
Warranty and Service
HDDG generally warrants its products against defects for a period of one to
five years from the date of sale. HDDG has generally provided warranty service
on a return to factory basis. However, HDDG began offering returns for credit
on desktop disk drive products with the introduction of the Fireball lct and
the Fireball Plus LM disk drives, and will offer returns for credit on all
future desktop disk drive products. HDDG maintains in-house service facilities
for refurbishment or repair of its products in Milpitas, California; Dundalk,
Ireland; and Penang, Malaysia. HDDG also utilizes third party providers for
warranty repairs.
Backlog
HDDG 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,
HDDG 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, 2000, HDDG had approximately 3,200 regular employees. In
addition, approximately 800 Quantum employees perform services for both HDDG
and DSSG. In the advanced electronics industry, competition for highly skilled
employees is intense. HDDG believes that a great part of its future success
will
10
<PAGE>
depend on its ability to attract and retain highly skilled employees. None of
HDDG's employees are represented by a union, and HDDG has experienced no work
stoppages. HDDG believes that its employee relations are favorable.
Technology
Both HDDG and DSSG 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. HDDG and DSSG consult each other on a regular basis
concerning technology issues that affect both groups.
Quantum has been granted and/or owns by assignment 464 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 HDDG believes that its
patents and applications have significant value, the rapidly changing computer
industry technology makes HDDG's future success dependent primarily upon the
technical competence and creative skills of its personnel rather than on
patent protection.
Several companies and individuals have approached HDDG concerning the need
for a license under patented technology that HDDG assertedly used, or is
assertedly using, in the manufacture and sale of one or more of its products.
HDDG 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, HDDG 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 Fujitsu, Hewlett-
Packard, IBM, Seagate, Western Digital and others. These agreements enable
HDDG to use certain patents owned by these companies and enable these
companies to use certain patents owned by Quantum.
11
<PAGE>
EXECUTIVE OFFICERS OF QUANTUM CORPORATION
Set forth below are the names, ages (as of March 31, 2000), positions and
offices held by, and a brief account of the business experience of, each
executive officer of Quantum.
<TABLE>
<CAPTION>
Name Age Position with Quantum
---- --- ---------------------
<C> <C> <S>
Michael A. Brown......... 41 Chairman of the Board and Chief Executive
Officer
Richard L. Clemmer....... 48 Executive Vice President, Finance, Chief
Financial Officer, and Secretary
W. Curtis Francis........ 50 Vice President, Corporate Development
John J. Gannon........... 53 President, Hard Disk Drive Group
Jerald L. Maurer......... 57 Executive Vice President, Human Resources, Real
Estate, and Corporate Services
Thomas H. Scott*......... 53 Executive Vice President of Worldwide Sales and
Corporate Marketing
</TABLE>
--------
* Mr. Scott became an executive officer of Quantum in April 2000.
Mr. Brown has been Chairman of the Board and Chief Executive Officer since
1998 and 1995, respectively. Mr. Brown was President of the Desktop Storage
Division from 1993 to 1995 and Executive Vice President in a chief operating
officer role from 1992 to 1993. Previously, Mr. Brown was named Vice President
of Marketing in 1990 and held positions in product and marketing management
since joining Quantum's marketing organization in August 1984. Before joining
Quantum, Mr. Brown served in the marketing organization at Hewlett-Packard and
provided management consulting services at Braxton Associates. Mr. Brown is
also a member of the board of Digital Impact, a publicly-held internet
marketing company.
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 Corporate Development 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 Personal Computer Business from 1996 to 1998 and its Digital Audio
Tape business from 1993 to 1996.
Mr. Maurer joined Quantum as Executive Vice President of Human Resources,
Real Estate and Corporate Services in December 1998. Prior to joining Quantum,
Mr. Maurer was Senior Vice President of Human Resources at Seagate Technology
from 1996 to 1998. Previously, he was Senior Vice President of Human Resources
for Melville Corporation from 1993 to 1996 and spent more than 25 years in a
variety of management and human resources positions with companies such as
Illinois Bell Telephone CO., AT&T and Aetna Life & Casualty.
Mr. Scott joined Quantum as Executive Vice President of Worldwide Sales and
Corporate Marketing in April 2000. Prior to joining Quantum, from February
1999 to March 2000, Mr. Scott provided consulting services to emerging
technology companies in the areas of strategic planning, marketing,
organization and development. From November 1997 to January 1999, Mr. Scott
was senior vice president of worldwide sales and marketing for AST Research,
Inc. Previously, from 1990 to May 1997, Mr. Scott held various positions with
Toshiba America Information Systems, last serving as general manager of the
Computer Systems Division.
12
<PAGE>
ITEM 2. Properties
Quantum's headquarters is located in Milpitas, California. Quantum owns or
leases facilities in North America, Europe and Asia. DSSG and HDDG share space
at the Corporate, European and Asian headquarters, at worldwide sales offices
and other locations worldwide. The following is a summary of the locations,
functions and square footage:
<TABLE>
<CAPTION>
Square
Location Function Feet
-------- -------- ------
<C> <S> <C>
North America
Milpitas, CA Corporate headquarters; hard drive research
and development, configuration and
distribution................................ 1,170,000
San Jose, CA Network attached storage operations including
research and development.................... 75,000
Irvine, CA DLTtape library manufacturing and research
and development............................. 185,000
Shrewsbury, MA Hard drive and DLTtape research and
development................................. 670,000
Colorado Springs, CO DLTtape manufacturing and DLTtape warehouse.. 555,000
Boulder, CO DLTtape research and development............. 55,000
Other USA & Canada 18 sales offices............................. 90,000
Europe
Dundalk, Ireland Hard drive and DLTtape configuration and
distribution................................ 110,000
Other Europe European headquarters, and 7 sales offices... 55,000
Asia
Singapore Asia Pacific headquarters; hard drive and
DLTtape configuration and distribution...... 95,000
Penang, Malaysia DLTtape manufacturing and hard drive customer
service..................................... 160,000
Other Asia Japan headquarters and 11 sales offices...... 40,000
</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 and Note 13 of the Hard
Disk Drive group Notes to Combined Financial Statements, in Annex I and Annex
III of this report, respectively.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
13
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Quantum Corporation's common stock was traded in the over-the-counter
market under the Nasdaq symbol QNTM for the period December 10, 1982, the date
of Quantum's initial public offering, through August 3, 1999, the date of the
recapitalization. On August 4, 1999, DSSG common stock and HDDG common stock
began trading on the New York Stock Exchange under the symbols DSS and HDD,
respectively.
The prices per share reflected in the table represent the range of high and
low closing prices of QNTM on the Nasdaq National Market System and of DSS and
HDD on the New York Stock Exchange for the quarter indicated.
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
---------------- ---- ---
<S> <C> <C>
QNTM
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
<CAPTION>
Fiscal Year 2000 High Low
---------------- ---- ---
<S> <C> <C>
QNTM
First quarter ended June 27, 1999...................... $25 1/16 $16 15/16
Second quarter (for the period June 28, 1999 through
August 3, 1999)....................................... 27 3/16 21 9/16
DSS
Second quarter (for the period August 4, 1999 through
September 26, 1999)................................... 21 7/16 14 3/8
Third quarter ended December 26, 1999.................. 18 9/16 11 1/2
Fourth quarter ended March 31, 2000.................... 15 11/16 8 3/4
HDD
Second quarter (for the period August 4, 1999 through
September 26, 1999)................................... 8 7/8 6
Third quarter ended December 26, 1999.................. 7 1/2 5 5/8
Fourth quarter ended March 31, 2000.................... 11 11/16 6 5/16
</TABLE>
Historically, Quantum has not paid cash dividends on its common stocks.
As of May 28, 2000, there were approximately 4,868 DSS and 4,733 HDD
shareholders of record.
ITEM 6. Selected Financial Data
The information required by Item 6 is incorporated by reference from Annex
I, Annex II and Annex III included herein.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 is incorporated by reference from Annex
I, Annex II and Annex III included herein.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For information about market risk, refer to the "Financial Market Risks"
sections in Annex I, Annex II and Annex III of this report.
14
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
The information required by Item 8 is incorporated by reference from Annex
I, Annex II and Annex III included herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
15
<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. For information pertaining to executive officers of
Quantum, refer to the "Executive Officers of Quantum Corporation" section of
Part I, Item 1 of this document.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference from
Quantum's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from
Quantum's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from
Quantum's Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and
13 of this Form 10-K Annual Report, Quantum's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders is not deemed "filed" as part of this
Form 10-K Annual Report.
16
<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--The consolidated financials statements of Quantum
Corporation and the combined financial statements of the DLT & Storage Systems
group and the Hard Disk Drive group, which are listed in the Index to
Financial Statements and Financial Statement Schedules.
2. Financial Statement Schedules--The consolidated financial statement
schedule of Quantum Corporation and the combined financial statement schedules
of the DLT & Storage Systems group and the Hard Disk Drive group, which are
listed in the Index to Financial Statements and Financial Statement Schedules.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
3.1(2) Restated Certificate of Incorporation of Registrant
3.2 Amended and Restated By-laws of Registrant, as amended
3.3(2) Certificate of Designations for the Series B Participating Junior
Preferred Stock and Series C Participating Junior Preferred Stock
4.1(2) Restated Preferred Shares Rights Agreement between the Registrant
and Harris Trust and Savings Bank
10.10(4) Form of Indemnification Agreement between Registrant and the Named
Executive Officers and Directors
10.13(6) Lease, dated as of October 13, 1989, between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.14(7) Lease, dated as of September 17, 1990, between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.15(3) Lease, dated as of April 10, 1992, between Registrant and John
Arrillaga and Richard T. Perry, Separate Property Trusts
10.17(8) Form of Statement of Employment Terms between the Registrant and the
Named Executive Officers and Directors
10.18(5) Lease, dated as of November 13, 1992, and First Amendment to Lease,
dated as of November 17, 1992, between Registrant and Milpitas
Realty Delaware, Inc.
10.21(9) 1993 Long-Term Incentive Plan
10.23(10) Second Amendment, dated as of April 15, 1993, to Lease, dated as of
November 13, 1992, between Registrant and Milpitas Realty Delaware,
Inc.
10.24(10) Lease, dated as of 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 Registrant
10.40(11) Mortgage and Security Agreement, dated September 10, 1996, by
Quantum Peripherals Realty Corporation, as Mortgagor, to CS First
Boston Mortgage Capital Corporation, as Mortgagee
10.41(11) 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(11) Master Lease, dated as of September 10, 1996, between Quantum
Peripherals Realty Corporation, Lessor, and Registrant, Lessee
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.43(11) 1996 Board of Directors Stock Option Plan and Form of Option
Agreement, as amended
10.45(12) Indenture, dated August 1, 1997, between the Registrant and La Salle
National Bank as trustee, related to the Registrants subordinated
debt securities
10.46(12) Supplemental Indenture, dated August 1, 1997, between the Registrant
and Trustee, relating to the Notes, including the form of Note
10.47(13) Lease, dated as of April 16, 1997, between Registrant and John
Arrillaga, Trustee
10.48(13) Credit Agreement, dated as of June 6, 1997, among Registrant and the
Banks named therein 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(13) Amended and Restated Master Agreement, dated April 30, 1997, between
Registrant and Matsushita-Kotobuki Electronics Industries, Ltd.
10.50(13) Amended and Restated Purchase Agreement, dated April 30, 1997,
between Registrant and Matsushita-Kotobuki Electronics Industries,
Ltd.
10.51(13) License Agreement, dated as of April 17, 1997, between International
Business Machines Corporation and Registrant
10.52(14) Master Lease, dated as of August 22, 1997, between Lease Plan North
America, Inc., as the Lessor and Registrant, as Lessee
10.53(14) Participation Agreement, dated as of August 22, 1997, among
Registrant, 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(14) Appendix 1 to Participation Agreement, Master Lease and Construction
Deed of Trust each dated as of August 22, 1997
10.56(15) Agreement and Plan of Reorganization, dated as of May 18, 1998,
among Registrant, Quick Acquisition Corporation, a wholly-owned
subsidiary of Registrant, and ATL Products, Inc.
10.57(15) First Amendment to Credit Agreement, dated as of June 26, 1998,
among Registrant, certain financial institutions (collectively, the
"Banks"), and Canadian Imperial Bank Of Commerce, as administrative
agent for the Banks
10.58(16) Reimbursement Agreement, dated as of September 14, 1998, between
Quantum Peripherals (Europe) S.A. and The Sumitomo Bank, Limited,
London Branch
10.59(16) This Charge, dated as of September 14, 1998, between Quantum
Peripherals (Europe) S.A. and The Sumitomo Bank, Limited
10.60(17) Second Amendment to Credit Agreement, dated as of December 18, 1998,
among Registrant, 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(17) Credit Agreement, dated as of December 18, 1998, among ATL Products,
Inc., certain financial institutions (collectively, the "Banks")
and Fleet National Bank, as agent for the Banks
10.62(17) Industrial Lease, dated as of July 17, 1998, between The Irvine
Company as lessor, and ATL Products, Inc. as lessee
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.63(2) Registrant's Employee Stock Purchase Plan and form of Subscription
Agreement, as amended
10.64(18) First Amendment to Credit Agreement, dated as of June 21, 1999,
among ATL Products, Inc., certain financial institutions
(collectively, the "Banks") and Fleet National Bank as agent for
the Banks.
10.65(19) Third Amendment to Credit Agreement, dated as of August 31, 1999,
among Registrant, certain financial institutions (collectively, the
"Banks"), and Canadian Imperial Bank of Commerce, as administrative
agent for the Banks.
10.66(20) Fourth Amendment to Credit Agreement, dated as of November 8, 1999,
among Registrant, certain financial institutions (collectively, the
"Banks"), Canadian Imperial Bank of Commerce as administrative
agent for the Banks, ABN AMRO Bank, N.V., and CIBC Inc., as co-
arrangers for the Banks, ABN, as syndication agent for the Banks,
Bank of America N.A., as documentation agent for the Banks, and
BankBoston, N.A., The Bank of Nova Scotia, Fleet National Bank and
The Industrial Bank of Japan, Limited, as co-agents for the Banks.
10.67(21) Agreement and Plan of Merger and Reorganization, dated as of May 10,
1999, by and among Registrant, Defiant Acquisition Sub, Inc. and
Meridian Data, Inc.
10.68(21) First Amendment, dated as of June 28, 1999, to Agreement and Plan of
Merger and Reorganization, dated as of May 10, 1999, by and among
Registrant, Defiant Acquisition Sub, Inc. and Meridian Data, Inc.
10.69 Fifth Amendment to Credit Agreement, dated as of January 14, 2000,
among Registrant, certain financial institutions (collectively, the
"Banks"), Canadian Imperial Bank of Commerce as administrative
agent for the Banks, ABN AMRO Bank, N.V., and CIBC Inc., as co-
arrangers for the Banks, ABN, as syndication agent for the Banks,
Bank of America N.A., as documentation agent for the Banks, and
BankBoston, N.A., The Bank of Nova Scotia, Fleet National Bank and
The Industrial Bank of Japan, Limited, as co-agents for the Banks.
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>
--------
(1) Incorporated by reference to Registrant's Form 8-K filed with the
Securities and Exchange Commission on October 17, 1994.
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-4, Amendment No.2, filed with the Securities and Exchange Commission on
June 10, 1999
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1992.
(4) Incorporated by reference to Registrant's Definitive Special Meeting
Proxy Statement filed with the Securities and Exchange Commission on
March 24, 1987.
(5) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended December 27, 1992, filed with the Securities and Exchange
Commission on February 10, 1993.
(6) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended December 31, 1989, filed with the Securities and Exchange
Commission on February 14, 1990.
(7) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended December 30, 1990, filed with the Securities and Exchange
Commission on February 13, 1991.
19
<PAGE>
(8) Incorporated by reference to the Registrant's Amendment No. 1 to Form 10-
Q for the quarter ended June 30, 1991.
(9) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (No. 33-72222) filed with the Securities and Exchange Commission on
November 30, 1993.
(10) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1994.
(11) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended September 29, 1996, filed with the Securities and Exchange
Commission on November 13, 1996.
(12) Incorporated by reference to Registrant's Form 8-K filed with the
Securities and Exchange Commission on August 6, 1997.
(13) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended June 29, 1997 filed with the Securities and Exchange
Commission on August 13, 1997.
(14) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended September 28, 1997 filed with the Securities and Exchange
Commission on October 29, 1997.
(15) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended June 28, 1998 filed with the Securities and Exchange
Commission on August 12, 1998.
(16) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended September 27, 1998 filed with the Securities and Exchange
Commission on October 15, 1998.
(17) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended December 27, 1998 filed with the Securities and Exchange
Commission on February 9, 1999.
(18) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended June 27, 1999 filed with the Securities and Exchange
Commission on August 11, 1999.
(19) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended September 26, 1999 filed with the Securities and Exchange
Commission on November 2, 1999.
(20) Incorporated by reference to Registrant's Form 10-Q for the quarterly
period ended December 26, 1999 filed with the Securities and Exchange
Commission on February 9, 2000.
(21) Incorporated by reference to Registrant's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on August 10, 1999.
(b) Reports on Form 8-K: None.
(c) Exhibits: See Item 14(a) above.
(d) Financial Statement Schedules: See Item 14(a) above.
20
<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.
Dated: June 27, 2000 QUANTUM CORPORATION
/s/ Richard L. Clemmer
By: _________________________________
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 27, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ Michael A. Brown Chairman of the Board, and Chief Executive
___________________________________________ Officer (Principal Executive Officer)
Michael A. Brown
/s/ Richard L. Clemmer Executive Vice President, Finance, Chief
___________________________________________ Financial Officer (Principal Financial and
Richard L. Clemmer 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/ Gregory W. Slayton Director
___________________________________________
Gregory W. Slayton
/s/ Steven C. Wheelwright Director
___________________________________________
Steven C. Wheelwright
</TABLE>
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Annex I
Quantum Corporation--Consolidated Financial Statements
Selected Consolidated Financial Information.......................... I-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... I-3
Report of Ernst & Young LLP, Independent Auditors.................... I-11
Independent Auditors' Report......................................... I-12
Consolidated Statements of Operations for the Years Ended March 31,
1998, 1999 and 2000................................................. I-13
Consolidated Balance Sheets as of March 31, 1999 and 2000............ I-14
Consolidated Statements of Cash Flows for the Years Ended March 31,
1998, 1999 and 2000................................................. I-15
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1998, 1999 and 2000....................................... I-16
Notes to Consolidated Financial Statements........................... I-18
Schedule II--Consolidated Valuation and Qualifying Accounts.......... I-44
Annex II
Quantum Corporation DLT & Storage Systems Group--Combined Financial
Statements
Selected Combined Financial Information.............................. II-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... II-2
Report of Ernst & Young LLP, Independent Auditors.................... II-11
Combined Statements of Operations for the Years Ended March 31, 1998,
1999 and 2000....................................................... II-12
Combined Balance Sheets as of March 31, 1999 and 2000................ II-13
Combined Statements of Cash Flows for the Years Ended March 31, 1998,
1999 and 2000....................................................... II-14
Combined Statements of Group Equity for the Years Ended March 31,
1998, 1999 and 2000................................................. II-15
Notes to Combined Financial Statements............................... II-16
Schedule II--Combined Valuation and Qualifying Accounts.............. II-39
Annex III
Quantum Corporation Hard Disk Drive Group--Combined Financial
Statements
Selected Combined Financial Information.............................. III-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... III-3
Report of Ernst & Young LLP, Independent Auditors.................... III-12
Combined Statements of Operations for the Years Ended March 31, 1998,
1999 and 2000....................................................... III-13
Combined Balance Sheets as of March 31, 1999 and 2000................ III-14
Combined Statements of Cash Flows for the Years Ended March 31, 1998,
1999 and 2000....................................................... III-15
Combined Statements of Group Equity for the Years Ended March 31,
1998, 1999 and 2000................................................. III-16
Notes to Combined Financial Statements............................... III-17
Schedule II--Combined Valuation and Qualifying Accounts.............. III-40
</TABLE>
22
<PAGE>
ANNEX I
QUANTUM CORPORATION SELECTED CONSOLIDATED FINANCIAL INFORMATION
This summary of consolidated financial information of Quantum Corporation
("Quantum" or "the Company") for fiscal years 1996 to 2000 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 1996 and 1997 and the
balance sheet data at March 31, 1996, 1997 and 1998, was taken from these
financial statements.
A number of items affect the comparability of this information:
. The results of operations for fiscal year 2000 include the effect of a
$59.4 million special charge, of which $57.1 million is included in cost
of revenue and $2.3 million is included in operating expenses,
associated with the Hard Disk Drive group's ("HDDG") streamlining of its
logistics model, change in customer service strategy and consolidation
of certain product development programs. The results of operations for
fiscal year 2000 also include the effect of a $40.1 million special
charge included in operating expenses associated with the DLT & Storage
Systems group's ("DSSG") strategy to reduce overhead expenses and
product cost including the transfer of volume manufacturing to Penang,
Malaysia.
. The results of operations for fiscal years 1999 and 2000 include charges
of $89 million and $37 million, respectively, for purchased in-process
research and development in connection with the acquisitions of ATL
Products, Inc. ("ATL") and Meridian Data, Inc. ("Meridian"),
respectively.
. Through May 1997, the Company consolidated the results of a recording
heads business acquired in October 1994. The recording heads business
generated losses from operations of $70 million, $110 million and $9
million in fiscal years 1996 through 1998. In May 1997, the Company sold
a 51% interest in these operations to Matsushita-Kotobuki Electronics
Industries, Ltd. ("MKE"). 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,
Quantum and MKE agreed to dissolve the joint venture and, as a result,
Quantum 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 the Company's high-end hard
disk drive products.
. The results of operations for the fiscal year 1996 include the effect of
a $209 million charge related to the transition of the Company's high-
end products to MKE.
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<PAGE>
Pro forma net income (loss) per share for DSSG and HDDG assumes the
recapitalization occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenue................. $4,422,726 $5,319,457 $5,805,235 $4,902,056 $4,727,204
Gross profit............ 542,417 768,741 875,521 871,338 878,960
Research and development
expenses............... 239,116 291,332 321,741 353,223 365,204
Sales and marketing,
general and
administrative
expenses............... 207,558 235,878 258,395 284,876 357,768
Restructuring/special
charges included in
operating expenses..... 209,122 -- -- -- 42,421
Purchased in-process
research and
development expense.... -- -- -- 89,000 37,000
Income (loss) from
operations............. (113,379) 241,531 295,385 144,239 76,567
Loss from investee...... -- -- (66,060) (142,050) --
Net income (loss)....... $ (90,456) $ 148,515 $ 170,801 $ (29,535) $ 40,844
Net income (loss) per
share:
Basic................. $ (0.87) $ 1.27 $ 1.25 $ (0.18) $ NM
Diluted............... $ (0.87) $ 1.04 $ 1.07 $ (0.18) $ NM
DLT & Storage Systems
group
Pro forma net income
per share:
Basic............... $ 0.34 $ 0.92 $ 1.64 $ 0.77 $ 0.89
Diluted............. $ 0.31 $ 0.75 $ 1.37 $ 0.73 $ 0.86
Hard Disk Drive group
Pro forma net income
(loss) per share:
Basic............... $ (2.43) $ 0.70 $ (0.78) $ (0.90) $ (1.26)
Diluted............. $ (2.43) $ 0.58 $ (0.78) $ (0.90) $ (1.26)
Balance Sheet Data
Property, plant and
equipment, net......... $ 364,111 $ 407,206 $ 285,159 $ 271,928 $ 236,685
Total assets............ 1,975,355 2,158,263 2,438,411 2,483,596 2,533,952
Total long-term debt,
convertible debt and
redeemable preferred
stock.................. 598,158 422,906 327,485 344,461 325,338
</TABLE>
--------
NM = Not meaningful
Net income (loss) per share for Quantum common stock for fiscal year 2000
is not meaningful because the amount is for the period April 1, 1999 through
August 3, 1999, and therefore would not be comparable with the preceding
fiscal years. Net loss for Quantum common stock for this period, basic and
diluted, is $(0.10).
I-2
<PAGE>
QUANTUM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 2000 Compared With Fiscal Year 1999
Revenue. Revenue in fiscal year 2000 was $4.7 billion, compared to $4.9
billion in fiscal year 1999, a decrease of 4%. The decrease in revenue
reflected decreased revenue from sales of desktop hard disk drives. Revenue
increased from sales of storage systems and increased DLTtape media royalties.
Shipments of desktop hard disk drives increased to a record high in fiscal
year 2000. However, lower average unit prices resulted in reduced desktop hard
disk drive revenue. The increase in shipments reflected increased demand,
particularly from computer equipment manufacturers, and a strong desktop PC
market. The decline in average unit prices reflected intense competitive
pricing pressures, especially in the first two quarters of fiscal year 2000.
Shipments of high-end hard disk drives also increased to a record high in
fiscal year 2000 as HDDG completed a transition to new high-end products.
However, continued pricing pressures in the high-end market resulted in lower
average unit prices and only a moderate increase in revenue.
Revenue from sales of storage systems and DLTtape media royalties both
increased to record highs in fiscal year 2000. Revenue from sales of DLTtape
drives declined. The increase in storage systems revenue reflected an increase
in shipments of tape libraries and the acquisition of ATL in September 1998,
and shipments of network attached storage appliances following the acquisition
of Meridian in September 1999. The increase in DLTtape media royalties
reflected an increase in sales of DLTtape media cartridges at licensed media
manufacturers for which DSSG earns a royalty. The overall increase in market
sales of DLTtape media cartridges reflected sales of cartridges for use in
both new DLTtape drives and to meet the ongoing new media needs of the
installed base of DLTtape drives. The decrease in DLTtape drive revenue
reflected increased shipments, offset by competitive price declines.
Sales to our top five customers in fiscal year 2000 represented 47% of
revenue, compared to 46% of revenue in fiscal year 1999. These amounts
reflected a retroactive combination of sales to Compaq and Digital Equipment
as a result of their merger in June 1998 as well as a retroactive combination
of sales to Ingram Micro Inc. and Electronic Resources Limited as a result of
the completion of their merger in July 1999. Sales to Compaq were 13% of
revenue in fiscal year 2000, compared to 14% of revenue in fiscal year 1999,
including sales made to Digital Equipment. Sales to Hewlett-Packard were 12%
of revenue in fiscal year 2000, compared to 14% of revenue in fiscal year
1999.
Sales to computer equipment manufacturers and distribution channel
customers were 61% and 33% of revenue, respectively, in fiscal year 2000
compared to 63% and 34% of revenue in fiscal year 1999. The remaining revenue
in fiscal years 2000 and 1999 represented media royalty revenue and sales to
value added resellers.
Gross Margin Rate. The gross margin rate in fiscal year 2000 was 18.6%,
compared to 17.8% in fiscal year 1999. The gross margin rate in fiscal year
2000 reflected the impact of a $59.4 million special charge, of which $57.1
million was included in cost of revenue. The special charge was related to
HDDG's streamlining of the logistics model, change in customer service
strategy and consolidation of certain product development programs. Excluding
the impact of the charge, the gross margin rate was 19.8% in fiscal year 2000.
The 2 percentage point increase in fiscal year 2000 reflected increased
revenues from storage systems and DLTtape media royalties, which have
significantly higher margins than our hard disk drive products. The increase
also reflected higher margins earned on high-end hard disk drives. Gross
margins earned on desktop hard disk drives and DLTtape drives declined,
reflecting lower average unit prices.
Research and Development Expenses. Research and development expenses in
fiscal year 2000 were $365 million, or 7.7% of revenue, compared to $353
million, or 7.2% of revenue, in fiscal year 1999. The
I-3
<PAGE>
increase in research and development expenses reflected the inclusion of ATL's
expenses which were not included in the first two quarters of fiscal year
1999, as the acquisition occurred on September 28, 1998, the inclusion of
Meridian's expenses which were not included in fiscal year 1999 and the first
quarter of fiscal year 2000, as the acquisition occurred on September 10,
1999, and higher research and development expenses related to new tape drive
products and other new information storage products, including Super DLTtape
technology. This was partially offset by expense reductions in the hard disk
drive business associated with the special charge taken in the second quarter
of fiscal year 2000.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
2000 were $229 million, or 4.8% of revenue, compared to $191 million, or 3.9%
of revenue, in fiscal year 1999. The increase in sales and marketing expenses
reflected the inclusion of ATL and Meridian's expenses and an increase in
marketing and advertising costs associated with storage systems and DLTtape
products, partially offset by lower commissions as a result of the reduced
level of HDDG revenue.
General and Administrative Expenses. General and administrative expenses in
fiscal year 2000 were $129 million, or 2.7% of revenue, compared to $94
million, or 1.9% of revenue, in fiscal year 1999. The increase in general and
administrative expenses reflected the inclusion of ATL and Meridian's
expenses, the amortization of intangible assets, particularly goodwill, and an
increase in the provision for bad debt due to the bankruptcy of a distributor
in fiscal year 2000.
Purchased In-process Research and Development Expense. The Company expensed
purchased in-process research and development costs of $37 million as a result
of the Meridian acquisition in the second quarter of fiscal year 2000, and $89
million as a result of the ATL acquisition in the third quarter of fiscal year
1999. For additional information regarding the Meridian and ATL acquisitions
and the costs associated with in-process research and development, refer to
Note 5 of the Notes to Consolidated Financial Statements.
Special Charge--HDDG. During the second quarter of fiscal year 2000, the
Company's Hard Disk Drive group recorded a special charge of $59.4 million, of
which $57.1 million is included in cost of revenue and $2.3 million is
included in operating expenses. The charge reflected HDDG's strategy to modify
the hard disk drive business to more closely align product development and the
business's operating model with the requirements of the rapidly growing low-
cost PC market. The special charge was associated primarily with the
streamlining of HDDG's logistics model in order to create a faster and more
flexible fulfillment system, changes in the customer service strategy and
consolidation of certain product development programs.
The special charge consisted of $26.4 million related to facilities costs,
$13.2 million in asset write-offs related to the streamlining of the global
logistics model and change in customer service strategy, $7.8 million in
severance and benefits for terminated employees, and approximately $12 million
in other costs associated with the plan.
Subsequent to the end of the second quarter of fiscal year 2000, HDDG
revised its estimate of costs required to implement the restructuring plan.
HDDG currently estimates that severance and benefits, inventory and other
costs, which include the disposition of additional capital assets, will be
more than previously estimated as a result of changes in the customer service
strategy. HDDG also estimates that costs associated with vacating leased
facilities will be less than previously estimated as a result of vacating a
major facility earlier than previously expected. Accordingly, HDDG has
reallocated amounts between these categories.
Upon full implementation of the plan, HDDG expects to realize more than
$100 million in cost savings per year, beginning in fiscal year 2001. The
majority of the savings are expected in cost of revenue as a result of a more
efficient distribution system and reduced customer service costs, with the
remaining savings in research and development, as a result of the
consolidation of product development programs. As compared to fiscal year
2000, HDDG expects operating expenses to be relatively flat in fiscal year
2001, with increased investments in disk drive and other storage products,
primarily reflected in research and development, offsetting the cost savings
resulting from the special charge. These expectations are forward-looking
statements and actual results may differ.
I-4
<PAGE>
Special Charge--DSSG. During the fourth quarter of fiscal year 2000, the
Company's DLT & Storage Systems group recorded a special charge of $40.1
million. The charge was primarily focused on DSSG's DLTtape Division and
reflected DSSG's strategy to align its DLTtape drive operations with market
conditions. These conditions include slower growth in the mid-range server
market and increasing centralization of server backup through automation
solutions, both of which have resulted in relatively flat DLTtape drive
shipments. The special charge included a reduction of overhead expenses
throughout the DLTape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs,
$13.9 million for the write-off of investments in optical technology, $7.6
million for severance and benefits for terminated employees, $3.2 million for
fixed assets to be written-off, primarily related to the transfer of
manufacturing to Penang, Malaysia and $1.9 million in other costs associated
with the plan.
DSSG expects to realize annual cost savings from the plan of approximately
$40 million beginning upon full implementation of the plan at the end of
fiscal year 2001. Approximately $30 million of the savings are expected in
cost of revenue as a result of reduced manufacturing costs with the remaining
amount in operating expenses, primarily research and development, as a result
of ending research on certain optical-based storage solutions. As compared to
fiscal year 2000, DSSG expects operating expenses to increase because of
increased investments in storage systems products and marketing in fiscal year
2001 and as a result of including the Snap Division's operations for a full
year following the acquisition of Meridian in September 1999. These
expectations are forward-looking statements and actual results may differ.
Interest and Other Income/Expense. Net interest and other income and
expense in fiscal year 2000 was $12.6 million income, compared to $2.4 million
expense in fiscal year 1999. The income for fiscal year 2000 reflected
increased interest income as a result of higher cash balances and a $2.6
million gain on the sale of an equity investment. In addition, the expense in
fiscal year 1999 reflected a $6.8 million write-down of an equity investment.
Loss from Investee. The loss from investee reflected the Company's 49%
share in the operating losses of its recording heads joint venture with MKE,
which was dissolved in the third quarter of fiscal year 1999. The Company's
share of the loss in the joint venture for fiscal year 1999 was $142.1
million. See Note 7 of the Notes to Consolidated Financial Statements for
additional discussion of the dissolution of the recording heads joint venture.
Income Taxes. The effective tax rate in fiscal year 2000, excluding the
write-off of purchased in-process research and development, was 38%, compared
to 33% in fiscal year 1999. The higher effective tax rate was primarily
attributable to decreased benefits from foreign earnings taxed at less than
the U.S. rate. Additionally, no tax benefit was recognizable for the charge
for purchased in-processed research and development.
Net Income (Loss). The Company reported net income of $41 million in fiscal
year 2000, compared to a net loss of $30 million in fiscal year 1999. The
increase reflected the absence of the $101 million charge related to the
recording heads joint venture dissolution in fiscal year 1999 and the lower
charge for purchased in-process research and development in fiscal year 2000,
partially offset by increased operating expenses and the special charges.
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 the inclusion 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
I-5
<PAGE>
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 46% 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 as well as a retroactive
combination of sales to Ingram Micro Inc. and Electronic Resources Limited as
a result of the completion of their merger in July 1999. Sales to Compaq were
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.
Gross Margin Rate. The 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 inclusion 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 inclusion 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 DSSG's infrastructure to
support increased revenue and earnings growth and the inclusion of ATL's
expenses, partially offset by the impact of cost control efforts.
Purchased In-process Research and Development Expense. The Company 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.
I-6
<PAGE>
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. The Company's investment and operating results related
to its recording heads business have resulted in significant losses. The
Company acquired a recording heads business from Digital Equipment in October
1994. In May 1997, the Company sold a 51% majority interest in its recording
heads operations to MKE, and formed a recording heads joint venture with MKE.
On October 28, 1998, Quantum and MKE agreed to dissolve the recording heads
joint venture. In connection with the dissolution, Quantum recorded a $101
million loss in the third quarter of fiscal year 1999. This loss included a
write-off of Quantum's investment in the recording heads joint venture, a
write-down of Quantum's 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 Quantum's 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 7 of the Notes to Consolidated Financial Statements for additional
discussion of the dissolution of the recording heads joint venture.
Income Taxes. The 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.
Net Income (Loss). The Company 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Management does not expect SFAS No. 133 to have a material effect on the
Company's financial position or results of operations. Implementation of this
standard has recently been delayed by the FASB for a 12-month period. The
Company is required to adopt SFAS 133 in fiscal year 2002.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarized certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 will be effective for the Company in the first quarter of
fiscal year 2001. The Company is reviewing the requirements of SAB 101 and
currently believes that its revenue recognition policy is consistent with the
guidance of SAB 101.
In March 2000, FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN 44
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. Management does not expect the application of FIN 44 to have
a material impact on the Company's financial position or results of
operations.
I-7
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $950 million at March
31, 2000 compared to $797 million at March 31, 1999. The Company used cash in
fiscal year 2000 primarily to purchase $325 million of treasury stock, as
discussed below, and to invest in property and equipment. Cash was provided by
operating activities, primarily net income, a reduction in inventories and
accounts receivable, and an increase in accounts payable.
During fiscal year 2000, the Board of Directors authorized the Company to
repurchase up to $700 million of the Company's common stocks in open market or
private transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSSG or HDDG common stock, while
$100 million was authorized for repurchase of HDDG common stock. During fiscal
year 2000, the Company repurchased 3.9 million shares of Quantum common stock,
15.7 million shares of DSSG common stock and 3.5 million shares of HDDG common
stock for a combined total of $325 million dollars. The Company has utilized
equity instrument contracts, including call and put options, as part of its
stock repurchase program. At March 31, 2000, the Company held equity
instrument contracts that related to the purchase of 8 million shares of DSSG
common stock at an average price of $10.48 per share. By May 8, 2000, the
Company had closed out its outstanding equity instrument contracts and
repurchased 8 million shares of DSSG common stock for a total cost of $84
million. The equity instruments had no effect on diluted earnings per common
share for fiscal year 2000.
In September 1999, the Company issued 4.1 million DSSG shares and 2 million
HDDG shares to the stockholders of Meridian to complete the acquisition of
Meridian. Substantially all of the shares the Company issued to complete the
acquisition were DSSG and HDDG shares held as treasury stock. The difference
between the cost of the treasury stock and the value at which the shares were
reissued resulted in a $3.5 million addition to paid-in-capital in fiscal year
2000. For additional information regarding the Meridian acquisition, refer to
Note 5 of the Notes to Consolidated Financial Statements.
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 the Company's $500 million revolving credit line, expiring in
June 2000. As amended, at the option of ATL, borrowings under the revolving
credit line bear interest at either the London interbank offered rate plus a
margin determined by the Company's total funded debt ratio, or at a base rate,
with option periods of two weeks to six months. At March 31, 2000, there was
no outstanding balance drawn on this line.
The Company filed a registration statement, which became effective on July
24, 1997, pursuant to which the Company 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, 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 HDDG common
stock and DSSG common stock. The notes are convertible into 6,206,152 shares
of DSSG common stock, or 21.587 shares per $1,000 note, and 3,103,076 shares
of HDDG common stock, or 10.793 shares per $1,000 note. The Company has the
option to redeem the notes on or after August 1, 1999 and prior to August 1,
2001, under certain conditions related to the price of the Company's common
stocks. Subsequent to August 1, 2001, the Company may redeem the notes at any
time. In the event of certain changes involving all or substantially all of
the Company's common stocks, the holder would have the option to redeem the
notes. Redemption prices range from 107% of the principal to 100% at maturity.
The notes are unsecured obligations subordinated in right of payment to all of
the Company's existing and future senior indebtedness.
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 Company's 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, 2000, there was no outstanding balance drawn on
this line.
I-8
<PAGE>
In September 1996, the Company 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. The Company is
required to make monthly payments based on a 20-year amortization period, and
a balloon payment at the end of the 10-year term.
In April 2000, both the Company and ATL canceled their existing senior
credit facilities and the Company entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the Company's option,
borrowings under the revolving credit lines will bear interest at either the
London interbank offered rate or at a base rate, plus a margin determined by a
leverage ratio with option periods of one to six months.
The Company expects to spend approximately $115 million in fiscal year 2001
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.
The Company believes that its existing capital resources, including the
credit facilities and any cash generated from operations, will be sufficient
to meet all currently planned expenditures and sustain operations for the next
12 months. However, this belief assumes that operating results and cash flow
from operations will meet our expectations.
In the future, the Company may seek to raise cash through the issuance of
debt or equity securities. There can be no assurance that such financing would
be available on terms favorable to the Company if at all.
See Note 8 of the Notes to Consolidated Financial Statements for additional
information regarding long-term debt.
Financial Market Risks
The Company is exposed to a variety of risks, including changes in interest
rates, foreign currency fluctuations and marketable equity security prices. To
manage the volatility relating to these exposures, the Company enters into
various derivative transactions pursuant to the Company's policies to hedge
against known or forecasted market exposures.
Changes in interest rates affect interest income earned on the Company's
cash equivalents and short-term investments, and interest expense on short-
term and long-term borrowings. The Company does not enter into derivative
transactions related to its cash, cash equivalents or short-term investments,
nor existing or anticipated liabilities.
As a multinational corporation, the Company is exposed to changes in
foreign exchange rates. These exposures may change over time and could have a
material adverse impact to our financial results.
The Company utilized foreign currency forward contracts to manage the risk
of exchange rate fluctuations. In all cases, the Company uses these derivative
instruments to reduce its foreign exchange risk by essentially creating
offsetting market exposures. The instruments held by the Company are not
leveraged and are not held for trading or speculative purposes.
The Company uses forward exchange contracts to hedge its net asset or net
liability position, which primarily consists of inter-company balances,
foreign tax liabilities and non-functional currency denominated receivables.
The hedging activity is intended to manage the effects of foreign currency
remeasurement arising from certain assets and liabilities denominated in
foreign currency. The success of the hedging program depends on forecasts of
transaction activity in the various currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
the Company could experience unanticipated currency gains or losses.
The Company is exposed to equity price risk on its investment in TiVo, Inc.
common stock. The Company does not attempt to reduce or eliminate its market
exposure on this security. The Company entered into a strategic alliance with
TiVo in fiscal year 1999 to supply hard disk drives utilizing Quantum's
QuickView technology for
I-9
<PAGE>
integration into TiVo's Personal Video Recorder. At March 31, 2000, the fair
market value of the Company's investment was approximately $30 million. As
TiVo is a relatively new company and has introduced a new product in the
consumer electronics market, the Company does not believe it is possible to
reasonably estimate any future price movement of TiVo common stock.
Year 2000
The Company established a comprehensive program to address the year 2000
computer issue. To ensure year 2000 compliance for all of its systems, the
Company adopted an approach based on the U.S. General Accounting Office Year
2000 Assessment Guide. The Company determined by the end of calendar year 1999
that all internal computer systems and products were year 2000 compliant. The
Company assessed, remedied and certified all critical, key and active areas of
its operations, which include information technology, operating equipment with
embedded chips or software and products. In addition, the Company completed
the assessment, resolution, testing, and certification of critical and key
third parties.
Costs incurred in addressing the year 2000 issue have been approximately
$11 million, with $7.3 million and $3.7 million of this cost in the Hard Disk
Drive group and the DLT & Storage Systems group, respectively. The Company
currently does not expect any significant additional costs related to year
2000 issues. However, as the year 2000 progresses, the Company may address
issues as yet unknown, which may result in additional costs. The Company did
not defer any significant system projects due to the year 2000 program.
To date, there have been no reportable year 2000 computer issues in our
systems, applications, processes or supply chains and the Company resumed
normal business activities on schedule in January 2000. While this primary
event horizon was successfully managed, the Company continues to maintain its
vigilance as the year 2000 progresses. The Company does not expect any
significant disruption to its operations or operating results as a result of
year 2000 issues; however, the extent to which such issues may affect the
Company is uncertain. The Company cannot assure that it will be able to
assess, identify and correct as yet unknown year 2000 issues in a timely or
successful manner. The Company also cannot assure that its suppliers, service
providers, customers or other third parties will remain free of year 2000
problems.
Euro Impact
The Company believes that the adoption of a single currency, the Euro, by
eleven European countries has not and will not materially affect its business,
information systems or consolidated financial position, operating results or
cash flows.
I-10
<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, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 2000. Our audits also
included the financial statement schedule listed in the index at Item 14a.
These financial statements 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits 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, 1999 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended March 31, 2000,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
April 24, 2000
I-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
MKE-Quantum Components LLC:
We have audited the accompanying 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. 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
I-12
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Revenue................................... $5,805,235 $4,902,056 $4,727,204
Cost of revenue--on net sales............. 4,929,714 4,030,718 3,791,176
Cost of revenue--special charge........... -- -- 57,068
---------- ---------- ----------
Gross profit.............................. 875,521 871,338 878,960
Operating expenses:
Research and development................. 321,741 353,223 365,204
Sales and marketing...................... 169,031 191,126 228,636
General and administrative............... 89,364 93,750 129,132
Purchased in-process research and
development............................. -- 89,000 37,000
Special charge........................... -- -- 42,421
---------- ---------- ----------
580,136 727,099 802,393
---------- ---------- ----------
Income from operations.................... 295,385 144,239 76,567
Interest income and other, net............ 34,243 25,107 40,988
Interest expense.......................... (32,753) (27,481) (28,385)
Loss from investee........................ (66,060) (142,050) --
---------- ---------- ----------
Income (loss) before income taxes......... 230,815 (185) 89,170
Income tax provision...................... 60,014 29,350 48,326
---------- ---------- ----------
Net income (loss)......................... $ 170,801 $ (29,535) $ 40,844
========== ========== ==========
Quantum common stock(1):
Net income (loss)......................... $ 170,801 $ (29,535) $ (17,193)
========== ========== ==========
Net income (loss) per share:
Basic.................................... $ 1.25 $ (0.18) $ (0.10)
========== ========== ==========
Diluted.................................. $ 1.07 $ (0.18) $ (0.10)
========== ========== ==========
Weighted-average common shares:
Basic.................................... 136,407 160,670 165,788
========== ========== ==========
Diluted.................................. 166,016 160,670 165,788
========== ========== ==========
DLT & Storage Systems group common
stock(1):
Net income................................ $ 85,586
==========
Net income per share:
Basic.................................... $ 0.53
==========
Diluted.................................. $ 0.51
==========
Weighted-average common shares:
Basic.................................... 162,023
==========
Diluted.................................. 167,734
==========
Hard Disk Drive group common stock(1):
Net loss.................................. $ (27,549)
==========
Net loss per share:
Basic.................................... $ (0.33)
==========
Diluted.................................. $ (0.33)
==========
Weighted-average common shares:
Basic.................................... 83,018
==========
Diluted.................................. 83,018
==========
</TABLE>
--------
(1) As discussed in Note 1 of the Notes to Consolidated Financials Statements,
a recapitalization occurred on August 3, 1999. As a result, net loss per
share for Quantum common stock, for the year ended March 31, 2000, reflects
net loss through the recapitalization date, while net income (loss) per
share for the DLT & Storage Systems group common stock and the Hard Disk
Drive group common stock, for the year ended March 31, 2000, reflects
results from August 4, 1999 through the end of fiscal year 2000.
See accompanying notes to consolidated financial statements.
I-13
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
----------------------
1999 2000
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 772,368 $ 918,262
Marketable securities.................................. 24,426 32,080
Accounts receivable, net of allowance for doubtful
accounts of $12,130 and $23,110, respectively......... 646,557 609,225
Inventories............................................ 271,986 223,825
Deferred taxes......................................... 107,701 133,382
Other current assets................................... 104,835 96,780
---------- ----------
Total current assets............................... 1,927,873 2,013,554
Property, plant and equipment, less accumulated
depreciation........................................... 271,928 236,685
Intangible assets, less accumulated amortization........ 225,567 250,203
Other assets............................................ 58,228 33,510
---------- ----------
$2,483,596 $2,533,952
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................................... $ 406,369 $ 470,210
Accrued warranty....................................... 76,905 99,560
Accrued compensation................................... 73,605 90,452
Income taxes payable................................... 33,411 44,284
Accrued special charges................................ -- 43,363
Current portion of long-term debt...................... 1,024 1,033
Other accrued liabilities.............................. 90,691 105,345
---------- ----------
Total current liabilities.......................... 682,005 854,247
Deferred taxes.......................................... 67,340 55,336
Long-term debt.......................................... 56,961 37,838
Convertible subordinated debt........................... 287,500 287,500
Commitments and contingencies...........................
Stockholders' equity:
Preferred Stock:
Quantum Corporation preferred stock, $.01 par value;
4,000,000 and 20,000,000 shares authorized at March
31, 1999 and 2000, respectively; no shares issued at
March 31, 1999 and 2000............................. -- --
Common Stock:
Quantum Corporation common stock, $.01 par value;
500,000,000 shares and no shares authorized at March
31, 1999 and 2000, respectively; 167,406,738 shares
and no shares issued and outstanding at March 31,
1999 and 2000, respectively......................... 1,675 --
DSSG common stock, $.01 par value; no shares and
1,000,000,000 shares authorized at March 31, 1999
and 2000, respectively; no shares and 157,422,824
shares issued and outstanding at March 31, 1999 and
2000, respectively.................................. -- 1,574
HDDG common stock, $.01 par value; no shares and
600,000,000 shares authorized at March 31, 1999 and
2000, respectively; no shares and 83,784,277 shares
issued and outstanding at March 31, 1999 and 2000,
respectively........................................ -- 838
Capital in excess of par value......................... 884,759 734,608
Retained earnings...................................... 504,206 545,050
Accumulated other comprehensive income (loss).......... (850) 16,961
---------- ----------
Total stockholders' equity......................... 1,389,790 1,299,031
---------- ----------
$2,483,596 $2,533,952
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-14
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 170,801 $ (29,535) $ 40,844
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Loss from investee........................ 66,060 124,809 --
Special charge............................ -- -- 90,468
Purchased in-process research and
development.............................. -- 89,000 37,000
Depreciation.............................. 78,067 92,522 98,646
Amortization.............................. 13,532 20,413 31,923
Deferred taxes............................ (6,001) 22,904 (7,315)
Compensation related to stock incentive
plans.................................... 4,236 5,636 7,868
Changes in assets and liabilities:
Accounts receivable..................... 149,549 114,792 37,696
Inventories............................. (62,233) 67,149 49,302
Accounts payable........................ (55,826) (56,211) 61,726
Income taxes payable.................... 8,624 (6,367) 10,873
Accrued warranty........................ (20,972) 2,037 22,070
Other assets and liabilities............ (61,485) 16,740 15,568
--------- --------- ---------
Net cash provided by operating
activities........................... 284,352 463,889 496,669
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities.......... (71,573) (78,145) (37,890)
Maturities of marketable securities......... -- 125,292 70,400
Purchases of equity securities.............. (15,000) (1,750) (4,147)
Acquisition of intangible assets............ (25,850) -- (2,500)
Proceeds from sale of interest in recording
heads operations........................... 94,000 -- --
Investment in property and equipment........ (149,749) (115,662) (85,608)
Proceeds from disposition of property and
equipment.................................. 5,962 143 --
Proceeds from repayment of note receivable.. 18,000 -- 3,126
--------- --------- ---------
Net cash used in investing
activities........................... (144,210) (70,122) (56,619)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities... -- 33,545 10,000
Purchase of treasury stock.................. -- (305,287) (324,698)
Principal payments on long-term credit
facilities................................. (180,977) (34,090) (29,114)
Proceeds from issuance of common stock,
net........................................ 50,360 42,283 49,656
Proceeds from issuance of convertible
subordinated notes......................... 287,500 -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 156,883 (263,549) (294,156)
--------- --------- ---------
Increase in cash and cash equivalents......... 297,025 130,218 145,894
Cash and cash equivalents at beginning of
period....................................... 345,125 642,150 772,368
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 642,150 $ 772,368 $ 918,262
========= ========= =========
Supplemental disclosure of cash flow
information:
Conversion of debentures to common stock.... $ 241,350 $ -- $ --
========= ========= =========
Conversion of redeemable preferred stock to
common stock............................... $ 3,888 $ -- $ --
========= ========= =========
Cash paid during the year for:
Interest.................................. $ 29,030 $ 26,721 $ 26,878
========= ========= =========
Income taxes.............................. $ 62,615 $ 2,718 $ 28,469
========= ========= =========
Tangible and intangible assets acquired for
shares of Quantum, DSSG and HDDG common
stock, net of cash acquired and liabilities
assumed...................................... $ -- $ 289,474 $ 104,698
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-15
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Quantum DLT & Storage Hard Disk
Corporation Common Systems Group Drive Group Capital
Stock Common Stock Common Stock in Excess
------------------- --------------- -------------- of
Shares Amount Shares Amount Shares Amount Par Value
--------- -------- ------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1997................... 130,864 $ 1,308 -- $ -- -- $-- $ 458,492
Comprehensive income:
Net income............ -- -- -- -- -- -- --
Other comprehensive
loss--foreign
currency translation
adjustments.......... -- -- -- -- -- -- --
Comprehensive income.... -- -- -- -- -- -- --
Conversion of
subordinated
debentures............. 21,626 216 -- -- -- -- 236,506
Conversion of Series B
preferred shares....... 180 2 -- -- -- -- 3,886
Shares issued under
employee stock purchase
plan................... 3,454 35 -- -- -- -- 21,442
Shares issued under
employee stock option
plans, net............. 4,755 48 -- -- -- -- 28,835
Compensation expense and
other.................. -- -- -- -- -- -- 4,236
Tax benefits related to
stock option plans..... -- -- -- -- -- -- 21,285
--------- -------- ------- ------ ------ ---- ---------
Balances at March 31,
1998................... 160,879 1,609 -- -- -- -- 774,682
Comprehensive loss:
Net loss.............. -- -- -- -- -- -- --
Other comprehensive
income--foreign
currency translation
adjustments.......... -- -- -- -- -- -- --
Comprehensive loss...... -- -- -- -- -- -- --
Shares issued under
employee stock purchase
plan................... 2,555 26 -- -- -- -- 24,014
Shares issued under
employee stock option
plans, net............. 2,502 25 -- -- -- -- 18,218
Treasury shares
repurchased............ (15,477) -- -- -- -- -- --
Treasury shares reissued
for ATL acquisition.... 15,477 -- -- -- -- -- --
New shares issued for
ATL acquisition........ 1,471 15 -- -- -- -- 22,973
Conversion of ATL stock
options................ -- -- -- -- -- -- 22,367
Compensation expense and
other.................. -- -- -- -- -- -- 5,636
Tax benefits related to
stock option plans..... -- -- -- -- -- -- 16,869
--------- -------- ------- ------ ------ ---- ---------
Balances at March 31,
1999................... 167,407 1,675 -- -- -- -- 884,759
Comprehensive income:
Net income............ -- -- -- -- -- -- --
Other comprehensive
income:
Foreign currency
translation
adjustments......... -- -- -- -- -- -- --
Unrealized gain on
investments, net of
income taxes of
$12,025............. -- -- -- -- -- -- --
Other comprehensive
income............... -- -- -- -- -- -- --
Comprehensive income.... -- -- -- -- -- -- --
Shares issued under
employee stock purchase
plan................... 829 8 1,145 11 572 6 25,462
Shares issued under
employee stock option
plans, net............. 1,065 10 2,526 25 1,923 19 31,331
Treasury shares
repurchased--Quantum
common stock........... (3,868) -- -- -- -- -- --
Recapitalization (August
3, 1999)............... (165,433) (1,693) 165,433 1,693 82,716 846 (846)
Tracking stock issuance
costs.................. -- -- -- -- -- -- (7,216)
Treasury shares reissued
for Meridian
acquisition............ -- -- 3,868 -- 1,934 -- 3,505
New shares issued for
Meridian acquisition... -- -- 186 2 93 1 4,216
Conversion of Meridian
stock options.......... -- -- -- -- -- -- 10,276
Treasury shares
repurchased and
retired--DSSG and HDDG
common stock........... -- -- (15,735) (157) (3,454) (34) (240,268)
Compensation expense and
other.................. -- -- -- -- -- -- 7,868
Tax benefits related to
stock option plans..... -- -- -- -- -- -- 15,521
--------- -------- ------- ------ ------ ---- ---------
Balances at March 31,
2000................... -- $ -- 157,423 $1,574 83,784 $838 $ 734,608
========= ======== ======= ====== ====== ==== =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-16
<PAGE>
QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Treasury
Earnings Income (Loss) Stock Total
-------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balances at March 31, 1997...... $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..................... -- -- -- 236,722
Conversion of Series B preferred
shares......................... -- -- -- 3,888
Shares issued under employee
stock purchase plan............ -- -- -- 21,477
Shares issued under employee
stock option plans, net........ -- -- -- 28,883
Compensation expense and other.. -- -- -- 4,236
Tax benefits related to stock
option plans................... -- -- -- 21,285
-------- ------- --------- -----------
Balances at March 31, 1998...... 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............ -- -- -- 24,040
Shares issued under employee
stock option plans, net........ -- -- -- 18,243
Treasury shares repurchased..... -- -- (305,287) (305,287)
Treasury shares reissued for ATL
acquisition.................... (63,452) -- 305,287 241,835
New shares issued for ATL
acquisition.................... -- -- -- 22,988
Conversion of ATL stock
options........................ -- -- -- 22,367
Compensation expense and other.. -- -- -- 5,636
Tax benefits related to stock
option plans................... -- -- -- 16,869
-------- ------- --------- -----------
Balances at March 31, 1999...... 504,206 (850) -- 1,389,790
Comprehensive income:
Net income.................... 40,844 -- -- 40,844
Other comprehensive income:
Foreign currency translation
adjustments................. -- (212) -- --
Unrealized gain on
investments, net of income
taxes of $12,025............ -- 18,023 -- --
-------
Other comprehensive income.... -- 17,811 -- 17,811
-----------
Comprehensive income............ -- -- -- 58,655
Shares issued under employee
stock purchase plan............ -- -- -- 25,487
Shares issued under employee
stock option plans, net........ -- -- -- 31,385
Treasury shares repurchased--
Quantum common stock........... -- -- (84,239) (84,239)
Recapitalization (August 3,
1999).......................... -- -- -- --
Tracking stock issuance costs... -- -- -- (7,216)
Treasury shares reissued for
Meridian acquisition........... -- -- 84,239 87,744
New shares issued for Meridian
acquisition.................... -- -- -- 4,219
Conversion of Meridian stock
options........................ -- -- -- 10,276
Treasury shares repurchased and
retired--DSSG and HDDG common
stock.......................... -- -- -- (240,459)
Compensation expense and other.. -- -- -- 7,868
Tax benefits related to stock
option plans................... -- -- -- 15,521
-------- ------- --------- -----------
Balances at March 31, 2000...... $545,050 $16,961 $ -- $ 1,299,031
======== ======= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
I-17
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Nature of Business. Quantum Corporation ("Quantum" or "the Company")
operates its business through two separate groups: the DLT & Storage Systems
group ("DSSG") and the Hard Disk Drive group ("HDDG") as described below.
DSSG designs, develops, manufactures, licenses and markets DLTtape drives,
DLTtape media cartridges and storage systems. DSSG's storage systems consist
of DLTtape libraries, solid state storage systems, network attached storage
appliances and service. DLTtape is DSSG's half-inch tape technology that is
the de facto industry standard for data backup in the mid-range server market.
HDDG designs, develops and markets a diversified product portfolio of hard
disk drives to meet the storage requirements of entry-level to high-end
desktop PCs in home and business environments, and high-end hard disk drives
for the storage needs of network servers, workstations and storage sub-
systems. HDDG also designs hard disk drives for consumer electronics devices.
Recapitalization. On July 23, 1999, the Company's stockholders approved a
tracking stock proposal. As a result, Quantum's Certificate of Incorporation
was amended and restated, effective as of the close of business on August 3,
1999, designating two new classes of Quantum Corporation common stock, DLT &
Storage Systems group common stock, $.01 par value per share and Hard Disk
Drive group common stock, $.01 par value per share. On August 3, 1999, each
authorized share of Quantum common stock, $.01 par value per share, was
exchanged for one share of DSSG stock and one-half share of HDDG stock. These
two securities are intended to track separately the performance of the DLT &
Storage Systems group and the Hard Disk Drive group.
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 the 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. In particular,
significant estimates are required to value inventory and estimate the future
cost associated with the Company's warranties. If the actual value of the
Company's inventories and associated reserves differs from these estimates,
the Company's operating results could be materially adversely impacted. The
actual results with regard to warranty expenditures could also have a material
adverse 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.
Revenue Recognition. Revenue from sales of products is recognized on
passage of title to customers, when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price to the
buyer is fixed or determinable and collectibility is reasonably assured, with
provision made for estimated returns. The Company accrues royalty revenue
based on licensees' sales that incorporate certain licensed technology as
reported by the licensees.
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
I-18
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, with changes in
value recognized in other income.
Equity Instruments Indexed to the Company's Common Stock. Equity
instruments are utilized in connection with the Company's stock repurchase
program, which give the Company the choice of cash settlement or settlement in
shares of common stock. Proceeds received upon the sale of equity instruments
and amounts paid upon the purchase of equity instruments are recorded as a
component of stockholders' equity. Subsequent changes in the fair value of the
equity instruments are not recognized. If the contracts are ultimately settled
in cash, the amount of cash paid or received is recorded as a component of
stockholders' equity.
Net Income (Loss) Per Share. Net income (loss) per share was calculated on
a consolidated basis until DSSG stock and HDDG stock were created as a result
of the recapitalization on August 3, 1999. Subsequent to this date, net income
(loss) per share was computed individually for DSSG and HDDG.
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. Sales to the Company's top five customers in
fiscal year 2000 represented 47% of revenue. Two customers accounted for 13%
and 12% of revenue, respectively. 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 these investments. The Company limits the
amount of credit exposure to any one issuer and to any one type of investment.
I-19
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (generally less-than-20-percent-owned
companies) that are not represented by marketable securities are carried at
cost less write-downs for declines in value that are judged to be other-than-
temporary. Dividends are recorded in other income when received.
Inventories. Inventories are carried at the lower of cost or market. Cost
is determined on a first-in, first-out basis.
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 Intangible Assets. Goodwill and other acquired intangible assets
are amortized over their estimated useful lives, which range from two to
fifteen years. The accumulated amortization at March 31, 1999 and 2000 was $18
million and $42 million, respectively. Intangible assets are reviewed for
impairment whenever events or circumstances indicate impairment might exist,
or at least annually. The Company assesses the recoverability of its assets,
including goodwill, by comparing projected undiscounted net cash flows
associated with those assets against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the
fair value of those assets.
Warranty Expense. The Company generally warrants its products against
defects for a period of one to five years. A provision for estimated future
costs and estimated returns for credit relating to warranty are recorded when
products are shipped and revenue recognized.
Advertising Expense. 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, 1998, 1999 and
2000, was $41 million, $46 million, and $51 million, respectively.
Stock-Based Compensation. The Company accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
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 hard disk drive 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.
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
I-20
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Management does not expect SFAS No. 133 to have a material effect on the
Company's financial position or results of operations. Implementation of this
standard has recently been delayed by the FASB for a 12-month period. The
Company is required to adopt SFAS 133 in fiscal year 2002.
Revenue Recognition and Financial Statements. In December 1999, the
Securities and Exchange Commission ("SEC") issued SEC Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarized certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
will be effective for the Company in the first quarter of fiscal year 2001.
The Company is reviewing the requirements of SAB 101 and currently believes
that its revenue recognition policy is consistent with the guidance of SAB
101.
Certain Transactions Involving Stock Compensation. In March 2000, FASB
issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion
No. 25." FIN 44 clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether
a plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of the previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. Management does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
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, 1999 March 31, 2000
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Certificates of deposit.............. $499,400 $499,400 $590,171 $590,171
Money market funds................... 125,200 125,200 131,900 131,900
Corporate commercial paper and bank
notes............................... 58,484 58,486 128,222 128,246
U.S. Treasury securities and
obligations of U.S. government
agencies ........................... 100,589 100,589 28,952 28,962
Equity securities.................... -- -- 8 30,048
Other................................ 5,121 5,121 14,500 14,500
-------- -------- -------- --------
$788,794 $788,796 $893,753 $923,827
======== ======== ======== ========
Included in cash and cash
equivalents......................... $764,368 $764,368 $891,713 $891,747
Included in marketable securities.... 24,426 24,428 2,040 32,080
-------- -------- -------- --------
$788,794 $788,796 $893,753 $923,827
======== ======== ======== ========
</TABLE>
The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1999. At March 31, 2000, unrealized
gains on available-for-sale securities were recorded, net of tax, as a
component of accumulated other comprehensive income within stockholders'
equity. The estimated fair
I-21
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value of available-for-sale securities is based on market quotations. There
were no sales of available-for-sale securities in fiscal years 1999 or 2000.
At March 31, 2000, the average available-for-sale portfolio duration was
approximately 15 days for debt securities, and no security had a maturity
longer than one year.
Derivative Financial Instruments
Foreign Exchange--Asset and Liability Management. During the periods
covered by the financial statements, 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.
The following is a summary of foreign currency forward contracts held for
asset and liability management purposes:
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 2000
-------------- ----------
(In millions,
except for forward rates)
<S> <C> <C>
Currency to be sold.............................. Yen Yen
Maturity dates................................... April-May 1999 April 2000
Foreign currency notional amount................. 2,900 yen 650 yen
Weighted average forward rate.................... 119.06 109.88
U.S. dollar notional amount...................... $ 24.4 $ 5.9
U.S. dollar equivalent........................... $ 24.5 $ 6.2
Fair value....................................... $ (0.1) $(0.3)
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 March 31, 2000
----------------- --------------------------------------------
(In millions, except for forward rates)
<S> <C> <C> <C> <C>
Currency to be
purchased.............. Swiss Franc Swiss Franc Yen Irish Punt
Maturity dates.......... April 1999 April 1999 April 2000 April 2000
Foreign currency
notional amount........ 22.0 Swiss Francs 42.7 Swiss Francs 400 yen 7.6 Irish Punt
Weighted average forward
rate................... 1.49 1.65 104.7 1.23
U.S. dollar notional
amount................. $14.8 $25.9 $3.8 $9.3
U.S. dollar equivalent.. $14.8 $25.8 $3.8 $9.3
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, Swiss Francs or Irish Punt at the balance sheet dates. The
Company generally does not require collateral from the counterparties to
foreign currency forward contracts.
I-22
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Carrying Amount Fair Value Carrying Amount Fair Value
The estimated fair value of the Company's borrowings are summarized as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1999 2000
-------------------------- --------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Convertible subordinated
debt................... $287.5 $254.6 $287.5 $227.1
Revolving credit line... 18.0 18.0 -- --
Mortgage loan........... 40.0 40.8 38.9 39.0
</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.
Note 3 Inventories
Inventories consisted of:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000
-------- --------
(In thousands)
<S> <C> <C>
Materials and purchased parts............................ $ 62,342 $ 49,206
Work in process.......................................... 27,531 42,323
Finished goods........................................... 182,113 132,296
-------- --------
$271,986 $223,825
======== ========
</TABLE>
Note 4 Property, Plant and Equipment
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
March 31,
--------------------
1999 2000
--------- ---------
(In thousands)
<S> <C> <C>
Machinery and equipment............................... $ 365,795 $ 370,850
Furniture and fixtures................................ 33,330 36,489
Buildings and leasehold improvements.................. 159,470 123,775
Land.................................................. 4,950 5,242
--------- ---------
563,545 536,356
Less accumulated depreciation and amortization........ (291,617) (299,671)
--------- ---------
$ 271,928 $ 236,685
========= =========
</TABLE>
I-23
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5 Business Combinations
Meridian Data, Inc.
On September 10, 1999, the Company's DLT & Storage Systems group completed
the acquisition of Meridian Data, Inc. ("Meridian"). Meridian is a developer
and manufacturer of network attached storage appliances for the PC local area
network environment. The acquisition has been accounted for as a purchase at a
total cost of $115 million. The acquisition was completed with the issuance of
4.1 million shares of DSSG common stock and 2 million shares of HDDG common
stock valued at $74 million and $18 million, respectively, on the date of
acquisition in exchange for all outstanding shares of Meridian; the conversion
of outstanding Meridian stock options into options to purchase 630,000 shares
of DSSG common stock and 315,000 shares of HDDG common stock valued at $8
million and $2 million, respectively; and the assumption of Meridian
liabilities and other acquisition costs of approximately $13 million. At the
date of acquisition, Meridian had $11 million of cash and marketable
securities and a net operating loss carryforward for U.S. federal income tax
purposes of approximately $46 million. Meridian's results of operations are
included in the financial statements from the date of acquisition, and the
assets and liabilities acquired were recorded based on their fair values as of
the date of acquisition. Pro forma results of operations have not been
presented because the effect of the acquisition was not material to the
Company's financial position or results of operations.
The purchase price has been allocated based on the estimated fair market
value of net tangible and intangible assets acquired and assumed liabilities
as well as in-process research and development costs. As of the acquisition
date, technological feasibility of the in-process technology has not been
established and the technology has no alternative future use. Therefore, the
Company expensed $37 million of the purchase price as in-process research and
development in the second quarter of fiscal year 2000. The remaining
intangible assets will be amortized on a straight-line basis over periods
ranging from five to ten years.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets acquired............................................... $ 12
In-process research and development.................................... 37
Completed technology................................................... 29
Trademark.............................................................. 4
Assembled workforce.................................................... 3
Goodwill............................................................... 45
Deferred tax liability................................................. (15)
----
$115
====
</TABLE>
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using
a discount rate of 21%, which represents a premium to the Company's cost of
capital. The expected revenue assumes an average compound annual revenue
growth rate of 64% during calendar years 1999 through 2007. Expected total
revenue from the purchased in-process projects peak in calendar year 2005 and
then begin to decline as other new products are expected to be introduced.
These projections are based on management's estimates of market size and
growth, expected trends in technology and the expected timing of new product
introductions.
Four in-process research and development projects were identified and
valued, including three Snap! Server projects and one operating system ("O/S")
project. The Snap! Server is a family of network attached storage appliances
with products, which incorporate hard disk drives and an O/S designed to meet
the requirements of
I-24
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
entry and workgroup level computing environments where multiple computer users
access shared data files over a local area network. Since the O/S represents a
significant technology component of the Snap! Server product, the O/S
technology was valued as a separate technology asset. These projects are
intended to provide additional capacity and enhanced functionality to current
Snap! Server products. The Snap! Server projects and the O/S project represent
61% and 39%, respectively, of the total in-process research and development
value of $37 million. As of September 10, 1999, the Snap! Server projects
ranged from 24% to 82% complete and the O/S technology project was 39%
complete. The Snap! Server and O/S projects were completed on schedule in
fiscal year 2000.
ATL Products, Inc.
On September 28, 1998, the Company completed the acquisition of ATL
Products, Inc. ("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 purchase price has been allocated based on the estimated fair market
value of net tangible and intangible assets acquired and assumed liabilities
as well as in-process research and development costs. As of the acquisition
date, technological feasibility of the in-process technology has not been
established and the technology has no alternative future use. Therefore, the
Company expensed $89 million of the purchase price as in-process research and
development in the third quarter of fiscal year 1999. The remaining intangible
assets are being amortized on a straight-line basis over periods ranging from
two to fifteen years.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets acquired............................................. $ 59
In-process research and development.................................. 89
Completed technology................................................. 42
Trademarks and trade names........................................... 20
Original equipment manufacturer and value added reseller customer
relationships....................................................... 14
Assembled workforce.................................................. 4
Non-compete agreements............................................... 2
Goodwill............................................................. 138
Deferred tax liability............................................... (33)
----
$335
====
</TABLE>
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.
I-25
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Five in-process research and development projects were identified and
valued, including three tape library projects, one network project and one
software project. These projects were intended to develop next-generation
automated tape library and software management products. As of September 28,
1998, the tape library projects ranged from 68% to 83% complete, the network
project was 54% complete and the software project was 78% complete. These
projects were completed by the end of fiscal year 2000.
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 Special Charges
Hard Disk Drive Group
During the second quarter of fiscal year 2000, HDDG recorded a special
charge of $59.4 million. The charge reflected HDDG's strategy to modify the
hard disk drive business to more closely align product development and the
business' operating model with the requirements of the rapidly growing low-
cost PC market. The special charge was associated primarily with the
streamlining of HDDG's logistics model in order to create a faster and more
flexible fulfillment system, changes in the customer service strategy and
consolidation of certain product development programs.
The special charge consisted of $26.4 million related to facilities costs,
$13.2 million in asset write-offs related to the streamlining of the global
logistics model and change in customer service strategy, $7.8 million in
severance and benefits for terminated employees, and approximately $12 million
in other costs associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. HDDG expects that the affected facilities will be
vacated by the end of the second quarter of fiscal year 2001.
In connection with the charge, HDDG currently expects a workforce reduction
of approximately 600 employees. In addition, approximately 100 open
requisitions and budgeted positions have been eliminated. The reduction in
force primarily affects employees at HDDG's drive configuration centers and
warehouses in Milpitas, California and Dundalk, Ireland and employees within
the desktop drive business. As of March 31, 2000, 322 of the 600 employees had
been terminated. HDDG anticipates that the remaining employees will be
terminated by the end of the second quarter of fiscal year 2001.
I-26
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to the end of the second quarter fiscal year 2000, HDDG revised
its estimate of costs required to implement the restructuring plan. HDDG
currently estimates that severance and benefits, inventory and other costs,
which include the disposition of additional capital assets, will be more than
previously estimated as a result of the planned changes in the customer
service strategy. HDDG also estimates that costs associated with vacating
leased facilities will be less than previously estimated as a result of
vacating a major facility earlier than previously expected. Accordingly, HDDG
has reallocated amounts between these categories.
As of March 31, 2000, HDDG had incurred $7 million in cash expenditures
associated with employee severance and benefits, facilities and other costs.
HDDG expects to incur additional cash expenditures associated with the plan of
approximately $19 million, which it will fund from operations.
The following table summarizes activity related to the special charge at
March 31, 2000:
<TABLE>
<CAPTION>
Severance Facilities Other
and Benefits Costs Inventory Costs Total
------------ ---------- --------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Special charge
provision.............. $ 7,833 $26,359 $ 13,214 $12,000 $ 59,406
Cash payments........... (3,906) (1,394) -- (1,663) (6,963)
Non-cash charges........ -- (5,646) (15,588) (8,800) (30,034)
Adjustments............. 1,166 (7,852) 2,374 4,312 --
------- ------- -------- ------- --------
Balance at March 31,
2000................... $ 5,093 $11,467 $ -- $ 5,849 $ 22,409
======= ======= ======== ======= ========
</TABLE>
DLT & Storage Systems Group
During the fourth quarter of fiscal year 2000, DSSG recorded a special
charge of $40.1 million. The charge was primarily focused on DSSG's DLTtape
Division and reflected DSSG's strategy to align its DLTtape drive operations
with market conditions. These conditions include slower growth in the mid-
range server market and increasing centralization of server backup through
automation solutions, both of which have resulted in relatively flat DLTtape
drive shipments. The special charge included a reduction of overhead expenses
throughout the DLTape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs,
$13.9 million for the write-off of investments in optical technology, $7.6
million for severance and benefits for terminated employees, $3.2 million for
fixed assets to be written-off, primarily related to the transfer of
manufacturing to Penang, Malaysia and $1.9 million in other costs associated
with the plan.
The facilities costs noted above include lease payments for vacant space in
a facility in Colorado Springs, Colorado, the write off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang, Malaysia, as this
space is converted to DSSG manufacturing. DSSG expects that the Colorado
facility will be vacated by the end of fiscal year 2001.
The write-off of investments reflects DSSG's decision to end its research
on certain optical based storage solutions. As a result, DSSG has written of
an equity investment and technology licenses related to optical technology.
DSSG currently expects a workforce reduction of approximately 900
employees. The reduction in force primarily affects employees at DSSG's
manufacturing operations in Colorado Springs, Colorado, as well as
administrative employees within the DLTtape Division. As of March 31, 2000,
178 employees had been terminated. DSSG anticipates that the remaining
employees will be terminated by the end of the second quarter of fiscal year
2001.
I-27
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of March 31, 2000, DSSG had incurred cash expenditures of $2 million
associated with employee severance and benefits and other costs. DSSG expects
to incur additional cash expenditures associated with the plan of
approximately $16 million, which will be funded out of operations.
The following table summarizes activity related to the special charge at
March 31, 2000:
<TABLE>
<CAPTION>
Severance Facilities Fixed Other
and Benefits Costs Investments Assets Costs Total
------------ ---------- ----------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Special charge
provision.............. $7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments........... (956) -- -- -- (1,102) (2,058)
Non-cash charges........ -- -- (13,908) (3,163) -- (17,071)
------ ------- -------- ------- ------- --------
Balance at March 31,
2000................... $6,690 $13,500 $ -- $ -- $ 764 $ 20,954
====== ======= ======== ======= ======= ========
</TABLE>
Note 7 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. 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)
</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
I-28
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 was expected to be completed.
MKQC's unaudited 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.
Note 8 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt
Quantum's debt includes the following:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000
-------- --------
(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................................................. 39,985 38,871
-------- --------
345,485 326,371
Less short-term portion of debt.......................... 1,024 1,033
-------- --------
Total long-term debt and convertible subordinated debt... $344,461 $325,338
======== ========
</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 the London interbank offered rate plus a margin determined
by a total funded debt ratio, or at a base rate, with option periods of one to
six months. At March 31, 1999 and March 31, 2000, there was no outstanding
balance drawn on this line.
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 the Company's $500 million revolving credit line, expiring in
June 2000. As amended, at the option of ATL, borrowings under the revolving
credit line bear interest at either the London interbank offered rate plus a
margin determined by the Company's total funded debt ratio, or at a base rate,
with option periods of two weeks to six months. At March 31, 1999, $18 million
was outstanding and at March 31, 2000, 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 HDDG common stock and DSSG common stock. The notes
are convertible into 6,206,152 shares of DSSG common stock, or 21.587 shares
per $1,000 note, and 3,103,076 shares of HDDG common stock, or 10.793 shares
per $1,000 note. The Company has the option to redeem the notes on or after
August 1, 1999 and prior to August 1, 2001, under certain conditions related
to the price of the Company's common stocks. Subsequent to August 1, 2001, the
Company may redeem the notes at any time. In the event of certain changes
involving all or substantially all of the Company's common stocks, the holder
would have the option to redeem the notes. Redemption prices range from 107%
of the principal to 100% at maturity. The notes are unsecured obligations
subordinated in right of payment to all of the Company's existing and future
senior indebtedness.
I-29
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1996, the Company 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. The Company is
required to make 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.
Principal payments required on long-term debt outstanding at March 31,
2000, are $1.1 million in fiscal year 2001, $1.2 million in fiscal year 2002,
$1.3 million in fiscal year 2003, $1.5 million in fiscal year 2004 and $1.6
million in fiscal year 2005.
Subsequent to March 31, 2000, the Company entered into new credit facility
agreements as described in Note 18 of the Notes to Consolidated Financial
Statements.
Note 9 Stock Incentive Plans
As a result of the recapitalization, each outstanding stock option under
the Company's stock option plans was converted into separately exercisable
options to acquire one share of DLT & Storage Systems group stock and one-half
of a share of Hard Disk Drive group stock. The exercise price for the
resulting DSSG stock options and HDDG stock options was calculated by
multiplying the exercise price under the original options by a fraction, the
numerator of which was the opening price of DSSG stock or HDDG stock on August
4, 1999 (the date such stocks were first traded on the New York Stock
Exchange) and the denominator of which was the sum of these DSSG and HDDG
stock prices. However, the aggregate intrinsic value of the options was not
increased, and the ratio of the exercise price per option to the market value
per share was not reduced. In addition, the vesting provisions and option
periods of the original grants remained the same upon conversion.
Long-Term Incentive Plan. 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 23.6
million shares and 11.3 million shares of DSSG stock and HDDG stock,
respectively, and allows for an annual increase in the number of shares
available for issuance, subject to a limitation. Available for grant as of
March 31, 2000, were 4.1 million shares of DSSG group stock and 1.1 million
shares of HDDG stock. 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 1998, 1999 and 2000, the Company recorded compensation expense of
$3,179,000, $3,211,000 and $3,082,000, respectively, related to restricted
stock granted pursuant to stock purchase rights under the Plan. In fiscal
years 1998, 1999 and 2000, the Company granted 65,500 shares, 157,200 shares,
and 99,800 shares, respectively, of Quantum Corporation restricted stock under
the Plan at an exercise price of $.01 per share. Additionally, 321,600 shares
of DSSG restricted stock and 155,800 shares of HDDG restricted stock were
granted during fiscal year 2000 at an exercise price of $.01 per share.
Supplemental Plan. The Company has a Supplemental Stock Plan (the "SSP")
that provides for the issuance of stock options and stock purchase rights
(collectively referred to as "options") to employees and consultants of the
Company. The SSP has available and reserved for future issuance 9.7 million
shares and 5.7 million shares of DSSG stock and HDDG stock, respectively.
Options under the SSP generally vest over two to four years and expire ten
years after the grant date. At March 31, 2000, options with respect to 1.8
million shares of DSSG stock and 853,000 shares of HDDG stock were available
for grant. Restricted stock granted under the SSP generally vests over two to
three years. In fiscal year 2000, Quantum recorded compensation expense of
$4,532,000 related to restricted stock granted pursuant to stock purchase
rights under the SSP. In fiscal year 2000, 3.0 million shares of DSSG
restricted stock and 1.5 million of HDDG restricted stock were granted under
the SSP at an exercise price of $.01 per share.
I-30
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans. The Company has Stock Option Plans (the "Plans") under
which 4.3 million shares and 2.0 million shares of DSSG stock and HDDG stock,
respectively, were reserved for future issuance at March 31, 2000 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, 2000, options with respect to 377,500 shares and 189,000
shares of DSSG stock and HDDG stock, respectively, were available for grant.
Stock Option Summary Information. A summary of activity relating to the
Long-Term Incentive Plan, the Supplemental Plan and the Stock Option Plans
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
1998 1999
--------------------- ---------------------
Weighted-Avg. Weighted-Avg.
Shares Exercise Shares Exercise
(000s) Price (000s) Price
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
period....................... 16,354 $ 7.52 17,005 $12.09
Granted....................... 6,163 $19.80 10,781 $21.51
Canceled...................... (718) $14.11 (1,880) $22.63
Exercised..................... (4,794) $ 6.10 (2,530) $ 7.23
------ ------
Outstanding at end of period.. 17,005 $12.09 23,376 $14.68
====== ======
Exercisable at end of
period....................... 8,332 $ 8.84 11,786 $10.65
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 2000
-----------------------------------------------------------------
Period from Period from
April 1, 1999, to August 4, 1999, to
August 3, 1999 March 31, 2000
--------------------- -------------------------------------------
DLT & Storage Hard Disk Drive
Quantum Corporation Systems Group Group
--------------------- --------------------- ---------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 23,376 $14.68 26,412 $13.18 13,206 $4.80
Granted................. 4,719 $18.91 11,037 $ 6.45 7,430 $6.19
Canceled................ (585) $18.56 (3,404) $15.17 (1,789) $6.39
Exercised............... (1,098) $ 8.87 (2,605) $ 6.27 (1,961) $3.06
------ ------ ------
Outstanding at end of
period................. 26,412 $15.58 31,440 $11.14 16,886 $5.37
====== ====== ======
Exercisable at end of
period................. 13,037 $11.95 13,686 $11.03 6,407 $4.23
====== ====== ======
</TABLE>
The exercise prices for options outstanding at March 31, 2000 range from
$0.01 to $26.07 and from $0.01 to $11.06 for DSSG stock and HDDG stock,
respectively. Compensation expense of $1,057,000, $2,188,000, and $282,000 was
recorded in fiscal years 1998, 1999 and 2000, respectively, in connection with
accelerated vesting of stock options under the Plans.
I-31
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information about options outstanding and
exercisable at March 31, 2000:
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------------------
Shares Outstanding at Weighted-Average
March 31, 2000 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ --------------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.01-$ 6.61.......... 8,349 4.04 $ 3.17
$ 6.64-$13.88.......... 9,303 8.73 $ 9.20
$14.19-$26.07.......... 13,788 8.28 $17.28
------
31,440 7.29 $11.14
======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------------
Shares Outstanding at Weighted-Average
Range of Exercise Prices March 31, 2000 (000s) Exercise Price
------------------------ --------------------- ----------------
<S> <C> <C>
$ 0.01-$ 6.61..................... 4,974 $ 5.03
$ 6.64-$13.88..................... 2,870 $ 9.01
$14.19-$26.07..................... 5,842 $17.12
------
13,686 $11.03
======
</TABLE>
Hard Disk Drive Group
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------------------
Weighted-Average
Shares Outstanding at Remaining Weighted-Average
Range of Exercise Prices March 31, 2000 (000s) Contractual Life Exercise Price
------------------------ --------------------- ---------------- ----------------
<S> <C> <C> <C>
$0.01-$ 3.21........... 4,469 4.18 $1.33
$3.22-$ 5.85........... 2,524 6.98 $4.96
$5.86-$11.06........... 9,893 8.14 $7.30
------
16,886 6.92 $5.37
======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------------
Shares Outstanding at Weighted-Average
Range of Exercise Prices March 31, 2000 (000s) Exercise Price
------------------------ --------------------- ----------------
<S> <C> <C>
$0.01-$ 3.21...................... 2,752 $2.02
$3.22-$ 5.85...................... 1,769 $4.82
$5.86-$11.06...................... 1,885 $6.90
-----
6,407 $4.23
=====
</TABLE>
Expiration dates ranged from April 27, 2000 to February 11, 2011 for
options outstanding at March 31, 2000. Prices for options exercised during the
three-year period ended March 31, 2000, are as follows:
<TABLE>
<CAPTION>
Period Price range
-------------- ------------
<S> <C> <C>
Quantum Corporation........................... 4/1/97-8/3/99 $0.01-$23.94
DLT & Storage Systems Group................... 8/4/99-3/31/00 $0.01-$19.83
Hard Disk Drive Group......................... 8/4/99-3/31/00 $0.01-$ 8.00
</TABLE>
I-32
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proceeds received by the Company from exercises are credited to common
stock and capital in excess of par value.
Completing the acquisition of Meridian in September 1999 included the
conversion of outstanding Meridian stock options into options to purchase
630,000 shares of DSSG common stock and 315,000 shares of HDDG common stock.
These options relate to the Company's assumption of Meridian's 1985 Director
Incentive Stock Plan, 1988 Incentive Stock Plan, 1995 Director Stock Plan and
the 1997 Stock Plan, collectively referred to as the "Meridian Plans." Under
the terms of the Meridian Plans, employees, directors and consultants received
options to purchase shares of Meridian's previously outstanding common stock
at prices not less than 100% of the fair value on the date of grant as
determined by Meridian's Board of Directors. Options under Meridian Plans vest
over a four year period and expire ten years after date of grant or from 30
days to three months after termination of employment. Subsequent to completing
the acquisition of Meridian, no additional grants may be made from the
Meridian Plans. See Note 5 for more information on the acquisition of
Meridian.
Completing the acquisition of ATL in September 1998 included the conversion
of outstanding ATL stock options into options to purchase 1.8 million shares
of Quantum common stock, which were converted, as a result of the
recapitalization, into 1.8 million shares and 0.9 million shares of DSSG
common stock and HDDG common stock, respectively. 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 24.8 million DSSG shares and 12.4 million HDDG shares authorized to be
issued under the plan, 1,394,000 shares and 698,000 shares, respectively, were
available for issuance at March 31, 2000. Employees purchased
3,454,000 shares, 2,555,000 shares, and 829,000 shares of Quantum Corporation
common stock under the Purchase Plan in fiscal years 1998, 1999, and 2000,
respectively.
Additionally, employees purchased 1,145,000 shares of DSSG stock and
571,000 shares of HDDG stock during fiscal year 2000. The weighted average
exercise price of Quantum Corporation stock purchased under the Purchase Plan
was $6.22, $9.41, and $16.16 in fiscal years 1998, 1999, and 2000,
respectively. The weighted average exercise prices of DSSG stock and HDDG
stock purchased under the Purchase Plan were $8.08 and $5.03, respectively, in
fiscal year 2000.
Pro forma information. The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" in fiscal year 1997. The Company has elected to
continue to account for its stock-based compensation plans under APB Opinion
No. 25 and disclose the pro forma effects of the plans on net income and
earnings per share as provided by SFAS No. 123. Accordingly, no compensation
expense has been recognized for the stock option plans and the employee stock
purchase plans as all options have been issued at fair market value.
Pro forma net income and earnings per share information, as required by
SFAS No. 123, have been determined as if the Company had accounted for its
employee stock options (including shares issued under the Long-Term Incentive
Plan, Supplemental Plan, Stock Option Plans, and the Stock Purchase Plan,
collectively called "options") granted subsequent to March 31, 1995, under the
fair value method of that statement.
I-33
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted in fiscal years 1998, 1999 and 2000
reported below have been estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
Quantum Corporation
<TABLE>
<CAPTION>
Long-Term Incentive Plan,
Supplemental Plan
and Stock Option Plans Stock Purchase Plan
----------------------------------- -----------------------------------
Fiscal 1998 Fiscal 1999 Fiscal 2000 Fiscal 1998 Fiscal 1999 Fiscal 2000
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years).. 2.9 3.1 2.8 1.6 1.4 1.1
Risk-free interest
rate................... 6.25% 5.52% 5.19% 6.13% 5.85% 5.57%
Stock price volatility.. .56 .61 .65 .53 .56 .62
Dividend yield.......... -- -- -- -- -- --
</TABLE>
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Long-Term Incentive Plan,
Supplemental Plan
and Stock Option Plans Stock Purchase Plan
----------------------------------- -----------------------------------
Fiscal 1998 Fiscal 1999 Fiscal 2000 Fiscal 1998 Fiscal 1999 Fiscal 2000
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years).. -- -- 2.02 -- -- 0.8
Risk-free interest
rate................... -- -- 6.43% -- -- 6.12%
Stock price volatility.. -- -- .67 -- -- .66
Dividend yield.......... -- -- -- -- -- --
</TABLE>
Hard Disk Drive Group
<TABLE>
<CAPTION>
Long-Term Incentive Plan,
Supplemental Plan
and Stock Option Plans Stock Purchase Plan
----------------------------------- -----------------------------------
Fiscal 1998 Fiscal 1999 Fiscal 2000 Fiscal 1998 Fiscal 1999 Fiscal 2000
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years).. -- -- 3.5 -- -- 1.51
Risk-free interest
rate................... -- -- 6.27% -- -- 5.57%
Stock price volatility.. -- -- .68 -- -- .63
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.
I-34
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of weighted-average grant date fair values:
Quantum Corporation
<TABLE>
<CAPTION>
Weighted-Average
Grant Date Fair
Value
--------------------
Fiscal Fiscal Fiscal
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans............ $ 8.39 $ 9.86 $ 8.55
Restricted stock granted under the Long-Term
Incentive Plan and Supplemental Plan ............... $23.68 $22.40 $18.99
Shares granted under the Stock Purchase Plan......... $ 3.56 $ 4.86 $ 7.85
</TABLE>
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Weighted-Average
Grant Date
Fair Value
----------------
Fiscal 2000
----------------
<S> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan
and Stock Option Plans.................................... $ 4.03
Restricted stock granted under the Long-Term Incentive Plan
and
Supplemental Plan......................................... $ 8.86
Shares granted under the Stock Purchase Plan............... $ 4.62
</TABLE>
Hard Disk Drive Group
<TABLE>
<CAPTION>
Weighted-Average
Grant Date
Fair Value
----------------
Fiscal 2000
----------------
<S> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan
and Stock Option Plans.................................... $ 4.16
Restricted stock granted under the Long-Term Incentive Plan
and
Supplemental Plan......................................... $ 7.98
Shares granted under the Stock Purchase Plan............... $ 2.73
</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:
Quantum Corporation
<TABLE>
<CAPTION>
Year Ended March
31, Period from
----------------- April 1, 1999, to
1998 1999 August 3, 1999
-------- -------- -----------------
<S> <C> <C> <C>
Net income (loss) (in thousands)....... $139,907 $(83,964) $(32,227)
======== ======== ========
Net income (loss) per share:
Basic................................ $ 1.03 $ (0.52) $ (0.19)
======== ======== ========
Diluted.............................. $ 0.88 $ (0.52) $ (0.19)
======== ======== ========
</TABLE>
I-35
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Period from
August 4, 1999, to
March 31, 2000
------------------
<S> <C>
Net income (in thousands)................................. $54,265
=======
Net income per share:
Basic................................................... $ 0.33
=======
Diluted................................................. $ 0.33
=======
</TABLE>
Hard Disk Drive Group
<TABLE>
<CAPTION>
Period from
August 4, 1999, to
March 31, 2000
------------------
<S> <C>
Net loss (in thousands).................................. $(35,678)
========
Net loss per share:
Basic.................................................. $ (0.43)
========
Diluted................................................ $ (0.43)
========
</TABLE>
Since the DSSG stock and HDDG stock were not part of the capital structure
of Quantum prior to the recapitalization on August 3, 1999 and no DSSG stock
options and HDDG stock options were outstanding prior to this date, pro forma
information for DSSG and HDDG for fiscal years 1999 and 1998 is omitted.
Accordingly, the pro forma effect of DSSG stock options and HDDG stock options
is not representative of what the effect will be in future years.
As SFAS No. 123 is applicable only to options granted subsequent to March
31, 1995, its pro forma effect will not be fully reflected until fiscal year
2001.
Note 10 Common Stock and Stockholder Rights Agreement
The number of authorized shares of common stock is 1,600,000,000, of which
1,000,000,000 shares are authorized for DSSG common stock and 600,000,000
shares are authorized for HDDG common stock. The number of authorized shares
of preferred stock is 20,000,000.
The Company has a stockholder rights agreement (the "Rights Plan") that
provides existing stockholders with the right to purchase preferred stock in
the event of certain changes in Quantum's ownership. Specifically, existing
DSSG stockholders will have the right to purchase one one-thousandth of a
share of Series B Junior Participating Preferred Stock for each share of DSSG
common stock held, or, under certain circumstances, shares of DSSG common
stock with a market value twice the exercise price of such right and existing
HDDG stockholders will have the right to purchase one one-thousandth of a
share of Series C Junior Participating Preferred Stock for each share of HDDG
common stock held or, under certain circumstances, shares of HDDG common stock
with a market value twice the exercise price of such right. The purchase price
in either case is determined by the board of directors, subject to adjustment.
Subject to certain exceptions, these rights may be exercised the tenth day
after any person or group becomes the beneficial owner (or makes an offer that
would result in such beneficial ownership) of 20% or more of the outstanding
DSSG common stock or HDDG common stock. If such change in beneficial ownership
is combined with a merger of the Company or a sale of more than 50% of the
assets of the Company, then the existing stockholders have the right to
purchase, for the exercise price, a number of shares of common stock in the
surviving entity having a market value of twice the exercise
I-36
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price of such right. The Rights Plan may serve as a deterrent to takeover
tactics that are not in the best interests of stockholders. There are
1,600,000 preferred shares reserved for issuance under the Rights Plan.
Note 11 Earnings Per Share
Net income (loss) per share was calculated on a consolidated basis until
DSSG stock and HDDG stock were created as a result of the recapitalization on
August 3, 1999. Subsequent to this date, net income (loss) per share was
computed individually for DSSG and HDDG.
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------
1998 1999 2000
----------- ----------- -------------------------------------------------------
Period from Period from Period from
April 1, 1999, to August 4, 1999, to August 4, 1999, to
August 3, 1999 March 31, 2000 March 31, 2000
----------------- ------------------ ------------------
Quantum Quantum Quantum DLT & Storage Hard Disk Drive
Corporation Corporation Corporation Systems Group Group
----------- ----------- ----------------- ------------------ ------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Numerator:
Numerator for basic net
income (loss) per
share--income (loss)
available to common
stockholders........... $170,801 $(29,535) $(17,193) $ 85,586 $(27,549)
Effect of dilutive
securities:
5% convertible
subordinated
debentures............. 6,668 -- -- -- --
-------- -------- -------- -------- --------
Numerator for diluted
net income (loss) per
share--income (loss)
available to common
stockholders........... $177,469 $(29,535) $(17,193) $ 85,586 $(27,549)
======== ======== ======== ======== ========
Denominator:
Denominator for basic
net income (loss) per
share--weighted average
shares................. 136,407 160,670 165,788 162,023 83,018
Effect of dilutive
securities:
Outstanding options..... 9,600 -- -- 5,711 --
Series B preferred
stock.................. 90 -- -- -- --
5% convertible
subordinated
debentures............. 19,919 -- -- -- --
-------- -------- -------- -------- --------
Denominator for diluted
net income (loss) per
share--adjusted
weighted
Average shares and
assumed conversions.. 166,016 160,670 165,788 167,734 83,018
======== ======== ======== ======== ========
Basic net income (loss)
per share.............. $ 1.25 $ (0.18) $ (0.10) $ 0.53 $ (0.33)
======== ======== ======== ======== ========
Diluted net income
(loss) per share....... $ 1.07 $ (0.18) $ (0.10) $ 0.51 $ (0.33)
======== ======== ======== ======== ========
</TABLE>
The computation of diluted net loss per share for Quantum in the year ended
March 31, 1999, and in the period April 1, 1999, through August 3, 1999,
excluded the effect of the 7% convertible subordinated notes issued in July
1997, which were convertible into 6,206,152 shares of Quantum common stock, or
21.587 shares per $1,000 note, because the effect would have been
antidilutive.
I-37
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The computation of diluted net income per share for DSSG in the period
August 4, 1999 through March 31, 2000, excluded the effect of the 7%
convertible subordinated notes issued in July 1997, which are convertible into
6,206,152 shares of DSSG common stock, or 21.587 shares per $1,000 note,
because the effect would have been antidilutive.
The computation of diluted net loss per share for HDDG in the period August
4, 1999 through March 31, 2000, excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 3,103,076
shares of HDDG common stock, or 10.793 shares per $1,000 note, because the
effect would have been antidilutive.
Options to purchase 23,376,499 and 26,411,958 shares of Quantum common
stock were outstanding at March 31,1999, and August 3, 1999, respectively.
However, the corresponding weighted average outstanding options were not
included in the computation of diluted net loss per share for Quantum for the
year ended March 31, 1999, and the period April 1, 1999 through August 3,
1999, because the effect would have been antidilutive.
Options to purchase 16,885,729 shares of HDDG common stock were outstanding
at March 31, 2000. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
HDDG for the period August 4, 1999 through March 31, 2000, because the effect
would have been antidilutive.
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
$6 million, $7 million and $9 million, in fiscal years 1998, 1999 and 2000,
respectively.
Note 13 Income Taxes
The Company's income tax provision consists of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Federal:
Current...................................... $ 19,343 $(15,431) $ 46,773
Deferred..................................... 12,396 26,392 (33,109)
-------- -------- --------
31,739 10,961 13,664
-------- -------- --------
State:
Current...................................... 19,814 3,856 10,303
Deferred..................................... (17,803) 22 (5,717)
-------- -------- --------
2,011 3,878 4,586
-------- -------- --------
Foreign:
Current...................................... 26,857 18,021 37,391
Deferred..................................... (593) (3,510) (7,315)
-------- -------- --------
26,264 14,511 30,076
-------- -------- --------
Income tax provision........................... $ 60,014 $ 29,350 $ 48,326
======== ======== ========
</TABLE>
I-38
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of incentive stock options, and employee stock purchase plan
shares reduced taxes currently payable as shown above by $21 million, $17
million, and $15 million in fiscal years 1998, 1999, and 2000, respectively.
Such benefits are credited to capital in excess of par value when realized.
The Company's income tax provision differs from the amount computed by
applying the federal statutory rate of 35% to income before income taxes as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1998 1999 2000
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate........ $ 80,788 $ (65) $31,207
State income tax, net of federal benefit....... 1,307 2,521 2,981
Research and development credit................ (7,680) (2,265) (5,407)
Foreign earnings taxed at rates different than
U.S. rates.................................... (15,813) (5,004) --
Acquired in-process research and development... -- 31,150 12,950
Goodwill amortization.......................... -- 1,609 4,075
Other items.................................... 1,412 1,404 2,520
-------- ------- -------
$ 60,014 $29,350 $48,326
======== ======= =======
</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,
--------------------
1999 2000
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods........................ $ 39,770 $ 33,327
Accrued warranty expense........................... 24,041 30,444
Allowance for doubtful accounts.................... 3,379 5,443
Distribution reserves.............................. 10,363 18,115
Restructuring and special charges.................. 4,331 23,262
Net operating loss and credit carryforwards........ -- 37,228
Other accruals and reserves not currently
deductible for tax purposes....................... 39,627 27,383
Depreciation methods............................... 47,429 68,024
Amortization methods............................... 31,448 29,213
--------- ---------
200,388 272,439
--------- ---------
Deferred tax liabilities:
Foreign inventory valuation methods................ (13,810) (6,495)
Tax on unremitted foreign earnings net of foreign
tax credits and foreign deferred taxes............ (97,817) (130,671)
Acquired intangibles............................... (33,602) (40,821)
Other.............................................. (14,798) (16,406)
--------- ---------
(160,027) (194,393)
--------- ---------
Net deferred tax asset........................... $ 40,361 $ 78,046
========= =========
</TABLE>
I-39
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's pretax income from foreign operations was $139 million, $120
million, and $220 million for the fiscal years ended March 31, 1998, 1999, and
2000, respectively. U.S. taxes have not been provided for unremitted foreign
earnings of $357 million. The residual U.S. tax liability, if such amounts
were remitted, would be approximately $78 million.
As of March 31, 2000, the Company has net operating loss carryforwards of
$49 million and credit carryforwards of $20 million. These carryforwards
expire in varying amounts between fiscal years 2005 and 2019.
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
On August 7, 1998, the Company was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 24 U.S. patents which it asserts that the Company has infringed.
The Company has studied these patents and believes that defenses of patent
invalidity and non-infringement can be asserted. However, the Company has not
completed a full study of all the patents asserted by Papst and there can be
no assurance that the Company has not infringed these or other patents owned
by Papst. Recently, on Papst's motion, the case was transferred to a federal
district court in New Orleans, Louisiana, where it has been joined with suits
brought against Papst by Hewlett-Packard Company and Minebea Company, Ltd. for
the purposes of coordinated discovery under multi-district litigation rules.
Hewlett-Packard recently settled its dispute with Papst and has been withdrawn
from the litigation. To date, discovery has not begun to any significant
extent. Quantum does not believe that the transfer will affect the final
disposition of this matter in a significant way. The final results of this
litigation, as with any litigation, are uncertain. In addition, the costs of
engaging in litigation with Papst will be substantial.
The Company is also subject to other legal proceedings and claims that
arise in the ordinary course of its business. For example, Discovision
Associates has brought patents they hold to the Company's attention. While
management currently believes the amount of ultimate liability, if any, with
respect to these actions will not materially affect the financial position,
results of operations, or liquidity of the Company, the ultimate outcome of
any litigation is uncertain. Were an unfavorable outcome to occur, the impact
could be material to the Company.
Note 15 Commitments
The Company leases certain facilities under non-cancelable operating lease
agreements for periods of up to 15 years. Some of the leases have renewal
options ranging from one to ten years and contain provisions for maintenance,
taxes, or insurance.
Rent expense was $27 million, $32 million, and $33 million for the fiscal
years ended March 31, 1998, 1999, and 2000, respectively.
I-40
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Year ended March 31,
2001........................................................ $ 33,767
2002........................................................ 33,371
2003........................................................ 28,845
2004........................................................ 22,229
2005........................................................ 17,878
Thereafter.................................................. 125,748
--------
Total future minimum lease payments....................... $261,838
========
</TABLE>
The Company is contingently liable, under residual value guarantees, for
approximately $63 million for one of its current facility leases.
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, as further
described in their separate financial statements. HDDG consists of desktop and
high-end hard disk drives. DSSG consists of DLTtape drives and media,
autoloaders and libraries, network attached storage appliances and solid state
storage systems. The Company directly markets its products to computer
manufacturers and through a broad range of distributors, resellers and systems
integrators.
The 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 excluding 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,
---------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ---------------------
HDDG DSSG Total HDDG DSSG Total HDDG DSSG Total
------ ------ ------ ------ ------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from external
customers.............. $4,615 $1,190 $5,805 $3,599 $1,303 $4,902 $3,308 $1,419 $4,727
Intersegment revenue.... -- -- -- -- -- -- 3 -- 3
Interest and other
income/ (expense)...... 4 (3) 1 10 (12) (2) 13 -- 13
Depreciation and
amortization........... 68 24 92 71 42 113 69 62 131
Loss from investee...... (66) -- (66) (142) -- (142) -- -- --
Income tax expense
(benefit).............. (83) 143 60 (112) 141 29 (73) 122 48
Segment profit (loss)... (53) 224 171 (153) 123 (30) (105) 146 41
Segment assets.......... 1,646 792 2,438 1,470 1,014 2,484 1,478 1,086 2,564
Expenditures for long-
lived assets........... 129 47 176 83 33 116 50 35 85
</TABLE>
<TABLE>
<CAPTION>
Year Ended
March 31,
-------------
1999 2000
------ ------
(in millions)
<S> <C> <C>
Segment assets reconciliation:
Total assets for reportable segments.......................... $2,484 $2,564
Elimination of intersegment receivables....................... -- (30)
------ ------
Total consolidated segment assets............................ $2,484 $2,534
====== ======
</TABLE>
I-41
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Product Information
Revenue for reportable segments is comprised of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1998 1999 2000
------ ------ ------
(In millions)
<S> <C> <C> <C>
Hard Disk Drive group:
Desktop hard disk drives............................ $3,981 $3,079 $2,785
High-end hard disk drives........................... 634 520 527
------ ------ ------
Total............................................. $4,615 $3,599 $3,312
====== ====== ======
DLTtape & Storage Systems group:
DLTtape drives...................................... $ 784 $ 872 $ 858
DLTtape media....................................... 284 195 147
DLTtape royalties................................... 27 122 187
Storage systems..................................... 95 154 323
Intra-group elimination............................. -- (40) (96)
------ ------ ------
Total............................................. $1,190 $1,303 $1,419
====== ====== ======
</TABLE>
Intra-group elimination represents intra-group sales of DLTtape drives
incorporated into the DLT & Storage Systems group's tape libraries.
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,
--------------------------------------------
1998 1999 2000
-------------- -------------- --------------
Long- Long- Long-
Lived Lived Lived
Revenue Assets Revenue Assets Revenue Assets
------- ------ ------- ------ ------- ------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States................... $3,048 $271 $2,552 $457 $2,381 $454
Europe.......................... 1,689 13 1,315 12 1,173 11
Asia Pacific.................... 993 25 930 28 1,100 21
Latin America................... 75 -- 105 -- 73 --
------ ---- ------ ---- ------ ----
Total......................... $5,805 $309 $4,902 $497 $4,727 $486
====== ==== ====== ==== ====== ====
</TABLE>
Two customers of both reportable segments accounted for 10% or more of the
Company's consolidated revenue in fiscal years 1998, 1999 and 2000. Revenue
from one customer represented $1,036 million, $704 million and $599 million of
the Company's consolidated revenue in the respective periods. Revenue from the
other customer represented $759 million, $678 million and $565 million of the
Company's consolidated revenue in the respective periods.
I-42
<PAGE>
QUANTUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17 Unaudited Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended March 31, 2000
--------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue....................... $1,083,235 $1,125,124 $1,253,555 $1,265,290
Gross profit.................. 179,919 135,337 268,423 295,281
Net income (loss)............. 8,281 (62,653) 55,896 39,320
Net income (loss) per share:
Quantum common stock
Basic....................... 0.05 (0.15) NA NA
Diluted..................... 0.05 (0.15) NA NA
DLT & Storage Systems group
common stock
Basic....................... NA 0.08 0.31 0.14
Diluted..................... NA 0.07 0.30 0.14
Hard Disk Drive group common
stock
Basic....................... NA (0.60) 0.06 0.20
Diluted..................... NA (0.60) 0.06 0.20
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1999
--------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter 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
</TABLE>
--------
NA = Not applicable
Net income (loss) per share for the second quarter of fiscal year 2000
reflected the net loss per share for Quantum through the date of the August 3,
1999 recapitalization. Net income (loss) per share for the DLT & Storage
Systems group and the Hard Disk Drive group reflected net income (loss) per
share from August 4, 1999 through the end of fiscal year 2000.
The results of operations for the fourth quarter of fiscal year 2000
included the effect of a $40 million special charge associated with the DLT &
Storage Systems group's strategy to reduce overhead expenses and product cost
including the transfer of volume manufacturing to Penang, Malaysia.
The results of operations for the second quarter of fiscal year 2000
included the effect of a $59 million special charge associated with the Hard
Disk Drive group's streamlining of the logistics model, change in customer
service strategy and consolidation of certain product development programs,
and a $37 million charge related to purchased in-process research and
development related to the acquisition of Meridian.
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.
Note 18 Subsequent Event (Unaudited)
In April 2000, both the Company and ATL canceled their existing senior
credit facilities and the Company entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the option of the Company,
borrowings under the revolving credit lines will bear interest at either the
London interbank offered rate or a base rate, plus a margin determined by a
leverage ratio with option periods of one to six months.
I-43
<PAGE>
QUANTUM CORPORATION
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at (reductions) Balance at
beginning charged to end of
Classification of period expense Deductions(i) period
-------------- ---------- ------------ ------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts year ended:
March 31, 1998............. $10,610 $ 5,142 $ (2,824) $12,928
March 31, 1999............. $12,928 $ 9,481 $(10,279) $12,130
March 31, 2000............. $12,130 $15,307 $ (4,327) $23,110
</TABLE>
--------
(i) Uncollectible accounts written off, net of recoveries.
I-44
<PAGE>
ANNEX II
THE DLT & STORAGE SYSTEMS GROUP SELECTED COMBINED FINANCIAL INFORMATION
This summary of combined financial information of the DLT & Storage Systems
group ("DSSG") for fiscal years 1996 to 2000 should be read along with DSSG's
audited combined 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 1996 and 1997 and the balance sheet data at
March 31, 1996, 1997 and 1998, was taken from these financial statements.
A number of items affect the comparability of this information.
. The results of operations for fiscal year 2000 include the effect of a
$40.1 million special charge associated with DSSG's strategy to reduce
overhead expenses and product cost including the transfer of volume
manufacturing to Penang, Malaysia.
. The results of operations for fiscal years 1999 and 2000 include charges
of $89 million and $37 million, respectively, for purchased in-process
research and development in connection with the acquisitions of ATL
Products, Inc. ("ATL") and Meridian Data Inc. ("Meridian"),
respectively.
. Prior to fiscal year 1999, almost all DLTtape media cartridges were sold
directly by DSSG. However, beginning in fiscal year 1999, increased
DLTtape media availability allowed licensed third party DLTtape media
cartridge manufacturers to sell DLTtape media cartridges for which DSSG
receives royalties. Royalty receipts by DSSG are reported as royalty
revenue, which is significantly lower than the equivalent DLTtape media
cartridge product revenue for DSSG. However, this royalty model has
generated income from operations comparable to that generated by DLTtape
media cartridge sales made directly by DSSG.
Pro forma net income per share for DSSG assumes the recapitalization
occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
--------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Product revenue............ $335,565 $719,925 $1,162,725 $1,181,273 $1,232,442
Royalty revenue............ -- 8,088 27,075 121,463 186,429
-------- -------- ---------- ---------- ----------
Total revenue............ 335,565 728,013 1,189,800 1,302,736 1,418,871
Gross profit............... 126,610 270,339 502,214 579,919 648,890
Research and development
expenses.................. 24,968 30,039 62,825 99,330 122,821
Sales and marketing,
general and administrative
expenses.................. 19,201 35,240 69,607 114,895 181,495
Special charge............. -- -- -- -- 40,083
Purchased in-process
research and development
expense................... -- -- -- 89,000 37,000
Income from operations..... 82,441 205,060 369,782 276,694 267,491
Net income................. $ 34,973 $107,460 $ 223,659 $ 122,991 $ 145,614
Pro forma net income per
share:
Basic.................... $ 0.34 $ 0.92 $ 1.64 $ 0.77 $ 0.89
Diluted.................. $ 0.31 $ 0.75 $ 1.37 $ 0.73 $ 0.86
Balance Sheet Data
Property, plant and
equipment, net............ $ 30,135 $ 39,114 $ 57,399 $ 73,122 $ 78,137
Total assets............... 238,337 437,925 792,070 1,013,643 1,086,004
Total long-term debt,
convertible debt and
redeemable preferred
stock..................... 310,150 281,937 218,324 229,641 216,892
</TABLE>
II-1
<PAGE>
DLT & STORAGE SYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 2000 Compared With Fiscal Year 1999
Revenue. Total DSSG revenue in fiscal year 2000 was $1.4 billion, compared
to $1.3 billion in fiscal year 1999, an increase of 9%. The increase in
revenue reflected increased revenue from sales of storage systems and
increased DLTtape media royalties, both reaching record highs in fiscal year
2000, and a decline in revenue from sales of DLTtape drives. The increase in
storage systems revenue reflected an increase in shipments of tape libraries
and the acquisition of ATL in September 1998, and shipments of network
attached storage appliances following the acquisition of Meridian in September
1999. The increase in DLTtape media royalties reflected an increase in sales
of DLTtape media cartridges at licensed media manufacturers for which DSSG
earns a royalty. The overall increase in market sales of DLTtape media
cartridges reflected sales of cartridges for use in both new DLTtape drives
and to meet the ongoing new media needs of the installed base of DLTtape
drives. The decrease in DLTtape drive revenue reflected increased shipments,
offset by competitive price declines.
The table below summarizes the components of DSSG's revenue in the years
ended March 31, 2000 and March 31, 1999.
<TABLE>
<CAPTION>
1999 2000
------ ------
(in millions)
<S> <C> <C>
DLTtape drives............................................ $ 872 $ 858
DLTtape media............................................. 195 147
DLTtape royalty........................................... 122 187
Storage systems........................................... 154 323
Intra-group elimination*.................................. (40) (96)
------ ------
Revenue................................................. $1,303 $1,419
====== ======
</TABLE>
--------
* Represents intra-group sales of DLTtape drives for incorporation into DSSG's
tape libraries.
Sales to the DLT & Storage Systems group's top five customers in fiscal
year 2000 represented 47% of revenue, compared to 53% of revenue in fiscal
year 1999. These amounts reflected a retroactive combination of sales to
Compaq and Digital Equipment as a result of their merger in June 1998. Sales
to Compaq were 20% of revenue in fiscal year 2000, compared to 25% of revenue
in fiscal year 1999, including sales made to Digital Equipment. Sales to
Hewlett-Packard were 13% of revenue in fiscal years 2000 and 1999.
Sales to computer equipment manufacturers and distribution channel
customers were 63% and 16% of revenue, respectively, in fiscal year 2000,
compared to 71% and 17% of revenue, respectively, in fiscal year 1999. The
remaining revenue in fiscal years 2000 and 1999 represented media royalty
revenue and sales to value-added resellers.
Gross Margin Rate. The gross margin rate in fiscal year 2000 was 45.7%,
compared to 44.5% in fiscal year 1999. The 1.2 percentage point increase
reflected an increase in the proportion of overall revenue represented by
DLTtape media royalty revenue, partially offset by a decline in the gross
margin rate earned on DLTtape drives.
Research and Development Expenses. Research and development expenses in
fiscal year 2000 were $123 million, or 8.7% of revenue, compared to $99
million, or 7.6% of revenue, in fiscal year 1999. The increase in research and
development expenses reflected the inclusion of ATL's expenses, which were not
included in the first two quarters of fiscal year 1999, as the acquisition
occurred on September 28, 1998, the inclusion of
II-2
<PAGE>
Meridian's expenses, which were not included in fiscal year 1999 and the first
quarter of fiscal year 2000, as the acquisition occurred on September 10, 1999
and higher research and development expenses related to new tape drive
products and other new information storage products, including Super DLTtape
technology.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
2000 were $119 million, or 8.4% of revenue, compared to $77 million, or 5.9%
of revenue in fiscal year 1999. The increase in sales and marketing expenses
reflected the inclusion of ATL and Meridian's expenses and an increase in
marketing and advertising costs associated with DLTtape products.
General and Administrative Expenses. General and administrative expenses in
fiscal year 2000 were $63 million, or 4.4% of revenue, compared to $38
million, or 2.9% of revenue, in fiscal year 1999. The increase in general and
administrative expenses reflected the inclusion of ATL and Meridian's expenses
and the amortization of intangible assets, particularly goodwill.
Special Charge. During the fourth quarter of fiscal year 2000, DSSG
recorded a special charge of $40.1 million. The charge was primarily focused
on DSSG's DLTtape Division and reflected DSSG's strategy to align its DLTtape
drive operations with market conditions. These conditions include slower
growth in the mid-range server market and increasing centralization of server
backup through automation solutions, both of which have resulted in relatively
flat DLTtape drive shipments. The special charge included a reduction of
overhead expenses throughout the DLTape Division and an acceleration of DSSG's
low cost manufacturing strategy, which includes moving volume production of
DLTtape drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs,
$13.9 million for the write-off of investments in optical technology, $7.6
million for severance and benefits for terminated employees, $3.2 million for
fixed assets to be written-off, primarily related to the transfer of
manufacturing to Penang, Malaysia and $1.9 million in other costs associated
with the plan.
DSSG expects to realize annual cost savings from the plan of approximately
$40 million beginning upon full implementation of the plan at the end of
fiscal year 2001. Approximately $30 million of the savings are expected in
cost of revenue as a result of reduced manufacturing costs with the remaining
amount in operating expenses, primarily research and development, as a result
of ending research on certain optical based storage solutions. As compared to
fiscal year 2000, DSSG expects operating expenses to increase because of
increased investments in storage systems products and marketing in fiscal year
2001 and as a result of including the Snap Division's operations for a full
year following the acquisition of Meridian in September 1999. These
expectations are forward-looking statements and actual results may differ.
Purchased In-process Research and Development Expense. DSSG expensed
purchased in-process research and development costs of $37 million as a result
of the Meridian acquisition in the second quarter of fiscal year 2000, and $89
million as a result of the ATL acquisition in the third quarter of fiscal year
1999. For additional information regarding the Meridian and ATL acquisitions
and the costs associated with in-process research and development, refer to
Note 5 of the Notes to Combined Financial Statements
Interest and Other Income/Expense. Net interest and other income and
expense in fiscal year 2000 was nil, compared to $12 million expense in fiscal
year 1999. The decrease in expense reflected increased interest income as a
result of higher cash balances and a $2.6 million gain on the sale of an
equity investment. In addition, the expense in fiscal year 1999 reflected a
$6.8 million write-down of an equity investment.
Income Taxes. No tax benefit was recognizable for the charge for purchased
in-process research and development. DSSG recorded a provision for income
taxes at an effective rate of 40% of pretax earnings before the charge in
fiscal years 2000 and 1999.
Net Income. DSSG reported net income in fiscal year 2000 of $146 million,
compared to $123 million in fiscal year 1999. The increase reflected the lower
charge for purchased in-process research and development in
II-3
<PAGE>
fiscal year 2000, partially offset by increased operating expenses, including
the special charge and increased amortization of goodwill and other intangible
assets resulting from the ATL and Meridian acquisitions.
Fiscal Year 1999 Compared With Fiscal Year 1998
Revenue. Total DSSG revenue in fiscal year 1999 was $1.3 billion, compared
to $1.2 billion in fiscal year 1998, an increase of 9%. The increase in
revenue reflected increases in DLTtape drive revenue and total DLTtape media
cartridge revenue, and the inclusion of ATL's revenue effective September 28,
1998. The increase in DLTtape drive revenue reflected strong demand in the
second half of fiscal year 1999. Including sales by licensed media cartridge
manufacturers, total DLTtape media cartridge revenue increased. However,
direct DLTtape media cartridge sales by DSSG declined reflecting the shift in
a substantial portion of DLTtape media cartridge revenue from sales by DSSG to
royalties from the media cartridge manufacturers.
The table below summarizes the components of DSSG's revenue in the years
ended March 31, 1999 and March 31, 1998.
<TABLE>
<CAPTION>
1998 1999
------ ------
(in millions)
<S> <C> <C>
DLTtape drives............................................. $ 784 $ 872
DLTtape media.............................................. 284 195
DLTtape royalty............................................ 27 122
Storage systems............................................ 95 154
Intra-group elimination*................................... -- (40)
------ ------
Revenue.................................................. $1,190 $1,303
====== ======
</TABLE>
--------
* Represents intra-group sales of DLTtape drives for incorporation into DSSG's
tape libraries.
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.
In fiscal year 1999, sales to computer equipment manufacturers and
distribution channel customers were 71% and 17% of revenue, respectively,
compared to 79% and 21% of revenue, respectively, in fiscal year 1998. The
remaining revenue in fiscal year 1999 represented media royalty revenue and
sales to value-added resellers.
Gross Margin Rate. The gross margin rate in fiscal year 1999 was 44.5%,
compared to 42.2% in fiscal year 1998. The 2.3 percentage point increase
reflected an increase in the proportion of overall revenue represented by
royalty revenue. Declines in the gross margin rate earned on DLTtape drives
resulting from price reductions aimed at expanding the overall market for
DLTtape drives partially offset the increase from royalty revenue.
Research and Development Expenses. Research and development expenses in
fiscal year 1999 were $99 million, or 7.6% of revenue, compared to $63
million, or 5.3% of revenue, in fiscal year 1998. The increase in research and
development expenses reflected higher research and development expenses
related to new tape drive products and to other new information storage
products and technologies, including Super DLTtape technology and, to a
significantly lesser extent, optical storage technology and the inclusion of
ATL's expenses.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1999 were $77 million, or 5.9% of revenue, compared to $47 million, or 4.0% of
revenue in fiscal year 1998. This reflected the inclusion of ATL's expenses
and an increase in marketing and advertising costs associated with DLTtape
products.
II-4
<PAGE>
General and Administrative Expenses. General and administrative expenses in
fiscal year 1999 were $38 million, or 2.9% of revenue, compared to $22
million, or 1.9% of revenue, in fiscal year 1998. The increase in general and
administrative expenses reflected expansion of DSSG's infrastructure to
support increased revenue and earnings growth and the inclusion of ATL's
expenses.
Purchased In-process Research and Development Expense. DSSG 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 Combined Financial
Statements.
Interest and Other Income/Expense. Net interest and other income and
expense in fiscal year 1999 was $12 million expense, compared to $3 million
expense in fiscal year 1998. The increase reflected a $6.8 million write-down
of an equity investment. In addition, the increase reflected a reduction in
interest income as cash was used to purchase treasury stock prior to the ATL
acquisition. A reduction in interest expense partially offset this increase.
Income Taxes. DSSG's effective tax rate in fiscal year 1999, excluding the
write-off of the purchased in-process research and development, was 40%,
compared to 39% in fiscal year 1998. DSSG recorded a provision for income
taxes at an effective rate of 53.5% of pretax earnings in fiscal year 1999.
This higher effective tax rate was primarily attributable to the impact of the
purchased in-process research and development write-off, for which a tax
benefit is not recognizable, and a lower research and development credit.
Net Income. DSSG reported net income in fiscal year 1999 of $123 million,
compared to $224 million in fiscal year 1998. The decrease primarily resulted
from the charge for purchased in-process research and development of $89
million. Excluding the charge, net income was $212 million, a decrease of $12
million. This decrease reflected increased amortization of goodwill and other
intangible assets resulting from the ATL acquisition, increased operating
expenses and decreased interest income. This decrease was partially offset by
an increase in gross profit.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Management does not expect SFAS No. 133 to have a material effect on DSSG's
financial position or results of operations. Implementation of this standard
has recently been delayed by the FASB for a 12-month period. DSSG is required
to adopt SFAS 133 in fiscal year 2002.
Revenue Recognition and Financial Statements. In December 1999, the
Securities and Exchange Commission ("SEC") issued SEC Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarized certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
will be effective for Quantum in the first quarter of fiscal year 2001. DSSG
is reviewing the requirements of SAB 101 and currently believes that its
revenue recognition policy is consistent with the guidance of SAB 101.
Certain Transactions Involving Stock Compensation. In March 2000, Financial
Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN 44
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. Management does not expect the application of FIN 44 to have
a material impact on DSSG's financial position or results of operations.
II-5
<PAGE>
Liquidity and Capital Resources
Operating Activities. DSSG generated cash from operations of $380 million
during fiscal year 2000 compared to $217 million in fiscal year 1999. The
increase primarily reflected a reduction of accounts receivable and
inventories and an increase in accounts payable.
Investing Activities. Investments during fiscal year 2000 were $33 million,
which consisted primarily of investments in property and equipment.
Investments in fiscal year 1999 totaled $35 million.
Financing Activities. At March 31, 2000, and March 31, 1999, Quantum
Corporation's ("Quantum") debt allocated to DSSG was $218 million and $230
million, respectively. Debt allocated to DSSG bears interest at a rate equal
to the weighted average interest rate of Quantum's total debt, calculated on a
quarterly basis. At March 31, 2000, Quantum had total debt of $326 million
with an average interest rate of 7.4%. During fiscal year 2000, DSSG used cash
to purchase $304 million of treasury stock, as discussed below, and to pay off
ATL's line of credit.
During fiscal year 2000, the Board of Directors authorized Quantum to
repurchase up to $700 million of its common stocks in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSSG or HDDG common stock, while
$100 million was authorized for repurchase of HDDG common stock. During fiscal
year 2000, DSSG repurchased 15.7 million shares of DSSG common stock and
acquired 3.9 million shares of Quantum common stock for $304 million, and HDDG
repurchased 3.5 million shares of HDDG common stock for $21 million. Quantum
has utilized equity instrument contracts, including call and put options, as
part of its stock repurchase program. At March 31, 2000, DSSG held equity
instrument contracts that related to the purchase of 8 million shares of DSSG
common stock at an average price of $10.48 per share. By May 8, 2000, DSSG had
closed out its outstanding equity instrument contracts and repurchased 8
million shares of DSSG common stock for a total cost of $84 million. The
equity instruments had no effect on diluted earnings per common share for
fiscal year 2000.
In September 1999, Quantum's DLT & Storage Systems group issued 4.1 million
DSSG shares and 1.9 million HDDG shares it had acquired (and HDDG issued 0.1
million HDDG shares) to the stockholders of Meridian to complete the
acquisition of Meridian. Substantially all of the shares DSSG issued to
complete the acquisition were DSSG and HDDG shares held as treasury stock. The
difference between the cost of the treasury stock and the value at which the
shares were reissued resulted in a $3.5 million addition to paid-in-capital in
fiscal year 2000. For additional information regarding the Meridian
acquisition, refer to Note 5 of the Notes to Combined Financial Statements.
In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is co-
terminous with Quantum's $500 million revolving credit line, expiring in June
2000. As amended, at the option of ATL, borrowings under the revolving credit
line bear interest at either London interbank offered rate plus a margin
determined by Quantum's total funded debt ratio, or at a base rate, with
option periods of two weeks to six months. At March 31, 2000, there was no
outstanding balance drawn on this line.
Quantum filed a registration statement which became effective on July 24,
1997, pursuant to which Quantum may issue debt or equity securities, in one or
more series or issuances, limited to $450 million aggregate public offering
price. Under the registration statement, in July 1997, Quantum issued $288
million of 7% convertible subordinated notes. The notes mature on August 1,
2004, and are convertible at the option of the holder at any time prior to
maturity, unless previously redeemed, into shares of DSSG common stock and
HDDG common stock. The notes are convertible into 6,206,152 shares of DSSG
common stock, or 21.587 shares per $1,000 note, and 3,103,076 shares of HDDG
common stock, or 10.793 shares per $1,000 note. Quantum has the option to
redeem the notes on or after August 1, 1999 and prior to August 1, 2001, under
certain conditions related to the price of Quantum's common stocks. Subsequent
to August 1, 2001, Quantum may redeem the notes at any time. In the event of
certain changes involving all or substantially all of Quantum's common stocks,
the
II-6
<PAGE>
holder would have the option to redeem the notes. Redemption prices range from
107% of the principal to 100% at maturity. The notes are unsecured obligations
subordinated in right of payment to all of Quantum's existing and future
senior indebtedness.
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either 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, 2000, there was no outstanding balance drawn on this
line.
In September 1996, Quantum 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. Quantum is required
to make monthly payments based on a 20-year amortization period, and a balloon
payment at the end of the 10-year term.
In April 2000, both Quantum and ATL canceled their existing senior credit
facilities and Quantum entered into two new unsecured credit facilities, each
providing a $187.5 million revolving credit line and expiring in April 2001
and April 2003, respectively. At Quantum's option, borrowings under the
revolving credit lines will bear interest at either the London interbank
offered rate or a base rate, plus a margin determined by a leverage ratio with
option periods of one to six months.
DSSG expects to spend approximately $60 million in fiscal year 2001 for
capital equipment and leasehold improvements. These capital expenditures will
support the introduction and manufacturing of Super DLTtape products;
manufacturing DLTtape drives in a new location, Penang, Malaysia; and DSSG's
general infrastructure.
DSSG expects its cash flow from operations, together with available
financing sources, will be sufficient to meet all currently planned
expenditures and sustain operations for the next 12 months. However, this
belief assumes that operating results and cash flow from operations will meet
DSSG's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt
or equity securities. There can be no assurance that such financing would be
available on terms favorable to Quantum if at all.
Financial Market Risks
DSSG is exposed to a variety of risks, including changes in interest rates,
foreign currency fluctuations and marketable equity security prices. To manage
the volatility relating to these exposures, DSSG enters into various
derivative transactions pursuant to DSSG's policies to hedge against known or
forecasted market exposures.
Changes in interest rates affect interest income earned on DSSG's cash
equivalents and short-term investments, and interest expense on short-term and
long-term borrowings. DSSG does not enter into derivative transactions related
to its cash, cash equivalents or short-term investments, nor existing or
anticipated liabilities.
As a multinational corporation, DSSG is exposed to changes in foreign
exchange rates. These exposures may change over time and could have a material
adverse impact to our financial results.
DSSG utilized foreign currency forward contracts to manage the risk of
exchange rate fluctuations. In all cases, DSSG uses these derivative
instruments to reduce its foreign exchange risk by essentially creating
offsetting market exposures. The instruments held by DSSG are not leveraged
and are not held for trading or speculative purposes.
DSSG uses forward exchange contracts to hedge its net asset or net
liability position, which primarily consists of inter-company balances,
foreign tax liabilities and non-functional currency denominated receivables.
The hedging activity is intended to manage the effects of foreign currency
remeasurement arising from certain assets and liabilities denominated in
foreign currency. The success of the hedging program depends on forecasts of
transaction activity in the various currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
DSSG could experience unanticipated currency gains or losses.
II-7
<PAGE>
Trends and Uncertainties Relating to the DLT & Storage Systems Group
Holders of DSSG stock remain stockholders of one company and, therefore,
financial effects on HDDG could adversely affect DSSG
Holders of DSSG stock and HDDG stock are stockholders of a single company.
DSSG and HDDG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of its businesses, assets and liabilities. The issuance of DSSG stock and HDDG
stock and the allocation of assets and liabilities and stockholders' equity
between DSSG and HDDG did not result in a distribution or spin-off to
stockholders of any Quantum assets or liabilities and did not affect ownership
of our assets or responsibility for our liabilities or those of our
subsidiaries. The assets we attribute to one group could be subject to the
liabilities of the other group, whether such liabilities arise from lawsuits,
contracts or indebtedness that we attribute to the other group. If we are
unable to satisfy one group's liabilities out of the assets we attribute to
it, we may be required to satisfy those liabilities with assets we attribute
to the other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of
tracking stock under Delaware law. For these reasons, you should read our
consolidated financial information with the financial information we provide
for each group.
Competition may increase in the tape drive market as a result of large
competitors introducing tape drive products based on new technology standards
DSSG competes with companies that develop, manufacture, market and sell
tape drive products. DSSG's principal competitors include Exabyte Corporation,
Hewlett-Packard, Seagate Technology, Inc., Sony Corporation and StorageTek.
These competitors are aggressively trying to develop new tape drive
technologies that compete more successfully with DLTtape technology. Hewlett-
Packard, IBM and Seagate have formed a consortium to develop new linear tape
drive products. DSSG expects products based on this developing technology
standard to target the high-capacity data back-up market and to compete with
DSSG's products based on Super DLTtape technology. Such competition could have
a material adverse impact on DSSG's operating results.
DSSG's operating results depend on new product introductions which may not be
successful
To compete effectively, DSSG must improve existing products and introduce
new products, such as products based on Super DLTtape technology and network
attached storage appliances. DSSG cannot assure you that:
. it will introduce any of these new products in the time frame DSSG
currently forecasts;
. it will not experience technical or other difficulties that could
prevent or delay the introduction of these new products;
. its new products will achieve market acceptance;
. its new products will be successfully or timely qualified with DSSG's
customers by meeting customer performance and quality specifications. A
successful and timely customer qualification must occur before customers
will place large product orders; or
. it will achieve high volume production of these new products in a timely
manner, if at all.
This risk is magnified because DSSG expects technological changes, changes
in customer requirements and increasing competition could result in declining
sales and gross margins on its existing products.
II-8
<PAGE>
Reliance on a limited number of third-party suppliers could result in
significantly increased costs and delays in the event these suppliers
experience shortages or quality problems
DSSG depends on a limited number of suppliers for components and sub-
assemblies, including recording heads, media cartridges and integrated
circuits, all of which are essential to the manufacture of DLTtape drives and
tape libraries. DSSG currently purchases the DLTtape media cartridges it sells
primarily from Fuji Photo Film Co., Ltd. and Hitachi Maxell, Ltd. DSSG cannot
assure you that Fuji or Maxell will continue to supply adequate high quality
media cartridges in the future. If component shortages occur, or if DSSG
experiences quality problems with component suppliers, shipments of products
could be significantly delayed and/or costs significantly increased. In
addition, DSSG qualifies only a single source for many components and sub-
assemblies, which magnifies the risk of future shortages.
DSSG's main supplier of tape heads is located in China and political
instability, trade restrictions or currency fluctuations in China could have
an adverse impact on DSSG's operating results
DSSG's main supplier of tape heads is located in China and political
instability, trade restrictions, changes in tariff or freight rates or
currency fluctuations in China could result in increased costs, delays in
shipment and could have an adverse impact on DSSG's operating results.
DSSG's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
DSSG's quarterly operating results have fluctuated significantly in the
past and could fluctuate significantly in the future. Quarterly operating
results could be adversely affected by:
. an inadequate supply of DLTtape media cartridges;
. customers canceling, deferring or rescheduling significant orders as a
result of excess inventory levels or other factors;
. declines in network server demand;
. failure to complete shipments in the last month of a quarter during
which a substantial portion of DSSG's products are typically shipped; or
. increased competition.
A majority of sales come from a few customers and these customers have no
minimum or long-term purchase commitments
DSSG's sales are concentrated with a few customers. Customers are not
obligated to purchase any minimum product volume and DSSG's relationships with
its customers are terminable at will. The loss of, or a significant change in
demand from, one or more key customers could materially adversely impact
DSSG's operating results.
Unpredictable end-user demand may cause excess inventories which could result
in inventory write-downs or losses or insufficient inventories which could
have an adverse impact on DSSG's customer relationships
Unpredictable end-user demand, combined with the computer equipment
manufacturer trend toward carrying minimal inventory levels, increases the
risk that DSSG will manufacture and custom configure too much or too little
inventory for particular customers. Significant excess inventory could result
in inventory write-downs and losses while inventory shortages could adversely
impact DSSG's relationship with its customers, either of which could adversely
impact DSSG's operating results.
II-9
<PAGE>
DSSG does not control licensee pricing or licensee sales of DLTtape media
cartridges and as a result DSSG's royalty revenue may decline
DSSG receives a royalty fee based on sales of DLTtape media cartridges by
Fuji and Maxell. Under DSSG's license agreements with Fuji and Maxell, each of
the licensees determine the pricing and number of units of DLTtape media
cartridges sold by it. In addition, other companies may begin to sell DLTtape
media cartridges under license agreements. As a result, DSSG's royalty revenue
will vary depending upon the level of sales and prices set by Fuji, Maxell and
potentially other licensees. In addition, lower licensee pricing could require
DSSG to lower its prices on direct sales of DLTtape media cartridges which
would adversely impact DSSG's margins for this product.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege DSSG's infringement of and need for
a license under their patented or other proprietary technology. Adverse
resolution of any third party infringement claim could subject DSSG to
substantial liabilities and require it to refrain from manufacturing and
selling certain products. In addition, the costs incurred in intellectual
property litigation can be substantial, regardless of the outcome.
II-10
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Quantum Corporation
We have audited the accompanying combined balance sheets of the DLT &
Storage Systems group (as described in Note 1) of Quantum Corporation as of
March 31, 1999 and 2000 and the related combined statements of operations,
group equity, and cash flows for each of the three years in the period ended
March 31, 2000. Our audits also included the financial statement schedule
listed in the index at Item 14a. These financial statements and schedule are
the responsibility of Quantum Corporation's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DLT & Storage Systems
group at March 31, 1999 and 2000 and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As more fully described in Note 1 to these financial statements, the DLT &
Storage Systems group is a business group of Quantum Corporation; accordingly,
the combined financial statements of the DLT & Storage Systems group should be
read in conjunction with the audited consolidated financial statements of
Quantum Corporation.
/s/ Ernst & Young LLP
San Jose, California
April 24, 2000
II-11
<PAGE>
DLT & STORAGE SYSTEMS GROUP
COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Product revenue........................... $1,162,725 $1,181,273 $1,232,442
Royalty revenue........................... 27,075 121,463 186,429
---------- ---------- ----------
Total revenue............................. 1,189,800 1,302,736 1,418,871
Cost of revenue........................... 687,586 722,817 769,981
---------- ---------- ----------
Gross profit.............................. 502,214 579,919 648,890
Operating expenses:
Research and development................ 62,825 99,330 122,821
Sales and marketing..................... 47,244 76,737 118,504
General and administrative.............. 22,363 38,158 62,991
Special charge.......................... -- -- 40,083
Purchased in-process research and
development............................ -- 89,000 37,000
---------- ---------- ----------
132,432 303,225 381,399
---------- ---------- ----------
Income from operations.................... 369,782 276,694 267,491
Interest income and other, net............ 18,707 5,946 18,838
Interest expense.......................... (21,835) (18,322) (18,978)
---------- ---------- ----------
Income before income taxes................ 366,654 264,318 267,351
Income tax provision...................... 142,995 141,327 121,737
---------- ---------- ----------
Net income................................ $ 223,659 $ 122,991 $ 145,614
========== ========== ==========
Pro forma net income per share(1):
Basic................................... $ 1.64 $ 0.77 $ 0.89
========== ========== ==========
Diluted................................. $ 1.37 $ 0.73 $ 0.86
========== ========== ==========
Pro forma weighted-average common
shares(1):
Basic................................... 136,407 160,670 163,182
========== ========== ==========
Diluted................................. 170,125 167,407 169,045
========== ========== ==========
Net income for the period from August 4,
1999 to March 31, 2000................... $ 85,586
==========
Net income per share:
Basic................................... $ 0.53
==========
Diluted................................. $ 0.51
==========
Weighted-average common shares:
Basic................................... 162,023
==========
Diluted................................. 167,734
==========
</TABLE>
--------
(1) Pro forma net income per share and pro forma weighted average common shares
assume the recapitalization occurred at the beginning of the earliest
period presented.
See accompanying notes to combined financial statements.
II-12
<PAGE>
DLT & STORAGE SYSTEMS GROUP
COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31,
---------------------
1999 2000
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 272,643 $ 336,720
Marketable securities.................................. -- 2,032
Accounts receivable, net of allowance for doubtful
accounts of $2,507 and $3,492 respectively............ 254,228 214,107
Inventories............................................ 124,462 101,478
Deferred taxes......................................... 35,594 54,669
Other current assets................................... 8,434 38,424
---------- ----------
Total current assets................................. 695,361 747,430
Property, plant and equipment, less accumulated
depreciation............................................ 73,122 78,137
Intangible assets, less accumulated amortization......... 220,368 248,288
Other assets............................................. 24,792 12,149
---------- ----------
$1,013,643 $1,086,004
========== ==========
Liabilities and Group Equity
Current liabilities:
Accounts payable....................................... $ 64,025 $ 94,596
Accrued warranty....................................... 37,988 52,593
Accrued compensation................................... 22,557 36,379
Accrued special charge................................. -- 20,954
Current portion of long-term debt...................... 683 689
Due to the Hard Disk Drive group....................... -- 30,100
Other accrued liabilities.............................. 32,850 27,749
---------- ----------
Total current liabilities............................ 158,103 263,060
Deferred taxes........................................... 27,355 13,578
Long-term debt........................................... 37,974 25,225
Convertible subordinated debt............................ 191,667 191,667
Commitments and contingencies............................
Group equity............................................. 598,544 592,474
---------- ----------
$1,013,643 $1,086,004
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
II-13
<PAGE>
DLT & STORAGE SYSTEMS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 223,659 $ 122,991 $ 145,614
Adjustments to reconcile net income to net
cash provided by operations:
Special charge............................. -- -- 38,025
Purchased in-process research and
development............................... -- 89,000 37,000
Depreciation............................... 15,484 25,952 33,987
Amortization............................... 8,160 15,955 28,011
Deferred taxes............................. (11,340) 3,388 (26,049)
Compensation related to stock incentive
plans..................................... 2,824 3,757 5,381
Changes in assets and liabilities:
Accounts receivable...................... 2,588 (78,727) 40,485
Inventories.............................. (55,831) 2,666 24,125
Accounts payable......................... (2,863) 2,769 28,456
Accrued warranty......................... 4,676 3,359 14,020
Other assets and liabilities............. 15,300 25,995 10,558
--------- --------- ---------
Net cash provided by operating
activities............................ 202,657 217,105 379,613
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities.......... -- -- (4,523)
Maturities of marketable securities......... -- -- 12,607
Purchases of equity securities.............. (15,000) (1,750) (3,397)
Acquisition of intangible assets............ (16,000) -- (2,500)
Investment in property and equipment........ (30,682) (33,176) (35,192)
Proceeds from disposition of property and
equipment.................................. -- 3 --
--------- --------- ---------
Net cash used in investing activities.. (61,682) (34,923) (33,005)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities... -- 25,212 6,667
Inter-group payment for common stock
issued..................................... -- (15,118) (2,835)
Purchase of treasury stock.................. -- (305,287) (303,766)
Principal payments on long-term credit
facilities................................. (120,651) (31,445) (19,410)
Proceeds from issuance of common stock,
net........................................ 33,573 28,189 36,813
Proceeds from issuance of convertible
subordinated notes......................... 191,667 -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities.................. 104,589 (298,449) (282,531)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................. 245,564 (116,267) 64,077
Cash and cash equivalents at beginning of
period....................................... 143,346 388,910 272,643
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 388,910 $ 272,643 $ 336,720
========= ========= =========
Supplemental disclosure of cash flow
information:
Conversion of debentures to common stock.... $ 160,900 $ -- $ --
========= ========= =========
Conversion of redeemable preferred stock to
common stock............................... $ 2,592 $ -- $ --
========= ========= =========
Cash paid during the year for:
Interest................................... $ 19,353 $ 17,813 $ 17,885
========= ========= =========
Income taxes, net of (refunds)............. $ 44,747 $ (19,146) $ 10,992
========= ========= =========
Tangible and intangible assets acquired for
shares of Quantum, DSSG and HDDG common
stock, net of cash acquired and liabilities
assumed...................................... $ -- $ 274,356 $ 101,863
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
II-14
<PAGE>
DLT & STORAGE SYSTEMS GROUP
COMBINED STATEMENTS OF GROUP EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained Group
Other Earnings Equity
--------- -------- ---------
<S> <C> <C> <C>
Balances at March 31, 1997.................... $(111,417) $142,340 $ 30,923
Net income.................................... -- 223,659 223,659
Conversion of subordinated debentures......... 157,815 -- 157,815
Conversion of Series B preferred shares....... 2,592 -- 2,592
Shares issued under employee stock purchase
plan......................................... 14,318 -- 14,318
Shares issued under employee stock option
plans, net................................... 19,255 -- 19,255
Compensation expense and other................ 2,824 -- 2,824
Tax benefits related to stock option plans.... 14,190 -- 14,190
--------- -------- ---------
Balances at March 31, 1998.................... 99,577 365,999 465,576
Net income.................................... -- 122,991 122,991
Shares issued under employee stock purchase
plan......................................... 16,027 -- 16,027
Shares issued under employee stock option
plans, net................................... 12,162 -- 12,162
Treasury shares repurchased................... (305,287) -- (305,287)
Treasury shares reissued for ATL acquisition.. 305,287 (63,452) 241,835
New shares issued for ATL acquisition......... 15,326 -- 15,326
Conversion of ATL stock options............... 14,911 -- 14,911
Compensation expense and other................ 3,757 -- 3,757
Tax benefits related to stock option plans.... 11,246 -- 11,246
--------- -------- ---------
Balances at March 31, 1999.................... 173,006 425,538 598,544
Net income.................................... -- 145,614 145,614
Shares issued under employee stock purchase
plan......................................... 18,156 -- 18,156
Shares issued under employee stock option
plans, net................................... 22,265 -- 22,265
Treasury shares repurchased................... (84,239) -- (84,239)
Treasury shares reissued for Meridian
acquisition.................................. 87,744 -- 87,744
New shares issued for Meridian acquisition.... 3,394 -- 3,394
Conversion of Meridian stock options.......... 8,266 -- 8,266
Treasury shares repurchased and retired....... (219,527) -- (219,527)
Compensation expense and other................ 5,381 -- 5,381
Tracking stock issuance costs................. (3,608) -- (3,608)
Tax benefits related to stock option plans.... 10,484 -- 10,484
--------- -------- ---------
Balances at March 31, 2000.................... $ 21,322 $571,152 $ 592,474
========= ======== =========
</TABLE>
See accompanying notes to combined financial statements.
II-15
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Nature of Business. Quantum Corporation ("Quantum") operates its business
through two separate groups: the DLT & Storage Systems group ("DSSG") and the
Hard Disk Drive group ("HDDG") as described below.
DSSG designs, develops, manufactures, licenses and markets DLTtape drives,
DLTtape media cartridges and storage systems. DSSG's storage systems consists
of DLTtape libraries, solid state storage systems, network attached storage
appliances and service. DLTtape is DSSG's half-inch tape technology that is
the de facto industry standard for data back-up in the mid-range server
market.
HDDG designs, develops and markets a diversified product portfolio of hard
disk drives to meet the storage requirements of entry-level to high-end
desktop PCs in home and business environments, and high-end hard disk drives
for the demanding storage needs of network servers, workstations and storage
sub-systems. HDDG also designs hard disk drives for consumer electronics
devices.
Financial Statement Presentation. The combined financial statements of
DSSG, together with the combined financial statements of HDDG, include all of
the accounts in the consolidated financial statements of Quantum. The separate
group combined financial statements give effect to the accounting policies
applicable with the implementation of the tracking stock proposal. The
separate DSSG and HDDG financial statements have been prepared on a basis that
management believes to be reasonable and appropriate and include (i) the
historical balance sheets, results of operations, and cash flows of businesses
that comprise each of the groups, with all significant intragroup transactions
and balances eliminated, (ii) in the case of DSSG's financial statements,
corporate assets and liabilities of Quantum and related transactions
identified with DSSG, including allocated portions of Quantum's debt and
selling, general and administrative costs, and (iii) in the case of HDDG's
financial statements, corporate assets and liabilities of Quantum and related
transactions identified with HDDG, including allocated portions of Quantum's
debt and selling, general and administrative costs. Intergroup transactions
and balances are not eliminated in the separate financial statements of DSSG
or HDDG. Certain amounts in prior periods have been reclassified to conform to
current presentation.
The combined financial statements of the DLT & Storage Systems group
provide DSSG stockholders with financial information about the DLT & Storage
Systems group's operations. Holders of DSSG stock and HDDG stock are Quantum
stockholders and are subject to all of the risks of an investment in Quantum
and all of Quantum's businesses, assets and liabilities. Quantum retains
ownership and control of all of the assets and operations of each group.
Financial effects arising from one group that affect Quantum's consolidated
results of operations or financial condition could, if significant, affect the
results of operations or financial condition of the other group and the market
price of the other group's stock. Any net losses of DSSG or HDDG, and
dividends or distributions on, or repurchases of HDDG stock, or repurchases of
preferred stock at a price per share greater than par value, will reduce the
funds of Quantum legally available for payment of dividends on DSSG stock. As
a result, DSSG's combined financial statements should be read in conjunction
with Quantum's consolidated financial statements and HDDG's combined financial
statements.
DSSG's combined financial statements reflect the application of the
management and allocation policies adopted by the Board to various corporate
activities, as described below.
Financing Activities. Quantum manages most financial activities of DSSG and
HDDG on a centralized basis. Such financial activities include the investment
of surplus cash, the issuance and repayment of short-term and long-term debt,
the issuance and repurchase of common stock, and the issuance and repurchase
of any preferred stock.
II-16
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
At March 31, 2000, $218 million of Quantum's debt was allocated to DSSG and
$109 million was allocated to HDDG. The Board has adopted the following
financing policy that will affect the combined statements of DSSG and HDDG:
Quantum will allocate its debt between the groups ("pooled debt") or, if
Quantum so determines, in its entirety to a particular group. Quantum will
allocate preferred stock, if issued, in a similar manner.
Cash allocated to one group that is used to repay pooled debt or redeem
pooled preferred stock decreases such group's allocated portion of the pooled
debt or preferred stock. Cash or other property allocated to one group that is
transferred to the other group, if so determined by the Board, decreases the
transferring group's allocated portion of the pooled debt or preferred stock
and, correspondingly, increases the recipient group's allocated portion of the
pooled debt or preferred stock.
Pooled debt bears interest for group financial statement purposes at a rate
equal to the weighted average interest rate of the debt calculated on a
quarterly basis and applied to the average pooled debt balance during the
period. Preferred stock, if issued and if pooled in a manner similar to the
pooled debt, may bear dividends for group financial statement purposes at a
rate based on the weighted average dividend rate of the preferred stock
similarly calculated and applied. Any expense related to increases in pooled
debt or preferred stock is reflected in the weighted average interest or
dividend rate of such pooled debt or preferred stock as a whole.
Debt for a particular financing, allocated in its entirety to one group,
bears interest for group financial statement purposes at the rate determined
by the Board. For preferred stock allocated in its entirety to one group, the
dividend cost to that group is determined in a similar manner. If the interest
or dividend cost is higher than Quantum's actual cost, the other group
receives a credit for an amount equal to the difference as compensation for
the use of Quantum's credit capacity. Any expense related to debt or preferred
stock that is allocated in its entirety to a group is allocated in whole to
that group.
Cash or other property that Quantum allocated to one group that is
transferred to the other group is, if so determined by the Board, accounted
for either as a short-term loan or as a long-term loan. Short-term loans and,
unless Quantum's board determines otherwise, long-term loans bear interest at
a rate equal to the weighted average interest rate of Quantum's pooled debt.
If Quantum does not have any pooled debt, the Board determines the rate of
interest for such loan. The Board establishes the terms on which long-term
loans between the groups is made, including interest rate if not based on
Quantum's weighted average interest rate, amortization schedule, maturity and
redemption terms.
Although Quantum may allocate its debt and preferred stock between groups,
the debt and preferred stock remain obligations of Quantum and all
stockholders of Quantum are subject to the risks associated with those
obligations.
Allocation of Support Activities. DSSG is charged for specifically
identified costs of certain support activities based upon DSSG's use of such
activities. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of support activities attributable to DSSG. Such allocated support activities
included certain selling and marketing, executive management, human resources,
corporate finance, legal and corporate planning costs. The total of these
allocations were $28 million, $30 million, and $37 million in fiscal years
1998, 1999 and 2000, respectively. It is not practicable to provide a detailed
estimate of the expenses that would be recognized if DSSG were a separate
entity.
Allocation of Federal and State Income Taxes. The federal income taxes of
Quantum and the subsidiaries which own assets allocated between the groups are
determined on a consolidated basis. Consolidated federal income tax provisions
and related tax payments or refunds are allocated between the groups based
principally on
II-17
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
the taxable income and tax credits directly attributable to each group, as if
each group were a stand-alone entity. Such allocations reflect each group's
contribution (whether positive or negative) to Quantum's consolidated federal
taxable income and the consolidated federal tax liability and tax credit
position. Tax benefits that cannot be used by the group generating those
benefits but can be used on a consolidated basis are credited to the group
that generated such benefits. Accordingly, the amounts of taxes payable or
refundable allocated to each group may not necessarily be the same as that
which would have been payable or refundable had each group filed a separate
income tax return.
Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a consolidated or combined basis or on a
separate corporation basis. State income tax provisions and related tax
payments or refunds determined on a consolidated or combined basis are
allocated between the groups based on their respective contributions to such
consolidated or combined state taxable incomes. State and local income tax
provisions and related tax payments which are determined on a separate
corporation basis are allocated between the groups in a manner designed to
reflect the respective contributions of the groups to the corporation's
separate state or local taxable income.
The discussion of DSSG's income tax provision (Note 12) should be read in
conjunction with Quantum's consolidated financial statements and notes
thereto.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with
DSSG's warranties. If the actual value of DSSG's inventories and associated
reserves differs from these estimates, DSSG's operating results could be
materially adversely impacted. The actual results with regard to warranty
expenditures could also have a material adverse impact on DSSG if the actual
rate of unit failure or the cost to repair a unit is greater than what DSSG
has used in estimating the warranty expense accrual.
Revenue Recognition. Revenue from sales of products is recognized on
passage of title to customers, when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price to the
buyer is fixed or determinable and collectibility is reasonably assured, with
provision made for estimated returns. DSSG accrues royalty revenue based on
licensees' sales that incorporate certain licensed technology, as reported by
the licensees.
Foreign Currency Transactions. Assets, liabilities, and operations of
foreign offices and subsidiaries are recorded based on the functional currency
of the entity. For a majority of DSSG's material foreign operations, the
functional currency is the U.S. dollar. In addition, a majority of DSSG's
material transactions are denominated in U.S. dollars. Accordingly,
transaction gains or losses have been immaterial to the financial statements
for all years presented. The effect of foreign currency exchange rate
fluctuations on cash was also immaterial for the years presented. Assets and
liabilities denominated in other than the functional currency are remeasured
each month with the remeasurement gain or loss recorded in other income.
Foreign Exchange Contracts. The effect of foreign currency rate changes on
the remeasurement of certain assets and liabilities denominated in a foreign
currency are managed using foreign currency forward exchange contracts.
Foreign currency forward exchange contracts represent agreements to exchange
the currency of one country for the currency of another country at an agreed-
upon price, on an agreed-upon settlement date. Foreign currency forward
exchange contracts are accounted for by the fair value method, with changes in
value recognized in other income.
II-18
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Equity Instruments Indexed to DSSG Common Stock. Equity instruments are
utilized in connection with the Quantum's stock repurchase program which give
Quantum the choice of cash settlement or settlement in shares of common stock.
Proceeds received upon the sale of equity instruments and amounts paid upon
the purchase of equity instruments are recorded as a component of group
equity. Subsequent changes in the fair value of the equity instruments are not
recognized. If the contracts are ultimately settled in cash, the amount of
cash paid or received is recorded as a component of group equity.
Net Income Per Share. As a result of the recapitalization, net income per
share for DSSG has been calculated based on DSSG's net income from August 4,
1999 through March 31, 2000. It was not calculated on a group basis for
periods prior to the recapitalization because DSSG stock was not part of
Quantum's capital structure at that time. Pro forma net income per share
presented in DSSG's statements of operations assumes that DSSG stock created
in the recapitalization existed for all periods presented.
Cash Equivalents. Highly liquid debt instruments with a maturity of 90 days
or less at the time of purchase are considered to be cash equivalents. Cash
equivalents are carried at fair value, which approximates cost. Marketable
securities have maturities of more than 90 days at the time of purchase. Cash
equivalents and marketable securities have been classified as available-for-
sale. Securities classified as available-for-sale are carried at fair value
with material unrealized gains and losses reported in group equity. The cost
of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other-than-
temporary are recorded in other income or expense. The cost of securities sold
is based on the specific identification method.
Concentration of Credit Risk. Quantum performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral
from its customers. Sales to DSSG's top five customers in fiscal year 2000
represented 47% of revenue. Two customers accounted for 20% and 13% of
revenue, respectively. Reserves are maintained for potential credit losses and
such losses have historically been within management's expectations.
Quantum invests its excess cash in deposits with major banks and in money
market funds and short-term debt securities of companies with strong credit
ratings from a variety of industries. These securities generally mature within
365 days and, therefore, bear minimal risk. Quantum has not experienced any
material losses on these investments. Quantum, by corporate policy, limits the
amount of credit exposure to any one issuer and to any one type of investment.
Investments. Investments in 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.
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 Intangible Assets. Goodwill and other acquired intangible assets
are amortized over their estimated useful lives, which range from two to
fifteen years. The accumulated amortization at March 31, 1999 and 2000 was $13
million and $34 million, respectively. Intangible assets are reviewed for
impairment whenever events or circumstances indicate impairment might exist,
or at least annually. DSSG assesses the recoverability
II-19
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
of its assets including goodwill, by comparing projected undiscounted net cash
flows associated with those assets against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the
fair value of those assets.
Warranty Expense. DSSG generally warrants its products against defects for
a period of one to three years. A provision for estimated future costs
relating to warranty expense is recorded when products are shipped and revenue
recognized.
Advertising Expense. DSSG 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, 1998, 1999 and
2000, was $15 million, $26 million, and $29 million, respectively.
Stock-Based Compensation. DSSG accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
Risks and Uncertainties. As is typical in the information storage industry,
a significant portion of DSSG's customer base is concentrated with a small
number of OEMs, and DSSG 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 DSSG's more significant customers could have a material adverse effect
on DSSG's results of operations. A limited number of tape drive storage
products make up a significant majority of DSSG's sales, and due to
increasingly rapid technological change in the industry, DSSG's future depends
on its ability to develop and successfully introduce new products.
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Management does not expect SFAS
No. 133 to have a material effect on DSSG's financial position or results of
operations. Implementation of this standard has recently been delayed by the
FASB for a 12-month period. DSSG is required to adopt SFAS 133 in fiscal year
2002.
Revenue Recognition and Financial Statements. In December 1999, the
Securities and Exchange Commission ("SEC") issued SEC Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarized certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
will be effective for Quantum in the first quarter of fiscal year 2001. DSSG
is reviewing the requirements of SAB 101 and currently believes that its
revenue recognition policy is consistent with the guidance of SAB 101.
Certain Transactions Involving Stock Compensation. In March 2000, FASB
issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion
No. 25." FIN 44 clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether
a plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of the previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. Management does not expect the
application of FIN 44 to have a material impact on DSSG's financial position
or results of operations.
II-20
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 2 Financial Instruments
Available-For-Sale Securities
Quantum's cash and cash equivalents, including certain available-for-sale
securities, are allocated between the DLT & Storage Systems group and the Hard
Disk Drive group.
The following is a summary of Quantum's consolidated available-for-sale
securities, all of which are classified as cash equivalents and marketable
securities:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 2000
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Certificates of deposit.............. $499,400 $499,400 $590,171 $590,171
Money market funds................... 125,200 125,200 131,900 131,900
Corporate commercial paper and bank
notes............................... 58,484 58,486 128,222 128,246
U.S. Treasury securities and
obligations of U.S. government
agencies............................ 100,589 100,589 28,952 28,962
Equity investments................... -- -- 8 30,048
Other................................ 5,121 5,121 14,500 14,500
-------- -------- -------- --------
$788,794 $788,796 $893,753 $923,827
======== ======== ======== ========
Included in cash and cash
equivalents......................... $764,368 $764,368 $891,713 $891,747
Included in marketable securities.... 24,426 24,428 2,040 32,080
-------- -------- -------- --------
$788,794 $788,796 $893,753 $923,827
======== ======== ======== ========
</TABLE>
The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1999. At March 31, 2000, unrealized
gains on available-for-sale securities were recorded, net of tax, as a
component of accumulated other comprehensive income within Quantum's
stockholders' equity. The estimated fair value of available-for-sale
securities is based on market quotations. There were no sales of available-
for-sale securities in fiscal years 1999 or 2000. At March 31, 2000, the
average available-for-sale portfolio duration was approximately 15 days for
debt securities, and no security had a maturity longer than one year.
Derivative Financial Instruments
Foreign Exchange--Asset and Liability Management. During the periods
covered by the financial statements, Quantum utilized foreign currency forward
exchange contracts to manage the effects of foreign currency remeasurement
arising from certain assets and liabilities denominated in a foreign currency.
The gains and losses from market rate changes on these contracts, which are
intended to offset the losses and gains on certain foreign currency
denominated assets and liabilities, are recorded monthly in other income. Such
gains and losses have been immaterial to DSSG.
II-21
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Carrying Amount and Fair Values of Financial Instruments
The estimated fair value of Quantum's borrowings (pooled debt) are
summarized as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1999 2000
-------------------------- --------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Convertible subordinated
debt................... $287.5 $254.6 $287.5 $227.1
Revolving credit line... 18.0 18.0 -- --
Mortgage loan........... 40.0 40.8 38.9 39.0
</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.
Note 3 Inventories
Inventories consisted of:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000
-------- --------
(In thousands)
<S> <C> <C>
Materials and purchased parts............................. $ 60,138 $ 41,819
Work in process........................................... 22,154 37,024
Finished goods............................................ 42,170 22,635
-------- --------
$124,462 $101,478
======== ========
</TABLE>
Note 4 Property, Plant, and Equipment
Property, plant, and equipment consisted of:
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
(In thousands)
<S> <C> <C>
Machinery and equipment.................................. $ 82,923 $116,864
Furniture and fixtures................................... 7,556 8,006
Buildings and leasehold improvements..................... 36,151 33,305
Land..................................................... 1,122 959
-------- --------
127,752 159,134
Less accumulated depreciation and amortization........... (54,630) (80,997)
-------- --------
$ 73,122 $ 78,137
======== ========
</TABLE>
II-22
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 5 Business Combinations
Meridian Data, Inc.
On September 10, 1999, Quantum's DLT & Storage Systems group completed the
acquisition of Meridian Data, Inc. ("Meridian"). Meridian is a developer and
manufacturer of network attached storage appliances for the PC local area
network environment. The acquisition has been accounted for as a purchase at a
total cost of $115 million. The acquisition was completed with the issuance of
4.1 million shares of DSSG common stock and 2 million shares of HDDG common
stock valued at $74 million and $18 million, respectively, on the date of
acquisition in exchange for all outstanding shares of Meridian; the conversion
of outstanding Meridian stock options into options to purchase 630,000 shares
of DSSG common stock and 315,000 shares of HDDG common stock valued at $8
million and $2 million, respectively; and the assumption of Meridian
liabilities and other acquisition costs of approximately $13 million. At the
date of acquisition, Meridian had $11 million of cash and marketable
securities and a net operating loss carryforward for U.S. federal income tax
purposes of approximately $46 million. Meridian's results of operations are
included in the financial statements from the date of acquisition, and the
assets and liabilities acquired were recorded based on their fair values as of
the date of acquisition. Pro forma results of operations have not been
presented because the effect of the acquisition was not material to DSSG's
financial position or results of operations.
The purchase price has been allocated based on the estimated fair market
value of net tangible and intangible assets acquired and assumed liabilities
as well as in-process research and development costs. As of the acquisition
date, technological feasibility of the in-process technology has not been
established and the technology has no alternative future use. Therefore, DSSG
expensed $37 million of the purchase price as in-process research and
development in the second quarter of fiscal year 2000. The remaining
intangible assets will be amortized on a straight-line basis over periods
ranging from five to ten years.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets acquired............................................... $ 12
In-process research and development.................................... 37
Completed technology................................................... 29
Trademark.............................................................. 4
Assembled workforce.................................................... 3
Goodwill............................................................... 45
Deferred tax liability................................................. (15)
----
$115
====
</TABLE>
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using
a discount rate of 21%, which represents a premium to Quantum's cost of
capital. The expected revenue assumes an average compound annual revenue
growth rate of 64% during calendar years 1999 through 2007. Expected total
revenue from the purchased in-process projects peak in calendar year 2005 and
then begin to decline as other new products are expected to be introduced.
These projections are based on management's estimates of market size and
growth, expected trends in technology and the expected timing of new product
introductions.
Four in-process research and development projects were identified and
valued, including three Snap! Server projects and one operating system ("O/S")
project. The Snap! Server is a family of network attached storage appliances
with products, which incorporate hard disk drives and an O/S designed to meet
the requirements of
II-23
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
entry and workgroup level computing environments where multiple computer users
access shared data files over a local area network. Since the O/S represents a
significant technology component of the Snap! Server product, the O/S
technology was valued as a separate technology asset. These projects are
intended to provide additional capacity and enhanced functionality to current
Snap! Server products. The Snap! Server projects and the O/S project represent
61% and 39%, respectively, of the total in-process research and development
value of $37 million. As of September 10, 1999, the Snap! Server projects
ranged from 24% to 82% complete and the O/S technology project was 39%
complete. The Snap! Server and O/S projects were completed on schedule in
fiscal year 2000.
ATL Products, Inc.
On September 28, 1998, Quantum completed the acquisition of ATL Products,
Inc. ("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 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. DSSG also recognized deferred tax liabilities of $33
million. ATL's results of operations are included in the financial statements
from the date of acquisition, and the assets and liabilities acquired were
recorded based on their fair values as of the date of acquisition.
The purchase price has been allocated based on the estimated fair market
value of net tangible and intangible assets acquired and assumed liabilities
as well as in-process research and development costs. As of the acquisition
date, technological feasibility of the in-process technology has not been
established, and the technology has no alternative future use. Therefore, DSSG
expensed $89 million of the purchase price as in-process research and
development in the third quarter of fiscal year 1999. The remaining
identifiable intangible assets are being amortized on a straight-line basis
over periods ranging from two to fifteen years.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets acquired............................................. $ 59
In-process research and development.................................. 89
Completed technology................................................. 42
Trademarks and trade names........................................... 20
Original equipment manufacturer and value added reseller customer
relationships....................................................... 14
Assembled workforce.................................................. 4
Non-compete agreements............................................... 2
Goodwill............................................................. 138
Deferred tax liability............................................... (33)
----
$335
====
</TABLE>
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each in-
process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using
a discount rate of 20%, which represents a premium to Quantum's cost of
capital. The expected revenue assumes an average compound annual revenue
growth rate of 37% during fiscal years 1999 to 2007. Expected total revenues
from the purchased in-process projects peak in fiscal year 2002 and then begin
to decline as other new products are expected to be introduced.
II-24
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
Five in-process research and development projects were identified and
valued, including three tape library projects, one network project and one
software project. These projects were intended to develop next-generation
automated tape library and software management products. As of September 28,
1998, the tape library projects ranged from 68% to 83% complete, the network
project was 54% complete and the software project was 78% complete. These
projects were completed by the end of fiscal year 2000.
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, 1998 March 31, 1999
-------------- --------------
(In thousands)
<S> <C> <C>
Total revenue................................ $1,250,802 $1,343,037
Net income................................... $ 208,443 $ 202,363
</TABLE>
Note 6 Special Charge
During the fourth quarter of fiscal year 2000, DSSG recorded a special
charge of $40.1 million. The charge was primarily focused on DSSG's DLTtape
Division and reflected DSSG's strategy to align its DLTtape drive operations
with market conditions. These conditions include slower growth in the mid-
range server market and increasing centralization of server backup through
automation solutions, both of which have resulted in relatively flat DLTtape
drive shipments. The special charge included a reduction of overhead expenses
throughout the DLTape Division and an acceleration of DSSG's low cost
manufacturing strategy, which includes moving volume production of DLTtape
drives from Colorado Springs, Colorado to Penang, Malaysia.
The special charge consisted of $13.5 million in facility related costs,
$13.9 million for the write-off of investments in optical technology, $7.6
million for severance and benefits for terminated employees, $3.2 million for
fixed assets to be written-off, primarily related to the transfer of
manufacturing to Penang, Malaysia and $1.9 million in other costs associated
with the plan.
The facilities costs noted above include lease payments for vacant space in
a facility in Colorado Springs, Colorado, the write off of related leasehold
improvements and manufacturing equipment, as well as the write-off of certain
leasehold improvements at Quantum's facility in Penang, Malaysia, as this
space is converted to DSSG manufacturing. DSSG expects that the Colorado
facility will be vacated by the end of fiscal year 2001.
The write-off of investments reflects DSSG's decision to end its research
on certain optical based storage solutions. As a result, DSSG has written of
an equity investment and technology licenses related to optical technology.
DSSG currently expects a workforce reduction of approximately 900
employees. The reduction in force primarily affects employees at DSSG's
manufacturing operations in Colorado Springs, Colorado, as well as
administrative employees within the DLTtape Division. As of March 31, 2000,
178 employees had been terminated. DSSG anticipates that the remaining
employees will be terminated by the end of the second quarter of fiscal year
2001.
II-25
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
As of March 31, 2000, DSSG had incurred cash expenditures of $2 million
associated with employee severance and benefits and other costs. DSSG expects
to incur additional cash expenditures associated with the plan of
approximately $16 million, which will be funded out of operations.
The following table summarizes activity related to the special charge at
March 31, 2000:
<TABLE>
<CAPTION>
Severance
And Facilities Fixed Other
Benefits Costs Investments Assets Costs Total
--------- ---------- ----------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Special charge
provision.............. $7,646 $13,500 $ 13,908 $ 3,163 $ 1,866 $ 40,083
Cash payments........... (956) -- -- -- (1,102) (2,058)
Non-cash charges........ -- -- (13,908) (3,163) -- (17,071)
------ ------- -------- ------- ------- --------
Balance at March 31,
2000................... $6,690 $13,500 $ -- $ -- $ 764 $ 20,954
====== ======= ======== ======= ======= ========
</TABLE>
Note 7 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt
Quantum's debt includes the following:
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
(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............................................... 39,985 38,871
-------- --------
345,485 326,371
Less short-term portion of debt........................ 1,024 1,033
-------- --------
Total long-term debt and convertible subordinated
debt.................................................. $344,461 $325,338
======== ========
The DLT & Storage Systems group's portion of Quantum
debt:
Short-term debt...................................... $ 683 $ 689
Long-term debt and convertible subordinated debt,
excluding current portion........................... 229,641 216,892
-------- --------
The DLT & Storage Systems group total debt......... $230,324 $217,581
======== ========
The Hard Disk Drive group's portion of Quantum debt:
Short-term debt...................................... $ 341 $ 344
Long-term debt and convertible subordinated debt,
excluding current portion........................... 114,820 108,446
-------- --------
The Hard Disk Drive group total debt............... $115,161 $108,790
======== ========
Weighted average interest rate on Quantum's debt at
period-end............................................ 7.31% 7.37%
</TABLE>
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At the
option of Quantum, borrowings under the revolving credit line bear interest at
either the London interbank offered rate plus a margin determined by a total
funded debt ratio, or at a base rate, with option periods of one to six
months. At March 31, 1999 and March 31, 2000, there was no outstanding balance
drawn on this line.
In December 1998, ATL entered into a senior credit facility that provides a
$35 million revolving credit line to ATL. The revolving credit line is co-
terminous with Quantum's $500 million revolving credit line, expiring in
II-26
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
June 2000. As amended, at the option of ATL, borrowings under the revolving
credit line bear interest at either the London interbank offered rate plus a
margin determined by Quantum's total funded debt ratio, or at a base rate,
with option periods of two weeks to six months. At March 31, 1999, $18 million
was outstanding and at March 31, 2000, there was no outstanding balance drawn
on this line.
In July 1997, Quantum issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option
of the holder at any time prior to maturity, unless previously redeemed, into
shares of DSSG common stock and HDDG common stock. The notes are convertible
into 6,206,152 shares of DSSG common stock, or 21.587 shares per $1,000 note,
and 3,103,076 shares of HDDG common stock, or 10.793 shares per $1,000 note.
Quantum has the option to redeem the notes on or after August 1, 1999 and
prior to August 1, 2001, under certain conditions related to the price of
Quantum's common stocks. Subsequent to August 1, 2001, Quantum may redeem the
notes at any time. In the event of certain changes involving all or
substantially all of Quantum's common stocks, the holder would have the option
to redeem the notes. Redemption prices range from 107% of the principal to
100% at maturity. The notes are unsecured obligations subordinated in right of
payment to all of Quantum's existing and future senior indebtedness.
In September 1996, Quantum 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.
Principal payments required on Quantum's long-term debt outstanding at
March 31, 2000, are $1.1 million in fiscal year 2001, $1.2 million in fiscal
year 2002, $1.3 million in fiscal year 2003, $1.5 million in fiscal year 2004
and $1.6 million in fiscal year 2005.
Subsequent to March 31, 2000, Quantum entered into new credit facility
agreements as described in Note 16 of the Notes to Combined Financial
Statements.
Note 8 Stock Incentive Plans
As a result of the recapitalization, each outstanding stock option under
Quantum's stock option plans was converted into separately exercisable options
to acquire one share of DLT & Storage Systems group stock and one-half of a
share of Hard Disk Drive group stock. The exercise price for the resulting
DSSG stock options and HDDG stock options was calculated by multiplying the
exercise price under the original options by a fraction, the numerator of
which was the opening price of DSSG stock or HDDG stock on August 4, 1999 (the
date such stocks were first traded on the New York Stock Exchange) and the
denominator of which was the sum of these DSSG stock and HDDG stock prices.
However, the aggregate intrinsic value of the options was not increased, and
the ratio of the exercise price per option to the market value per share was
not reduced. In addition, the vesting provisions and option periods of the
original grants remained the same upon conversion.
Long-Term Incentive Plan. Quantum has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates
of Quantum. The Plan has available and reserved for future issuance 23.6
million shares and 11.3 million shares of DSSG and HDDG stock, respectively,
and allows for an annual increase in the number of shares available for
issuance, subject to a limitation. Available for grant as of March 31, 2000,
were 4.1 million shares of DSSG stock and 1.1 million shares of HDDG stock.
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. Compensation expense of $2,119,000,
$2,141,000, and $2,097,000 was recorded by DSSG in fiscal years 1998,
II-27
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
1999 and 2000, respectively, on restricted stock options granted pursuant to
stock purchase rights under the Plan. In fiscal years 1998, 1999 and 2000,
Quantum granted 65,500 shares, 157,200 shares, and 99,800 shares,
respectively, of Quantum Corporation restricted stock under the Plan at an
exercise price of $.01 per share. Additionally, 321,600 shares of DSSG
restricted stock and 155,800 shares of HDDG restricted stock were granted
during fiscal year 2000 at an exercise price of $.01 per share.
Supplemental Plan. Quantum has a Supplemental Stock Plan (the "SSP") that
provides for the issuance of stock options and stock purchase rights
(collectively referred to as "options") to employees and consultants of
Quantum. The SSP has available and reserved for future issuance 9.7 million
shares and 5.7 million shares of DSSG group stock and HDDG stock,
respectively. Options under the SSP generally vest over two to four years and
expire ten years after the grant date. At March 31, 2000, options with respect
to 1.8 million shares of DSSG stock and 853,000 shares of HDDG stock were
available for grant. Restricted stock granted under the SSP generally vests
over two to three years. In fiscal year 2000, compensation expense of
$3,108,000 related to restricted stock granted was recorded by DSSG pursuant
to stock purchase rights under the SSP. In fiscal year 2000, 3.0 million
shares of DSSG restricted stock and 1.5 million of HDDG restricted stock were
granted under the SSP at an exercise price of $.01 per share.
Stock Option Plans. Quantum has Stock Option Plans (the "Plans") under
which 4.3 million shares and 2.0 million shares of DSSG stock and HDDG stock,
respectively, were reserved for future issuance at March 31, 2000 to
employees, officers and directors of Quantum. Options under the Plans are
granted at prices determined by the Board of Directors, but at not less than
the fair market value, and accordingly no compensation accounting has been
required at the original date of grant. Options currently expire no later than
ten years from the grant date and generally vest ratably over one to four
years. At March 31, 2000, options with respect to 377,500 shares and 189,000
shares of DSSG stock and HDDG stock, respectively, were available for grant.
Stock Option Summary Information. A summary of activity relating to the
Long-Term Incentive Plan, the Supplemental Plan and the Stock Option Plans
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------------------------
Period from Period from
April 1, 1999, August 4, 1999
to August 3, to March 31,
1999 2000
----------------- -----------------
Quantum Quantum Quantum DLT & Storage
Corporation Corporation Corporation Systems Group
----------------- ----------------- ----------------- -----------------
Weighted- Weighted- Weighted- Weighted-
Avg. Avg. Avg. Avg.
Shares Exercise Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price (000s) Price
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 16,354 $ 7.52 17,005 $12.09 23,376 $14.68 26,412 $13.18
Granted................. 6,163 $19.80 10,781 $21.51 4,719 $18.91 11,037 $ 6.45
Canceled................ (718) $14.11 (1,880) $22.63 (585) $18.56 (3,404) $15.17
Exercised............... (4,794) $ 6.10 (2,530) $ 7.23 (1,098) $ 8.87 (2,605) $ 6.27
------ ------ ------ ------
Outstanding at end of
period................. 17,005 $12.09 23,376 $14.68 26,412 $15.58 31,440 $11.14
====== ====== ====== ======
Exercisable at end of
period................. 8,332 $ 8.84 11,786 $10.65 13,037 $11.95 13,686 $11.03
====== ====== ====== ======
</TABLE>
The exercise prices for options outstanding at March 31, 2000 range from
$0.01 to $26.07 for DSSG stock. Compensation expense of $705,000, $1,459,000,
and $189,000 was recorded by DSSG in fiscal years 1998, 1999 and 2000,
respectively, in connection with accelerated vesting of Quantum and DSSG stock
options under the Plans.
II-28
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information about DSSG options outstanding
and exercisable at March 31, 2000:
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------------------
Weighted-Average
Shares Outstanding at Remaining Weighted-Average
Range of Exercise Prices March 31, 2000 (000s) Contractual Life Exercise Price
------------------------ --------------------- ---------------- ----------------
<S> <C> <C> <C>
$0.01-$6.61............ 8,349 4.04 $ 3.17
$6.64-$13.88........... 9,303 8.73 $ 9.20
$14.19-$26.07.......... 13,788 8.28 $17.28
------
31,440 7.29 $11.14
======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------------
Shares Outstanding at Weighted-Average
Range of Exercise Prices March 31, 2000 (000s) Exercise Price
------------------------ --------------------- ----------------
<S> <C> <C>
$0.01-$6.61....................... 4,974 $ 5.03
$6.64-$13.88...................... 2,870 $ 9.01
$14.19-$26.07..................... 5,842 $17.12
------
13,686 $11.03
======
</TABLE>
Expiration dates ranged from April 27, 2000 to February 11, 2011 for DSSG's
options outstanding at March 31, 2000. Prices for options exercised during the
three-year period ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
Period Price range
-------------- ------------
<S> <C> <C>
Quantum Corporation............................ 4/1/97-8/3/99 $0.01-$23.94
DLT & Storage Systems Group.................... 8/4/99-3/31/00 $0.01-$19.83
</TABLE>
Proceeds received by Quantum and DSSG from exercises are credited to common
stock and capital in excess of par value.
Completing the acquisition of Meridian in September 1999 included the
conversion of outstanding Meridian stock options into options to purchase
630,000 shares of DSSG common stock and 315,000 shares of HDDG common stock.
These options relate to Quantum's assumption of Meridian's 1985 Director
Incentive Stock Plan, 1988 Incentive Stock Plan, 1995 Director Stock Plan and
the 1997 Stock Plan, collectively referred to as the "Meridian Plans." Under
the terms of the Meridian Plans, employees, directors and consultants received
options to purchase shares of Meridian's previously outstanding common stock
at prices not less than 100% of the fair value on the date of grant as
determined by Meridian's Board of Directors. Options under Meridian Plans vest
over a four year period and expire ten years after date of grant or from 30
days to three months after termination of employment. Subsequent to completing
the acquisition of Meridian, no additional grants may be made from the
Meridian Plans. See Note 5 for more information on the acquisition of
Meridian.
Completing the acquisition of ATL in September 1998 included the conversion
of outstanding ATL stock options into options to purchase 1.8 million shares
of Quantum common stock, which were converted, as a result of the
recapitalization, into 1.8 million shares and 0.9 million shares of DSSG
common stock and HDDG
II-29
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
common stock, respectively. These options relate to Quantum'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. Quantum has an employee stock purchase plan (the
"Purchase Plan") that allows for the purchase of stock at 85% of fair market
value at the date of grant or the exercise date, whichever value is less. The
Purchase Plan is qualified under Section 423 of the Internal Revenue Code. Of
the 24.8 million DSSG shares and 12.4 million Hard Disk Drive group shares
authorized to be issued under the plan, 1,394,000 shares and 698,000 shares,
respectively, were available for issuance at March 31, 2000. Employees
purchased 3,454,000 shares, 2,555,000 shares, and 829,000 shares of Quantum
Corporation common stock under the Purchase Plan in fiscal years 1998, 1999,
and 2000, respectively. Additionally, employees purchased 1,145,000 shares of
DSSG stock and 571,000 shares of HDDG stock during fiscal year 2000. The
weighted average exercise price of Quantum Corporation stock purchased under
the Purchase Plan was $6.22, $9.41, and $16.16 in fiscal years 1998, 1999, and
2000, respectively. The weighted average exercise price of DSSG stock
purchased under the Purchase Plan was $8.08 in fiscal year 2000.
Pro forma information. Quantum adopted SFAS No. 123, "Accounting for Stock-
Based Compensation" in fiscal year 1997. Quantum has elected to continue to
account for its stock-based compensation plans under APB Opinion No. 25 and
disclose the pro forma effects of the plans on net income and earnings per
share as provided by SFAS No. 123. Accordingly, no compensation expense has
been recognized for the stock option plans and the employee stock purchase
plans as all options have been issued at fair market value.
Pro forma net income and earnings per share information, as required by
SFAS No. 123, have been determined as if Quantum had accounted for its
employee stock options (including shares issued under the Long-Term Incentive
Plan, Supplemental Plan, Stock Option Plans, and the Stock Purchase Plan,
collectively called "options") granted subsequent to March 31, 1995, under the
fair value method of that statement.
The fair value of options granted in fiscal years 1998, 1999 and 2000
reported below have been estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
Quantum Corporation
<TABLE>
<CAPTION>
Long-Term
Incentive Plan,
Supplemental Plan
And Stock Option
Plans Stock Purchase Plan
-------------------- --------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1999 2000 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years)............. 2.9 3.1 2.8 1.6 1.4 1.1
Risk-free interest rate............ 6.25% 5.52% 5.19% 6.13% 5.85% 5.57%
Stock price volatility............. .56 .61 .65 .53 .56 .62
Dividend yield..................... -- -- -- -- -- --
</TABLE>
II-30
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Long-Term
Incentive Plan,
Supplemental Plan
And Stock Option
Plans Stock Purchase Plan
-------------------- --------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1999 2000 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years)............. -- -- 2.2 -- -- 0.8
Risk-free interest rate............ -- -- 6.43% -- -- 6.12%
Stock price volatility............. -- -- .67 -- -- .66
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 Quantum Corporation and DSSG options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of the options.
The following is a summary of weighted-average grant date fair values:
Quantum Corporation
<TABLE>
<CAPTION>
Weighted-Average
Grant Date Fair
Value
--------------------
Fiscal Fiscal Fiscal
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans............ $ 8.39 $ 9.86 $ 8.55
Restricted stock granted under the Long-Term
Incentive Plan and Supplemental Plan................ $23.68 $22.40 $18.99
Shares granted under the Stock Purchase Plan.......... $ 3.56 $ 4.86 $ 7.85
</TABLE>
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Weighted-Average
Grant Date
Fair Value
----------------
Fiscal 2000
----------------
<S> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans.................. $4.03
Restricted stock granted under the Long-Term
Incentive Plan and Supplemental Plan...................... $8.86
Shares granted under the Stock Purchase Plan................ $4.62
</TABLE>
II-31
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Quantum's
and DSSG's pro forma net income (loss) and net income (loss) per share
follows:
Quantum Corporation
<TABLE>
<CAPTION>
Period from
Year Ended March April 1,
31, 1999, to
----------------- August 3,
1998 1999 1999
-------- -------- -----------
<S> <C> <C> <C>
Net income (loss) (in thousands).............. $139,907 $(83,964) $(32,227)
======== ======== ========
Net income (loss) per share:
Basic....................................... $ 1.03 $ (0.52) $ (0.19)
======== ======== ========
Diluted..................................... $ 0.88 $ (0.52) $ (0.19)
======== ======== ========
</TABLE>
DLT & Storage Systems Group
<TABLE>
<CAPTION>
Period from
August 4,
1999, to
March 31,
2000
-----------
<S> <C>
Net income (in thousands)........................................ $54,265
=======
Net income per share:
Basic.......................................................... $ 0.33
=======
Diluted........................................................ $ 0.33
=======
</TABLE>
Since DSSG stock was not part of the capital structure of Quantum prior to
the recapitalization on August 3, 1999 and no DSSG stock options were
outstanding prior to this date, pro forma information for DSSG for fiscal
years 1999 and 1998 is omitted. Accordingly, the pro forma effect of DSSG
stock options is not representative of what the effect will be in future
years.
As SFAS No. 123 is applicable only to options granted subsequent to March
31, 1995, its pro forma effect will not be fully reflected until fiscal year
2001.
Note 9 Common Stock and Stockholder Rights Agreement
The number of authorized shares of common stock is 1,600,000,000, of which
1,000,000,000 shares are authorized for DSSG common stock and 600,000,000
shares are authorized for HDDG common stock. The number of authorized shares
of preferred stock is 20,000,000.
The Company has a stockholder rights agreement (the "Rights Plan") that
provides existing stockholders with the right to purchase preferred stock in
the event of certain changes in Quantum's ownership. Specifically, existing
DSSG stockholders will have the right to purchase one one-thousandth of a
share of Series B Junior Participating Preferred Stock for each share of DSSG
common stock held, or, under certain circumstances, shares of DSSG common
stock with a market value twice the exercise price of such right and existing
HDDG stockholders will have the right to purchase one one-thousandth of a
share of Series C Junior Participating Preferred Stock for each share of HDDG
common stock held or, under certain circumstances, shares of HDDG common stock
with a market value twice the exercise price of such right. The purchase price
in either case is
II-32
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
determined by the board of directors, subject to adjustment. Subject to
certain exceptions, these rights may be exercised the tenth day after any
person or group becomes the beneficial owner (or makes an offer that would
result in such beneficial ownership) of 20% or more of the outstanding DSSG
common stock or HDDG common stock. If such change in beneficial ownership is
combined with a merger of Quantum or a sale of more than 50% of the assets of
Quantum, then the existing stockholders have the right to purchase, for the
exercise price, a number of shares of common stock in the surviving entity
having a market value of twice the exercise price of such right. The Rights
Plan may serve as a deterrent to takeover tactics that are not in the best
interests of stockholders. There are 1,600,000 preferred shares reserved for
issuance under the Rights Plan.
Note 10 Earnings Per Share
As a result of the recapitalization, net income per share for DSSG has been
calculated based on the group's net income from August 4, 1999 through March
31, 2000. It was not calculated on a group basis for periods prior to the
recapitalization because DSSG stock was not part of Quantum's capital
structure at that time.
The following table sets forth the computation of basic and diluted net
income per share for DSSG after the recapitalization date:
<TABLE>
<CAPTION>
Period from
August 4, 1999,
to March 31,
2000
---------------
(In thousands,
except per
share data)
<S> <C>
Numerator:
Numerator for basic and diluted net income per share--
income available to common stockholders................... $85,586
=======
Denominator:
Denominator for basic net income per share--weighted
average shares............................................ 162,023
Effect of dilutive securities:
Weighted average options outstanding....................... 5,711
-------
Denominator for diluted net income per share--adjusted
weighted average shares................................... 167,734
=======
Basic net income per share................................. $ 0.53
=======
Diluted net income per share............................... $ 0.51
=======
</TABLE>
The computation of diluted net income per share for DSSG in the period
August 4, 1999 through March 31, 2000, excluded the effect of the 7%
convertible subordinated notes issued in July 1997, which are convertible into
6,206,152 shares of DSSG common stock, or 21.587 shares per $1,000 note,
because the effect would have been antidilutive.
Note 11 Savings and Investment Plan
Substantially all of the regular domestic employees are eligible to make
contributions to Quantum's 401(k) savings and investment plan. Quantum matches
a percentage of the employees' contributions and may also make additional
discretionary contributions to the plan. Quantum contributions were $6
million, $7 million and $9 million in fiscal years 1998, 1999 and 2000,
respectively.
II-33
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 12 Income Taxes
The DLT & Storage Systems group income tax provision consists of the
following:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Federal:
Current...................................... $125,930 $110,509 $126,793
Deferred..................................... (8,634) 5,710 (25,050)
-------- -------- --------
117,296 116,219 101,743
-------- -------- --------
State:
Current...................................... 28,404 27,430 24,236
Deferred..................................... (2,705) (2,322) (4,242)
-------- -------- --------
25,699 25,108 19,994
-------- -------- --------
Income tax provision........................... $142,995 $141,327 $121,737
======== ======== ========
</TABLE>
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of incentive stock options, and employee stock purchase plan
shares reduced taxes currently payable as shown above by $14 million, $11
million, and $10 million in fiscal years 1998, 1999 and 2000, respectively.
Such benefits are credited to group equity when realized.
The DLT & Storage Systems group's income tax provision differs from the
amount computed by applying the federal statutory rate or 35% to income before
income taxes as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Tax at federal statutory rate................. $128,329 $ 92,511 $ 93,570
State income tax, net of federal benefit...... 16,705 16,320 12,996
Research and development credit............... (1,690) (634) (2,109)
Acquired in-process research and development.. -- 31,150 12,950
Goodwill amortization......................... -- 1,609 4,075
Other items................................... (349) 371 255
-------- -------- --------
$142,995 $141,327 $121,737
======== ======== ========
</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.
II-34
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
Year Ended
March 31,
----------------
1999 2000
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods............................ $16,093 $15,283
Accrued warranty expense............................... 5,289 16,193
Allowance for doubtful accounts........................ 946 761
Distribution reserves.................................. 3,578 3,206
Special charges........................................ -- 8,725
Acquired net operating loss and credit carryforwards... -- 19,089
Other accruals and reserves not currently deductible
for tax purposes...................................... 10,527 12,969
Depreciation methods................................... 5,730 8,034
Amortization methods................................... 1,241 1,122
------- -------
43,404 85,382
------- -------
Deferred tax liabilities:
Acquired intangibles................................... (33,602) (40,821)
Other.................................................. (1,563) (3,470)
------- -------
(35,165) (44,291)
------- -------
Net deferred tax asset............................... $ 8,239 $41,091
======= =======
</TABLE>
Quantum'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.
Quantum's federal income 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.
As of March 31, 2000, DSSG has acquired net operating loss carryforwards of
$42 million and credit carryforwards of $4 million. These carryforwards expire
in varying amounts between fiscal years 2005 and 2018.
Note 13 Commitments
Quantum leases certain facilities for DSSG's use 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.
DSSG's rent expense was $6 million, $10 million, and $11 million for the
fiscal years ended March 31, 1998, 1999, and 2000, respectively.
II-35
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Year ended March 31,
2001........................................................ $12,655
2002........................................................ 12,459
2003........................................................ 8,634
2004........................................................ 5,245
2005........................................................ 3,440
Thereafter.................................................. 18,415
-------
Total future minimum lease payments....................... $60,848
=======
</TABLE>
DSSG is contingently liable, under residual value guarantees, for
approximately $63 million for one of its current facility leases.
Note 14 Business and Geographic Information
Two customers accounted for 10% or more of the DLT & Storage System group's
combined revenue in fiscal years 1998, 1999 and 2000. Revenue from one
customer represented $433 million, $329 million and $283 million of the
group's combined revenue in the respective periods. Revenue from the other
customer represented $133 million, $171 million and $183 million of the
group's combined revenue in the respective periods.
Product Information
Revenue for the DLT & Storage Systems group is comprised of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1998 1999 2000
------ ------ ------
(In millions)
<S> <C> <C> <C>
DLTtape & Storage Systems group:
DLTtape drives......................................... $ 784 $ 872 $ 858
DLTtape media.......................................... 284 195 147
DLTtape royalties...................................... 27 122 187
Storage systems........................................ 95 154 323
Intra-group elimination................................ -- (40) (96)
------ ------ ------
Total................................................ $1,190 $1,303 $1,419
====== ====== ======
</TABLE>
Intra-group elimination represents intra-group sales of DLTtape drives
incorporated into the DLT & Storage Systems group's tape libraries.
II-36
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED 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,
--------------------------------------------------------
1998 1999 2000
------------------ ------------------ ------------------
Long-Lived Long-Lived Long-Lived
Revenue Assets Revenue Assets Revenue Assets
------- ---------- ------- ---------- ------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States...... $ 934 $71 $ 922 $291 $ 915 $322
United Kingdom..... 149 -- 188 -- 117 --
Rest of Europe..... 83 -- 134 1 259 4
Asia Pacific....... 24 1 59 1 126 --
Latin America...... -- -- -- -- 2 --
------ --- ------ ---- ------ ----
Total............ $1,190 $72 $1,303 $293 $1,419 $326
====== === ====== ==== ====== ====
</TABLE>
Note 15 Unaudited Quarterly Combined Financial Data
<TABLE>
<CAPTION>
Year Ended March 31, 2000
------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Revenue................................ $330,744 $357,098 $365,780 $365,249
Gross profit........................... 151,650 170,206 164,088 162,946
Net income............................. 51,465 21,060 50,790 22,299
Net income per share:
Basic................................ NA 0.08 0.31 0.14
Diluted.............................. NA 0.07 0.30 0.14
Pro forma net income per share:
Basic................................ 0.31 0.13 NA NA
Diluted.............................. 0.30 0.12 NA NA
<CAPTION>
Year Ended March 31, 1999
------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Revenue................................ $255,702 $290,458 $366,495 $390,081
Gross profit........................... 113,674 131,675 161,301 173,269
Net income (loss)...................... 43,565 52,143 (30,584) 57,867
Pro forma net income (loss) per share:
Basic................................ 0.27 0.34 (0.18) 0.35
Diluted.............................. 0.26 0.33 (0.18) 0.33
</TABLE>
--------
NA = Not applicable
Pro forma net income (loss) per share for the DLT & Storage Systems group
assumes the recapitalization occurred at the beginning of the earliest period
presented.
The results of operations for the fourth quarter of fiscal year 2000
included the effect of a $40 million special charge associated with the DLT &
Storage Systems group's strategy to reduce overhead expenses and product cost
including the transfer of volume manufacturing to Penang, Malaysia.
II-37
<PAGE>
DLT & STORAGE SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The results of operations for the second quarter of fiscal year 2000
included the effect of a $37 million charge related to purchased in-process
research and development related to the acquisition of Meridian.
The results of operations for the third quarter of fiscal year 1999
included the effect of an $89 million charge related to purchased in-process
research and development related to the acquisition of ATL.
Note 16 Subsequent Event (Unaudited)
In April 2000, both Quantum and ATL canceled their existing senior credit
facilities and Quantum entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the option of Quantum,
borrowings under the revolving credit lines will bear interest at either the
London interbank offered rate or a base rate, plus a margin determined by a
leverage ratio with option periods of one to six months.
II-38
<PAGE>
DLT & STORAGE SYSTEMS GROUP
SCHEDULE II
COMBINED 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, 1998........... $1,698 $1,970 $(1,082) $2,586
March 31, 1999........... $2,586 $2,709 $(2,788) $2,507
March 31, 2000........... $2,507 $1,297 $ (312) $3,492
</TABLE>
--------
(i) Uncollectible accounts written off, net of recoveries.
II-39
<PAGE>
ANNEX III
THE HARD DISK DRIVE GROUP SELECTED COMBINED FINANCIAL INFORMATION
This summary of combined financial information of the Hard Disk Drive group
("HDDG") for fiscal years 1996 to 2000 should be read along with HDDG's
audited combined 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 1996 and 1997 and the balance sheet data at
March 31, 1996, 1997 and 1998, was taken from these financial statements.
A number of items affect the comparability of this information:
. The results of operations for fiscal year 2000 include the effect of a
$59.4 million special charge, of which $57.1 million is included in cost
of revenue and $2.3 million is included in operating expenses,
associated with HDDG's streamlining of its logistics model, change in
customer service strategy and consolidation of certain product
development programs.
. Through May 1997, HDDG combined the results of a recording heads
business acquired from Digital Equipment in October 1994. These
operations generated operating losses of $70 million, $110 million and
$9 million in fiscal years 1996 through 1998. In May 1997, Quantum
Corporation ("Quantum") sold a 51% interest in these operations to
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"). 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, Quantum and MKE agreed to dissolve
the joint venture, and, as a result, HDDG recorded an additional $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 HDDG's high-end hard disk
drive products.
. The results of operations for the fiscal year 1996 include the effect of
a $209 million charge related to the transition of HDDG's high-end
products to MKE.
HDDG currently has two primary product lines; desktop hard disk drives and
high-end hard disk drives. HDDG has two separate business units that support
these two product lines. HDDG's recording heads operation was transferred to
MKE and used in the manufacture of hard disk drives for HDDG. The value at
which the recording heads were transferred was recorded as an offset to cost
of sales.
III-1
<PAGE>
Pro forma net income (loss) per share for HDDG assumes the recapitalization
occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Business unit:
Desktop
Revenue............. $3,349,735 $4,004,828 $3,981,614 $3,079,437 $2,784,808
Gross profit........ 511,390 565,681 453,278 232,036 129,429
Unit operating
profit (loss)...... 290,767 300,287 184,331 (49,132) (154,963)
High-end
Revenue............. $ 737,426 $ 586,616 $ 633,821 $ 519,883 $ 526,771
Gross profit
(loss)............. (73,974) (10,721) (80,790) 59,383 100,641
Unit operating
loss............... (416,620) (154,184) (250,136) (83,323) (35,961)
Recording heads
Unit operating
loss............... (69,967) (109,632) (8,592) -- --
Loss from investee.. -- -- (66,060) (142,050) --
Combined group
Revenue............... $4,087,161 $4,591,444 $4,615,435 $3,599,320 $3,311,579
Gross profit.......... 415,807 498,402 373,307 291,419 230,070
Research and
development
expenses............. 214,148 261,293 258,916 253,893 242,383
Sales and marketing,
general and
administrative
expenses............. 188,357 200,638 188,788 169,981 176,273
Restructuring/special
charge............... 209,122 -- -- -- 2,338
Income (loss) from
operations........... (195,820) 36,471 (74,397) (132,455) (190,924)
Net income (loss)..... $ (125,429) $ 41,055 $ (52,858) $ (152,526) $ (104,770)
Pro forma net income
(loss) per share:
Basic............... $ (2.43) $ 0.70 $ (0.78) $ (1.90) $ (1.26)
Diluted............. $ (2.43) $ 0.58 $ (0.78) $ (1.90) $ (1.26)
Balance Sheet Data
Property, plant and
equipment, net......... $ 333,976 $ 368,092 $ 227,760 $ 198,806 $ 158,548
Total assets............ 1,740,949 1,721,402 1,646,340 1,469,953 1,478,048
Total long-term debt,
convertible debt and
redeemable preferred
stock.................. 288,008 140,969 109,161 114,820 108,446
</TABLE>
III-2
<PAGE>
HARD DISK DRIVE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 2000 Compared With Fiscal Year 1999
Revenue. Revenue in fiscal year 2000 was $3.3 billion, compared to $3.6
billion in fiscal year 1999, a decrease of 8%. The decrease in revenue
reflected lower revenue from sales of desktop hard disk drives.
. Desktop hard disk drive revenue in fiscal year 2000 was $2.8 billion,
compared to $3.1 billion in fiscal year 1999. Shipments of desktop hard
disk drives increased to a record high in fiscal year 2000. However,
lower average unit prices resulted in reduced desktop hard disk drive
revenue. The increase in shipments reflected increased demand,
particularly from computer equipment manufacturers, and a strong desktop
PC market. The decline in average unit prices reflected intense
competitive pricing pressures, especially in the first two quarters of
fiscal year 2000.
. High-end hard disk drive revenue in fiscal year 2000 was $527 million,
compared to $520 million in fiscal year 1999. Shipments of high-end hard
disk drives also increased to a record high in fiscal year 2000 as HDDG
completed a transition to new high-end products. However, continued
pricing pressures in the high-end market resulted in lower average unit
prices and only a moderate increase in revenue.
Sales to the top five customers in fiscal year 2000 represented 50% of
revenue, compared to 47% of revenue in fiscal year 1999. These amounts
reflected a retroactive combination of sales to Ingram Micro and Electronic
Resources as a result of the completion of their merger in July 1999 as well
as a retroactive combination of sales to Compaq and Digital Equipment as a
result of their merger in June 1998. Sales to Ingram Micro were 13% of revenue
in fiscal year 2000, compared to 10% of revenue in fiscal year 1999, including
sales to Electronic Resources. Sales to Hewlett-Packard were 12% of revenue in
fiscal year 2000, compared to 14% of revenue in fiscal year 1999. Sales to
Compaq were less than 10% of revenue in fiscal year 2000, compared to 10% of
revenue in fiscal year 1999, including sales to Digital Equipment.
Sales to computer equipment manufacturers and distribution channel
customers were 60% and 40% of revenue, respectively, in both fiscal years 2000
and 1999.
Gross Margin Rate. The gross margin rate in fiscal year 2000 was 6.9%,
compared to 8.1% in fiscal year 1999. The gross margin rate in fiscal year
2000 reflected the impact of a $59.4 million special charge, of which $57.1
million was included in cost of revenue. The special charge was related to
HDDG's streamlining of the logistics model, change in customer service
strategy and consolidation of certain product development programs. Excluding
the impact of the charge, the gross margin rate was 8.7% in fiscal year 2000.
. The desktop gross margin rate in fiscal year 2000 was 4.6%, compared to
7.5% in fiscal year 1999. Excluding the desktop portion of the special
charge of $51.4 million, the gross margin rate was 6.5% in fiscal year
2000. The decrease in the gross margin rate reflected intense
competitive pricing pressures, particularly in the first two quarters of
fiscal year 2000. The transition to new lower cost, higher margin
products and cost reductions associated with the special charge in the
second half of fiscal year 2000 partially offset the gross margin
decline.
. The high-end gross margin rate for fiscal year 2000 was 19.1%, compared
to 11.4% in year fiscal 1999. Excluding the high-end portion of the
special charge of $5.7 million, the gross margin rate was 20.2% in
fiscal year 2000. The increase in the gross margin rate reflected the
transition to new, higher margin products.
Research and Development Expenses. Research and development expenses in
fiscal year 2000, were $242 million, or 7.3% of revenue, compared to $254
million, or 7.1% of revenue, in fiscal year 1999. The decrease in research and
development expenses reflected expense reductions in the hard disk drive
business associated with the special charge taken in the second quarter of
fiscal year 2000.
III-3
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
2000, were $110 million, or 3.3% of revenue, compared to $114 million, or 3.2%
of revenue in fiscal year 1999. The decrease in sales and marketing expenses
reflected lower commissions as a result of the reduced level of revenue.
General and Administrative Expenses. General and administrative expenses in
fiscal year 2000, were $66 million, or 2.0% of revenue, compared to $56
million, or 1.5% of revenue, in fiscal year 1999. The increase in general and
administrative expenses reflected an increase in the provision for bad debt
due to the bankruptcy of a distributor in fiscal year 2000 and implementation
of a new quality program at the beginning of fiscal year 2000.
Special Charge. During the second quarter of fiscal year 2000, HDDG
recorded a special charge of $59.4 million, of which $57.1 million is included
in cost of revenue and $2.3 million is included in operating expenses. The
charge reflected HDDG's strategy to modify the hard disk drive business to
more closely align product development and the business's operating model with
the requirements of the rapidly growing low-cost PC market. The special charge
was associated primarily with the streamlining of HDDG's logistics model in
order to create a faster and more flexible fulfillment system, changes in the
customer service strategy and consolidation of certain product development
programs.
The special charge consisted of $26.4 million related to facilities costs,
$13.2 million in asset write-offs related to the streamlining of the global
logistics model and change in customer service strategy, $7.8 million in
severance and benefits for terminated employees, and approximately $12 million
in other costs associated with the plan.
Subsequent to the end of the second quarter of fiscal year 2000, HDDG
revised its estimate of costs required to implement the restructuring plan.
HDDG currently estimates that severance and benefits, inventory and other
costs, which include the disposition of additional capital assets, will be
more than previously estimated as a result of changes in the customer service
strategy. HDDG also estimates that costs associated with vacating leased
facilities will be less than previously estimated as a result of vacating a
major facility earlier than previously expected. Accordingly, HDDG has
reallocated amounts between these categories.
Upon full implementation of the plan, HDDG expects to realize more than
$100 million in cost savings per year, beginning in fiscal year 2001. The
majority of the savings are expected in cost of revenue as a result of a more
efficient distribution system and reduced customer service costs, with the
remaining savings in research and development, as a result of the
consolidation of product development programs. As compared to fiscal year
2000, HDDG expects operating expenses to be relatively flat in fiscal year
2001, with increased investments in disk drive and other storage products,
primarily reflected in research and development, offsetting the cost savings
resulting from the special charge. These expectations are forward-looking
statements and actual results may differ.
Interest and Other Income/Expense. Net interest and other income and
expense in fiscal year 2000 was $13 million income, compared to $10 million
income in fiscal year 1999. The increase reflected increased interest income
on higher cash balances.
Loss from Investee. The loss from investee reflected HDDG's 49% equity
share in the operating losses of its recording heads joint venture with MKE,
which was dissolved in the third quarter of fiscal year 1999. HDDG's share of
the loss in the joint venture for fiscal year 1999 was $142 million. See Note
6 of the Notes to Combined Financial Statements for additional discussion of
the dissolution of the recording heads joint venture.
Income Taxes. HDDG recorded benefits of $73 million and $112 million for
effective benefit rates of 41% and 42% in fiscal years 2000 and 1999,
respectively. The effective rate in fiscal year 2000 reflects decreased
benefits from foreign earnings taxed at less than the U.S. rate.
Net Loss. HDDG reported a net loss in fiscal year 2000 of $105 million,
compared to $153 million in fiscal year 1999. The decreased loss resulted from
the absence of the $101 million charge related to the
III-4
<PAGE>
dissolution of the recording heads joint venture in fiscal year 1999,
partially offset by reduced gross profits in fiscal year 2000, reflecting $57
million of the special charge.
Fiscal Year 1999 Compared With Fiscal Year 1998
Revenue. Revenue in fiscal year 1999 was $3.6 billion, compared to $4.6
billion in fiscal year 1998, a decrease of 22%. The decrease in revenue
reflected lower revenue from sales of both desktop and high-end hard disk
drives.
. Desktop hard disk drive revenue in fiscal year 1999 was $3.1 billion,
compared to $4.0 billion in 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 price decline reflected intense
competition, especially in the first two quarters of fiscal year 1999,
and the growth of the low cost PC market, which has become a higher
proportion of the overall desktop PC market.
. High-end hard disk drive revenue in fiscal year 1999 was $520 million,
compared to $634 million in fiscal year 1998. Although high-end hard
disk drive shipments increased in fiscal year 1999, increased
competitive pricing pressures, especially in the second half of fiscal
year 1999, resulted in reduced average unit prices and lower high-end
hard disk drive revenue.
Sales to the top five customers represented 47% of revenue in fiscal years
1999 and 1998. These amounts reflected a retroactive combination of the sales
to Ingram Micro and Electronic Resources as a result of the completion of
their merger in July 1999 as well as a retroactive combination of sales to
Compaq and Digital Equipment as a result of their merger in June 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 to Hewlett-
Packard were 14% of revenue in both fiscal years 1999 and 1998. Sales to
Ingram Micro were 10% of revenue in fiscal year 1999, compared to less than
10% of revenue in fiscal year 1998, including sales to Electronic Resources.
In fiscal year 1999, sales to computer equipment manufacturers and
distribution channel customers were 60% and 40% of revenue, respectively,
compared to 59% and 41% of revenue, respectively, in fiscal year 1998.
Gross Margin Rate. The gross margin rate in fiscal years 1999 and 1998 was
8.1%.
. The desktop gross margin rate in fiscal year 1999 was 7.5%, compared to
11.4% in fiscal year 1998.
. The high-end gross margin rate in fiscal year 1999 was 11.4%, compared
to -12.7% 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 10.3% in fiscal year
1998. This 2.2 percentage point decline between fiscal year 1998 and 1999
reflected 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 $254 million, or 7.1% of revenue, compared to $259
million, or 5.6% of revenue, in fiscal year 1998. The decrease in research and
development expenses reflected reduced spending as a result of cost control
efforts.
Sales and Marketing Expenses. Sales and marketing expenses in fiscal year
1999, were $114 million, or 3.2% of revenue, compared to $122 million, or 2.6%
of revenue in fiscal year 1998. The decrease in sales and marketing expenses
reflected reduced spending including lower commissions as a result of the
lower level of revenue.
General and Administrative Expenses. General and administrative expenses in
fiscal year 1999, were $56 million, or 1.5% of revenue, compared to $67
million, or 1.5% of revenue, in fiscal year 1998. The decrease in general and
administrative expenses reflected the impact of cost control efforts.
III-5
<PAGE>
Interest and Other Income/Expense. Net interest and other income and
expense in fiscal year 1999 was $10 million income, compared to $5 million
income in fiscal year 1998. The increase reflected increased interest income
on higher cash balances and reduced interest expense.
Loss from Investee. HDDG's investment and operating results related to its
recording heads business have resulted in significant losses. HDDG acquired a
recording heads business from Digital Equipment in October 1994. In May 1997,
HDDG sold a 51% majority interest in its recording heads operations to MKE,
and formed a recording heads joint venture with MKE. On October 28, 1998, HDDG
and MKE agreed to dissolve the recording heads joint venture. In connection
with the dissolution, HDDG recorded a $101 million loss in the third quarter
of fiscal year 1999. This loss included a write-off of HDDG's investment in
the recording heads joint venture; a write-down of HDDG's 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 HDDG's 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 Combined Financial
Statements for additional discussion of the dissolution of the recording heads
joint venture.
Income Taxes. HDDG recorded benefits of $112 million and $83 million for
effective benefit rates of 42% and 61% in fiscal years 1999 and 1998,
respectively. The 1999 effective rate reflects decreased benefits from foreign
earnings taxed at less than the U.S. rate, a lower research and development
credit and decreased state tax benefits. Fiscal year 1998 includes a benefit
as a result of the recognition of state deferred tax assets through tax
planning.
Net Loss. HDDG reported a net loss in fiscal year 1999 of $153 million,
compared to $53 million in fiscal year 1998. The increased loss resulted from
the $101 million charge related to the recording heads joint venture
dissolution and the decrease in revenue and gross profit, partially offset by
a decrease in operating costs.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Management does not expect SFAS No. 133 to have a material effect on HDDG's
financial position or results of operations. Implementation of this standard
has recently been delayed by the FASB for a 12-month period. HDDG is required
to adopt SFAS 133 in fiscal year 2002.
Revenue Recognition and Financial Statements. In December 1999, the
Securities and Exchange Commission ("SEC") issued SEC Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarized certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
will be effective for Quantum in the first quarter of fiscal year 2001. HDDG
is reviewing the requirements of SAB 101 and currently believes that its
revenue recognition policy is consistent with the guidance of SAB 101.
Certain Transactions Involving Stock Compensation. In March 2000, FASB
issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of Accounting
Principles Board ("APB") Opinion No. 25." FIN 44 clarifies the following: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan;
the accounting consequence of various modifications to the terms of the
previously fixed stock options or awards; and the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. Management does
not expect the application of FIN 44 to have a material impact on HDDG's
financial position or results of operations.
III-6
<PAGE>
Liquidity and Capital Resources
Operating Activities. HDDG generated cash from operations of $117 million
during fiscal year 2000 compared to $247 million in fiscal year 1999. Cash
from operations in fiscal year 2000 primarily reflected a reduction in
inventories and an increase in accounts payable. Cash from operations in
fiscal year 1999 primarily reflected a reduction in accounts receivable and
inventories, partially offset by a reduction in accounts payable.
Investing Activities. Investments during fiscal year 2000 were $24 million,
which consisted primarily of investments in property and equipment, partially
offset by net maturities of marketable securities. Investments in fiscal year
1999 totaled $35 million.
Financing Activities. At March 31, 2000, and March 31, 1999, Quantum's debt
allocated to HDDG was $109 million and $115 million, respectively. Debt
allocated to HDDG bears interest at a rate equal to the weighted average
interest rate of Quantum's total debt, calculated on a quarterly basis. At
March 31, 2000, Quantum had total debt of $326 million with an average
interest rate of 7.4%. During fiscal year 2000, HDDG used cash to purchase $21
million of treasury stock as discussed below.
During fiscal year 2000, the Board of Directors authorized Quantum to
repurchase up to $700 million of its common stocks in open market or private
transactions. Of the total repurchase authorization, $600 million was
authorized for repurchase of either Quantum, DSSG or HDDG common stock, while
$100 million was authorized for repurchase of HDDG common stock. During fiscal
year 2000, DSSG repurchased 15.7 million shares of DSSG common stock and
acquired 3.9 million shares of Quantum common stock for $304 million, and HDDG
repurchased 3.5 million shares of HDDG common stock for $21 million. Quantum
has utilized equity instrument contracts, including call and put options, as
part of its stock repurchase program.
Quantum filed a registration statement which became effective on July 24,
1997, pursuant to which Quantum may issue debt or equity securities, in one or
more series or issuances, limited to $450 million aggregate public offering
price. Under the registration statement, in July 1997, Quantum issued $288
million of 7% convertible subordinated notes. The notes mature on August 1,
2004, and are convertible at the option of the holder at any time prior to
maturity, unless previously redeemed, into shares of DSSG common stock and
HDDG common stock. The notes are convertible into 6,206,152 shares of DSSG
common stock, or 21.587 shares per $1,000 note, and 3,103,076 shares of HDDG
common stock, or 10.793 shares per $1,000 note. Quantum has the option to
redeem the notes on or after August 1, 1999 and prior to August 1, 2001, under
certain conditions related to the price of Quantum's common stocks. Subsequent
to August 1, 2001, Quantum may redeem the notes at any time. In the event of
certain changes involving all or substantially all of Quantum's common stocks,
the holder would have the option to redeem the notes. Redemption prices range
from 107% of the principal to 100% at maturity. The notes are unsecured
obligations subordinated in right of payment to all of Quantum's existing and
future senior indebtedness.
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At
Quantum's option, borrowings under the revolving credit line bear interest at
either 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, 2000, there was no outstanding balance drawn on this
line.
In September 1996, Quantum 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. Quantum is required
to make monthly payments based on a 20-year amortization period, and a balloon
payment at the end of the 10-year term.
In April 2000, both Quantum and ATL canceled their existing senior credit
facilities and Quantum entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At Quantum's option, borrowings
under the revolving credit lines will bear interest at either the London
interbank offered rate or a base rate, plus a margin determined by a leverage
ratio with option periods of one to six months.
III-7
<PAGE>
HDDG expects to spend approximately $55 million in fiscal year 2001 for
capital equipment and leasehold improvements. These capital expenditures will
support the development and introduction of new disk drive products.
HDDG expects its cash flow from operations, together with available
financing sources, will be sufficient to meet all currently planned
expenditures and sustain operations for the next 12 months. However, this
belief assumes that operating results and cash flow from operations will meet
HDDG's expectations.
In the future, Quantum may seek to raise cash through the issuance of debt
or equity securities. There can be no assurance that such financing would be
available on terms favorable to Quantum if at all.
Financial Market Risks
HDDG is exposed to a variety of risks, including changes in interest rates,
foreign currency fluctuations and marketable equity security prices. To manage
the volatility relating to these exposures, HDDG enters into various
derivative transactions pursuant to HDDG's policies to hedge against known or
forecasted market exposures.
Changes in interest rates affect interest income earned on HDDG's cash
equivalents and short-term investments, and interest expense on short-term and
long-term borrowings. HDDG does not enter into derivative transactions related
to its cash, cash equivalents or short-term investments, nor existing or
anticipated liabilities.
As a multinational corporation, HDDG is exposed to changes in foreign
exchange rates. These exposures may change over time and could have a material
adverse impact to our financial results.
HDDG utilized foreign currency forward contracts to manage the risk of
exchange rate fluctuations. In all cases, HDDG uses these derivative
instruments to reduce its foreign exchange risk by essentially creating
offsetting market exposures. The instruments held by HDDG are not leveraged
and are not held for trading or speculative purposes.
HDDG uses forward exchange contracts to hedge its net asset or net
liability position, which primarily consists of inter-company balances,
foreign tax liabilities and non-functional currency denominated receivables.
The hedging activity is intended to manage the effects of foreign currency
remeasurement arising from certain assets and liabilities denominated in
foreign currency. The success of the hedging program depends on forecasts of
transaction activity in the various currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
HDDG could experience unanticipated currency gains or losses.
HDDG is exposed to equity price risk on its investment in TiVo, Inc. common
stock. HDDG does not attempt to reduce or eliminate its market exposure on
this security. HDDG entered into a strategic alliance with TiVo in fiscal year
1999 to supply hard disk drives utilizing Quantum's QuickView technology for
integration into TiVo's Personal Video Recorder. At March 31, 2000, the fair
market value of HDDG's investment was approximately $30 million. As TiVo is a
relatively new company and has introduced a new product in the consumer
electronics market, HDDG does not believe it is possible to reasonably
estimate any future price movement of TiVo common stock.
Trends and Uncertainties Relating to the Hard Disk Drive Group
Holders of HDDG stock remain stockholders of one company and, therefore,
financial effects on DSSG could adversely affect HDDG
Holders of HDDG stock and DSSG stock are stockholders of a single company.
HDDG and DSSG are not separate legal entities. As a result, stockholders will
continue to be subject to all of the risks of an investment in Quantum and all
of its businesses, assets and liabilities. The issuance of HDDG stock and DSSG
stock and the allocation of assets and liabilities and stockholders' equity
between HDDG and DSSG did not result in a distribution or spin-off to
stockholders of any Quantum assets or liabilities and did not affect ownership
of our assets or responsibility for our liabilities or those of our
subsidiaries. The assets we attribute to one group could
III-8
<PAGE>
be subject to the liabilities of the other group, whether such liabilities
arise from lawsuits, contracts or indebtedness that we attribute to the other
group. If we are unable to satisfy one group's liabilities out of the assets
we attribute to it, we may be required to satisfy those liabilities with
assets we attribute to the other group.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the tracking stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of tracking stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of
tracking stock under Delaware law. For these reasons, you should read our
consolidated financial information with the financial information we provide
for each group.
HDDG's operating results depend on new product introductions which may not be
successful
To compete effectively, HDDG must frequently introduce new hard disk
drives. HDDG cannot assure you that:
. it will successfully or timely develop or market any new hard disk
drives in response to technological changes or evolving industry
standards;
. it will not experience technical or other difficulties that could delay
or prevent the successful development, introduction or marketing of new
hard disk drives;
. it will successfully qualify new hard disk drives, particularly high-end
disk drives, with HDDG's customers by meeting customer performance and
quality specifications. A successful and timely customer qualification
must occur before customers will place large product orders;
. it will quickly achieve high volume production of new hard disk drives;
or
. its new products will achieve market acceptance.
These risks are magnified because HDDG expects technological changes, short
product life cycles and intense competitive pressures to result in declining
sales and gross margins on its current generation products.
HDDG's quarterly operating results could fluctuate significantly and past
quarterly operating results should not be used to predict future performance
HDDG's quarterly operating results have fluctuated significantly in the
past and may fluctuate significantly in the future. As a result, you should
not use HDDG's past quarterly operating results to predict future performance.
Quarterly operating results could be adversely affected by:
. the ability of MKE, HDDG's exclusive manufacturer, to quickly achieve
high volume production of HDDG's hard disk drives;
. customers canceling, deferring or rescheduling significant orders;
. returns by customers of unsold hard disk drives for credit;
. decline in PC demand; or
. failure to complete shipments in the last month of a quarter during
which a substantial portion of HDDG's products are typically shipped.
HDDG's prices and margins are subject to declines due to unpredictable end-
user demand and oversupply of hard disk drives
End-user demand for the computer systems which contain HDDG's hard disk
drives has historically been subject to rapid and unpredictable fluctuations.
As a result, the hard disk drive market tends to experience periods
III-9
<PAGE>
of excess capacity which typically lead to intense price competition. If
intense price competition occurs, HDDG may be forced to lower prices sooner
and more than expected and transition to new products sooner than expected.
For example, in fiscal year 1999 and the second half of fiscal year 1998, as a
result of excess inventory in the desktop hard disk drive market, aggressive
pricing and corresponding margin reductions materially adversely impacted
HDDG's operating results. HDDG experienced similar conditions in the high-end
hard disk drive market during most of fiscal years 1998 and 1999.
Growth of the lower priced PC markets is putting downward pressure on HDDG's
desktop hard disk drive prices
The growth of the lower priced PC market has led to a shift toward lower
priced desktop hard disk drives. HDDG expects the trend toward lower prices on
hard disk drives to continue. If HDDG is unable to lower the cost of its
desktop hard disk drives accordingly, operating results could be materially
adversely impacted.
Intense competition in the desktop and high-end hard disk drive market could
adversely impact HDDG's operating results
In the desktop hard disk drive market, HDDG's primary competitors are
Fujitsu Limited, IBM, Maxtor Corporation, Samsung Electronics Co., Ltd.,
Seagate and Western Digital Corporation. The desktop hard disk drive market is
characterized by more competitiveness than that seen in the computer industry
in general. HDDG's operating results and competitive position could be
negatively impacted by the introduction of competitive products with higher
performance, higher reliability and/or lower cost than HDDG's products. For
example, in the first half of fiscal year 2000, certain competitors reduced
prices for their products significantly. As a result, HDDG's operating results
were materially adversely impacted.
In the high-end hard disk drive market, HDDG's primary competitors are
Fujitsu, Hitachi, IBM and Seagate. Currently, Seagate and IBM have the largest
market share for high-end hard disk drives. Intense technology and pricing
competition has led to losses on HDDG's high-end hard disk drive products over
the past 12 quarters.
A majority of sales come from a few customers that have no minimum or long-
term purchase commitments
HDDG's sales are concentrated with a few customers. Customers are not
obligated to purchase any minimum product volume and HDDG's customer
relationships are terminable at will. The loss of, or a significant change in
demand from, one or more key HDDG customers could have a material adverse
impact on HDDG's operating results.
Because HDDG depends on MKE for the manufacture of all hard disk drives,
adverse material developments in this critical manufacturing relationship
would adversely impact HDDG's operating results
HDDG's relationship with MKE is critical to the Hard Disk Drive group's
operating results and overall business performance. HDDG's dependence on MKE
includes the following principal risks:
. Quality and Delivery. HDDG relies on MKE to quickly achieve volume
production of new hard disk drives at a competitive cost, to meet HDDG's
stringent quality requirements and to respond quickly to changing
product delivery schedules. Failure of MKE to satisfy these requirements
could have a material adverse impact on HDDG's operating results.
. Purchase Forecasts. MKE's production schedule is based on HDDG's
forecasts of its purchase requirements, and HDDG has limited rights to
modify short-term purchase orders. The failure of HDDG to accurately
forecast its requirements or successfully adjust MKE's production
schedule could lead to inventory shortages or surpluses.
. Pricing. HDDG negotiates pricing arrangements with MKE on a quarterly
basis. Any failure to reach competitive pricing arrangements would have
a material adverse impact on HDDG's operating results.
III-10
<PAGE>
. Capital Commitment. HDDG's future growth will require that MKE continue
to devote substantial financial resources to property, plant and
equipment to support the manufacture of HDDG's products.
. Manufacturing Capacity. If MKE is unable or unwilling to meet HDDG's
manufacturing requirements, an alternative manufacturing source may not
be available in the near-term.
MKE 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
MKE depends on a limited number of qualified suppliers for components and
sub-assemblies, including recording heads, media and integrated circuits, all
of which are essential to the manufacture of HDDG's hard disk drives. MKE may
qualify only a single source for certain components and sub-assemblies, which
can magnify the risk of component shortages. Component shortages have
constrained HDDG's sales growth in the past, and HDDG believes that it will
periodically experience component shortages. If MKE experiences quality
problems with its component suppliers, HDDG's hard disk drive shipments could
be significantly delayed or costs could be significantly increased.
Unexpected warranty costs could have a material adverse impact on operating
results
HDDG warrants its products against defects for a period of one to five
years. Actual warranty costs could have a material adverse impact on HDDG's
operating results if the actual unit failure rate or unit repair costs are
greater than those for which HDDG established a warranty accrual.
Third party infringement claims could result in substantial liability and
significant costs
From time to time, third parties allege HDDG's infringement of and need for
a license under their patented or other proprietary technology. For example,
in August 1998 Quantum was named as one of several defendants in a patent
infringement lawsuit. The plaintiff, Papst Licensing GmbH, owns at least 24
U.S. patents, which it asserts that HDDG has infringed. Recently, Discovision
Associates has brought patents to HDDG's attention. Adverse resolution of the
Papst or any other third party infringement claim could subject HDDG to
substantial liabilities and require it to refrain from manufacturing and
selling certain products. HDDG cannot assure you that licenses to any
technology owned by Papst or any other third party alleging infringement could
be obtained on commercially reasonable terms, or at all. In addition, the
costs of litigation could be substantial, regardless of the outcome.
HDDG's foreign manufacturing costs could be adversely impacted by fluctuations
in currency exchange rates
MKE 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 MKE's manufacturing costs and could
result in higher product prices and/or declining margins for HDDG's products.
III-11
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Quantum Corporation
We have audited the accompanying combined balance sheets of the Hard Disk
Drive group (as described in Note 1) of Quantum Corporation as of March
31,1999 and 2000 and the related combined statements of operations, group
equity, and cash flows for each of the three years in the period ended March
31, 2000. Our audits also included the financial statement schedule listed in
the index at Item 14a. These financial statements and schedule are the
responsibility of Quantum Corporation'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 Hard Disk
Drive group, 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits 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 financial position of the Hard Disk Drive group at March 31,
1999 and 2000 and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As more fully described in Note 1 to these financial statements, the Hard
Disk Drive group is a business group of Quantum Corporation; accordingly, the
combined financial statements of the Hard Disk Drive group should be read in
conjunction with the audited consolidated financial statements of Quantum
Corporation.
/s/ Ernst & Young LLP
San Jose, California
April 24, 2000
III-12
<PAGE>
HARD DISK DRIVE GROUP
COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Revenue................................... $4,615,435 $3,599,320 $3,311,579
Cost of revenue--on net sales............. 4,242,128 3,307,901 3,024,441
Cost of revenue--special charge........... -- -- 57,068
---------- ---------- ----------
Gross profit.............................. 373,307 291,419 230,070
Operating expenses:
Research and development................ 258,916 253,893 242,383
Sales and marketing..................... 121,787 114,389 110,132
General and administrative.............. 67,001 55,592 66,141
Special charge.......................... -- -- 2,338
---------- ---------- ----------
447,704 423,874 420,994
---------- ---------- ----------
Loss from operations...................... (74,397) (132,455) (190,924)
Interest income and other, net............ 15,536 19,161 22,150
Interest expense.......................... (10,918) (9,159) (9,407)
Loss from investee........................ (66,060) (142,050) --
---------- ---------- ----------
Loss before income taxes.................. (135,839) (264,503) (178,181)
Income tax benefit........................ (82,981) (111,977) (73,411)
---------- ---------- ----------
Net loss.................................. $ (52,858) $ (152,526) $ (104,770)
========== ========== ==========
Pro forma net loss per share(1):
Basic................................... $ (0.78) $ (1.90) $ (1.26)
========== ========== ==========
Diluted................................. $ (0.78) $ (1.90) $ (1.26)
========== ========== ==========
Pro forma weighted-average common
shares(1):
Basic................................... 68,203 80,335 83,096
========== ========== ==========
Diluted................................. 68,203 80,335 83,096
========== ========== ==========
Net loss for the period from August 4,
1999 to March 31, 2000................... $ (27,549)
==========
Net loss per share:
Basic................................... $ (0.33)
==========
Diluted................................. $ (0.33)
==========
Weighted-average common shares:
Basic................................... 83,018
==========
Diluted................................. 83,018
==========
</TABLE>
--------
(1) Pro forma net loss per share and pro forma weighted average common shares
assume the recapitalization occurred at the beginning of the earliest
period presented.
See accompanying notes to combined financial statements.
III-13
<PAGE>
HARD DISK DRIVE GROUP
COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31,
---------------------
1999 2000
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 499,725 $ 581,542
Marketable securities.................................. 24,426 30,048
Accounts receivable, net of allowance for doubtful
accounts of $9,623 and $19,618 respectively........... 392,329 395,118
Inventories............................................ 147,524 122,347
Due from the DLT & Storage Systems group............... -- 30,100
Deferred taxes......................................... 72,107 78,713
Other current assets................................... 96,401 58,356
---------- ----------
Total current assets................................. 1,232,512 1,296,224
Property, plant, and equipment, less accumulated
depreciation............................................ 198,806 158,548
Intangible assets, less accumulated amortization......... 5,199 1,915
Other assets............................................. 33,436 21,361
---------- ----------
$1,469,953 $1,478,048
========== ==========
Liabilities and Group Equity
Current liabilities:
Accounts payable....................................... $ 342,344 $ 375,614
Accrued warranty....................................... 38,917 46,967
Accrued compensation................................... 51,048 54,073
Income taxes payable................................... 33,411 44,284
Accrued special charge................................. -- 22,409
Current portion of long-term debt...................... 341 344
Other accrued liabilities.............................. 57,841 77,596
---------- ----------
Total current liabilities............................ 523,902 621,287
Deferred taxes........................................... 39,985 41,758
Long-term debt........................................... 18,987 12,613
Convertible subordinated debt............................ 95,833 95,833
Commitments and contingencies............................
Group equity............................................. 791,246 706,557
---------- ----------
$1,469,953 $1,478,048
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
III-14
<PAGE>
HARD DISK DRIVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (52,858) $(152,526) $(104,770)
Adjustments to reconcile net loss to net
cash provided by operations:
Loss from investee........................ 66,060 124,809 --
Special charge............................ -- -- 52,443
Depreciation.............................. 62,583 66,570 64,659
Amortization.............................. 5,372 4,458 3,912
Deferred taxes............................ 5,338 19,516 18,734
Compensation related to stock incentive
plans.................................... 1,412 1,879 2,487
Changes in assets and liabilities:
Accounts receivable..................... 146,961 193,519 (2,789)
Inventories............................. (6,402) 64,483 25,177
Accounts payable........................ (52,963) (58,980) 33,270
Income taxes payable.................... 8,624 (6,367) 10,873
Accrued warranty........................ (25,648) (1,322) 8,050
Other assets and liabilities............ (76,785) (9,255) 5,010
--------- --------- ---------
Net cash provided by operating
activities........................... 81,694 246,784 117,056
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities.......... (71,573) (78,145) (33,367)
Maturities of marketable securities......... -- 125,292 57,793
Purchases of equity securities.............. -- -- (750)
Acquisition of intangible assets............ (9,850) -- --
Proceeds from sale of interest in recording
heads operations........................... 94,000 -- --
Investment in property and equipment........ (119,066) (82,486) (50,416)
Proceeds from disposition of property and
equipment.................................. 5,962 140 --
Proceeds from repayment of note receivable.. 18,000 -- 3,126
--------- --------- ---------
Net cash used in investing
activities........................... (82,527) (35,199) (23,614)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term credit facilities... -- 8,333 3,333
Inter-group proceeds for common stock
issued..................................... -- 15,118 2,835
Purchase of treasury stock.................. -- -- (20,932)
Principal payments on long-term credit
facilities................................. (60,326) (2,645) (9,704)
Proceeds from issuance of common stock,
net........................................ 16,787 14,094 12,843
Proceeds from issuance of convertible
subordinated notes......................... 95,833 -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 52,294 34,900 (11,625)
--------- --------- ---------
Increase in cash and cash equivalents......... 51,461 246,485 81,817
Cash and cash equivalents at beginning of
period....................................... 201,779 253,240 499,725
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 253,240 $ 499,725 $ 581,542
========= ========= =========
Supplemental disclosure of cash flow
information:
Conversion of debentures to common stock.... $ 80,450 $ -- $ --
========= ========= =========
Conversion of redeemable preferred stock to
common stock............................... $ 1,296 $ -- $ --
========= ========= =========
Cash paid during the year for:
Interest.................................. $ 9,677 $ 8,908 $ 8,993
========= ========= =========
Income taxes.............................. $ 17,868 $ 21,864 $ 17,477
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
III-15
<PAGE>
HARD DISK DRIVE GROUP
COMBINED STATEMENTS OF GROUP EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Other
(Accumulated Comprehensive Group
Other Deficit) Income (Loss) Equity
-------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Balances at March 31, 1997...... $571,217 $ 284,052 $ -- $ 855,269
Comprehensive loss:
Net loss...................... -- (52,858) -- (52,858)
Other comprehensive loss--
foreign currency translation
adjustments.................. -- -- (1,462) (1,462)
---------
Comprehensive loss.............. -- -- -- (54,320)
Conversion of subordinated
debentures..................... 78,907 -- -- 78,907
Conversion of Series B preferred
shares......................... 1,296 -- -- 1,296
Shares issued under employee
stock purchase plan............ 7,159 -- -- 7,159
Shares issued under employee
stock option plans, net........ 9,628 -- -- 9,628
Compensation expense and other.. 1,412 -- -- 1,412
Tax benefits related to stock
option plans................... 7,095 -- -- 7,095
-------- --------- ------- ---------
Balances at March 31, 1998...... 676,714 231,194 (1,462) 906,446
Comprehensive loss:
Net loss...................... -- (152,526) -- (152,526)
Other comprehensive income--
foreign currency translation
adjustments.................. -- -- 612 612
---------
Comprehensive loss.............. -- -- -- (151,914)
Shares issued under employee
stock purchase plan............ 8,013 -- -- 8,013
Shares issued under employee
stock option plans, net........ 6,081 -- -- 6,081
New shares issued for ATL
acquisition.................... 7,662 -- -- 7,662
Conversion of ATL stock
options........................ 7,456 -- -- 7,456
Compensation expense and other.. 1,879 -- -- 1,879
Tax benefits related to stock
option plans................... 5,623 -- -- 5,623
-------- --------- ------- ---------
Balances at March 31, 1999...... 713,428 78,668 (850) 791,246
Comprehensive loss:
Net loss...................... -- (104,770) -- (104,770)
Other comprehensive income:
Foreign currency translation
adjustments................ -- -- (212) --
Unrealized gain on
investments, net of income
taxes of $12,025........... -- -- 18,023 --
-------
Other comprehensive income.... -- -- 17,811 17,811
---------
Comprehensive loss.............. -- -- -- (86,959)
Shares issued under employee
stock purchase plan............ 7,331 -- -- 7,331
Shares issued under employee
stock option plans, net........ 9,120 -- -- 9,120
New shares issued for Meridian
acquisition.................... 825 -- -- 825
Conversion of Meridian stock
options........................ 2,010 -- -- 2,010
Treasury shares repurchased and
retired........................ (20,932) -- -- (20,932)
Compensation expense and other.. 2,487 -- -- 2,487
Tracking stock issuance costs... (3,608) -- -- (3,608)
Tax benefits related to stock
option plans................... 5,037 -- -- 5,037
-------- --------- ------- ---------
Balances at March 31, 2000...... $715,698 $ (26,102) $16,961 $ 706,557
======== ========= ======= =========
</TABLE>
See accompanying notes to combined financial statements.
III-16
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Nature of Business. Quantum Corporation ("Quantum") operates its business
through two separate groups: the Hard Disk Drive group ("HDDG") and the DLT &
Storage Systems group ("DSSG") as described below.
HDDG designs, develops and markets a diversified product portfolio of hard
disk drives to meet the storage requirements of entry-level to high-end
desktop PCs in home and business environments, and high-end hard disk drives
for the demanding storage needs of network servers, workstations and storage
sub-systems. HDDG also designs hard disk drives for consumer electronics
devices.
DSSG designs, develops, manufactures, licenses and markets DLTtape drives,
DLTtape media cartridges and storage systems. DSSG's storage systems consist
of DLTtape libraries, solid state storage systems, network attached storage
appliances and service. DLTtape is DSSG's half-inch tape technology that is
the de facto industry standard for data back-up in the mid-range server
market.
Financial Statement Presentation. The combined financial statements of HDDG
together with the combined financial statements of DSSG, include all of the
accounts in the consolidated financial statements of Quantum. The separate
group combined financial statements give effect to the accounting policies
applicable with the implementation of the tracking stock proposal. The
separate HDDG and DSSG financial statements have been prepared on a basis that
management believes to be reasonable and appropriate and include (i) the
historical balance sheets, results of operations, and cash flows of businesses
that comprise each of the groups, with all significant intragroup transactions
and balances eliminated, (ii) in the case of HDDG's financial statements,
corporate assets and liabilities of Quantum and related transactions
identified with HDDG, including allocated portions of Quantum's debt and
selling, general and administrative costs, and (iii) in the case of DSSG's
financial statements, corporate assets and liabilities of Quantum and related
transactions identified with DSSG, including allocated portions of Quantum's
debt and selling, general and administrative costs. Intergroup transactions
and balances are not eliminated in the separate financial statements of HDDG
or DSSG. Certain amounts in prior periods have been reclassified to conform to
current presentation.
The combined financial statements of the Hard Disk Drive group provide HDDG
stockholders with financial information about the Hard Disk Drive group's
operations. Holders of HDDG stock and DSSG stock are Quantum stockholders and
are subject to all of the risks of an investment in Quantum and all of
Quantum's businesses, assets and liabilities. Quantum retains ownership and
control of all of the assets and operations of each group. Financial effects
arising from one group that affect Quantum's consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of
the other group's stock. Any net losses of HDDG or DSSG, and dividends or
distributions on, or repurchases of DSSG stock, or repurchases of preferred
stock at a price per share greater than par value, will reduce the funds of
Quantum legally available for payment of dividends on HDDG stock. As a result,
HDDG's combined financial statements should be read in conjunction with
Quantum's consolidated financial statements and DSSG's combined financial
statements.
HDDG's combined financial statements reflect the application of the
management and allocation policies adopted by the Board to various corporate
activities, as described below.
Financing Activities. Quantum manages most financial activities of HDDG and
DSSG on a centralized basis. Such financial activities include the investment
of surplus cash, the issuance and repayment of short-term and long-term debt,
the issuance and repurchase of common stock, and the issuance and repurchase
of any preferred stock.
III-17
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
At March 31, 2000, $109 million of Quantum's debt was allocated to HDDG and
$218 million was allocated to DSSG. The Board has adopted the following
financing policy that will affect the combined statements of HDDG and DSSG:
Quantum will allocate its debt between the groups ("pooled debt") or, if
Quantum so determines, in its entirety to a particular group. Quantum will
allocate preferred stock, if issued, in a similar manner.
Cash allocated to one group that is used to repay pooled debt or redeem
pooled preferred stock decreases such group's allocated portion of the pooled
debt or preferred stock. Cash or other property allocated to one group that is
transferred to the other group, if so determined by the Board, decreases the
transferring group's allocated portion of the pooled debt or preferred stock
and, correspondingly, increases the recipient group's allocated portion of the
pooled debt or preferred stock.
Pooled debt bears interest for group financial statement purposes at a rate
equal to the weighted average interest rate of the debt calculated on a
quarterly basis and applied to the average pooled debt balance during the
period. Preferred stock, if issued and if pooled in a manner similar to the
pooled debt, may bear dividends for group financial statement purposes at a
rate based on the weighted average dividend rate of the preferred stock
similarly calculated and applied. Any expense related to increases in pooled
debt or preferred stock is reflected in the weighted average interest or
dividend rate of such pooled debt or preferred stock as a whole.
Debt for a particular financing, allocated in its entirety to one group,
bears interest for group financial statement purposes at the rate determined
by the Board. For preferred stock allocated in its entirety to one group the
dividend cost to that group is determined in a similar manner. If the interest
or dividend cost is higher than Quantum's actual cost, the other group
receives a credit for an amount equal to the difference as compensation for
the use of Quantum's credit capacity. Any expense related to debt or preferred
stock that is allocated in its entirety to a group is allocated in whole to
that group.
Cash or other property that Quantum allocated to one group that is
transferred to the other group is, if so determined by the Board, accounted
for either as a short-term loan or as a long-term loan. Short-term loans and,
unless Quantum's board determines otherwise, long-term loans bear interest at
a rate equal to the weighted average interest rate of Quantum's pooled debt.
If Quantum does not have any pooled debt, the Board determines the rate of
interest for such loan. The Board establishes the terms on which long-term
loans between the groups is made, including interest rate if not based on
Quantum's weighted average interest rate, amortization schedule, maturity and
redemption terms.
Although Quantum may allocate its debt and preferred stock between groups,
the debt and preferred stock remain obligations of Quantum and all
stockholders of Quantum are subject to the risks associated with those
obligations.
Allocation of Support Activities. HDDG is charged for specifically
identified costs of certain support activities based upon HDDG's use of such
activities. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of support activities attributable to HDDG. Such allocated support activities
included certain selling and marketing, executive management, human resources,
corporate finance, legal and corporate planning costs. The total of these
allocations were $79 million, $70 million, and $71 million in fiscal years
1998, 1999 and 2000, respectively. It is not practicable to provide a detailed
estimate of the expenses that would be recognized if HDDG were a separate
entity.
Allocation of Federal and State Income Taxes. The federal income taxes of
Quantum and the subsidiaries which own assets allocated between the groups are
determined on a consolidated basis. Consolidated federal income tax provisions
and related tax payments or refunds are allocated between the groups based
principally on
III-18
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
the taxable income and tax credits directly attributable to each group, as if
each group were a stand-alone entity. Such allocations reflect each group's
contribution (whether positive or negative) to Quantum's consolidated federal
taxable income and the consolidated federal tax liability and tax credit
position. Tax benefits that cannot be used by the group generating those
benefits but can be used on a consolidated basis are credited to the group
that generated such benefits. Accordingly, the amounts of taxes payable or
refundable allocated to each group may not necessarily be the same as that
which would have been payable or refundable had each group filed a separate
income tax return.
Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a consolidated or combined basis or on a
separate corporation basis. State income tax provisions and related tax
payments or refunds are allocated between the groups based on their respective
contributions to such consolidated or combined state taxable incomes. State
and local income tax provisions and related tax payments which are determined
on a separate corporation basis are allocated between the groups in a manner
designed to reflect the respective contributions of the groups to the
corporation's separate state or local taxable income.
The discussion of HDDG's income tax provision (Note 12) should be read in
conjunction with Quantum's consolidated financial statements and notes
thereto.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with
HDDG's warranties. If the actual value of HDDG's inventories and associated
reserves differs from these estimates, HDDG's operating results could be
materially adversely impacted. The actual results with regard to warranty
expenditures could also have a material adverse impact on HDDG if the actual
rate of unit failure or the cost to repair a unit is greater than what HDDG
has used in estimating the warranty expense accrual.
Revenue Recognition. Revenue from sales of products is recognized on
passage of title to customers, when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price to the
buyer is fixed or determinable and collectibility is reasonably assured, with
provision made for estimated returns.
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 HDDG'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
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
group equity. Although over half of HDDG's sales are made to customers in non-
U.S. locations and all of HDDG's hard disk drive products are manufactured in
Japan, Singapore and Ireland by Matsushita-Kotobuki Electronics Industries,
Ltd. ("MKE"), a majority of HDDG's material transactions are denominated in
U.S. dollars, including the purchase by HDDG of hard disk drives manufactured
by MKE in U.S. dollars. Accordingly, transaction gains or losses have been
immaterial to the 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
III-19
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
country for the currency of another country at an agreed-upon price, on an
agreed-upon settlement date. Foreign currency forward exchange contracts are
accounted for by the fair value method, with changes in value recognized in
other income.
Net Income (Loss) Per Share. As a result of the recapitalization, net loss
per share for HDDG has been calculated based on HDDG's net loss from August 4,
1999 through March 31, 2000. It was not calculated on a group basis for
periods prior to the recapitalization because HDDG stock was not part of
Quantum's capital structure at that time. Pro forma net loss per share
presented in HDDG's statements of operations assumes that HDDG stock created
in the recapitalization existed for all periods presented.
Cash Equivalents and Marketable Securities. Highly liquid debt instruments
with a maturity of 90 days or less at the time of purchase are considered to
be cash equivalents. Cash equivalents are carried at fair value, which
approximates cost. Marketable securities have maturities of more than 90 days
at the time of purchase. Cash equivalents and marketable securities have been
classified as available-for-sale. Securities classified as available-for-sale
are carried at fair value with material unrealized gains and losses reported
in group equity. The cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to
be other-than-temporary are recorded in other income or expense. The cost of
securities sold is based on the specific identification method.
Concentration of Credit Risk. Quantum performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral
from its customers. Sales to HDDG's top five customers in fiscal year 2000
represented 50% of revenue. Two customers accounted for 13% and 12% of
revenue, respectively. Reserves are maintained for potential credit losses and
such losses have historically been within management's expectations.
Quantum invests its excess cash in deposits with major banks and in money
market funds and short-term debt securities of companies with strong credit
ratings from a variety of industries. These securities generally mature within
365 days and, therefore, bear minimal risk. Quantum has not experienced any
material losses on these investments. Quantum, by corporate policy, 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.
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 Intangible Assets. Acquired intangible assets are amortized over
their estimated useful lives, which range from three to five years. The
accumulated amortization at March 31, 1999 and 2000 was $5 million
III-20
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
and $8 million, respectively. Intangible assets are reviewed for impairment
whenever events or circumstances indicate impairment might exist, or at least
annually. HDDG assesses the recoverability of its assets, including goodwill,
by comparing projected undiscounted net cash flows associated with those
assets against their respective carrying amounts. Impairment, if any, is based
on the excess of the carrying amount over the fair value of those assets.
Warranty Expense. HDDG generally warrants its products against defects for
a period of one to five years. A provision for estimated future costs and
estimated returns for credit relating to warranty is recorded when products
are shipped and revenue recognized.
Advertising Expense. HDDG 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, 1998, 1999 and
2000, was $26 million, $20 million, and $22 million, respectively.
Stock-Based Compensation. HDDG accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
Risks and Uncertainties. HDDG's business entails a number of risks. As is
typical in the information storage industry, a significant portion of HDDG's
customer base is concentrated with a small number of OEMs, and HDDG 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 HDDG's more significant
customers could have a material adverse effect on HDDG's results of
operations. A limited number of hard disk drive storage products make up a
significant majority of HDDG's sales, and due to increasingly rapid
technological change in the industry, HDDG's future depends on its ability to
develop and successfully introduce new products. HDDG utilizes a third party,
MKE, to manufacture all of the products it sells. HDDG relies on MKE's ability
to bring new products rapidly to volume production and to meet stringent
quality standards. MKE manufactures HDDG's drives in Japan, Singapore, and
Ireland. If MKE were unable to satisfy HDDG's production requirements, HDDG
would not have an alternative source to meet the demand for its products
without substantial delay and disruption to its operations.
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Management does not expect SFAS
No. 133 to have a material effect on HDDG's financial position or results of
operations. Implementation of this standard has recently been delayed by the
FASB for a 12-month period. HDDG is required to adopt SFAS 133 in fiscal year
2002.
Revenue Recognition and Financial Statements. In December 1999, the
Securities and Exchange Commission ("SEC") issued SEC Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarized certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
will be effective for Quantum in the first quarter of fiscal year 2001. HDDG
is reviewing the requirements of SAB 101 and currently believes that its
revenue recognition policy is consistent with the guidance of SAB 101.
Certain Transactions Involving Stock Compensation. In March 2000, FASB
issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion
No. 25." FIN 44 clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether
a plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of the previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective
III-21
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. Management does
not expect the application of FIN 44 to have a material impact on HDDG's
financial position or results of operations.
Note 2 Financial Instruments
Available-For-Sale Securities
Quantum's cash and cash equivalents, including certain available-for-sale
securities, are allocated between the Hard Disk Drive group and the DLT &
Storage Systems group. The following is a summary of Quantum's consolidated
available-for-sale securities, all of which are classified as cash equivalents
and marketable securities:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 2000
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Certificates of deposit.............. $499,400 $499,400 $590,171 $590,171
Money market funds................... 125,200 125,200 131,900 131,900
Corporate commercial paper and bank
notes............................... 58,484 58,486 128,222 128,246
U.S. Treasury securities and
obligations of U.S. government
agencies............................ 100,589 100,589 28,952 28,962
Equity investments................... -- -- 8 30,048
Other................................ 5,121 5,121 14,500 14,500
-------- -------- -------- --------
$788,794 $788,796 $893,753 $923,827
======== ======== ======== ========
Included in cash and cash
equivalents......................... $764,368 $764,368 $891,713 $891,747
Included in marketable securities.... 24,426 24,428 2,040 32,080
-------- -------- -------- --------
$788,794 $788,796 $893,753 $923,827
======== ======== ======== ========
</TABLE>
The difference between the amortized cost of available-for-sale securities
and fair value was immaterial at March 31, 1999. At March 31, 2000, unrealized
gains on available-for-sale securities were recorded, net of tax, as a
component of accumulated other comprehensive income within Quantum's
stockholders' equity. The estimated fair value of available-for-sale
securities is based on market quotations. There were no sales of available-
for-sale securities in fiscal years 1999 or 2000. At March 31, 2000, the
average available-for-sale portfolio duration was approximately 15 days for
debt securities, and no security had a maturity longer than one year.
Derivative Financial Instruments
Foreign Exchange--Asset and Liability Management. During the periods
covered by the financial statements, Quantum utilized foreign currency forward
exchange contracts to manage the effects of foreign currency remeasurement
arising from certain assets and liabilities denominated in a foreign currency.
The gains and losses from market rate changes on these contracts, which are
intended to offset the losses and gains on certain foreign currency
denominated assets and liabilities, are recorded monthly in other income.
III-22
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following is a summary of foreign currency forward contracts held for
asset and liability management purposes:
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 2000
-------------- ----------
(In millions, except for
forward rates)
<S> <C> <C>
Currency to be sold................................ Yen Yen
Maturity dates..................................... April-May 1999 April 2000
Foreign currency notional amount................... 2,900 yen 650 yen
Weighted average forward rate...................... 119.06 109.88
U.S. dollar notional amount........................ $24.4 $ 5.9
U.S. dollar equivalent............................. $24.5 $ 6.2
Fair value......................................... $(0.1) $(0.3)
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 March 31, 2000
----------------- --------------------------------------------
(In millions, except for forward rates)
<S> <C> <C> <C> <C>
Currency to be
purchased.............. Swiss Franc Swiss Franc Yen Irish Punt
Maturity dates.......... April 1999 April 1999 April 2000 April 2000
Foreign currency
notional amount........ 22.0 Swiss Francs 42.7 Swiss Francs 400 yen 7.6 Irish Punt
Weighted average forward
rate................... 1.49 1.65 104.7 1.23
U.S. dollar notional
amount................. $14.8 $25.9 $ 3.8 $ 9.3
U.S. dollar equivalent.. $14.8 $25.8 $ 3.8 $ 9.3
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, Swiss Francs and Irish Punt at the balance sheet dates.
Quantum generally does not require collateral from the counterparties to
foreign currency forward contracts.
Carrying Amount and Fair Values of Financial Instruments
The estimated fair value of Quantum's borrowings (pooled debt) are
summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1999 2000
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(In millions)
<S> <C> <C> <C> <C>
Convertible subordinated debt............... $287.5 $254.6 $287.5 $227.1
Revolving credit line....................... 18.0 18.0 -- --
Mortgage loan............................... 40.0 40.8 38.9 39.0
</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.
III-23
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 3 Inventories
Inventories consisted of:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000
-------- --------
(In thousands)
<S> <C> <C>
Materials and purchased parts............................. $ 2,204 $ 7,387
Work in process........................................... 5,337 5,299
Finished goods............................................ 139,943 109,661
-------- --------
$147,524 $122,347
======== ========
</TABLE>
Note 4 Property, Plant and Equipment
Property, plant, and equipment consisted of:
<TABLE>
<CAPTION>
March 31,
--------------------
1999 2000
--------- ---------
(In thousands)
<S> <C> <C>
Machinery and equipment................................ $ 282,872 $ 253,986
Furniture and fixtures................................. 25,774 28,483
Buildings and leasehold improvements................... 123,319 90,470
Land................................................... 3,828 4,283
--------- ---------
435,793 377,222
Less accumulated depreciation and amortization......... (236,987) (218,674)
--------- ---------
$ 198,806 $ 158,548
========= =========
</TABLE>
Note 5 Special Charge
During the second quarter of fiscal year 2000, HDDG recorded a special
charge of $59.4 million. The charge reflected HDDG's strategy to modify the
hard disk drive business to more closely align product development and the
business' operating model with the requirements of the rapidly growing low-
cost PC market. The special charge was associated primarily with the
streamlining of HDDG's logistics model in order to create a faster and more
flexible fulfillment system, changes in the customer service strategy and
consolidation of certain product development programs.
The special charge consisted of $26.4 million related to facilities costs,
$13.2 million in asset write-offs related to the streamlining of the global
logistics model and change in customer service strategy, $7.8 million in
severance and benefits for terminated employees, and approximately $12 million
in other costs associated with the plan.
The facilities costs noted above include lease payments on facilities to be
vacated in and around Milpitas, California and Singapore, the write-off of
related leasehold improvements, and other maintenance expenses associated with
the vacated facilities. HDDG expects that the affected facilities will be
vacated by the end of the second quarter of fiscal year 2001.
In connection with the charge, HDDG currently expects a workforce reduction
of approximately 600 employees. In addition, approximately 100 open
requisitions and budgeted positions have been eliminated. The reduction in
force primarily affects employees at HDDG's drive configuration centers and
warehouses in
III-24
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Milpitas, California and Dundalk, Ireland and employees within the desktop
drive business. As of March 31, 2000, 322 of the 600 employees had been
terminated. HDDG anticipates that the remaining employees will be terminated
by the end of the second quarter of fiscal year 2001.
Subsequent to the end of the second quarter fiscal year 2000, HDDG revised
its estimate of costs required to implement the restructuring plan. HDDG
currently estimates that severance and benefits, inventory and other costs,
which include the disposition of additional capital assets, will be more than
previously estimated as a result of the planned changes in the customer
service strategy. HDDG also estimates that costs associated with vacating
leased facilities will be less than previously estimated as a result of
vacating a major facility earlier than previously expected. Accordingly, HDDG
has reallocated amounts between these categories.
As of March 31, 2000, HDDG had incurred $7 million in cash expenditures
associated with employee severance and benefits, facilities and other costs.
HDDG expects to incur additional cash expenditures associated with the plan of
approximately $19 million, which it will fund from operations.
The following table summarizes activity related to the special charge at
March 31, 2000:
<TABLE>
<CAPTION>
Severance
And Facilities Other
Benefits Costs Inventory Costs Total
--------- ---------- --------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Special charge provision.... $ 7,833 $26,359 $ 13,214 $12,000 $ 59,406
Cash Payments............... (3,906) (1,394) -- (1,663) (6,963)
Non-cash charges............ -- (5,646) (15,588) (8,800) (30,034)
Adjustments................. 1,166 (7,852) 2,374 4,312 --
------- ------- -------- ------- --------
Balance at March 31, 2000... $ 5,093 $11,467 $ -- $ 5,849 $ 22,409
======= ======= ======== ======= ========
</TABLE>
Note 6 Loss from Investee
On May 16, 1997, the Hard Disk Drive group 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 HDDG's hard disk drive products manufactured by MKE.
HDDG 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 Quantum shared pro rata in MKQC's results of operations and agreed
to share pro rata in any capital funding requirements.
Subsequent to May 16, 1997, HDDG accounted for its 49% interest in MKQC
using the equity method of accounting. The results of HDDG's involvement in
recording heads through May 15, 1997, were combined.
Quantum provided support services to MKQC. The support services were mainly
finance, human resources, legal, and computer support. MKQC reimbursed Quantum
for the estimated cost of the services.
III-25
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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)
</TABLE>
On October 28, 1998, Quantum 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 HDDG recorded a $101 million loss from investee which
includes a write-off of HDDG's investment in MKQC; a write-down of HDDG'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 HDDG's 49% pro rata share in funding MKQC's
repayment of its obligations, primarily bank debt, accounts payable, and other
liabilities through June 1999 when the liquidation of MKQC is expected to be
completed.
MKQC's unaudited net loss for the six months ended September 27, 1998 was
$84 million on revenue of $62 million. The Hard Disk Drive group's 49%
interest in the net loss was $41 million.
Note 7 Credit Agreements, Long-Term Debt and Convertible Subordinated Debt
Quantum's debt includes the following:
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
(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............................................... 39,985 38,871
-------- --------
345,485 326,371
Less short-term portion of debt........................ 1,024 1,033
-------- --------
Total long-term debt and convertible subordinated
debt.................................................. $344,461 $325,338
======== ========
The DLT & Storage Systems group's portion of Quantum
debt:
Short-term debt........................................ $ 623 $ 689
Long-term debt and convertible subordinated debt,
excluding current portion............................. 229,641 216,892
-------- --------
The DLT & Storage Systems group total debt........... $230,324 $217,581
======== ========
The Hard Disk Drive group's portion of Quantum debt:
Short-term debt........................................ $ 341 $ 344
Long-term debt and convertible subordinated debt,
excluding current portion............................. 114,820 108,446
-------- --------
The Hard Disk Drive group total debt................. $115,161 $108,790
======== ========
Weighted average interest rate on Quantum's debt at
period-end............................................ 7.31% 7.37%
</TABLE>
III-26
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
In June 1997, Quantum entered into an unsecured senior credit facility that
provides a $500 million revolving credit line and expires in June 2000. At the
option of Quantum, borrowings under the revolving credit line bear interest at
either the London interbank offered rate plus a margin determined by a total
funded debt ratio, or at a base rate, with option periods of one to six
months. At March 31, 1999 and March 31, 2000, there was no outstanding balance
drawn on this line.
In July 1997, Quantum issued $288 million of 7% convertible subordinated
notes. The notes mature on August 1, 2004, and are convertible at the option
of the holder at any time prior to maturity, unless previously redeemed, into
shares of DSSG common stock and HDDG common stock. The notes are convertible
into 6,206,152 shares of DSSG common stock, or 21.587 shares per $1,000 note,
and 3,103,076 shares of HDDG common stock, or 10.793 shares per $1,000 note.
Quantum has the option to redeem the notes on or after August 1, 1999 and
prior to August 1, 2001, under certain conditions related to the price of
Quantum's common stocks. Subsequent to August 1, 2001, Quantum may redeem the
notes at any time. In the event of certain changes involving all or
substantially all of Quantum's common stocks, the holder would have the option
to redeem the notes. Redemption prices range from 107% of the principal to
100% at maturity. The notes are unsecured obligations subordinated in right of
payment to all of Quantum's existing and future senior indebtedness.
In September 1996, Quantum 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.
Principal payments required on Quantum's long-term debt outstanding at
March 31, 2000, are $1.1 million in fiscal year 2001, $1.2 million in fiscal
year 2002, $1.3 million in fiscal year 2003, $1.5 million in fiscal year 2004
and $1.6 million in fiscal year 2005.
Subsequent to March 31, 2000, Quantum entered into new credit facility
agreements as described in Note 17 of the Notes to Combined Financial
Statements.
Note 8 Stock Incentive Plans
As a result of the recapitalization, each outstanding stock option under
Quantum's stock option plans was converted into separately exercisable options
to acquire one-half of a share of Hard Disk Drive group stock and one share of
DLT & Storage Systems group stock. The exercise price for the resulting HDDG
stock options and DSSG stock options was calculated by multiplying the
exercise price under the original options by a fraction, the numerator of
which was the opening price of HDDG stock or DSSG stock on August 4, 1999 (the
date such stocks were first traded on the New York Stock Exchange) and the
denominator of which was the sum of these HDDG stock and DSSG stock prices.
However, the aggregate intrinsic value of the options was not increased, and
the ratio of the exercise price per option to the market value per share was
not reduced. In addition, the vesting provisions and option periods of the
original grants remained the same upon conversion.
Long-Term Incentive Plan. Quantum has a Long-Term Incentive Plan (the
"Plan") that provides for the issuance of stock options, stock appreciation
rights, stock purchase rights, and long-term performance awards (collectively
referred to as "options") to employees, consultants, officers and affiliates
of Quantum. The Plan has available and reserved for future issuance 11.3
million shares and 23.6 million shares of HDDG stock and DSSG stock,
respectively, and allows for an annual increase in the number of shares
available for issuance, subject to a limitation. Available for grant as of
March 31, 2000, were 1.1 million shares of HDDG stock and 4.1 million shares
of DSSG stock. 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.
III-27
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Compensation expense of $1,060,000, $1,070,000, and $985,000 was recorded by
HDDG in fiscal years 1998, 1999 and 2000, respectively, on restricted stock
options granted pursuant to stock purchase rights under the Plan. In fiscal
years 1998, 1999 and 2000, Quantum granted 65,500 shares, 157,200 shares, and
99,800 shares, respectively, of Quantum Corporation restricted stock under the
Plan at an exercise price of $.01 per share. Additionally, 155,800 shares of
HDDG and 321,600 shares of DSSG restricted stock restricted stock were granted
during fiscal year 2000 at an exercise price of $.01 per share.
Supplemental Plan. Quantum has a Supplemental Stock Plan (the "SSP") that
provides for the issuance of stock options and stock purchase rights
(collectively referred to as "options") to employees and consultants of
Quantum. The SSP has available and reserved for future issuance 5.7 million
shares and 9.7 million shares of HDDG stock and DSSG group stock,
respectively. Options under the SSP generally vest over two to four years and
expire ten years after the grant date. At March 31, 2000, options with respect
to 853,000 shares of HDDG stock and 1.8 million shares of DSSG stock were
available for grant. Restricted stock granted under the SSP generally vests
over two to three years. In fiscal year 2000, compensation expense of
$1,423,000 related to restricted stock granted was recorded by the Hard Disk
Drive group pursuant to stock purchase rights under the SSP. In fiscal year
2000, 1.5 million of HDDG restricted stock and 3.0 million shares of DSSG
restricted stock were granted under the SSP at an exercise price of $.01 per
share.
Stock Option Plans. Quantum has Stock Option Plans (the "Plans") under
which 2.0 million shares and 4.3 million shares of HDDG stock and DSSG stock,
respectively, were reserved for future issuance at March 31, 2000 to
employees, officers and directors of Quantum. Options under the Plans are
granted at prices determined by the Board of Directors, but at not less than
the fair market value, and accordingly no compensation accounting has been
required at the original date of grant. Options currently expire no later than
ten years from the grant date and generally vest ratably over one to four
years. At March 31, 2000, options with respect to 189,000 shares and 377,500
shares of HDDG stock and DSSG stock, respectively, were available for grant.
Stock Option Summary Information. A summary of activity relating to the
Long-Term Incentive Plan, the Supplemental Plan and the Stock Option Plans
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------------------------
Period from
Period from August 4, 1999,
April 1, 1999 to to
August 3, 1999 March 31, 2000
----------------- -----------------
Quantum Quantum Quantum Hard Disk
Corporation Corporation Corporation Drive Group
----------------- ----------------- ----------------- -----------------
Weighted- Weighted- Weighted- Weighted-
Avg. Avg. Avg. Avg.
Shares Exercise Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price (000s) Price
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 16,354 $ 7.52 17,005 $12.09 23,376 $14.68 13,206 $4.80
Granted................. 6,163 $19.80 10,781 $21.51 4,719 $18.91 7,430 $6.19
Canceled................ (718) $14.11 (1,880) $22.63 (585) $18.56 (1,789) $6.39
Exercised............... (4,794) $ 6.10 (2,530) $ 7.23 (1,098) $ 8.87 (1,961) $3.06
------ ------ ------ ------
Outstanding at end of
period................. 17,005 $12.09 23,376 $14.68 26,412 $15.58 16,886 $5.37
====== ====== ====== ======
Exercisable at end of
period................. 8,332 $ 8.84 11,786 $10.65 13,037 $11.95 6,407 $4.23
====== ====== ====== ======
</TABLE>
III-28
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The exercise prices for options outstanding at March 31, 2000 range from
$0.01 to $11.06 for HDDG stock. Compensation expense of $352,000, $729,000,
and $93,000 was recorded by HDDG in fiscal years 1998, 1999 and 2000,
respectively, in connection with accelerated vesting of Quantum and HDDG stock
options under the Plans.
The following tables summarize information about HDDG options outstanding
and exercisable at March 31, 2000:
Hard Disk Drive Group
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------------
Shares
Outstanding at Weighted-Average
March 31, 2000 Remaining Weighted-Average
Range of Exercise Prices (000s) Contractual Life Exercise Price
------------------------ -------------- ---------------- ----------------
<S> <C> <C> <C>
$0.01-$ 3.21.............. 4,469 4.18 $1.33
$3.22-$ 5.85.............. 2,524 6.98 $4.96
$5.86-$11.06.............. 9,893 8.14 $7.30
------
16,886 6.92 $5.37
======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
------------------------
Shares Weighted-
Outstanding at Average
March 31, 2000 Exercise
Range of Exercise Prices (000s) Price
------------------------ -------------- ---------
<S> <C> <C>
$0.01-$ 3.21...................................... 2,752 $2.02
$3.22-$ 5.85...................................... 1,769 $4.82
$5.86-$11.06...................................... 1,885 $6.90
-----
6,407 $4.23
=====
</TABLE>
Expiration dates ranged from April 27, 2000 to February 11, 2011 for HDDG's
options outstanding at March 31, 2000. Prices for options exercised during the
three-year period ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
Period Price range
-------------- ------------
<S> <C> <C>
Quantum Corporation.............................. 4/1/97-8/3/99 $0.01-$23.94
Hard Disk Drive Group............................ 8/4/99-3/31/00 $0.01-$ 8.00
</TABLE>
Proceeds received by Quantum and HDDG from exercises are credited to common
stock and capital in excess of par value.
Completing the acquisition of Meridian in September 1999 included the
conversion of outstanding Meridian stock options into options to purchase
315,000 shares of HDDG common stock and 630,000 shares of DSSG common stock.
These options relate to Quantum's assumption of Meridian's 1985 Director
Incentive Stock Plan, 1988 Incentive Stock Plan, 1995 Director Stock Plan and
the 1997 Stock Plan, collectively referred to as the "Meridian Plans." Under
the terms of the Meridian Plans, employees, directors and consultants received
options to purchase shares of Meridian's previously outstanding common stock
at prices not less than 100% of the fair value on the date of grant as
determined by Meridian's Board of Directors. Options under Meridian Plans vest
over a four year period and expire ten years after date of grant or from 30
days to three months after termination of employment. Subsequent to completing
the acquisition of Meridian, no additional grants may be made from the
Meridian Plans.
III-29
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Completing the acquisition of ATL in September 1998 included the conversion
of outstanding ATL stock options into options to purchase 1.8 million shares
of Quantum common stock, which were converted, as a result of the
recapitalization, into 0.9 million shares and 1.8 million shares of HDDG
common stock and DSSG common stock, respectively. These options relate to
Quantum'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.
Stock Purchase Plan. Quantum has an employee stock purchase plan (the
"Purchase Plan") that allows for the purchase of stock at 85% of fair market
value at the date of grant or the exercise date, whichever value is less. The
Purchase Plan is qualified under Section 423 of the Internal Revenue Code. Of
the 12.4 million HDDG shares and 24.8 million DSSG shares authorized to be
issued under the plan, 698,000 shares and 1,394,000 shares, respectively, were
available for issuance at March 31, 2000. Employees purchased
3,454,000 shares, 2,555,000 shares, and 829,000 shares of Quantum Corporation
common stock under the Purchase Plan in fiscal years 1998, 1999, and 2000,
respectively. Additionally, employees purchased 571,000 shares of HDDG and
1,145,000 shares of DSSG stock during fiscal year 2000. The weighted average
exercise price of Quantum Corporation stock purchased under the Purchase Plan
was $6.22, $9.41, and $16.16 in fiscal years 1998, 1999, and 2000,
respectively. The weighted average exercise price of HDDG stock purchased
under the Purchase Plan was $5.03 in fiscal year 2000.
Pro forma information. Quantum adopted SFAS No. 123, "Accounting for Stock-
Based Compensation" in fiscal year 1997. Quantum has elected to continue to
account for its stock-based compensation plans under APB Opinion No. 25 and
disclose the pro forma effects of the plans on net income and earnings per
share as provided by SFAS No. 123. Accordingly, no compensation expense has
been recognized for the stock option plans and the employee stock purchase
plans as all options have been issued at fair market value.
Pro forma net income and earnings per share information, as required by
SFAS No. 123, have been determined as if Quantum had accounted for its
employee stock options (including shares issued under the Long-Term Incentive
Plan, Supplemental Plan, Stock Option Plans, and the Stock Purchase Plan,
collectively called "options") granted subsequent to March 31, 1995, under the
fair value method of that statement.
The fair value of options granted in fiscal years 1998, 1999 and 2000
reported below have been estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
Quantum Corporation
<TABLE>
<CAPTION>
Long-Term Incentive
Plan, Supplemental
Plan And Stock
Option Plans Stock Purchase Plan
-------------------- --------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1999 2000 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years)............. 2.9 3.1 2.8 1.6 1.4 1.1
Risk-free interest rate............ 6.25% 5.52% 5.19% 6.13% 5.85% 5.57%
Stock price volatility............. .56 .61 .65 .53 .56 .62
Dividend yield..................... -- -- -- -- -- --
</TABLE>
III-30
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Hard Disk Drive Group
<TABLE>
<CAPTION>
Long-Term Incentive
Plan, Supplemental
Plan And
Stock Option Plans Stock Purchase Plan
-------------------- --------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1999 2000 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Option life (in years)............. -- -- 3.5 -- -- 1.51
Risk-free interest rate............ -- -- 6.27% -- -- 5.57%
Stock price volatility............. -- -- .68 -- -- .63
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 Quantum and HDDG options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of the options.
The following is a summary of weighted-average grant date fair values:
Quantum Corporation
<TABLE>
<CAPTION>
Weighted-Average
Grant Date Fair
Value
--------------------
Fiscal Fiscal Fiscal
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans............ $ 8.39 $ 9.86 $ 8.55
Restricted stock granted under the Long-Term
Incentive Plan and Supplemental Plan................ $23.68 $22.40 $18.99
Shares granted under the Stock Purchase Plan......... $ 3.56 $ 4.86 $ 7.85
</TABLE>
Hard Disk Drive Group
<TABLE>
<CAPTION>
Weighted-Average
Grant Date
Fair Value
----------------
Fiscal 2000
----------------
<S> <C>
Options granted under the Long-Term Incentive Plan,
Supplemental Plan and Stock Option Plans................ $4.16
Restricted stock granted under the Long-Term Incentive
Plan and Supplemental Plan.............................. $7.98
Shares granted under the Stock Purchase Plan............. $2.73
</TABLE>
III-31
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Quantum's
and HDDG's pro forma net income (loss) and net income (loss) per share
follows:
Quantum Corporation
<TABLE>
<CAPTION>
Period from
Year Ended March April 1,
31, 1999, to
----------------- August 3,
1998 1999 1999
-------- -------- -----------
<S> <C> <C> <C>
Net income (loss) (in thousands).............. $139,907 $(83,964) $(32,227)
======== ======== ========
Net income (loss) per share:
Basic....................................... $ 1.03 $ (0.52) $ (0.19)
======== ======== ========
Diluted..................................... $ 0.88 $ (0.52) $ (0.19)
======== ======== ========
</TABLE>
Hard Disk Drive Group
<TABLE>
<CAPTION>
Period from
August 4,
1999, to
March 31,
2000
-----------
<S> <C>
Net loss (in thousands)......................................... $(35,678)
========
Net loss per share:
Basic......................................................... $ (0.43)
========
Diluted....................................................... $ (0.43)
========
</TABLE>
Since HDDG stock was not part of the capital structure of Quantum prior to
the recapitalization on August 3, 1999 and no HDDG stock options were
outstanding prior to this date, pro forma information for HDDG for fiscal
years 1999 and 1998 is omitted. Accordingly, the pro forma effect of HDDG
stock options is not representative of what the effect will be in future
years.
As SFAS No. 123 is applicable only to options granted subsequent to March
31, 1995, its pro forma effect will not be fully reflected until fiscal year
2001.
Note 9 Common Stock and Stockholder Rights Agreement
The number of authorized shares of common stock is 1,600,000,000, of which
1,000,000,000 shares are authorized for DSSG common stock and 600,000,000
shares are authorized for HDDG common stock. The number of authorized shares
of preferred stock is 20,000,000.
Quantum has a stockholder rights agreement (the "Rights Plan") that
provides existing stockholders with the right to purchase preferred stock in
the event of certain changes in Quantum's ownership. Specifically, existing
DSSG stockholders will have the right to purchase one one-thousandth of a
share of Series B Junior Participating Preferred Stock for each share of DSSG
common stock held, or, under certain circumstances, shares of DSSG common
stock with a market value twice the exercise price of such right and existing
HDDG stockholders will have the right to purchase one one-thousandth of a
share of Series C Junior Participating Preferred Stock for each share of HDDG
common stock held or, under certain circumstances, shares of HDDG common stock
with a market value twice the exercise price of such right. The purchase price
in either case is
III-32
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
determined by the board of directors, subject to adjustment. Subject to
certain exceptions, these rights may be exercised the tenth day after any
person or group becomes the beneficial owner (or makes an offer that would
result in such beneficial ownership) of 20% or more of the outstanding DSSG
common stock or HDDG common stock. If such change in beneficial ownership is
combined with a merger of Quantum or a sale of more than 50% of the assets of
Quantum, then the existing stockholders have the right to purchase, for the
exercise price, a number of shares of common stock in the surviving entity
having a market value of twice the exercise price of such right. The Rights
Plan may serve as a deterrent to takeover tactics that are not in the best
interests of stockholders. There are 1,600,000 preferred shares reserved for
issuance under the Rights Plan.
Note 10 Earnings Per Share
As a result of the recapitalization, net loss per share for HDDG has been
calculated based on the group's net loss from August 4, 1999 through March 31,
2000. It was not calculated on a group basis for periods prior to the
recapitalization because HDDG stock was not part of Quantum's capital
structure at that time.
The following table sets forth the computation of basic and diluted net
loss per share for HDDG after the recapitalization date:
<TABLE>
<CAPTION>
Period from
August 4, 1999,
to
March 31, 2000
---------------
(In thousands,
except per
share data)
<S> <C>
Numerator:
Numerator for basic and diluted net loss per share--loss
available to common stockholders.......................... $(27,549)
========
Denominator:
Denominator for basic and diluted net loss per share--
weighted average shares................................... 83,018
--------
Basic and diluted net loss per share..................... $ (0.33)
========
</TABLE>
The computation of diluted net loss per share for HDDG in the period August
4, 1999 through March 31, 2000, excluded the effect of the 7% convertible
subordinated notes issued in July 1997, which are convertible into 3,103,076
shares of HDDG common stock, or 10.793 shares per $1,000 note, because the
effect would have been antidilutive.
Options to purchase 16,885,729 shares of HDDG common stock were outstanding
at March 31, 2000. However, the corresponding weighted average outstanding
options were not included in the computation of diluted net loss per share for
HDDG for the period August 4, 1999 through March 31, 2000, because the effect
would have been antidilutive.
Note 11 Savings and Investment Plan
Substantially all of the regular domestic employees are eligible to make
contributions to Quantum's 401(k) savings and investment plan. Quantum matches
a percentage of the employees' contributions and may also make additional
discretionary contributions to the plan. Quantum contributions were $6
million, $7 million and $9 million, in fiscal years 1998, 1999 and 2000,
respectively.
III-33
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 12 Income Taxes
The Hard Disk Drive group income tax benefit consists of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
1998 1999 2000
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Federal:
Current $(106,585) $(125,940) $(80,020)
Deferred................................. 21,029 20,682 (8,059)
--------- --------- --------
(85,556) (105,258) (88,079)
--------- --------- --------
State:
Current (8,591) (23,574) (13,933)
Deferred................................. (15,098) 2,344 (1,475)
--------- --------- --------
(23,689) (21,230) (15,408)
--------- --------- --------
Foreign:
Current 26,857 18,021 37,391
Deferred................................. (593) (3,510) (7,315)
--------- --------- --------
26,264 14,511 30,076
--------- --------- --------
Income tax benefit....................... $ (82,981) $(111,977) $(73,411)
========= ========= ========
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of incentive stock options, and employee stock purchase plan
shares increase refundable taxes as shown above by $7 million, $6 million, and
$5 million in fiscal years 1998, 1999 and 2000, respectively. Such benefits are
credited to group equity when realized.
The Hard Disk Drive group's income tax provision differs from the amount
computed by applying the federal statutory rate of 35% to income before income
taxes as follows:
<CAPTION>
Year Ended March 31,
------------------------------
1998 1999 2000
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Tax benefit at federal statutory rate...... $ (47,544) $ (92,576) $(62,362)
State income tax benefit, net of federal
effect.................................... (15,398) (13,800) (10,015)
Research and development credit............ (5,990) (1,631) (3,298)
Foreign earnings taxed at rates different
than U.S. rates........................... (15,813) (5,004) --
Other items................................ 1,764 1,034 2,264
--------- --------- --------
$ (82,981) $(111,977) $(73,411)
========= ========= ========
</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.
III-34
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
Year Ended March
31,
--------------------
1999 2000
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory valuation methods........................ $ 23,677 $ 18,043
Accrued warranty expense........................... 18,752 14,251
Allowance for doubtful accounts.................... 2,433 4,682
Distribution reserves.............................. 6,785 14,909
Restructuring and special charges.................. 4,331 14,538
Net operating loss and credit carryforwards........ -- 18,139
Other accruals and reserves not currently
deductible for tax purposes....................... 29,099 14,414
Depreciation methods............................... 41,699 59,990
Amortization methods............................... 30,207 28,091
--------- ---------
156,983 187,057
--------- ---------
Deferred tax liabilities:
Foreign inventory valuation methods................ (13,810) (6,495)
Tax on un-remitted foreign earnings net of foreign
tax credits and foreign deferred taxes............ (97,817) (130,671)
Other.............................................. (13,234) (12,936)
--------- ---------
(124,861) (150,102)
--------- ---------
Net deferred tax asset........................... $ 32,122 $ 36,955
========= =========
</TABLE>
HDDG's pretax income from foreign operations was $139 million, $120
million, and $220 million for the fiscal years ended March 31, 1998, 1999, and
2000, respectively. U.S. taxes have not been provided for unremitted foreign
earnings of $357 million. The residual U.S. tax liability, if such amounts
were remitted, would be approximately $78 million.
As of March 31, 2000, HDDG has net operating loss carryforwards of $7
million and credit carryforwards of $16 million. These carryforwards expire in
varying amounts between fiscal years 2013 and 2019.
Quantum'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.
Quantum'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 13 Litigation
On August 7, 1998, Quantum was named as one of several defendants in a
patent infringement lawsuit filed in the U.S. District Court for the Northern
District of Illinois, Eastern Division. The plaintiff, Papst Licensing GmbH,
owns at least 24 U.S. patents which it asserts that Quantum has infringed.
Quantum has studied these patents and believes that defenses of patent
invalidity and non-infringement can be asserted. However, Quantum has not
completed a full study of all the patents asserted by Papst and there can be
no assurance that Quantum has not infringed these or other patents owned by
Papst. Recently, on Papst's motion, the case was transferred to a federal
district court in New Orleans, Louisiana, where it has been joined with suits
brought against Papst by Hewlett-Packard and Minebea Company, Ltd. for the
purposes of coordinated discovery under multi-district
III-35
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
litigation rules. Hewlett-Packard recently settled its dispute with Papst and
has been withdrawn from the litigation. To date, discovery has not begun to
any significant extent. Quantum does not believe that the transfer will affect
the final disposition of this matter in a significant way. The final results
of this litigation, as with any litigation, are uncertain. In addition, the
costs of engaging in litigation with Papst will be substantial.
Quantum is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. For example, Discovision Associates has
brought patents they hold to Quantum's attention. While management currently
believes the amount of ultimate liability, if any, with respect to these
actions will not materially affect the financial position, results of
operations, or liquidity of Quantum, the ultimate outcome of any litigation is
uncertain. Were an unfavorable outcome to occur, the impact could be material
to Quantum.
Note 14 Commitments
Quantum leases certain facilities for HDDG's use 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.
HDDG's rent expense was $21 million for the fiscal year ended March 31,
1998 and $22 million for the fiscal years ended March 31, 1999 and 2000.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------
<S> <C>
Year ended March 31,
2001........................................................ $ 21,112
2002........................................................ 20,912
2003........................................................ 20,211
2004........................................................ 16,984
2005........................................................ 14,438
Thereafter.................................................. 107,333
--------
Total future minimum lease payments....................... $200,990
========
</TABLE>
Note 15 Business Units and Geographic Information
The Hard Disk Drive group currently has two primary product lines, desktop
hard disk drives and high-end hard disk drives. HDDG has two separate business
units that support these two product lines. In addition, through May 15, 1997,
recording heads were manufactured by HDDG and were used only in HDDG's hard
disk drives.
The desktop business unit designs, develops and markets desktop hard disk
drives designed to meet the storage requirements of entry-level to high-end
desktop personal computers in home and business environments. The high-end
business unit designs, develops and markets high-end hard disk drives designed
to meet the storage requirements of network servers, workstations and storage
subsystems. In the future, the two HDDG business units may become a single
business unit as their markets begin to merge and be reported on a combined
basis.
HDDG's recording heads business through May 15, 1997 was reported in HDDG's
combined operations. Effective May 16, 1997, MKE acquired a 51% interest in
HDDG's recording heads business which became part of a joint venture with MKE.
HDDG accounted for its 49% interest in the joint venture using the equity
method. On October 28, 1998, the joint venture was dissolved and a charge was
recorded to write-off assets and recognize obligations related to the
dissolution. For more information on the loss from investee see Note 6 of the
Notes to Combined Financial Statements.
III-36
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At or For the
Year Ended March 31,
----------------------
1998 1999 2000
------ ------ ------
(in millions)
<S> <C> <C> <C>
Business unit:
Desktop
Revenue............................................ $3,981 $3,079 $2,785
Gross profit....................................... 453 232 129
Unit operating profit (loss)....................... 184 (49) (155)
Inventory and property, plant and equipment, net of
accumulated depreciation.......................... 320 294 205
Expenditures for long-lived assets................. 89 64 37
High-end
Revenue............................................ 634 520 527
Gross profit (loss)................................ (81) 59 101
Unit operating loss................................ (250) (83) (36)
Inventory and property, plant and equipment, net of
accumulated depreciation.......................... 120 52 76
Expenditures for long-lived assets................. 40 18 13
Recording heads
Unit operating loss................................ (9) -- --
Loss from investee................................. (66) (142) --
Inventory and property, plant and equipment, net of
accumulated depreciation.......................... -- -- --
Expenditures for long-lived assets................. -- -- --
<CAPTION>
Year Ended March 31,
----------------------
1998 1999 2000
------ ------ ------
(in millions)
<S> <C> <C> <C>
Loss reconciliation:
Total unit operating loss............................ $ (74) $ (132) $ (191)
Total loss from investee............................. (66) (142) --
Unallocated amounts:
Interest and other income............................ 4 10 13
------ ------ ------
Loss before income taxes........................... $ (136) $ (264) $ (178)
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
March 31,
-------------
1999 2000
------ ------
(in millions)
<S> <C> <C>
Assets reconciliation:
Total unit inventory and property, plant and equipment, net of
accumulated depreciation...................................... $ 346 $ 281
Cash and cash equivalents...................................... 500 582
Marketable securities.......................................... 24 30
Accounts receivable, net of allowance for doubtful accounts.... 392 395
Due from the DLT & Storage Systems group....................... -- 30
Deferred taxes................................................. 72 79
Other current assets........................................... 97 58
Intangible assets, less accumulated amortization............... 5 2
Other assets................................................... 34 21
------ ------
Total combined assets........................................ $1,470 $1,478
====== ======
</TABLE>
III-37
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Recording heads produced by the recording heads business were transferred
to MKE and used in the manufacture of hard disk drives for HDDG. The value at
which the recording heads were transferred was recorded as an offset to cost
of sales by HDDG.
Property plant and equipment, net of accumulated depreciation, included
equipment related to research and development, testing and configuration of
hard disk drives, logistics, customer service, and administration. Cash and
cash equivalents, marketable securities, accounts receivable, intersegment
receivables, deferred taxes, other current assets, intangible assets and other
assets were not allocated to the business units.
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,
--------------------------------------------
1998 1999 2000
-------------- -------------- --------------
Long- Long- Long-
Lived Lived Lived
Revenue Assets Revenue Assets Revenue Assets
------- ------ ------- ------ ------- ------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
United States................... $2,114 $200 $1,630 $166 $1,470 $132
Europe.......................... 1,457 13 993 11 797 7
Singapore....................... 417 3 350 2 344 1
Rest of Asia Pacific............ 969 21 521 25 630 20
Latin America................... 75 -- 105 -- 71 --
------ ---- ------ ---- ------ ----
Total......................... $4,615 $237 $3,599 $204 $3,312 $160
====== ==== ====== ==== ====== ====
</TABLE>
One customer accounted for 10% or more of the Hard Disk Drive group's
combined revenue in fiscal years 1998, 1999 and 2000. Revenue from this
customer represented $626 million, $506 million and $382 million of HDDG's
combined revenue in the respective periods. Another customer accounted for 10%
of more of combined revenue in fiscal years 1998 and 1999. Revenue from this
customer represented $552 million and $375 million of HDDG's combined revenue
in the respective periods. Another customer accounted for 10% or more of
combined revenue in fiscal years 1999 and 2000. Revenue from this customer
represented $367 million and $418 million of HDDG's combined revenue in the
respective periods.
III-38
<PAGE>
HARD DISK DRIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 16 Unaudited Quarterly Combined Financial Data
<TABLE>
<CAPTION>
Year Ended March 31, 2000
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue.................... $752,491 $768,214 $889,024 $901,850
Gross profit (loss)........ 28,269 (34,843) 104,379 132,265
Net income (loss).......... (43,184) (83,687) 5,150 16,951
Net income (loss) per
share:
Basic.................... NA (0.60) 0.06 0.20
Diluted.................. NA (0.60) 0.06 0.20
Pro forma net loss per
share:
Basic.................... (0.52) (1.01) NA NA
Diluted.................. (0.52) (1.01) NA NA
<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.................... $847,321 $874,253 $959,086 $918,660
Gross profit............... 52,699 60,214 77,788 100,718
Net loss................... (40,554) (34,878) (75,968) (1,126)
Pro forma net loss per
share:
Basic.................... (0.51) (0.46) (0.92) (0.01)
Diluted.................. (0.51) (0.46) (0.92) (0.01)
</TABLE>
--------
NA = Not applicable
Pro forma net loss per share for the Hard Disk Drive group assumes the
recapitalization occurred at the beginning of the earliest period presented.
The results of operations for the second quarter of fiscal year 2000
included the effect of a $59 million special charge associated with the Hard
Disk Drive group's streamlining of the logistics model, change in customer
service strategy and consolidation of certain product development programs.
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.
Note 17 Subsequent Event (Unaudited)
In April 2000, both Quantum and ATL canceled their existing senior credit
facilities and Quantum entered into two new unsecured senior credit
facilities, each providing a $187.5 million revolving credit line and expiring
in April 2001 and April 2003, respectively. At the option of Quantum,
borrowings under the revolving credit lines will bear interest at either the
London interbank offered rate or a base rate, plus a margin determined by a
leverage ratio with option periods of one to six months.
III-39
<PAGE>
HARD DISK DRIVE GROUP
SCHEDULE II
COMBINED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at (reductions) Balance at
beginning of charged to end of
Classification (In period expense Deductions(i) period
thousands) ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts year ended:
March 31, 1998........... $ 8,912 $ 3,172 $(1,742) $10,342
March 31, 1999........... $10,342 $ 6,772 $(7,491) $ 9,623
March 31, 2000........... $ 9,623 $14,010 $(4,015) $19,618
</TABLE>
--------
(i) Uncollectible accounts written off, net of recoveries.
III-40
