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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 April 30, 2003

Or

     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from      to

Commission file number 0-21103


ADVANCED DIGITAL INFORMATION CORPORATION

     
Incorporated under the laws   I.R.S. Employer Identification
of the State of Washington   No. 91-1618616

11431 Willows Road N.E.
P.O. Box 97057
Redmond, Washington 98073-9757

(425) 881-8004

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes x   No o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

     Yes x   No o

     The total shares of common stock without par value outstanding at the end of the quarter reported is 62,482,670.




TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT 99.1
EXHIBIT 99.2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Advanced Digital Information Corporation
Consolidated Balance Sheets
(In thousands, except for share data)

                         
            October 31,   April 30,
            2002   2003
           
 
       
Assets
               
Current assets:
               
 
Cash and cash equivalents
  $ 150,741     $ 159,357  
 
Accounts receivable, net of allowances of $1,379 in 2002 and $1,650 in 2003
    71,383       87,382  
 
Inventories, net
    32,296       37,024  
 
Short-term marketable securities
    24,878       23,848  
 
Prepaid expenses and other
    2,245       2,844  
 
Income taxes receivable
    6,305       5,065  
 
Deferred income taxes
    13,250       13,055  
 
 
   
     
 
     
Total current assets
    301,098       328,575  
Property, plant and equipment, net of accumulated depreciation of $20,672 in 2002 and $28,950 in 2003
    48,722       49,104  
Service parts for maintenance, net of accumulated amortization of $15,545 in 2002 and $18,726 in 2003
    22,936       24,753  
Deferred income taxes
    3,347       3,329  
Long-term marketable securities
    7,221       7,218  
Investments
    10,928       3,228  
Intangible and other assets, net of accumulated amortization of $3,869 in 2002 and $4,205 in 2003
    4,885       4,559  
 
 
   
     
 
 
  $ 399,137     $ 420,766  
 
 
   
     
 
       
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
 
Accounts payable
  $ 35,126     $ 40,897  
 
Accrued liabilities
    11,668       16,458  
 
Deferred revenue
    20,343       23,217  
 
Bank lines of credit and current portion of long-term debt
    2,282       1,913  
 
 
   
     
 
       
Total current liabilities
    69,419       82,485  
Long-term debt
    984       1,018  
Commitments
               
Shareholders’ equity:
               
 
Preferred stock, no par value; 4,000,000 shares authorized; none issued and outstanding
           
 
Common stock, no par value; 160,000,000 shares authorized, 62,482,670 issued and outstanding (61,874,990 in 2002)
    222,687       225,438  
 
Retained earnings
    108,159       112,264  
 
Accumulated other comprehensive income (loss):
               
   
Cumulative translation adjustment
    (1,887 )     (770 )
   
Unrealized investment gains (losses)
    (225 )     331  
 
 
   
     
 
       
Total shareholders’ equity
    328,734       337,263  
 
 
   
     
 
 
  $ 399,137     $ 420,766  
 
 
   
     
 

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Operations

(In thousands, except for per share data)

                                   
      Three months ended   Six months ended
      April 30,   April 30,
     
 
      2002   2003   2002   2003
     
 
 
 
Net sales
  $ 80,687     $ 100,642     $ 177,410     $ 197,738  
Cost of sales
    59,696       67,728       132,617       134,968  
 
   
     
     
     
 
 
Gross profit
    20,991       32,914       44,793       62,770  
 
   
     
     
     
 
Operating expenses:
                               
 
Sales and marketing
    11,958       14,516       22,884       27,657  
 
General and administrative
    5,527       6,172       10,939       12,147  
 
Research and development
    7,269       9,967       14,070       20,271  
 
Acquisition expenses
    1,475             1,475        
 
   
     
     
     
 
 
    26,229       30,655       49,368       60,075  
 
   
     
     
     
 
Operating profit (loss)
    (5,238 )     2,259       (4,575 )     2,695  
 
   
     
     
     
 
Other income (expense):
                               
 
Interest income
    961       585       2,007       1,236  
 
Interest expense
    (59 )     (40 )     (119 )     (91 )
 
Gain on securities transactions, net
    5,935       700       8,179       1,412  
 
Foreign currency transaction gains, net
    360       209       81       1,171  
 
Other
    69       (28 )     61       (123 )
 
   
     
     
     
 
 
    7,266       1,426       10,209       3,605  
 
   
     
     
     
 
Income before provision for income taxes
    2,028       3,685       5,634       6,300  
Provision (benefit) for income taxes
    (479 )     1,266       745       2,195  
 
   
     
     
     
 
Net income
  $ 2,507     $ 2,419     $ 4,889     $ 4,105  
 
   
     
     
     
 
Basic net income per share
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 
Diluted net income per share
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Cash Flows

(In thousands)

                     
        Six months ended
        April 30,
       
        2002   2003
       
 
Cash flows from operating activities:
               
 
Net income
  $ 4,889     $ 4,105  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation and amortization
    7,377       10,096  
   
Allowance for doubtful accounts receivable
    330       494  
   
Inventory obsolescence
    1,948       2,962  
   
Gain on securities transactions
    (8,179 )     (1,412 )
   
Acquired in-process research and development
    1,200        
   
Deferred income taxes
    (304 )     (54 )
   
Tax benefit from exercise of stock options
    2,029       587  
   
Other
    12       27  
 
Change in assets and liabilities:
               
   
Accounts receivable
    280       (17,013 )
   
Inventories
    8,306       (7,425 )
   
Prepaid expenses and other assets
    190       (544 )
   
Income taxes receivable
    3,649       1,268  
   
Service parts for maintenance
    (4,063 )     (3,548 )
   
Accounts payable
    750       5,245  
   
Accrued liabilities
    (51 )     4,183  
   
Deferred revenue
    130       2,364  
 
 
   
     
 
Net cash provided by operating activities
    18,493       1,335  
 
 
   
     
 
Cash flows from investing activities:
               
 
Purchase of property, plant and equipment
    (15,624 )     (6,442 )
 
Purchase of marketable securities
          (2,352 )
 
Proceeds from securities transactions
    20,726       13,352  
 
Purchase of other investments
    (2,900 )      
 
 
   
     
 
Net cash provided by investing activities
    2,202       4,558  
 
 
   
     
 
Cash flows from financing activities:
               
 
Repayment of bank lines of credit and long-term debt
    (1,078 )     (1,510 )
 
Proceeds from short-term borrowings
          781  
 
Repurchase of common stock
          (697 )
 
Proceeds from issuance of common stock for stock options, stock warrants and Stock Purchase Plan
    3,935       2,861  
 
 
   
     
 
Net cash provided by financing activities
    2,857       1,435  
 
 
   
     
 
Effect of exchange rate changes on cash
    51       1,288  
 
 
   
     
 
Net increase in cash and cash equivalents
    23,603       8,616  
Cash and cash equivalents at beginning of period
    155,274       150,741  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 178,877     $ 159,357  
 
 
   
     
 

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended April 30, 2003

(In thousands)

                                               
                                  Accumulated        
          Common stock           Other        
         
  Retained   Comprehensive        
          Shares   Amount   Earnings   Income (Loss)   Total
         
 
 
 
 
Balance at October 31, 2002
    61,875     $ 222,687     $ 108,159     $ (2,112 )   $ 328,734  
Shares repurchased
    (113 )     (697 )                 (697 )
Purchases under Stock Purchase Plan
    240       1,129                   1,129  
Exercise of stock options, including tax benefit of $587
    481       2,319                   2,319  
Comprehensive income:
                                       
 
Net income
                4,105              
 
Change in unrealized investment gains:
                                       
     
Unrealized investment gains, net of tax of $212
                      394        
     
Reclassification adjustment for investment losses included in net income, net of tax of $87
                      162        
 
Change in foreign currency translation adjustment, net of tax of $601
                      1,117        
     
Total comprehensive income
                            5,778  
 
   
     
     
     
     
 
Balance at April 30, 2003
    62,483     $ 225,438     $ 112,264     $ (439 )   $ 337,263  
 
   
     
     
     
     
 

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements

April 30, 2003

Note 1. Basis of presentation

     The accompanying consolidated financial statements are unaudited and include the accounts of the Company and its subsidiaries. All significant intercompany transactions, balances and profits have been eliminated in consolidation. Certain prior period balances have been adjusted or reclassified to conform to current period presentation. These reclassifications have no effect on net income, shareholders’ equity or cash flows as previously presented.

     The accompanying consolidated financial statements are unaudited and should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended October 31, 2002. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. In our opinion all normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the three and six month periods ended April 30, 2003 are not necessarily indicative of results to be expected for a full year.

Note 2. Stock-based compensation plans

     Stock-based compensation plans are accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based compensation cost is reflected in net income, as all stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” our net income and basic and diluted net income per share would have been reduced to the pro forma amounts indicated below:

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

April 30, 2003

                                     
        Three months ended   Six months ended
        April 30,   April 30,
       
 
        2002   2003   2002   2003
       
 
 
 
        (In thousands, except for per share data)
Net income, as reported
  $ 2,507     $ 2,419     $ 4,889     $ 4,105  
Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax
    (2,668 )     (1,611 )     (5,260 )     (3,581 )
 
   
     
     
     
 
Pro forma net income (loss)
  $ (161 )   $ 808     $ (371 )   $ 524  
 
   
     
     
     
 
Basic net income (loss) per share:
                               
 
As reported
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 
 
Pro forma
  $ 0.00     $ 0.01     $ (0.01 )   $ 0.01  
 
   
     
     
     
 
Diluted net income (loss) per share:
                               
 
As reported
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 
 
Pro forma
  $ 0.00     $ 0.01     $ (0.01 )   $ 0.01  
 
   
     
     
     
 

     The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:

                                 
    Three months ended   Six months ended
    April 30,   April 30,
   
 
    2002   2003   2002   2003
   
 
 
 
Weighted average risk free interest rates
    4.17 %     3.13 %     4.07 %     3.28 %
Expected dividend yield
    0 %     0 %     0 %     0 %
Expected volatility
    84 %     103 %     84 %     103 %
Expected lives (in years)
    4.0       6.0       4.0       6.0  

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

April 30, 2003

Note 3. Earnings per share

     The following table sets forth the computation of basic and diluted net income per share for the three and six months ended April 30, 2002 and 2003:

                                   
      Three months ended   Six months ended
      April 30,   April 30,
     
 
      2002   2003   2002   2003
     
 
 
 
      (In thousands, except for per share data)
Numerator:
                               
 
Net income
  $ 2,507     $ 2,419     $ 4,889     $ 4,105  
 
 
   
     
     
     
 
Denominator:
                               
 
Denominator for basic net income per share — weighted average shares
    62,396       62,343       62,235       62,105  
 
Dilutive potential common shares from Team Member (employee) stock options and warrants
    1,428       730       1,724       773  
 
 
   
     
     
     
 
 
Denominator for diluted net income per share — adjusted weighted average shares and assumed conversions
    63,824       63,073       63,959       62,878  
 
 
   
     
     
     
 
Basic net income per share
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
 
   
     
     
     
 
Diluted net income per share
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
 
   
     
     
     
 

Note 4. Inventories

     Inventories are comprised of the following:

                 
    October 31,   April 30,
    2002   2003
   
 
    (In thousands)
Finished goods
  $ 26,225     $ 29,142  
Work-in-process
    140       337  
Raw materials
    16,644       21,399  
 
   
     
 
 
    43,009       50,878  
Allowance for inventory obsolescence
    (10,713 )     (13,854 )
 
   
     
 
 
  $ 32,296     $ 37,024  
 
   
     
 

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

April 30, 2003

Note 5. Investments in marketable securities and other investments

     At April 30, 2003, the cost basis of the marketable securities we held was $30,558,000 and the fair value was $31,066,000. The difference between the cost basis and fair value of $508,000, net of taxes of $177,000 is recorded as an unrealized investment gain. At April 30, 2003, the fair value of marketable securities comprised equity securities of $3,019,000 and debt securities of $28,047,000. The equity securities consist of stock in a U.S. company that operates in an area within our strategic focus. The debt securities consist of investment-grade government and commercial securities purchased in accordance with our cash management policy to generate a higher yield than cash equivalents. Consistent with our investment policy, investment maturities do not exceed 24 months at the date of purchase. The objectives of our cash management policy are safety and preservation of funds, liquidity sufficient to meet cash flow requirements and attainment of a market rate of return. During the three months ended April 30, 2002 and 2003, we sold a portion of our marketable securities and realized gains of $1,985,000 and $700,000, respectively. During the six month periods ended April 30, 2002 and 2003, sales of marketable securities resulted in gains of $3,657,000 and $637,000, respectively.

     From time to time, we make other strategic investments that are accounted for under the cost method. In November 2002, one of these investments was converted to cash and marketable equity securities with a combined value of $8,351,000, and we recorded a gain on securities transactions of $651,000. In December 2002, we received additional shares of marketable equity securities under an earnout provision and recorded an additional gain on securities transactions of $124,000.

     During the six month period ended April 30, 2002 we received cash of $287,000 related to the sale of derivative financial instruments on certain marketable equity securities held by us. We recorded a liability of $38,000 at April 30, 2002, which represented the fair value of the derivative financial instruments at that time. We recognized a gain on securities transactions of $3,950,000 and $4,522,000, respectively, during the three and six month periods ended April 30, 2002 to reflect the change in the fair value of the related liability during the period plus the cash received on sales of derivatives during the period.

Note 6. Intangible and other assets

     On November 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which requires us to discontinue amortization of goodwill. As required by SFAS 142, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. In applying these criteria, we transferred net assembled workforce from intangible assets to goodwill in the first quarter of fiscal 2003. During the first quarter, we completed the assessment for impairment of goodwill required upon implementation of SFAS 142 and concluded that goodwill was not impaired. We are required to perform goodwill impairment tests on an annual basis or when indicators of impairment exist. We plan to perform our annual goodwill impairment test in the third quarter of each fiscal year, including 2003. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

April 30, 2003

     The following table presents net income and net income per share for the three and six months ended April 30, 2002 and 2003 on a pro forma basis as if SFAS 142 had been adopted on November 1, 2001:

                                     
        Three months ended   Six months ended
        April 30,   April 30,
       
 
        2002   2003   2002   2003
       
 
 
 
        (In thousands, except for per share data)
Net income, as reported
  $ 2,507     $ 2,419     $ 4,889     $ 4,105  
Add back: amortization of goodwill (including assembled workforce), net of tax
    71             141        
 
   
     
     
     
 
Pro forma net income
  $ 2,578     $ 2,419     $ 5,030     $ 4,105  
 
   
     
     
     
 
Basic net income per share:
                               
 
As reported
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 
 
Pro forma
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 
Diluted net income per share:
                               
 
As reported
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 
 
Pro forma
  $ 0.04     $ 0.04     $ 0.08     $ 0.07  
 
   
     
     
     
 

     Intangible and other assets consists of the following:

                                                 
    October 31, 2002   April 30, 2003
   
 
    Gross   Accumulated           Gross   Accumulated        
    Amount   amortization   Net amount   amount   amortization   Net amount
   
 
 
 
 
 
            (In thousands)           (In thousands)        
Developed technology
  $ 980     $ (925 )   $ 55     $ 980     $ (980 )   $  
Core technology
    3,804       (1,675 )     2,129       3,804       (1,947 )     1,857  
Assembled workforce
    147       (139 )     8                    
Non-compete agreements
    50       (12 )     38       50       (21 )     29  
Goodwill
    3,706       (1,118 )     2,588       3,853       (1,257 )     2,596  
Other assets
    67             67       77             77  
 
   
     
     
     
     
     
 
 
  $ 8,754     $ (3,869 )   $ 4,885     $ 8,764     $ (4,205 )   $ 4,559  
 
   
     
     
     
     
     
 

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

April 30, 2003

     During the three and six month periods ended April 30, 2003, we recorded intangible amortization expense of $141,000 and $336,000, respectively. During the comparable periods in fiscal 2002, intangible amortization expense was $327,000 and $653,000, respectively. Total expected future amortization related to intangible assets is provided in the following table:

         
    Amortization
   
    (In thousands)
Six months ended October 31, 2003
  $ 282  
Fiscal year 2004
  $ 562  
Fiscal year 2005
  $ 543  
Fiscal year 2006
  $ 499  

Note 7. Guarantees

     In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of the guarantee. In addition, FIN 45 requires disclosures about the guarantees that a company has issued, including a rollforward of the company’s product warranty liabilities. We are required to apply the recognition provisions of FIN 45 prospectively to any guarantees issued after December 31, 2002. The disclosure provisions of FIN 45 were effective for us during the first quarter of fiscal 2003 and are included below. We do not expect the provisions of FIN 45 to have a significant impact on our financial position or results of operations.

     For our products, parts and labor are covered under warranty for periods between three months and three years. A provision for labor costs related to warranty expense is recorded when revenue is recognized. We hold service parts for maintenance that are used to service our warranties and extended service contracts. The cost of these parts is amortized over their estimated useful lives, which range from three to seven years. With respect to drives and tapes used in our products but manufactured by a third party, we provide to the customer a warranty on such drives and tapes that is substantially equivalent to the warranty provided by the manufacturer.

     Changes in our accrued warranty balance for the six months ended April 30, 2003 are as follows:

         
Balance at October 31, 2002
  $ 4,225  
Accruals for warranties issued
    2,918  
Settlements during the period
    (2,043 )
 
   
 
Balance at April 30, 2003
  $ 5,100  
 
   
 

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

April 30, 2003

Note 8. Recent accounting pronouncements

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also amends the disclosure provisions of that statement. The disclosure provisions of this statement are effective for us beginning in the second quarter of fiscal 2003, and the required disclosures are included in Note 2. We do not currently have plans to change to the fair value method of accounting for our stock-based compensation, but we will reassess our plans during the fourth quarter of fiscal 2003 to determine whether we will change to the fair value method during fiscal 2004.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in interim periods beginning after June 15, 2003. We are currently evaluating the impact EITF 00-21 will have, if any, on our financial position or results of operations.

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities and results of operations of a VIE need to be included in a company’s financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE. The provisions of FIN 46 are effective immediately for all VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the provisions of FIN 46 must be adopted at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 requires that certain financial instruments that, under previous guidance, could be accounted for as equity, now be classified as liabilities. These financial instruments include mandatorily redeemable shares, instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares. SFAS 150 also requires additional disclosures about alternative ways of settling these types of instruments and the capital structure of entities. Most of the provisions of SFAS 150 are effective for all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis should be read in conjunction with our financial statements and the information about our critical accounting estimates included in our Annual Report on Form 10-K for the year ended October 31, 2002. This discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Such risks are detailed in our Annual Report on Form 10-K for the year ended October 31, 2002 and are incorporated herein by reference. Our actual results could differ materially from those discussed here. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

     We provide hardware and software-based data storage solutions to the open systems marketplace. Our storage solutions integrate into a wide range of rapidly evolving network computing environments and are designed to enable organizations to organize, protect and retrieve complex mission-critical data. We design, manufacture, sell and support specialized data storage hardware and software products and provide related services. Currently, we derive substantially all of our revenue from the sale of storage libraries, connectivity and management products and related services and support. We distribute our products primarily through value-added resellers (VARs), distributors and original equipment manufacturers (OEMs) and also sell directly to certain end users.

Results of Operations

     Net Sales. Net sales increased during the second quarter of fiscal 2003 to $100.6 million, an increase of 25% from $80.7 million in the comparable quarter of fiscal 2002. Net sales for the six months ended April 30, 2003 were $197.7 million, an increase of 11% from $177.4 million during the six months ended April 30, 2002. The increase in both comparison periods is due to higher sales to both branded and OEM customers. Revenue from branded customers increased 27% in the second quarter of fiscal 2003 from the comparable quarter of fiscal 2002, and OEM sales increased 22% between the comparable quarters. OEM sales remained a constant 45% of net sales during the second quarters of both fiscal 2003 and 2002. During the six months ended April 30, 2003, branded sales increased 15% over the comparative period in fiscal 2002. OEM revenue increased 7% during the six months ended April 30, 2003 compared to the six months ended April 30, 2002. Branded sales to customers outside of the United States were particularly strong, increasing 53% in the second quarter of fiscal 2003 compared to fiscal 2002 and 47% during the six months ended April 30, 2003 compared to 2002. Higher software and services revenue also contributed to the increases in net sales.

     Intelligent Storage Solutions™ (ISS), which include elements of our software and connectivity technology and are sold through both branded and OEM sales channels, represented 38% of sales in the second quarter of fiscal 2003 compared to 29% of sales during the second quarter of fiscal 2002. ISS related sales comprised 40% and 25% of sales during the first six months of fiscal 2003 and 2002, respectively. We believe that an increasing proportion of ISS sales, whether sold on a branded or OEM basis, will generally result in the likelihood of increasing gross margins as a percentage of sales, although this expected correlation may be overshadowed in any particular period by the specific mix of ISS products or other factors.

     Gross Profit. Gross profit was $32.9 million or 33% of net sales for the three months ended April 30, 2003 compared to $21.0 million or 26% of net sales for the same period in fiscal 2002. For the six months ended April 30, 2003, gross profit was $62.8 million or 32% of net sales compared to $44.8

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million or 25% of net sales for the same period in fiscal 2002. The increase in gross profit is primarily a result of the increase in sales of software and other higher-margin enterprise-level products.

     Sales and Marketing Expenses. Sales and marketing expenses were $14.5 million or 14% of net sales for the three months ended April 30, 2003 compared to $12.0 million or 15% of net sales for the same period in fiscal 2002. For the six month period ended April 30, 2003, sales and marketing expenses were $27.7 million or 14% of net sales compared to $22.9 million or 13% of net sales for the same period in fiscal 2002. Sales and marketing expenses have increased in absolute dollars due to continued efforts to expand our sales and services channels to support new product offerings and improve market penetration with our more complex enterprise-level products. We expect sales and marketing expenditures to increase moderately during the balance of fiscal 2003 as we continue to expand our sales channels.

     General and Administrative Expenses. General and administrative expenses were $6.2 million or 6% of net sales for the three months ended April 30, 2003 compared to $5.5 million or 7% of net sales for the same period in fiscal 2002. For the six month period ended April 30, 2003, general and administrative expenses were $12.1 million or 6% of net sales compared to $10.9 million or 6% of net sales for the same period in fiscal 2002. General and administrative expenses have increased in absolute dollars due to continued investments in our infrastructure, including our global information system. We expect very modest growth in general and administrative expenses during the remainder of fiscal 2003.

     Research and Development Expenses. Research and development expenses were $10.0 million or 10% of net sales for the second quarter of fiscal 2003 compared to $7.3 million or 9% of net sales for the second quarter of fiscal 2002. During the six months ended April 30, 2003, we incurred research and development expenses of $20.3 million or 10% of net sales compared to $14.1 million or 8% of net sales for the same period in fiscal 2002. These increases reflect our strategy to maintain heavy investments in software and connectivity product development and relate to added personnel resources and additional spending related to new products. We believe that significant investments in research and development are required to remain competitive and to solidify our market position in intelligent storage solutions. We expect moderate growth in research and development expenses during the remainder of fiscal 2003 as we continue to invest in new product development.

     Acquisition Expenses. Expenses related to our acquisition of V-Stor were $1.5 million for the three and six month periods ended April 30, 2002. These one-time acquisition charges related to acquired in-process research and development and compensation to V-Stor personnel.

     Other Income. Other income primarily consists of interest income, net gain on securities transactions and net foreign currency transaction gains. Other income was $1.4 million for the second quarter of fiscal 2003 compared to $7.3 million for the second quarter of fiscal 2002. For the six months ended April 30, 2003, other income was $3.6 million compared to $10.2 million for the same period in fiscal 2002. Other income during the three months ended April 30, 2003 and 2002 included a gain on securities transactions of $700,000 and $5.9 million, respectively. The gain on securities transactions during the six month period ended April 30, 2003 and 2002 was $1.4 million and $8.2 million, respectively. The gains realized in fiscal 2003 primarily relate to conversion of one of our investments in a private company to cash and marketable equity securities and subsequent sale of a portion of those securities. The gains realized in fiscal 2002 consisted of gains from the sale of derivative financial instruments on securities held for investment as well as the sale of marketable securities. Interest income was $585,000 and $961,000 during the second quarter of fiscal 2003 and 2002, respectively, and $1.2 million and $2.0 million during the first six months of fiscal 2003 and 2002, respectively. The decrease in interest income is the result of lower returns on cash and investment balances. Foreign currency transaction gains were $209,000 and $360,000 during the second quarter of fiscal 2003 and 2002,

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respectively, and $1.2 million and $81,000 during the first six months of fiscal 2003 and 2002, respectively. These gains are the result of the strengthening of the Euro during the periods. The significant increase in foreign currency transaction gains during the six months ended April 30, 2003 compared to 2002 is due to the fact that the Euro strengthened more than 10% over the dollar during the first six months of fiscal 2003, compared to remaining almost flat during the first six months of fiscal 2002. Interest expense in all periods primarily relates to interest on operating credit lines through two German banks along with a loan payable to a German bank.

     Provision (Benefit) for Income Taxes. For the three months ended April 30, 2003, income tax expense was $1.3 million compared to income tax benefit of $479,000 for the comparable period in fiscal 2002. Income tax expense was $2.2 million for the six months ended April 30, 2003 compared to $745,000 for the six months ended April 30, 2002. The effective income tax rates for the three and six months ended April 30, 2003 were 34% and 35%, respectively. The effective tax rates for the comparable periods in fiscal 2002 were (24)% and 13%, respectively. Our effective tax rate is based on estimates and assumptions relating to future events. Actual results could differ from those estimates. In fiscal 2002, taxes paid in various federal, state and international jurisdictions were exceeded by the tax benefits of our credit for research and development spending, our extraterritorial income exclusion and non-taxable interest income. The effective tax rate includes tax expense for various federal, state and international jurisdictions.

Liquidity and Capital Resources

     Cash flows provided by operating activities were $1.3 million and $18.5 million for the six months ended April 30, 2003 and 2002, respectively. During the first six months of fiscal 2003, operating cash was primarily provided by net income, depreciation and amortization and increases in accounts payable and accrued liabilities, which were offset by increases in accounts receivable and inventories. Accounts receivable increased primarily due to increased sales, and inventories increased as we launched both new products and existing products into new channels. Accounts payable and accrued liabilities increased primarily due to the timing of payments. During the first six months of fiscal 2002, operating cash was primarily provided by net income, depreciation and amortization and decreases in inventories and income taxes receivable, which were offset by an increase in service parts for maintenance. In addition, gains on securities transactions were included as a component of cash flow provided by operating activities. Inventories decreased as we entered into certain vendor-managed inventory programs, under which ownership transfers at the time we take possession of inventory in the manufacturing process. Service parts for maintenance increased in order to support new product offerings as well as maintain our increasing installed base of existing solutions.

     Cash flows provided by investing activities were $4.6 million and $2.2 million for the first six months of fiscal 2003 and 2002, respectively. Cash flows include proceeds from certain securities transactions of $13.4 million and $20.7 million for first six months of 2003 and 2002, respectively. These proceeds were partially offset by purchases of marketable securities of $2.4 million during the first six months of fiscal 2003 and a $2.9 million investment in non-marketable securities during the first six months of fiscal 2002. Investments in property, plant and equipment were $6.4 million and $15.6 million during the first six months of fiscal 2003 and 2002, respectively. Capital expenditures during the first six months of fiscal 2003 and 2002 were comprised primarily of computer hardware and software for our global information technology infrastructure and tooling and equipment related to new product introductions. Capital expenditures during the first six months of fiscal 2002 also included leasehold improvements for our Englewood, Colorado facility.

     Cash flows provided by financing activities during the first six months of fiscal 2003 were $1.4 million, compared to $2.9 million during the first six months of fiscal 2002. We repurchased $697,000 of

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our common stock during the six months ended April 30, 2003. During the first six months of fiscal 2003 and 2002, we received proceeds from the issuance of common stock under our Stock Purchase Plan and the exercise of stock options and warrants of $2.9 million and $3.9 million, respectively. Offsetting the above proceeds in both periods were certain payments on bank lines of credit and long-term debt, which were $1.5 million and $1.1 million during the first six months of fiscal 2003 and 2002, respectively. During the first six months of fiscal 2003, we borrowed an additional $781,000 from two German banks.

     At April 30, 2003, our cash and cash equivalents totaled $159.4 million, a $8.6 million increase from $150.7 million at October 31, 2002. Our cash equivalents and marketable securities totaled $190.4 million and $182.8 million at April 30, 2003 and October 31, 2002, respectively. Our working capital, the difference between current assets and current liabilities, was $246.1 million and $231.7 million at April 30, 2003 and October 31, 2002, respectively. The ratio of current assets to current liabilities was 4.0 to 1 and 4.3 to 1 at April 30, 2003 and October 31, 2002, respectively.

     We believe that our existing cash and cash equivalents, available bank lines of credit, debt capacity and anticipated cash flow from our operating activities will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we believe are strategic, which may require the use of cash. In addition, we have made and expect to continue to make investments in companies with whom we have identified potential synergies.

Recent Accounting Pronouncements

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also amends the disclosure provisions of that statement. The disclosure provisions of this statement are effective for us beginning in the second quarter of fiscal 2003, and the required disclosures are included in Note 2. We do not currently have plans to change to the fair value method of accounting for our stock-based compensation, but we will reassess our plans during the fourth quarter of fiscal 2003 to determine whether we will change to the fair value method during fiscal 2004.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in interim periods beginning after June 15, 2003. We are currently evaluating the impact EITF 00-21 will have, if any, on our financial position or results of operations.

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities and results of operations of a VIE need to be included in a company’s financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE. The provisions of FIN 46 are effective immediately for all VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the provisions of FIN 46 must be adopted at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,

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“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 requires that certain financial instruments that, under previous guidance, could be accounted for as equity, now be classified as liabilities. These financial instruments include mandatorily redeemable shares, instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares. SFAS 150 also requires additional disclosures about alternative ways of settling these types of instruments and the capital structure of entities. Most of the provisions of SFAS 150 are effective for all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

Critical Accounting Estimates

     The preparation of our financial statements requires us to make estimates and judgments. The critical accounting policies that affect our more significant estimates and judgments are disclosed in our Annual Report on Form 10-K for the year ended October 31, 2002. New critical accounting policies are disclosed below.

     As a result of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” on November 1, 2002, we discontinued the amortization of goodwill. Instead, goodwill was reviewed for impairment upon adoption of SFAS 142 and will be reviewed annually thereafter, or more frequently when indicators of impairment are present. We did not record an impairment charge based on this initial review. Other intangible assets are carried and reported at acquisition cost, net of accumulated amortization subsequent to acquisition. The acquisition cost is amortized over the estimated useful lives of the assets, which range from two to ten years. Intangible assets are reviewed for impairment whenever events or circumstances indicate impairment might exist, or at least annually. The determination of the net carrying value of goodwill and intangible assets and the extent to which, if any, there is impairment are dependent on material estimates and judgments on our part, including the useful life over which the intangible assets are to be amortized, and the estimates of the value of future net cash flows, which are based upon further estimates of future revenues, expenses and operating margins.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to various market risks, including changes in foreign currency rates and interest rates. We may enter into various derivative transactions to manage certain of these exposures.

     The assets and liabilities of our non-U.S. subsidiaries have functional currencies other than the U.S. dollar and are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. A 10% appreciation in the U.S. dollar as of April 30, 2003 would have resulted in an approximately $2.3 million decrease in income before provision for income taxes during the first six months of fiscal 2003. Such a change in income would have resulted from applying a different exchange rate to translate and revalue the financial statements of our non-U.S. subsidiaries.

     At April 30, 2003, we had variable rate debt of approximately $1.7 million provided by German banks and fixed rate debt of $1.2 million, also provided by a German bank. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at April 30, 2003. We have entered into an interest rate swap agreement on the variable rate debt, which fixes the interest rate at 4.3% through November 2003. Interest on the fixed rate debt is 4.4%.

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Item 4. Controls and Procedures

     We maintain a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in filings pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     Our chief executive officer and our chief financial officer have evaluated our disclosure controls and procedures within 90 days before the filing of this quarterly report, and they have determined that our disclosure controls and procedures are effective.

     Subsequent to our evaluation, there were no significant changes in our internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

     No material pending litigation.

Item 2. Changes in Securities

     None.

Item 3. Defaults Upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     At its annual meeting on March 11, 2003 duly called and with proxies solicited, 56,207,248 shares were represented in person or by proxy constituting 90.07 percent of the outstanding shares. There were 62,401,306 shares of the Company’s common stock outstanding and entitled to vote at the annual meeting.

  i.   The proposal to amend the Advanced Digital Information Corporation 1999 Stock Incentive Compensation Plan was approved. It received the following votes (there were no broker non-votes):

                 
            Percent of Votes
    Votes   For/Against
   
 
For
    49,794,702       88.92 %
Against
    6,204,445       11.08 %
Abstain
    208,101        

  ii.   Two directors were reelected to the Board, each to hold office for three-year terms. The nominees received the following votes (there were no broker non-votes):

                 
    Number of Votes   Number of Votes
Nominee   For   Withheld

 
 
Christopher T. Bayley
    53,228,597       2,978,651  
Frank M. (“Pete”) Higgins
    54,200,465       2,006,783  

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     Tom A. Alberg, John W. Stanton, Peter H. van Oppen and Walter F. Walker had continuing terms as directors.

Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

     Exhibit 99.1 – Certification of Peter H. van Oppen, Chairman and Chief Executive Officer of Advanced Digital Information Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     Exhibit 99.2 – Certification of Jon W. Gacek, Senior Vice President and Chief Financial Officer of Advanced Digital Information Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     No reports on Form 8-K were filed during the quarter ended April 30, 2003.

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SIGNATURES

     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.

     
    ADVANCED DIGITAL INFORMATION
CORPORATION
     
Dated: June 16, 2003           PETER H. VAN OPPEN
   
            Peter H. van Oppen, Chairman
        and Chief Executive Officer
     
Dated: June 16, 2003           JON W. GACEK
   
            Jon W. Gacek, Senior Vice President
        and Chief Financial Officer (Principal
        Financial and Accounting Officer)

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CERTIFICATIONS

     I, Peter H. van Oppen, certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of Advanced Digital Information Corporation;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

     4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

       (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

       (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

       (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

       (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

       (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Dated: June 16, 2003   PETER H. VAN OPPEN
 
    Peter H. van Oppen, Chairman
    and Chief Executive Officer

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CERTIFICATIONS

     I, Jon W. Gacek, certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of Advanced Digital Information Corporation;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

     4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

       (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

       (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

       (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

       (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

       (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Dated: June 16, 2003   JON W. GACEK
 
    Jon W. Gacek, Senior Vice President
    and Chief Financial Officer (Principal
    Financial and Accounting Officer)

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