Quantum 10Q 2013 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

Form 10-Q
_______________

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2012

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 1-13449
_______________

QUANTUM CORPORATION
_______________

Incorporated Pursuant to the Laws of the State of Delaware

IRS Employer Identification Number 94-2665054

1650 Technology Drive, Suite 800, San Jose, California 95110

(408) 944-4000
_______________

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 checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨

Accelerated filerx

Non-accelerated filer¨

Smaller reporting company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ Nox

As of the close of business on August 3, 2012, 240.5 million shares of Quantum Corporation’s common stock were issued and outstanding.

QUANTUM CORPORATION

INDEX

		Page Number
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Comprehensive Loss		3
	Condensed Consolidated Statements of Cash Flows		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 4.	Controls and Procedures		18
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		19
Item 1A.	Risk Factors		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Mine Safety Disclosures		31
Item 5.	Other Information		31
Item 6.	Exhibits		31
	SIGNATURE		32
	EXHIBIT INDEX		33

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)

	June 30, 2012			March 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	46,270		$	51,261
Restricted cash		3,958			4,230
Accounts receivable, net of allowance for doubtful accounts of $208 and $217, respectively		86,857			110,840
Manufacturing inventories		63,575			61,111
Service parts inventories		38,438			39,050
Deferred income taxes		4,891			5,295
Other current assets		12,059			9,434
Total current assets		256,048			281,221
Long-term assets:
Property and equipment, less accumulated depreciation		25,287			25,440
Amortizable intangible assets, less accumulated amortization		21,145			25,763
In-process research and development		349			349
Goodwill		55,613			55,613
Other long-term assets		6,086			6,962
Total long-term assets		108,480			114,127
	$	364,528		$	395,348
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	47,367		$	56,304
Accrued warranty		7,797			7,586
Deferred revenue, current		86,131			93,441
Accrued restructuring charges		1,268			1,752
Accrued compensation		31,451			31,971
Income taxes payable		618			1,133
Other accrued liabilities		18,598			17,866
Total current liabilities		193,230			210,053

Long-term liabilities:
Deferred revenue, long-term		36,389			36,430
Deferred income taxes		4,530			4,564
Long-term debt		49,495			49,495
Convertible subordinated debt		135,000			135,000
Other long-term liabilities		6,438			6,486
Total long-term liabilities		231,852			231,975
Stockholders’ deficit:
Common stock, $0.01 par value; 1,000,000 shares authorized; 236,935 and 236,402 shares
issued and outstanding at June 30, 2012 and March 31, 2012, respectively		2,369			2,364
Capital in excess of par		413,907			409,770
Accumulated deficit		(482,895	)		(465,397	)
Accumulated other comprehensive income		6,065			6,583
Total stockholders’ deficit		(60,554	)		(46,680	)
	$	364,528		$	395,348

See accompanying notes to Condensed Consolidated Financial Statements.

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	Three Months Ended
	June 30, 2012			June 30, 2011
Product revenue	$	93,811		$	102,268
Service revenue		36,087			36,696
Royalty revenue		10,981			14,571
Total revenue		140,879			153,535

Cost of product revenue		64,750			68,507
Cost of service revenue		20,334			22,066
Restructuring benefit related to cost of revenue		—			(300	)
Total cost of revenue		85,084			90,273
Gross margin		55,795			63,262
Operating expenses:
Research and development		18,549			18,580
Sales and marketing		35,278			30,525
General and administrative		16,780			16,002
Restructuring benefit		—			(164	)
		70,607			64,943
Loss from operations		(14,812	)		(1,681	)
Other income and expense		(338	)		(98	)
Interest expense		(1,849	)		(2,809	)
Loss before income taxes		(16,999	)		(4,588	)
Income tax provision		499			638
Net loss	$	(17,498	)	$	(5,226	)

Basic and diluted net loss per share	$	(0.07	)	$	(0.02	)

Basic and diluted weighted-average common and common equivalent shares		236,628			228,423

See accompanying notes to Condensed Consolidated Financial Statements.

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

	Three Months Ended
	June 30, 2012			June 30, 2011
Net loss	$	(17,498	)	$	(5,226	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments		(802	)		116
Net unrealized gain (loss) on revaluation of long-term intercompany balances		284			(27	)
Total other comprehensive income (loss)		(518	)		89
Total comprehensive loss	$	(18,016	)	$	(5,137	)

See accompanying notes to Condensed Consolidated Financial Statements.

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Three Months Ended
	June 30, 2012			June 30, 2011
Cash flows from operating activities:
Net loss	$	(17,498	)	$	(5,226	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		3,021			2,982
Amortization		4,912			6,482
Service parts lower of cost or market adjustment		2,029			1,735
Deferred income taxes		382			(493	)
Share-based compensation		4,287			3,017
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		23,983			18,150
Manufacturing inventories		(4,603	)		(2,564	)
Service parts inventories		722			1,328
Accounts payable		(8,891	)		(1,364	)
Accrued warranty		211			123
Deferred revenue		(7,351	)		(7,055	)
Accrued restructuring charges		(484	)		(2,486	)
Accrued compensation		(274	)		(1,019	)
Income taxes payable		(474	)		303
Other assets and liabilities		(1,081	)		(2,545	)
Net cash provided by (used in) operating activities		(1,109	)		11,368

Cash flows from investing activities:
Purchases of property and equipment		(3,984	)		(3,413	)
Decrease in restricted cash		109			300
Return of principal from other investments		208			—
Payment for business acquisition, net of cash acquired		—			(8,152	)
Net cash used in investing activities		(3,667	)		(11,265	)

Cash flows from financing activities:
Repayments of long-term debt		—			(5,267	)
Payment of taxes due upon vesting of restricted stock		(321	)		(424	)
Proceeds from issuance of common stock		176			3,433
Net cash used in financing activities		(145	)		(2,258	)

Effect of exchange rate changes on cash and cash equivalents		(70	)		(26	)

Net decrease in cash and cash equivalents		(4,991	)		(2,181	)
Cash and cash equivalents at beginning of period		51,261			76,010
Cash and cash equivalents at end of period	$	46,270		$	73,829

Fair value of common stock issued for business combination	$	—		$	2,767

See accompanying notes to Condensed Consolidated Financial Statements.

QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1: BASIS OF PRESENTATION

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a global expert in data protection and big data management. We provide solutions for storing and protecting information in physical, virtual, cloud and big data environments that are designed to help customers be certain they are maximizing the value of their data over its entire lifecycle. With our solutions, customers can better adapt in a world of continuing change by keeping and protecting more data for a longer period of time while reducing costs and increasing return on investment. We work closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving data protection and big data management needs. Our stock is traded on the New York Stock Exchange under the symbol QTM.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Quantum and our wholly-owned subsidiaries. On June 13, 2011, we acquired Pancetera Software, Inc. (“Pancetera”), and Pancetera’s results of operations are included in our Condensed Consolidated Statements of Operations from that date. All intercompany balances and transactions have been eliminated. The interim financial statements reflect all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year. The Consolidated Balance Sheet as of March 31, 2012 has been derived from the audited financial statements at that date. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended March 31, 2012 included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on June 14, 2012.

NOTE 2: FAIR VALUE

The assets measured and recorded at fair value on a recurring basis consist of money market funds which are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates (in thousands):

	As of
	June 30, 2012		March 31, 2012
Money market funds	$	38,146	$	37,776

We did not record impairments to any non-financial assets in the first quarter of fiscal 2013 or 2012. We do not have any non-financial liabilities measured and recorded at fair value on a non-recurring basis.

We had $184.5 million in long-term debt at June 30, 2012, and the estimated fair value of our long-term debt was approximately $182.6 million, based on market prices in less active markets and current interest rates (level 2 fair value measurements).

NOTE 3: INVENTORIES

Manufacturing inventories and service parts inventories consisted of the following (in thousands):

	As of
	June 30, 2012		March 31, 2012
Manufacturing inventories:
Finished goods	$	21,226	$	22,122
Work in process		8,421		5,781
Materials and purchased parts		33,928		33,208
	$	63,575	$	61,111

	As of
	June 30, 2012		March 31, 2012
Service parts inventories:
Finished goods	$	19,715	$	19,202
Component parts		18,723		19,848
	$	38,438	$	39,050

NOTE 4: INTANGIBLE ASSETS AND GOODWILL

Intangible assets are evaluated for impairment whenever indicators of impairment are present. During the first quarter of fiscal 2013 and 2012, we considered whether there were any indicators of impairment for both our goodwill and our long-lived assets, including amortizable and indefinite-lived intangible assets, and determined there were none.

The following provides a summary of the carrying value of amortizable intangible assets (in thousands):

	As of
	June 30, 2012							March 31, 2012
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Purchased technology	$	182,922	$	(178,255	)	$	4,667	$	182,922	$	(176,893	)	$	6,029
Trademarks		3,900		(3,819	)		81		3,900		(3,656	)		244
Customer lists		106,419		(90,022	)		16,397		106,419		(86,929	)		19,490
	$	293,241	$	(272,096	)	$	21,145	$	293,241	$	(267,478	)	$	25,763

Total intangible amortization expense was $4.6 million and $5.9 million for the first quarter of fiscal 2013 and 2012, respectively.

We evaluate goodwill for impairment annually during the fourth quarter of our fiscal year, or more frequently when indicators of impairment are present. There were no changes to goodwill balances during the first quarter of fiscal 2013. The following table provides a summary of the goodwill balance at both June 30, 2012 and March 31, 2012 (in thousands):

	Goodwill			Accumulated Impairment Losses				Net Amount
Balance	$	394,613		$	(339,000	)		$	55,613

NOTE 5: ACCRUED WARRANTY

The following table details the change in the accrued warranty balance (in thousands):

	Three Months Ended
	June 30, 2012			June 30, 2011
Beginning balance	$	7,586		$	7,034
Additional warranties issued		2,624			2,449
Adjustments for warranties issued in prior fiscal years		317			421
Settlements		(2,730	)		(2,747	)
Ending balance	$	7,797		$	7,157

We generally warrant our products against defects for 1 to 3 years. A provision for estimated future costs and estimated returns for credit relating to warranty is recorded when products are shipped and revenue recognized. Our estimate of future costs to satisfy warranty obligations is primarily based on historical trends and, if believed to be significantly different from historical trends, estimates of future failure rates and future costs of repair including materials consumed in the repair, labor and overhead amounts necessary to perform the repair. If future actual failure rates differ from our estimates, we record the impact in subsequent periods. If future actual costs to repair were to differ significantly from our estimates, we record the impact of these unforeseen cost differences in subsequent periods.

NOTE 6: LONG-TERM DEBT

Our outstanding borrowings under the Wells Fargo credit agreement (“WF credit agreement”) were $49.5 million at June 30, 2012, at an interest rate of 2.72%. In addition, we have letters of credit totaling $0.3 million, reducing the amount available to borrow on the revolver to $25.2 million at June 30, 2012.

On June 28, 2012, the WF credit agreement was amended in order to allow the assignment of $25 million of the total revolver commitment to Silicon Valley Bank. This amendment also made certain other conforming and related modifications, including changes to the average liquidity requirements. The average liquidity covenant requirement was amended to be at least $15 million for the most recently completed month through December 31, 2012, increasing to $20 million on January 1, 2013. The average liquidity requirement to avoid triggering mandatory field audits was amended to be at least $20 million through March 31, 2013, increasing to $25 million on April 1, 2013. As of June 30, 2012, we were in compliance with all debt covenants.

NOTE 7: RESTRUCTURING CHARGES

In fiscal 2012, restructuring actions to consolidate operations supporting the business were the result of strategic management decisions. We had no restructuring expense for the three months ending June 30, 2012. The types of restructuring expense (benefit) for the three months ended June 30, 2011 were (in thousands):

	Three Months Ended
	June 30, 2012		June 30, 2011
By expense (benefit) type
Severance and benefits	$	—	$	(179	)
Facilities		—		15
Other		—		(300	)
	$	—	$	(464	)

During the first quarter of fiscal 2012, severance and benefits reversals were due to actual payments lower than estimated and retaining certain positions. The other restructuring reversal was due to actual payments lower than estimated on a supplier relationship exited.

Accrued Restructuring

The following tables show the activity and the estimated timing of future payouts for accrued restructuring (in thousands):

	Three Months Ended June 30, 2012
	Severance and Benefits			Facilities			Total
Balance as of March 31, 2012	$	1,312		$	440		$	1,752
Cash payments		(382	)		(102	)		(484	)
Balance as of June 30, 2012	$	930		$	338		$	1,268

	Severance and Benefits			Facilities			Total
Estimated timing of future payouts:
Fiscal 2013	$	930		$	195		$	1,125
Fiscal 2014 to 2016		—			143			143
	$	930		$	338		$	1,268

NOTE 8: STOCK INCENTIVE PLANS AND SHARE-BASED COMPENSATION

Overview

Our stock incentive plans (“Plans”) are broad-based, long-term retention programs that are intended to attract and retain talented employees and align stockholder and employee interests. The Plans provide for the issuance of stock options, stock appreciation rights, stock purchase rights and long-term performance awards to our employees, officers and affiliates. We also have an employee stock purchase plan (“Purchase Plan”) that allows for the purchase of stock at 85% of fair market value at the date of grant or the exercise date, whichever value is less.

The Black-Scholes option pricing model is used to estimate the fair value of options granted under our Plans and rights to acquire stock granted under our Purchase Plan.

Share-Based Compensation

The following table summarizes share-based compensation (in thousands):

	Three Months Ended
	June 30, 2012		June 30, 2011
Share-based compensation:
Cost of revenue	$	571	$	455
Research and development		900		640
Sales and marketing		1,084		719
General and administrative		1,732		1,203
	$	4,287	$	3,017
Share-based compensation by type of award:
Stock options	$	959	$	953
Restricted stock		2,753		1,697
Stock purchase plan		575		367
	$	4,287	$	3,017

Stock Options

No options were granted during the first quarter of fiscal 2013. The weighted-average grant date fair values of employee stock option grants, as well as the weighted-average assumptions used in calculating these values for the first quarter of fiscal 2012 were based on estimates at the date of grant as follows:

	Three Months Ended
	June 30, 2012	June 30, 2011
Option life (in years)	N/A		4.0
Risk-free interest rate	N/A		1.57%
Stock price volatility	N/A		112.33%
Weighted-average grant date fair value	N/A	$	1.91

Restricted Stock

The fair value of the restricted stock units granted is the intrinsic value as of the respective grant date since the restricted stock units are granted at no cost to the employee. The weighted-average grant date fair values of restricted stock units granted during the first quarter of fiscal 2013 and 2012 were $2.20 and $2.79, respectively.

Stock Purchase Plan

Under the Purchase Plan, rights to purchase shares are typically granted during the second and fourth quarter of each fiscal year. No rights to purchase shares were granted during the first quarter of fiscal 2013 or 2012.

Stock Activity

Stock Options

A summary of activity relating to our stock options follows (options and aggregate intrinsic value in thousands):

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of March 31, 2012	19,394		$	2.32
Exercised	(176	)		0.99
Forfeited	(71	)		1.17
Expired	(840	)		5.28
Outstanding as of June 30, 2012	18,307		$	2.20	2.56	$	6,412
Vested and expected to vest at June 30, 2012	18,204		$	2.20	2.54	$	6,405
Exercisable as of June 30, 2012	15,401		$	2.32	2.14	$	4,476

Restricted Stock

A summary of activity relating to our restricted stock follows (shares in thousands):

	Shares		Weighted-Average Grant Date Fair Value
Nonvested at March 31, 2012	8,861		$	2.75
Granted	353			2.20
Vested	(501	)		2.58
Forfeited	(138	)		2.22
Nonvested at June 30, 2012	8,575		$	2.75

NOTE 9: INCOME TAXES

Income tax provision for the first quarter of fiscal 2013 and 2012 was $0.5 million and $0.6 million, respectively, and reflects expenses for foreign income taxes and state taxes.

We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets. Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support a reversal or decrease in this allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.

NOTE 10: NET LOSS PER SHARE

The following is the computation of basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended
	June 30, 2012			June 30, 2011
Net loss	$	(17,498	)	$	(5,226	)
Basic and diluted weighted-average shares and common share equivalents		236,628			228,423
Basic and diluted net loss per share	$	(0.07	)	$	(0.02	)

The computations of diluted net loss per share for the periods presented exclude the following because the effect would have been anti-dilutive:

At June 30, 2012 and 2011, 31.2 million weighted equivalent shares of the 3.50% convertible subordinated notes were excluded.
Stock options to purchase 18.9 million and 22.6 million weighted-average shares at June 30, 2012 and 2011, respectively, were excluded.
Unvested restricted stock units of 8.7 million and 6.7 million weighted-average shares at June 30, 2012 and 2011, respectively, were excluded.

NOTE 11: LEGAL PROCEEDINGS

On June 28, 2012, Overland Storage, Inc. (“Overland”) filed a patent infringement lawsuit against Quantum and Venture Corporation Limited in the U.S. District Court in the Southern District of California, alleging that certain automated tape libraries of the defendants fall within the scope of patents 6,328,766 and 6,353,581. Overland is seeking injunctive relief, as well as the recovery of unspecified monetary damages, including treble damages for willful infringement. We are well-positioned to defend ourselves and will do so vigorously. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

On September 12, 2011, Compression Technology Solutions LLC (“CTS”) filed a patent infringement lawsuit against a group of companies, consisting of Quantum, CA., Inc., EMC Corporation, Hewlett-Packard Company, International Business Machines Corp., NetApp, Inc. and Quest Software, Inc., in the U.S. District Court in the Eastern District of Missouri, alleging that certain unspecified products of the defendants, characterized as “deduplication software systems,” and, in the case of Quantum, including Quantum’s “DXi Series Deduplication software,” fall within the scope of patent 5,414,650. CTS is seeking injunctive relief, as well as the recovery of monetary damages, including treble damages for willful infringement. We do not believe we infringe the CTS patent; we believe that the CTS patent is invalid, and we intend to defend ourselves vigorously. In April 2012, our motion to transfer venue was granted and the lawsuit was transferred to the U.S. District Court in the Northern District of California. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

NOTE 12: NEW ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02,Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 provides entities the option to perform a qualitative assessment to determine whether it is more likely than not an indefinite-lived asset is impaired, similar to the goodwill impairment testing guidance. If an entity determines the fair value of the indefinite-lived asset is not more likely than not impaired, then no additional testing is required. ASU 2012-02 also updated examples of changes in events and circumstances that an entity should consider for impairment indicators in interim periods. ASU 2012-02 is effective for fiscal years, and interim periods within those years, beginning after September 15, 2012 and may be early adopted. We are considering early adoption and do not anticipate adoption will impact our statements of financial position or results of operations.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENT

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this report usually contain the words “will,” “estimate,” “anticipate,” “expect,” “believe,” “project” or similar expressions and variations or negatives of these words. All such forward-looking statements including, but not limited to, (1) our goals for future operating performance; (2) our expectation that we will continue to derive a substantial portion of our revenue from products based on tape technology; (3) our belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service and sustain our operations for at least the next 12 months; (4) our expectations regarding our ongoing efforts to control our cost structure; (5) our belief that our ultimate liability in any infringement claims made by any third parties against us will not be material to us and (6) our business goals, objectives, key focuses, opportunities and prospects which are inherently uncertain as they are based on management’s expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, about which we speak only as of the date hereof. As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to: (1) the amount of orders received in future periods; (2) our ability to timely ship our products; (3) uncertainty regarding information technology spending and the corresponding uncertainty in the demand for our products and services; (4) our ability to maintain supplier relationships; (5) general economic, political and fiscal conditions in the U.S. and internationally, particularly in light of Greek and EU sovereign debt concerns and the uncertainty in the U.S. regarding fiscal and tax policies; (6) our ability to successfully introduce new products; (7) our ability to capitalize on market demand; (8) our ability to achieve anticipated gross margin levels and (9) those factors discussed under “Risk Factors” in Part II, Item 1A. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement.

OVERVIEW

We offer a comprehensive range of solutions for data protection and big data management challenges that provide performance and value to end user customers of all sizes, from small businesses to multinational enterprises. We believe our combination of expertise, innovation and platform independence enables us to solve data protection and big data management issues more easily, cost-effectively and securely. We earn our revenue from the sale of products, systems and services through an array of channel partners and our sales force to reach end user customers of all sizes. Our products are sold under both the Quantum brand name and the names of various OEM customers. They include DXi^® deduplication systems for high speed recovery and reliability, Scalar^® tape automation products for disaster recovery and long-term data retention, StorNext^® data management software and appliances for high-performance big data file sharing and archiving and vmPRO^™ solutions for protecting virtual machine data. We also offer cloud solutions for cloud-based backup, fast restore, data recovery and business continuity. In addition, we have the global scale and scope to support our worldwide customer base.

During the first quarter of fiscal 2013, we continued to implement a marketing campaign intended to increase awareness of Quantum products and their features to drive future growth. In addition, we continued to enhance and expand our product portfolio including introducing the StorNext M660,a larger, more scalable appliance that expands our StorNext appliances product line for enterprise and data intensive solutions. Our DXi 6000 family received its third product of the year award for its technological innovation, functionality and value. During our first quarter of fiscal 2013, global economic conditions deteriorated due to increased uncertainty, especially in Europe. This economic uncertainty has resulted in companies becoming more cautious with their purchasing decisions, and we noted that the larger the order in terms of total cost, the higher the risk of a purchase not being funded regardless of the size of the end user customer or geography.

Results

In the first quarter of fiscal 2013, revenue was negatively impacted by lower than expected revenue in Europe across all of our product lines and by a decrease in large orders, or orders greater than $200,000. We believe economic weakness in Europe was the primary reason we had lower than expected revenue in Europe. In addition, we believe large orders also decreased due to companies responding to the economic climate and budget uncertainty, choosing to cancel, reduce or delay these larger purchases. We had total revenue of $140.9 million in the first quarter of fiscal 2013, an 8% decrease from the first quarter of fiscal 2012. Our product revenue from OEM customers decreased 13% largely due to expected decreases and revenue from branded products decreased 7% primarily due to decreased enterprise tape automation and disk systems sales. Our continued efforts to increase revenue from disk systems and software solutions resulted in a 5% increase in this revenue category. Service revenue decreased $0.6 million, or 2%, primarily due to a decreased volume of OEM product repair services. Our continued focus on growing our branded business is reflected in the greater proportion of non-royalty revenue from branded business, at 82% in the first quarter of fiscal 2013, compared to 80% in the first quarter of fiscal 2012. Royalty revenue decreased 25% primarily due to lower LTO royalties and to a lesser extent from royalties from sales of older DLT media.

Our gross margin percentage decreased 160 basis points from the first quarter of fiscal 2012 to 39.6% primarily due to decreased royalty revenue. Operating expenses increased $5.7 million, or 9%, primarily from increased sales and marketing expenses, largely due to growing our sales force and marketing team. We also expanded marketing programs in the first quarter of fiscal 2013 to generate greater awareness and future demand for Quantum products and services. We had a $14.8 million loss from operations in the first quarter of fiscal 2013 compared to a $1.7 million loss from operations in the first quarter of fiscal 2012.

Interest expense decreased 34% to $1.8 million primarily due to refinancing our senior debt in March 2012. As a result, interest rates decreased and we had lower debt amortization expense compared to the first quarter of fiscal 2012. In addition, principal payments in the prior fiscal year decreased interest expense. We had a net use of cash from operating activities of $1.1 million compared to net cash provided by operating activities of $11.4 million in the first quarter of fiscal 2012.

RESULTS OF OPERATIONS

Revenue

	Three Months Ended
(In thousands)	June 30, 2012		% of revenue	June 30, 2011		% of revenue	Change			% Change
Product revenue	$	93,811	66.6%	$	102,268	66.6%	$	(8,457	)	(8.3	)%
Service revenue		36,087	25.6%		36,696	23.9%		(609	)	(1.7	)%
Royalty revenue		10,981	7.8%		14,571	9.5%		(3,590	)	(24.6	)%
Total revenue	$	140,879	100.0%	$	153,535	100.0%	$	(12,656	)	(8.2	)%

Total revenue was lower than we had planned in the first quarter of fiscal 2013, reflecting economic weakness in Europe and the decrease in large orders. Revenue from branded data protection products and services decreased $8.9 million, or 9% from the first quarter of fiscal 2012. Data protection products include our tape automation systems, disk systems and devices and media offerings. Revenue from branded big data and archive products and services increased $3.6 million, or 48% from the first quarter of fiscal 2012. Big data and archive products include StorNext software and StorNext and Q-Series appliances. In addition, OEM product and service revenue decreased $3.8 million from the first quarter of fiscal 2012. Royalty revenue decreased $3.6 million primarily due to lower LTO royalties and to a lesser extent from royalties from sales of older DLT media.

Product Revenue

Our product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased $8.5 million in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012, primarily due to decreased revenue from sales of enterprise tape automation systems and disk systems. This decrease was partially offset by the addition of revenue from our new StorNext appliances. Revenue from sales of branded products decreased 7% and sales of products to our OEM customers decreased 13% in the first quarter of fiscal 2013 compared to the prior year period.

	Three Months Ended
(In thousands)	June 30, 2012		% of revenue	June 30, 2011		% of revenue	Change			% Change
Disk systems and software solutions	$	24,661	17.5%	$	23,459	15.3%	$	1,202		5.1	%
Tape automation systems		50,480	35.8%		57,735	37.6%		(7,255	)	(12.6	)%
Devices and media		18,670	13.3%		21,074	13.7%		(2,404	)	(11.4	)%
Total product revenue	$	93,811	66.6%	$	102,268	66.6%	$	(8,457	)	(8.3	)%

Our disk systems and software solutions revenue increased 5% from the first quarter of fiscal 2012 primarily due to the addition of revenue from our StorNext appliances and Q-Series disk. In addition, midrange disk systems revenue increased 10% from the first quarter of fiscal 2012. However, disk systems and software solutions revenue was lower than anticipated for the first quarter of fiscal 2013, including a 44% decrease in enterprise disk systems revenue compared to the first quarter of fiscal 2012. We believe this was primarily due to a decrease in larger orders and, to a lesser extent, from economic weakness in Europe.

Tape automation results were also negatively impacted by the combination of economic weakness in Europe and a decrease in larger orders. The decrease in tape automation systems revenue in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was primarily due to decreased OEM tape automation system sales and, to a lesser extent, from decreased branded enterprise tape automation systems sales. The decrease in OEM tape automation systems revenue was primarily due to a decision by an OEM customer to reduce inventory. Branded midrange tape automation systems revenue increased 10% from the first quarter of fiscal 2012, partially offsetting the decrease in enterprise tape automation revenue.

Product revenue from devices, which includes tape drives and removable hard drives, and non-royalty media sales decreased as expected from the first quarter of fiscal 2012. The first quarter of fiscal 2012 had higher than usual media sales due to customers increasing their media inventories in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan.

Service Revenue

Service revenue includes revenue from sales of hardware service contracts, product repair, installation and professional services. Sales of hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time, or both. Service revenue decreased 2% from the first quarter of fiscal 2012 primarily due to a decreased volume of OEM product repair services.

Royalty Revenue

Tape media royalties decreased 25% from the first quarter of fiscal 2012 due to lower media unit sales sold by media licensees. The decrease was primarily due to higher than typical media sales during the first quarter of fiscal 2012 due to inventories being increased that period in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan. In addition, LTO royalties decreased approximately $1.0 million in the first quarter of fiscal 2013 due to a change in the basis on which royalties are reported and paid by one of the media manufacturers. This change affected the timing of royalties, but not the ultimate amount from this media manufacturer; therefore, it was only impactful to royalty results in the first quarter of fiscal 2013 when the transition took effect.

Gross Margin

	Three Months Ended
(In thousands)	June 30, 2012		Gross margin %	June 30, 2011			Gross margin %	Change			% Change
Product gross margin	$	29,061	31.0%	$	33,761		33.0%	$	(4,700	)	(13.9	)%
Service gross margin		15,753	43.7%		14,630		39.9%		1,123		7.7	%
Royalty gross margin		10,981	100.0%		14,571		100.0%		(3,590	)	(24.6	)%
Gross margin	$	55,795	39.6%	$	63,262	*	41.2%	$	(7,467	)	(11.8	)%

*First quarter of fiscal 2012 gross margin includes $0.3 million of restructuring benefit related to cost of revenue.

The 160 basis point decrease in gross margin percentage during the three months ended June 30, 2012 compared to the first quarter of fiscal 2012 was primarily due to the $3.6 million decrease in royalty revenue.

Product Margin

Product gross margin dollars decreased $4.7 million, or 14%, on a product revenue decrease of 8% compared to the first quarter of fiscal 2012, and our product gross margin rate decreased 200 basis points primarily due to decreased product revenue. Some of our product costs of goods sold are relatively fixed in the short term; therefore, product revenue increases or decreases impact the product gross margin rate. Partially offsetting this decrease was lower intangible amortization due to certain intangible assets becoming fully amortized in fiscal 2012.

Service Margin

Service gross margin dollars increased $1.1 million, or 8%, compared to the first quarter of fiscal 2012, and service gross margin percentage increased 380 basis points despite a decrease in service revenue of $0.6 million. These increases were primarily due to reduced costs across our service delivery model in part due to bringing repair of certain product lines in-house. In addition, our service activities continue to reflect a larger proportion of branded products under contract, which have relatively higher margins than margins for OEM repair services. The more significant cost decreases were for service materials, third party warehouse and external service providers. Service material decreases were primarily due to decreased volumes of repairs in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. Third party warehouse expenses decreased due to reduced usage as a result of bringing repair of certain product lines in-house. External service provider expense decreased due to a combination of bringing repair of certain product lines in-house and negotiating lower rates on the renewals of contracts with certain service providers.

Sales and Marketing Expenses

	Three Months Ended
(In thousands)	June 30, 2012		% of revenue	June 30, 2011		% of revenue	Change		% Change
Sales and marketing	$	35,278	25.0%	$	30,525	19.9%	$	4,753	15.6%

The $4.8 million increase in sales and marketing expense in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was primarily due to a $2.5 million increase in salaries and benefits, including commissions, largely from growing our branded sales force and marketing team. In addition, we had a $1.8 million increase in marketing expenses from expanded marketing programs to generate greater awareness of Quantum and increase future demand for our products and solutions. Travel expenses also increased $0.4 million from the first quarter of fiscal 2012.

General and Administrative Expenses

	Three Months Ended
(In thousands)	June 30, 2012		% of revenue	June 30, 2011		% of revenue	Change		% Change
General and administrative	$	16,780	11.9%	$	16,002	10.4%	$	778	4.9%

The increase in general and administrative expenses for the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was primarily due to a $0.5 million increase in stock compensation expense due to a modification to extend the post-retirement exercise period for certain options.

Interest Expense

	Three Months Ended
(In thousands)	June 30, 2012		% of revenue	June 30, 2011		% of revenue	Change			% Change
Interest expense	$	1,849	1.3%	$	2,809	1.8%	$	(960	)	(34.2	)%

Interest expense decreased from the first quarter of fiscal 2012 primarily due to refinancing our senior debt in March 2012 that decreased interest rates and debt amortization expense compared to the prior credit agreement. In addition, principal payments in the prior fiscal year reduced the outstanding balance of senior debt, decreasing interest expense.

Income Taxes

	Three Months Ended
(In thousands)	June 30, 2012		% of pre-tax loss		June 30, 2011		% of pre-tax loss		Change			% Change
Income tax provision	$	499	(2.9	)%	$	638	(13.9	)%	$	(139	)	(21.8	)%

The income tax provision for the both the first quarter of fiscal 2013 and fiscal 2012 reflects expenses for foreign income taxes and state taxes. We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets.

Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support a reversal or decrease in this allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.

Amortization of Intangible Assets

The following table details intangible asset amortization expense within our Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended
	June 30, 2012		June 30, 2011		Change			% Change
Cost of revenue	$	1,362	$	2,575	$	(1,213	)	(47.1	)%
Sales and marketing		3,256		3,331		(75	)	(2.3	)%
General and administrative		—		25		(25	)	(100.0	)%
	$	4,618	$	5,931	$	(1,313	)	(22.1	)%

The decrease in intangible amortization expense in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was due to certain intangible assets becoming fully amortized in fiscal 2012. For further information regarding amortizable intangible assets, refer to Note 4 “Intangible Assets and Goodwill.”

Share-based Compensation

The following table summarizes share-based compensation expense within our Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended
	June 30, 2012		June 30, 2011		Change		% Change
Cost of revenue	$	571	$	455	$	116	25.5	%
Research and development		900		640		260	40.6	%
Sales and marketing		1,084		719		365	50.8	%
General and administrative		1,732		1,203		529	44.0	%
	$	4,287	$	3,017	$	1,270	42.1	%

The increase in the first quarter of fiscal 2013 was primarily due to restricted stock unit awards granted during fiscal 2012. Incremental stock compensation expense from a modification to extend the post-retirement exercise period for certain options was offset by options that completed vesting in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Following is a summary of cash flows from operating, investing and financing activities (in thousands):

	Three Months Ended
	June 30, 2012			June 30, 2011
Net loss	$	(17,498	)	$	(5,226	)

Net cash provided by (used in) operating activities		(1,109	)		11,368
Net cash used in investing activities		(3,667	)		(11,265	)
Net cash used in financing activities		(145	)		(2,258	)

Three Months Ended June 30, 2012

The $16.4 million difference between reported net loss and cash used in operating activities during the three months ended June 30, 2012 was primarily due to a $24.0 million decrease in accounts receivable and $14.6 million in non-cash expenses, partially offset by an $8.9 million decrease in accounts payable and a $7.4 million decrease in deferred revenue. The decrease in accounts receivable was primarily due to decreased sales in the first quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. Non-cash expenses included $4.9 million in amortization, $4.3 million in share-based compensation and $3.0 million in depreciation. Accounts payable decreased due to the timing of payments in addition to decreased purchases compared to the fourth quarter of fiscal 2012. The decrease in deferred revenue was primarily due to a typical seasonal decline in service contract volumes. The majority of our service contracts renew in our third and fourth fiscal quarters.

Cash used in investing activities reflects $4.0 million of property and equipment purchases during the first quarter of fiscal 2013. Equipment purchases were primarily for engineering equipment and testing hardware to support product development activities, and we made leasehold improvements to a facility in the first quarter of fiscal 2013.

Three Months Ended June 30, 2011

The $16.6 million difference between reported net loss and cash provided by operating activities during the three months ended June 30, 2011 was primarily due to an $18.2 million decrease in accounts receivable and $13.7 million in non-cash expenses, partially offset by a $7.1 million decrease in deferred revenue. The decrease in accounts receivable was primarily due to decreased sales in the first quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011. Non-cash expenses included $6.5 million in amortization, $3.0 million in depreciation and $3.0 million in share-based compensation. The decrease in deferred revenue was primarily due to a typical seasonal decline in service contract volumes.

Cash used in investing activities reflects $8.2 million of cash paid, net of cash acquired, for our acquisition of Pancetera Software, Inc. and $3.4 million of equipment purchases during the first quarter of fiscal 2012. Equipment purchases were primarily for engineering equipment and testing hardware to support product development activities.

Cash used in financing activities during the first three months of fiscal 2012 was primarily due to a $5.3 million principal payment on the senior term debt, partially offset by $3.4 million in proceeds received from the exercise of stock options.

Capital Resources and Financial Condition

We continue to focus on improving our operating performance, including increasing revenue in higher margin areas of the business and continuing to improve margins in an effort to return to consistent profitability and to generate positive cash flows from operating activities. We believe that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service, contractual obligations and sustain operations for at least the next 12 months. This belief is dependent upon our ability to achieve revenue and gross margin projections and to control operating expenses in order to provide positive cash flow from operating activities. Should any of the above assumptions prove incorrect, either in combination or individually, it would likely have a material negative effect on our cash balances and capital resources.

The following is a description of our existing capital resources including outstanding balances, funds available to borrow, and primary repayment terms including interest rates.

Under the Wells Fargo credit agreement (“WF credit agreement”), we have the ability to borrow up to $75 million under a senior secured revolving credit facility. The maximum principal amount that may be borrowed is the lesser of $75 million, reduced by $1.0 million per quarter commencing July 1, 2012, or the amount of the monthly borrowing base. The WF credit agreement matures March 29, 2017, or on August 16, 2015 if our convertible subordinated notes remain outstanding on that date.

Our outstanding borrowings under the WF credit agreement were $49.5 million at June 30, 2012, at an interest rate of 2.72%, which was subsequently reset to 2.46% on July 2, 2012. In addition, we have letters of credit totaling $0.3 million, reducing the amount available to borrow on the revolver to $25.2 million at June 30, 2012. Quarterly, we are required to pay a 0.375% commitment fee on undrawn amounts under the revolving credit facility. There is a blanket lien on all of our assets under the WF credit agreement in addition to certain financial and reporting covenants.

We have $135 million aggregate principal amount outstanding of 3.50% convertible subordinated notes due November 15, 2015. Semi-annual interest payments are required on these notes.

Generation of positive cash flow from operating activities has historically been, and will continue to be, an important source of cash to fund operating needs and meet our current and long-term obligations. We have taken many actions in recent years to offset the negative impact of the recession and slow economic recovery and their impact on the data protection and big data and archive markets. We cannot provide assurance that the actions we have taken in the past or any actions we may take in the future will ensure a consistent, sustainable and sufficient level of net income and positive cash flow from operating activities to fund, sustain or grow our business. Certain events that are beyond our control, including prevailing economic, competitive and industry conditions, as well as various legal and other disputes, may prevent us from achieving these financial objectives. Any inability to achieve consistent and sustainable net income and cash flow could result in:

(i)	Restrictions on our ability to manage or fund our existing operations, which could result in a material and adverse effect on our future results of operations and financial condition.

(ii)	Unwillingness on the part of the lenders to do any of the following:

Provide a waiver or amendment for any covenant violations we may experience in future periods, thereby triggering a defaultunder, or termination of, the revolving credit line, or
Approve any amendments to the credit agreement we may seek to obtain in the future.

Any lack of renewal, waiver, or amendment, if needed, could result in the revolving credit line becoming unavailable to us and any amounts outstanding becoming immediately due and payable. In the case of our borrowings at June 30, 2012, this would mean $49.5 million could become immediately payable.

(iii)

Further impairment of our financial flexibility, which could require us to raise additional funding in the capital markets sooner than we otherwise would, and on terms less favorable to us, if available at all.

Any of the above mentioned items, individually or in combination, could have a material and adverse effect on our results of operations, available cash and cash flows, financial condition, access to capital and liquidity.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our discussion and analysis of the financial condition and results of operations is based on the accompanying unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these statements requires us to make significant estimates and judgments about future uncertainties that affect reported assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. In the event that estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting estimates requiring our most difficult, subjective or complex judgments because these matters are inherently uncertain are unchanged. These critical accounting estimates and policies have been disclosed in our Annual Report on Form 10-K for the year ended March 31, 2012 filed with the Securities and Exchange Commission on June 14, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in interest rates affect interest income earned on our cash equivalents and interest expense on our borrowings under the WF credit agreement. Our outstanding convertible subordinated notes have a fixed interest rate, thus a hypothetical 100 basis point increase in interest rates would not impact interest expense on these borrowings.

Our cash equivalents consisted solely of money market funds during the three months ended June 30, 2012. During the first quarter of fiscal 2013, interest rates on these funds were under 1.0% and we earned negligible amounts in interest income.

The interest rate on amounts borrowed on our WF credit agreement is based on an election by us of an annual rate equal to (1) a base rate established by Wells Fargo plus an applicable margin of 1.0% to 1.5%, based on availability levels under the WF credit agreement or (2) the LIBOR rate plus an applicable margin ranging from 2.0% and 2.5%, based on availability levels under the WF credit agreement. A hypothetical 100 basis point increase in interest rates would increase interest expense $0.1 million for the three months ended June 30, 2012.

ITEM 4. CONTROLS AND PROCEDURES

(a)		Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

(b)		Changes in internal control over financial reporting.There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING QUANTUM. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT ARE CURRENTLY DEEMED IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS AND OPERATIONS. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS “FORWARD-LOOKING” STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PLEASE SEE “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” FOR ADDITIONAL DISCUSSION OF THESE FORWARD-LOOKING STATEMENTS.

We continue to face risks related to the slow economic recovery.

The economic crisis in the U.S. and global financial markets in 2008 and 2009 and the continuing slow recovery has had a material and adverse impact on our business and our financial condition, including reduced demand for our products and concerns about our ability to access capital markets. We continue to face risks related to the slow economic recovery, including risks related to economic conditions in Europe. In addition, concerns about the potential default of various national bonds and debt backed by individual countries as well the politics impacting these, could negatively impact the U.S. and global economies and adversely affect our financial results. Uncertainty about economic conditions poses a risk as businesses may further reduce or postpone spending in response to reduced budgets, tight credit, negative financial news and declines in income or asset values which could adversely affect our business, financial condition and results of operations. In addition, our ability to access capital markets may be restricted which could have an impact on our ability to react to changing economic and business conditions and could also adversely affect our results of operations and financial condition.

We rely on indirect sales channels to market and sell our branded products. Therefore, the loss of or deterioration in our relationship with one or more of our resellers or distributors, or our inability to establish new indirect sales channels to drive growth of our branded revenue, especially for disk systems and software solutions, could negatively affect our operating results.

We sell the majority of our branded products to value-added resellers, or VARs, and to direct marketing resellers such as CDW Corporation, who in turn sell our products to end users, and to distributors such as Ingram Micro, Inc. and others. The success of these sales channels is hard to predict, particularly over time, and we have no purchase commitments or long-term orders from them that assure us of any baseline sales through these channels. Several of our resellers carry competing product lines that they may promote over our products. A reseller might not continue to purchase our products or market them effectively, and each reseller determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end user customers. Establishing new indirect sales channels is an important part of our strategy to drive growth of our branded revenue.

As we introduce new products and solutions, we could negatively impact our relationship with channel partners that historically have sold other products and solutions that now compete with our new offerings. For example, we introduced various StorNext appliance solutions in fiscal 2012 causing us to more directly compete for hardware sales with channel partners that sold other hardware products in conjunction with our StorNext software.

Certain of our contracts with customers contain “most favored nation” pricing provisions mandating that we offer our products to these customers at the lowest price offered to other similarly situated customers. In addition, sales of our enterprise products, and the revenue associated with the on-site service of those products, are somewhat concentrated in specific customers, including government agencies and government-related companies. Our operating results could be adversely affected by any number of factors including:

A change in competitive strategy that adversely affects a reseller’s willingness or ability to distribute our products;
The reduction, delay or cancellation of orders or the return of a significant amount of products;
Our inability to gain traction in developing new indirect sales channels for our branded products;
The loss of one or more of such distributors or resellers;
Any financial difficulties of such distributors or resellers that result in their inability to pay amounts owed to us; or
Changes in requirements or programs that allow our products to be sold by third parties to government customers.

A large percentage of our sales come from a few customers, some of which are also competitors, and these customers generally have no minimum or long-term purchase commitments. The loss of, or a significant reduction in demand from, one or more key customers could materially and adversely affect our business, financial condition and operating results.

Our sales have been and continue to be concentrated among a few customers because under our business model, we sell to OEMs, distributors, VARs and DMRs to reach end user customers. Furthermore, customers are not obligated to purchase any minimum product volume and our relationships with customers are terminable at will. Revenue from OEM customers has decreased in recent years. If we experience further declines in revenue from OEM customers or any of our other large customers, we could be materially and adversely affected. In addition, certain of our large customers are also our competitors, and such customers could decide to reduce or terminate their purchases of our products for competitive reasons.

Some of our tape and disk products are incorporated into larger storage systems or solutions that are marketed and sold to end users by large OEM customers as well as VARs, channel partners and other distributors. Because of this, we have limited market access to these end users, limiting our ability to reach and influence their purchasing decisions. These market conditions further our reliance on these OEM and other large customers such as distributors and VARs. Thus if they were to significantly reduce, cancel or delay their orders with us, our results of operations could be materially and adversely affected.

Our operating results depend on a limited number of products and on new product introductions, which may not be successful, in which case our business, financial condition and operating results may be materially and adversely affected.

A limited number of products comprise a significant majority of our sales, and due to rapid technological change in the industry, our future operating results depend on our ability to develop and successfully introduce new products. To compete effectively, we must continually improve existing products and introduce new ones. We have devoted and expect to continue to devote considerable management and financial resources to these efforts. We cannot provide assurance that:

We will introduce new products in the timeframe we are forecasting;
We will not experience technical, quality, performance-related or other difficulties that could prevent or delay the introductionand market acceptance of new products;
Our new products will achieve market acceptance and significant market share, or that the markets for these products willcontinue or grow as we have anticipated;
Our new products will be successfully or timely qualified with our customers by meeting customer performance and qualityspecifications which must occur before customers will place large product orders; or
We will achieve high volume production of these new products in a timely manner, if at all.

If we are not successful in timely completion of our new product qualifications and then ramping sales to our key customers, our revenue and results of operations could be adversely impacted. In addition, if the quality of our products is not acceptable to our customers, this could result in customer dissatisfaction, lost revenue and increased warranty and repair costs.

Competition may intensify in the data protection market as a result of competitors introducing products based on new technology standards and merger and acquisition activity, which could materially and adversely affect our business, financial condition and results of operations.

Our competitors in the data protection market for disk systems and virtual machine solutions are aggressively trying to advance and develop new technologies and products to compete against our technologies and products, and we face the risk that customers could choose competitor products over ours. Competition in our markets is characterized by technological innovation and advancement. As a result of competition and new technology standards, our sales or gross margins could decline, which could materially and adversely affect our business, financial condition and results of operations.

Technological developments and competition over the years in the tape automation market has resulted in decreased prices for tape automation products and product offerings. Pricing pressure is more pronounced in the tape automation market for entry-level products and least pronounced for enterprise products. Similar to our competitors, our products may be priced lower and often incorporate new and/or different features and technologies than prior years. We face risks that customers could choose competitor products over ours due to these features and technologies or due to pricing differences. We have managed pricing pressure by reducing production costs and/or adding features to increase value to maintain a certain level of gross margin for our tape automation systems. If competition further intensifies, or if there is additional industry consolidation, our sales and gross margins for tape automation systems could decline, which could materially and adversely affect our business, financial condition and results of operations.

Industry consolidation and competing technologies with device products, which include tape drives and removable hard drives, have resulted in decreased prices and increasingly commoditized device products. Our response has been to manage our device business at the material margin level and we have chosen not to compete for sales in intense price-based situations or if we would be unable to maintain a certain gross margin level. Our focus has shifted to higher margin opportunities in other product lines. Although revenue from devices has decreased in recent years, our material margins have remained relatively stable over this period. We have exited certain portions of the device market and have anticipated decreased sales of devices. We face risk of reduced shipments of our devices beyond our plans, and could have reduced margins on these products, which could adversely impact our business, financial condition and results of operations.

Additionally, the competitive landscape could change due to merger and acquisition activity in the data protection market. Such transactions may impact us in a number of ways. For instance, they could result in:

Competitors decreasing in number but having greater resources and becoming more competitive with us;
Companies that we have not historically competed against entering into one or more of our primary markets and increasing competition in that market(s); and
Customers that are also competitors becoming more competitive with us and/or reducing their purchase of our products.

These transactions also create uncertainty and disruption in the market because whether a pending transaction will be completed, the timing of such a transaction and its degree of impact are often unknown. Given these factors and others, such merger and acquisition activity may materially and adversely impact our business, financial condition and results of operations.

Competition may intensify in the big data and archive market as a result of competitors introducing products based on new technology standards and merger and acquisition activity, which could materially and adversely affect our business, financial condition and results of operations.

Competition in the big data and archive market is characterized by technological innovation and advancement, including performance and scale features, and our competitors are aggressively trying to advance and develop new technologies and solutions. We face the risk that customers could choose competitor solutions over ours due to these features and technologies. As a result of competition and new technology standards, our sales from software solutions and appliances could decline, which could materially and adversely affect our business, financial condition and results of operations.

Additionally, the competitive landscape could change due to merger and acquisition activity. Transactions such as these may impact us in a number of ways. For instance, they could result in:

Competitors decreasing in number but having greater resources and becoming more competitive with us;
Companies that we have not historically competed against entering into one or more of our primary markets and increasing competition in that market(s); and
Customers that are also competitors becoming more competitive with us and/or reducing their purchase of our products.

These transactions also create uncertainty and disruption in the market, because whether a pending transaction will be completed, the timing of such a transaction and its degree of impact are often unknown. Given these factors and others, such merger and acquisition activity may materially and adversely impact our business, financial condition and results of operations.

A significant decline in royalty, branded software or OEM deduplication software revenues could materially and adversely affect our business, financial condition and operating results.

Our royalties, branded software and OEM deduplication software revenues are relatively profitable and can significantly impact total company profitability. We receive royalty revenue based on tape media cartridges sold by various tape media manufacturers and resellers. Under our license agreements with these companies, each of the licensees determines the pricing and number of units of tape media cartridges that it sells. Our royalty revenue varies depending on the level of sales of the various media cartridge offerings sold by the licensees and other factors, including:

The size of the installed base of devices and similar products that use tape media cartridges;
The performance of our strategic licensing partners, which sell tape media cartridges;
The relative growth in units of newer device products, since the associated media cartridges for newer products typically sell athigher prices than the media cartridges associated with older products;
The media consumption habits and rates of end users;
The pattern of device retirements; and
The level of channel inventories.

Our media royalties depend on royalty rates and the quantity of media consumed in the market. We do not control licensee sales of these tape media cartridges. Reduced royalty rates, or a reduced installed device base using tape media cartridges, would result in further reductions in our royalty revenue and could reduce gross margins. This could materially and adversely affect our business, financial condition and results of operations.

Our branded software revenues are also dependent on many factors, including the success of competitive offerings, our ability to execute on our product roadmap and our effectiveness at marketing and selling our branded software solutions directly or through our channel partners. Disruptions to any one of these factors could reduce our branded software revenues which could adversely affect our business, financial condition and operating results.

Our OEM deduplication software revenues also depend on many factors, including the success of competitive offerings, our ability to execute on our product roadmap with our OEM deduplication software partners, the effort of our OEM deduplication software partners in marketing and selling the resulting products, the market acceptance of the resulting products and changes in the competitive landscape such as that which occurred with EMC’s purchase of Data Domain. Our relationship with EMC changed from partner to competitor in deduplication as a result of their acquisition of Data Domain. Following this acquisition, except for the first quarter of fiscal 2011 when significant revenue was recognized in accordance with contractual requirements, our OEM deduplication software revenue has significantly declined, which has negatively impacted our results. Any further disruptions to the factors on which our OEM deduplication software revenues depends could adversely affect our business, financial condition and operating results.

We derive the majority of our revenue from products incorporating tape technology. If we are unable to compete with new or alternative storage technologies, our business, financial condition and operating results could be materially and adversely affected.

We derive the majority of our revenue from products that incorporate some form of tape technology and we expect to continue to derive significant revenue from these products in the next several years. As a result, our future operating results depend in part on continued market acceptance and use of products employing tape technology. Disk products as well as various software solutions and alternative technologies continue to gain broader market acceptance. We face risks that our tape customers migrate toward these products and solutions.

We are addressing this risk through our own targeted investment in disk systems and other alternative technologies; however, these markets are characterized by rapid innovation, evolving customer demands and strong competition, including competition with several companies who are also significant customers. If we are not successful in our efforts, our business, financial condition and operating results could be materially and adversely affected.

If our products fail to meet our or our customers’ specifications for quality and reliability, our results of operations may be adversely impacted and our competitive position may suffer.

Although we place great emphasis on product quality, we may from time to time experience problems with the performance of our products, which could result in one or more of the following:

Increased costs related to fulfillment of our warranty obligations;
The reduction, delay or cancellation of orders or the return of a significant amount of products;
Focused failure analysis causing distraction of the sales, operations and management teams; or
The loss of reputation in the market and customer goodwill.

These factors could cause our business, financial condition and results of operations to be materially and adversely affected.

We have taken considerable steps towards reducing our cost structure and may take further cost reduction actions. The steps we have taken and may take in the future may not reduce our cost structure to a level appropriate in relation to our future sales and therefore, these anticipated cost reductions may be insufficient to result in consistent profitability.

In the last several years, we have recorded significant restructuring charges and made cash payments in order to reduce our cost of sales and operating expenses to rationalize our operations following past acquisitions, to respond to adverse economic and industry conditions and from strategic management decisions. We may take future steps to further reduce our operating costs, including future cost reduction steps or restructurings in response to strategic decisions, adverse changes in our business or industry or future acquisitions. We may be unable to reduce our cost of sales and operating expenses at a rate and to a level appropriate in relation to our future sales, which may adversely affect our business, financial condition and operating results.

If we are unable to attract and retain skilled employees, our business could be adversely impacted.

We may be subject to increased turnover in our employee base or the inability to fill open headcount requisitions due to competition, concerns about our operational performance or other factors. In addition, we may rely on the performance of employees whose skill sets are not sufficiently developed to fulfill their expected job responsibilities. Either of these situations could impair or delay our ability to realize operational and strategic objectives and cause increased expenses and lost sales opportunities.

Economic or other business factors may lead us to write down the carrying amount of our goodwill or long-lived assets, such as the goodwill impairment charge in fiscal 2009, which could have a material and adverse effect on our results of operations.

We evaluate our goodwill for impairment annually during the fourth quarter of our fiscal year, or more frequently when indicators of impairment are present. Long-lived assets are reviewed for impairment whenever events or circumstances indicate impairment might exist. We continue to monitor relevant market and economic conditions, including the price of our stock, and perform appropriate impairment reviews when conditions deteriorate such that we believe the value of our goodwill could be further impaired or an impairment exists in our long-lived assets. It is possible that conditions could deteriorate due to economic or other factors that affect our business, resulting in the need to write down the carrying amount of our goodwill or long-lived assets to fair value at the time of such assessment. As a result, our operating results could be materially and adversely affected.

Third party intellectual property infringement claims could result in substantial liability and significant costs, and, as a result, our business, financial condition and operating results may be materially and adversely affected.

From time to time, third parties allege our infringement of and need for a license under their patented or other proprietary technology, such as our current litigation with CTS Solutions and Overland Storage described in Legal Proceedings. While we currently believe the amount of ultimate liability, if any, with respect to any such actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any license discussion or litigation is uncertain. Adverse resolution of any third party infringement claim could subject us to substantial liabilities and require us to refrain from manufacturing and selling certain products. In addition, the costs incurred in intellectual property litigation can be substantial, regardless of the outcome. As a result, our business, financial condition and operating results could be materially and adversely affected.

In addition, certain products or technologies acquired or developed by us may include “open source” software. Open source software is typically licensed for use at no initial charge. Certain open source software licenses, however, require users of the open source software to license to others any software that is based on, incorporates or interacts with, the open source software under the terms of the open source license. Although we endeavor to comply fully with such requirements, third parties could claim that we are required to license larger portions of our software than we believe we are required to license under open source software licenses. If such claims were successful, they could adversely impact our competitive position and financial results by providing our competitors with access to sensitive information that may help them develop competitive products. In addition, our use of open source software may harm our business and subject us to intellectual property claims, litigation or proceedings in the future because:

Open source license terms may be ambiguous and may subject us to unanticipated obligations regarding ourproducts, technologies and intellectual property;
Open source software generally cannot be protected under trade secret law; and
It may be difficult for us to accurately determine the origin of the open source code and whether the open sourcesoftware infringes, misappropriates or violates third party intellectual property or other rights.

As a result of our global manufacturing and sales operations, we are subject to a variety of risks that are unique to businesses with international operations of a similar scope, any of which could, individually or in the aggregate have a material adverse effect on our business.

A significant portion of our manufacturing and sales operations and supply chain occurs in countries other than the U.S. We also have sales outside the U.S. We utilize contract manufacturers to produce certain of our products and have suppliers for various components, several of which have operations located in foreign countries including China, Hungary, Japan, Malaysia, Singapore and Thailand. Because of these operations, we are subject to a number of risks including:

Shortages in component parts and raw materials;
Import and export and trade regulation changes that could erode our profit margins or restrict our ability to transport ourproducts;
The burden and cost of complying with foreign and U.S. laws governing corporate conduct outside the U.S.;
Adverse movement of foreign currencies against the U.S. dollar (the currency in which our results are reported) and globaleconomic conditions generally;
Inflexible employee contracts and employment laws that may make it difficult to terminate or change the compensation structurefor employees in some foreign countries in the event of business downturns;

Potential restrictions on the transfer of funds between countries;
Political, military, social and infrastructure risks, especially in emerging or developing economies;
Import and export duties and value-added taxes; and
Natural disasters, including earthquakes, flooding, typhoons and tsunamis.

Any or all of these risks could have a material adverse effect on our business.

Our quarterly operating results could fluctuate significantly, and past quarterly operating results should not be used to predict future performance.

Our quarterly operating results have fluctuated significantly in the past and could fluctuate significantly in the future. As a result, our quarterly operating results should not be used to predict future performance. Quarterly operating results could be materially and adversely affected by a number of factors, including, but not limited to:

Failure to complete shipments in the last month of a quarter during which a substantial portion of our products are typicallyshipped;
Customers canceling, reducing, deferring or rescheduling significant orders as a result of excess inventory levels, weak economicconditions or other factors;
Customer fiscal year-ends and budget availability impacting customer demand for our products;
Declines in large orders, or orders greater than $200,000;
Declines in royalty revenues;
Declines in software revenues;
Product development and ramp cycles and product performance or quality issues;
Poor execution of and performance against expected sales and marketing plans and strategies;
Reduced demand from our OEM or distribution, VAR, DMR and other large customers; and
Increased competition.

For instance, for the first quarter of fiscal 2013, our financial results were below our guidance for the period in part because we were unable to close a number of larger transactions. After we reported this on July 9, 2012, our share price declined by 28%. If we fail to meet our projected quarterly results, our business, financial condition and results of operations may be materially and adversely affected.

If we fail to protect our intellectual property or if others use our proprietary technology without authorization, our competitive position may suffer.

Our future success and ability to compete depends in part on our proprietary technology. We rely on a combination of copyright, patent, trademark, and trade secrets laws and nondisclosure agreements to establish and protect our proprietary technology. However, we cannot provide assurance that patents will be issued with respect to pending or future patent applications that we have filed or plan to file or that our patents will be upheld as valid or will prevent the development of competitive products or that any actions we have taken will adequately protect our intellectual property rights. We generally enter into confidentiality agreements with our employees, consultants, customers, potential customers and others as required, in which we strictly limit access to, and distribution of, our software, and further limit the disclosure and use of our proprietary information.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. Enforcing our intellectual property rights can sometimes only be accomplished through the use of litigation. Our competitors may also independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S.

Because we may order components from suppliers in advance of receipt of customer orders for our products which include these components, we could face a material inventory risk, which could have a material and adverse effect on our results of operations and cash flows.

Although we use third parties to manufacture certain of our products, we also manufacture products in-house. Managing our in-house manufacturing capabilities presents a number of risks that could materially and adversely affect our financial condition. For instance, as part of our component planning, we place orders with or pay certain suppliers for components in advance of receipt of customer orders. We occasionally enter into negotiated orders with vendors early in the manufacturing process of our products to ensure that we have sufficient components for our products to meet anticipated customer demand. Because the design and manufacturing process for these components can be complicated, it is possible that we could experience a design or manufacturing flaw that could delay or even prevent the production of the components for which we previously committed to pay. We also face the risk of ordering too many components, or conversely, not enough components, since supply orders are generally based on forecasts of customer orders rather than actual customer orders. In addition, in some cases, we make non-cancelable order commitments to our suppliers for work-in-progress, supplier’s finished goods, custom sub-assemblies, discontinued (end-of-life) components and Quantum-unique raw materials that are necessary to meet our lead times for finished goods. If we cannot change or be released from supply orders, we could incur costs from the purchase of unusable components, either due to a delay in the production of the components or other supplies or as a result of inaccurately predicting supply orders in advance of customer orders. These same risks exist with our third party contract manufacturing partners. Our business and operating results could be materially and adversely affected if we incur increased costs, or are unable to fulfill customer orders.

In addition, several of our disk drive suppliers as well as suppliers of other components for our tape automation products with operations in Thailand were impacted by flooding in October 2011, which has affected those suppliers’ ability to manufacture a sufficient number of drives and components in order to meet the demands of their customers, including us. Certain suppliers have also announced anticipated price increases for available drives. Continued supply shortages and pricing complexities could materially and adversely affect our supply chain, customer relationships and results of operations. Although we have purchased a supply of hard disk drives to meet estimated demand for the near term, our business and operating results could be materially and adversely affected if we incur increased costs or are unable to meet customer demand.

Some of our manufacturing, component production and service repair are outsourced to third party contract manufacturers, component suppliers and service providers. If we cannot obtain products, parts and services from these third parties in a cost effective and timely manner that meets our customers’ expectations, this could materially and adversely impact our business, financial condition and results of operations.

Many aspects of our supply chain and operational results are dependent on the performance of third party business partners. We face a number of risks as a result of these relationships, including, among others:

Sole source of product supply
In many cases, our business partner may be the sole source of supply for the products or parts they manufacture, or theservices they provide, for us. Because we are relying on one supplier, we are at greater risk of experiencing shortages,reduced production capacity or other delays in customer deliveries that could result in customer dissatisfaction, lost salesand increased expenses, each of which could materially damage customer relationships and result in lost revenue.
Cost and purchase commitments
We may not be able to control the costs for the products our business partners manufacture for us or the services theyprovide to us. They procure inventory to build our products based upon a forecast of customer demand that we provide. Wecould be responsible for the financial impact on the contract manufacturer, supplier or service provider of any reduction orproduct mix shift in the forecast relative to materials that they had already purchased under a prior forecast. Such avariance in forecasted demand could require us to pay them for finished goods in excess of current customer demand or forexcess or obsolete inventory and generally incur higher costs. As a result, we could experience reduced gross margins andoperating losses based on these purchase commitments. With respect to service providers, although we have contracts formost of our third party repair service vendors, the contract period may not be the same as the underlying service contractwith our customer. In such cases, we face risks that the third party service provider may increase the cost of providingservices over subsequent periods contracted with our customer.
Financial condition and stability
Our third party business partners may suffer adverse financial or operational results or may be negatively impacted byglobal and local economic conditions. Therefore, we may face interruptions in the supply of product components orservice as a result of financial or other volatility affecting our supply chain. We could suffer production downtime orincreased costs to procure alternate products or services as a result of the possible inadequate financial condition of one ormore of our business partners.

Quality and supplier conduct
We have limited control over the quality of products and components produced and services provided by our supply chainbusiness partners. Therefore, the quality of the products, parts or services may not be acceptable to our customers andcould result in customer dissatisfaction, lost revenue and increased warranty costs. In addition, we have limited controlover the manner in which our business partners conduct their business. Sub-tier suppliers selected by the primary thirdparty could have process control issues or could select components with latent defects that manifest over a longer period oftime. Therefore, we may face negative consequences or publicity as a result of a third party’s failure to comply withapplicable compliance, trade, environmental or employment regulations.

Any or all of these risks could have a material adverse effect on our business. In the past we have successfully transitioned products or component supply from one supplier to another existing supplier of different products or to our own facilities without significant financial or operational impact, but there is no guarantee of our continued ability to do so.

If we do not successfully manage the changes that we have made and may continue to make to our infrastructure and management, our business could be disrupted, and that could adversely impact our results of operations and financial condition.

Managing change is an important focus for us. In recent years, we have implemented several significant initiatives involving our sales and marketing, engineering and operations organizations, aimed at increasing our efficiency and better aligning these groups with our corporate strategy. In addition, we have reduced headcount to streamline and consolidate our supporting functions as appropriate following past acquisitions and in response to market or competitive conditions. Our inability to successfully manage the changes that we implement, and detect and address issues as they arise could disrupt our business and adversely impact our results of operations and financial condition.

Our stock price could become more volatile if certain institutional investors were to increase or decrease the number of shares they own. In addition, there are other factors and events that could affect the trading prices of our common stock.

A small number of institutional investors have owned a significant portion of our common stock at various times in recent years. If any or all of these investors were to decide to purchase significant additional shares or to sell significant amounts or all of the common shares they currently own, that may cause our stock price to be more volatile. For example, there have been instances in the past where a shareholder with a significant equity position began to sell shares, putting downward pressure on our stock price for the duration of their selling activity. In these situations, selling pressure outweighed buying demand and our stock price declined. This situation has occurred due to our stock price falling below institutional investors’ price thresholds and our volatility increasing beyond investors’ volatility parameters causing even greater sell pressure. The opposite has also occurred whereby a shareholder purchases a significant equity position, creating demand for our common stock and an increased stock price.

Trading prices of our common stock may fluctuate in response to a number of other events and factors, such as:

General economic conditions;
Changes in interest rates;
Fluctuations in the stock market in general and market prices for technology companies in particular;
Quarterly variations in our operating results;
New products, services, innovations and strategic developments by our competitors or us, or business combinations andinvestments by our competitors or us;
Changes in financial estimates by us or securities analysts and recommendations by securities analysts;
Changes in our capital structure, including issuance of additional debt or equity to the public; and
Strategic acquisitions.

Any of these events and factors may cause our stock price to rise or fall and may adversely affect our business and financing opportunities.

Our design and production processes are subject to safety and environmental regulations which could lead to increased costs, or otherwise adversely affect our business, financial condition and results of operations.

We are subject to a variety of laws and regulations relating to, among other things, the use, storage, discharge and disposal of materials and substances used in our facilities and manufacturing processes as well as the safety of our employees and the public. Directives first introduced in the European Union impose a “take back” obligation on manufacturers for the financing of the collection, recovery and disposal of electrical and electronic equipment and restrict the use of certain potentially hazardous materials, including lead and some flame retardants, in electronic products and components. Other jurisdictions in the U.S. and internationally have since introduced similar requirements, and we anticipate that future regulations might further restrict allowable materials in our products, require the establishment of additional recycling or take back programs or mandate the measurement and reduction of carbon emissions into the environment. We have implemented procedures and will likely continue to introduce new processes to comply with current and future safety and environmental legislation. However, measures taken now or in the future to comply with such legislation may adversely affect our manufacturing or personnel costs or product sales by requiring us to acquire costly equipment or materials, redesign production processes or to incur other significant expenses in adapting our manufacturing programs or waste disposal and emission management processes. Furthermore, safety or environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us, or the suspension of affected operations, which could have an adverse effect on our business, financial condition and results of operations.

We are subject to many laws and regulations, and violation of or changes in those requirements could materially and adversely affect our business.

We are subject to numerous U.S. and international laws regarding corporate conduct, fair competition, preventing corruption and import and export practices, including requirements applicable to U.S. government contractors. While we maintain a rigorous corporate ethics and compliance program, we may be subject to increased regulatory scrutiny, significant monetary fines or penalties, suspension of business opportunities or loss of jurisdictional operating rights as a result of any failure to comply with those requirements. We may also be exposed to potential liability resulting from our business partners’ violation of these requirements. In addition, U.S. regulatory agencies have recently introduced new enforcement efforts that may proactively seek conduct-related information from companies operating in certain targeted industries or locations, without regard for whether potential violations have been identified. If we were to receive such an information request, we may incur increased personnel and legal costs in order to adequately review and respond to the request. Further our U.S. and international business models are based on currently applicable regulatory requirements and exceptions. Changes in those requirements or exceptions could necessitate changes to our business model. Any of these consequences could materially and adversely impact our business and operating results.

We may be sued by our customers as a result of failures in our products.

We face potential liability for performance problems of our products because our end users employ our storage technologies for the storage and backup of important data and to satisfy regulatory requirements. Although we maintain technology errors and omissions insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability or accrual of litigation costs that is not covered by insurance or is in excess of our insurance coverage could harm our business. In addition, we could potentially face claims for product liability from our customers if our products cause property damage or bodily injury. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability or accrual of litigation costs that is not covered by insurance or is in excess of our insurance coverage could harm our business.

We must maintain appropriate levels of service parts inventories. If we do not have sufficient service parts inventories, we may experience increased levels of customer dissatisfaction. If we hold excessive service parts inventories, we may incur financial losses.

We maintain levels of service parts inventories to satisfy future warranty obligations and also to earn service revenue by providing enhanced and extended warranty and repair service during and beyond the warranty period. We estimate the required amount of service parts inventories based on historical usage and forecasts of future warranty requirements, including estimates of failure rates and costs to repair, and out of warranty revenue. Given the significant levels of judgment inherently involved in the process, we cannot provide assurance that we will be able to maintain appropriate levels of service parts inventories to satisfy customer needs and to avoid financial losses from excess service parts inventories. If we are unable to maintain appropriate levels of service parts inventories, our business, financial condition and results of operations may be materially and adversely impacted.

Because we rely heavily on distributors and other resellers to market and sell our products, if one or more distributors were to experience a significant deterioration in its financial condition or its relationship with us, this could disrupt the distribution of our products and reduce our revenue, which could materially and adversely affect our business, financial condition and operating results.

In certain product and geographic segments we heavily utilize distributors and value added resellers to perform the functions necessary to market and sell our products. To fulfill this role, the distributor must maintain an acceptable level of financial stability, creditworthiness and the ability to successfully manage business relationships with the customers it serves directly. Under our distributor agreements with these companies, each of the distributors determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to its customers. If the distributor is unable to perform in an acceptable manner, we may be required to reduce the amount of sales of our product to the distributor or terminate the relationship. We may also incur financial losses for product returns from distributors or for the failure or refusal of distributors to pay obligations owed to us. Either scenario could result in fewer of our products being available to the affected market segments, reduced levels of customer satisfaction and/or increased expenses, which could in turn have a material and adverse impact on our business, results of operations and financial condition.

From time to time we have made acquisitions. The failure to successfully integrate future acquisitions could harm our business, financial condition and operating results.

As a part of our business strategy, we have in the past and may make acquisitions in the future, subject to certain debt covenants. We may also make significant investments in complementary companies, products or technologies. If we fail to successfully integrate such acquisitions or significant investments, it could harm our business, financial condition and operating results. Risks that we may face in our efforts to integrate any recent or future acquisitions include, among others:

Failure to realize anticipated savings and benefits from the acquisition;
Difficulties in assimilating and retaining employees;
Potential incompatibility of business cultures;
Coordinating geographically separate organizations;
Diversion of management’s attention from ongoing business concerns;
Coordinating infrastructure operations in a rapid and efficient manner;
The potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;
Failure of acquired technology or products to provide anticipated revenue or margin contribution;
Insufficient revenues to offset increased expenses associated with the acquisition;
Costs and delays in implementing or integrating common systems and procedures;
Reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;
Impairment of existing customer, supplier and strategic relationships of either company;
Insufficient cash flows from operations to fund the working capital and investment requirements;
Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
The possibility that we may not receive a favorable return on our investment, the original investment may become impaired, and/or we may incur losses from these investments;
Dissatisfaction or performance problems with the acquired company;
The assumption of risks of the acquired company that are difficult to quantify, such as litigation;
The cost associated with the acquisition, including restructuring actions, which may require cash payments that, if large enough, could materially and adversely affect our liquidity; and
Assumption of unknown liabilities or other unanticipated adverse events or circumstances.

Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction. We cannot provide assurance that we will be able to successfully integrate any business, products, technologies or personnel that we may acquire in the future, and our failure to do so could negatively impact our business, financial condition and operating results.

Our capital structure includes debt, which imposes upon us debt service obligations and our credit facility contains various operating and financial covenants that limit our discretion in the operation of our business. If we are unable to generate sufficient cash flows from operations to meet these debt obligations or remain in compliance with the covenants our business, financial condition and operating results could be materially and adversely affected.

Our level of indebtedness presents risks to investors, both in terms of the constraints that it places on our ability to operate our business and because of the possibility that we may not generate sufficient cash to pay the principal and interest on our indebtedness as it becomes due.

Potential consequences of having debt include:

Requiring that we dedicate a portion of our cash flow from operations and other capital resources to debt service, thereby reducing our ability to fund working capital, capital expenditures, research and development and other cash requirements;
Limiting our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete, such as limiting our ability to engage in mergers and acquisitions activity, which may place us at a competitive disadvantage;
Mandatory field audits and control of cash receipts by the lender if we do not maintain average liquidity above certain thresholds;
Increasing our vulnerability to adverse economic and industry conditions;
Making it more difficult or impossible for us to make payments on other indebtedness or obligations; and
Limiting our ability to incur additional debt on acceptable terms, if at all.

Our credit facility agreement contains restrictive covenants that require us to comply with and maintain certain financial tests and ratios, as well as restrict our ability, subject to certain thresholds, to:

Incur debt;
Incur liens;
Make acquisitions of businesses or entities or sell certain assets;
Make investments, including loans, guarantees and advances;
Engage in transactions with affiliates;
Pay dividends or engage in stock repurchases; and
Enter into certain restrictive agreements.

Our ability to comply with covenants contained in this credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

Our credit facility agreement is collateralized by a pledge of all of our assets. If we were to default and were unable to obtain a waiver for such a default, the lender would have a right to foreclose on our assets in order to satisfy our obligations under the credit agreement. Any such action on the part of the lender against us could have a materially adverse impact on our business, financial condition and results of operations.

If the future outcomes related to the estimates used in recording tax liabilities to various taxing authorities result in higher tax liabilities than estimated, then we would have to record tax charges, which could be material.

We have provided amounts and recorded liabilities for probable and estimable tax adjustments that may be proposed by various taxing authorities in the U.S. and foreign jurisdictions. If events occur that indicate payments of these amounts will be less than estimated, then reversals of these liabilities would create tax benefits being recognized in the periods when we determine the liabilities have reduced. Conversely, if events occur which indicate that payments of these amounts will be greater than estimated, then tax charges and additional liabilities would be recorded. In particular, various foreign jurisdictions could challenge the characterization or transfer pricing of certain intercompany transactions. In the event of an unfavorable outcome of such challenge, there exists the possibility of a material tax charge and adverse impact on the results of operations in the period in which the matter is resolved or an unfavorable outcome becomes probable and estimable.

Certain changes in stock ownership could result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. Should we undergo such a change in stock ownership, it would severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges, which could be material.

We are exposed to fluctuations in foreign currency exchange rates, and an adverse change in foreign currency exchange rates relative to our position in such currencies could have a materially adverse impact on our business, financial condition and results of operations.

We do not currently use derivative financial instruments for foreign currency hedging or speculative purposes. We have used in the past, and may use in the future, foreign currency forward contracts to hedge our exposure to foreign currency exchange rates. To the extent that we have assets or liabilities denominated in a foreign currency that are inadequately hedged or not hedged at all, we may be subject to foreign currency losses, which could be significant.

Our international operations can act as a natural hedge when both operating expenses and sales are denominated in local currencies. In these instances, although an unfavorable change in the exchange rate of a foreign currency against the U.S. dollar would result in lower sales when translated to U.S. dollars, operating expenses would also be lower in these circumstances. An increase in the rate at which a foreign currency is exchanged for U.S. dollars would require more of that particular foreign currency to equal a specified amount of U.S. dollars than before such rate increase. In such cases, and if we were to price our products and services in that particular foreign currency, we would receive fewer U.S. dollars than we would have received prior to such rate increase for the foreign currency. Likewise, if we were to price our products and services in U.S. dollars while competitors priced their products in a local currency, an increase in the relative strength of the U.S. dollar would result in our prices being uncompetitive in those markets. Such fluctuations in currency exchange rates could materially and adversely affect our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The Exhibit Index beginning on page 33 of this report is herein incorporated by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

QUANTUM CORPORATION

/s/ LINDA M. BREARD

Linda M. Breard

Chief Financial Officer

(Principal Financial and Chief Accounting Officer)

Dated: August 9, 2012

EXHIBIT INDEX

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

3.1

Amended and Restated Certificate of Incorporation of Registrant.

8-K

001-13449

3.1

August 16, 2007

3.2

Amended and Restated By-laws of Registrant, as amended.

8-K

001-13449

3.1

December 5, 2008

3.3

Certification of Amendment to the Bylaws of Quantum Corporation, as adopted on January 20, 2010.

8-K

001-13449

3.1

January 26, 2010

4.1

Stockholder Agreement, dated as of October 28, 2002, by and between Registrant and Private Capital Management.

10-Q

001-13449

4.2

November 13, 2002

4.2

Indenture for 3.50% Convertible Senior Subordinated Notes due 2015, between the Registrant and U.S. Bank National Association, as trustee, dated November 15, 2010, including the form of 3.50% Convertible Senior Subordinated Note due 2015.

8-K

001-13449

4.1

November 15, 2010

10.1

First Amendment to Credit Agreement, dated June 28, 2012, among Registrant, the lenders identified therein, and Wells Fargo Capital Finance, LLC, as the administrative agent for the lenders.

8-K

001-13449

10.1

June 28, 2012

31.1

Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. ‡

31.2

Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. ‡

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. †

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. †

101.INS

XBRL Instance Document.††

101.SCH

XBRL Taxonomy Extension Schema Document.††

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.††

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.††

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.††

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.††

‡		Filed herewith.
†		Furnished herewith.
††		XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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Quantum (QMCO) 10-Q2013 Q1 Quarterly report

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