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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)
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)
Registrant's telephone number, including area code: (408) 894-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
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
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:
Capacity Product Rotational
per Disk Capacity Speed
Products (GB) (GB) (RPM) Platform
-------- -------- ------------ ---------- --------
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
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
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
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
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.
Name Age Position with Quantum
---- --- ---------------------
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
- --------
* 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
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:
Square
Location Function Feet
-------- -------- ------
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
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
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.
Fiscal Year 1999 High Low
---------------- ---- ---
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
Fiscal Year 2000 High Low
---------------- ---- ---
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
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
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
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
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
Exhibit
Number Exhibit
------- -------
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
17
Exhibit
Number Exhibit
------- -------
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
18
Exhibit
Number Exhibit
------- -------
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
- --------
(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
(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
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.
Signature Title
--------- -----
/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
21
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
-------
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
22
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.
I-1
Pro forma net income (loss) per share for DSSG and HDDG assumes the
recapitalization occurred at the beginning of the earliest period presented.
At or For the Year Ended March 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
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
- --------
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
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
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
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
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
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
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
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
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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.
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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