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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21103
ADVANCED DIGITAL INFORMATION
CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1618616
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10201 WILLOWS ROAD 98052
REDMOND, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 881-8004
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
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(None) (None)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $170,874,198 as of December 31, 1997, based on the closing sale
price of such stock on the Nasdaq National Market on that date.
There were 9,703,324 shares of common stock outstanding as of December 31,
1997.
The Index to Exhibits appears on page 40.
Part III is incorporated by reference from the proxy statement to be filed
in connection with the 1998 Annual Meeting of Shareholders.
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ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Advanced Digital Information Corporation ("ADIC" or the "Company") is a
leading provider of automated tape libraries and standalone tape drives used to
back up and archive electronic data in client/ server network computing
environments. The Company integrates proprietary electro-mechanical robotics,
electronics hardware and firmware with technologically advanced tape drives
manufactured by third parties to provide highly automated data storage
protection. When used with third-party storage management software, the
Company's products can perform sophisticated backup and archiving of electronic
data residing across a network of PCs, workstations and servers with minimal
human intervention. The Company's product family operates in both PC-based
(Windows NT and Novell NetWare) and UNIX environments and provides data storage
capacity ranging from four gigabytes to over 50 terabytes.
The Company's customers are located worldwide and range in size from large
multinational companies to small businesses. The Company markets its products in
North America, Europe and the Asia Pacific region through multiple distribution
channels, including distributors, VARs and OEMs. The Company supports these
channels and its end users with a combination of more than one dozen regional
field sales offices, systems engineering and technical support personnel, as
well as third-party on-site service organizations.
The Company was incorporated under the laws of the state of Washington in
August 1984 and was acquired by Interpoint Corporation ("Interpoint") in
February 1994. In June 1994, ADIC Europe SARL ("ADIC Europe" or "ADE") was
acquired to provide international sales and distribution support. In October
1996, Interpoint and ADIC finalized a series of transactions whereby Interpoint
made a distribution to its shareholders of all the shares of ADIC Common Stock
and ADIC became an independent publicly traded company. Just prior to the
distribution, Interpoint made certain capital contributions to ADIC and
transferred certain other assets to ADIC. ADIC raised an additional $24 million
through a public offering of 1,500,000 common shares in March 1997.
INDUSTRY
CLIENT/SERVER NETWORK DATA BACKUP
The Company believes that multiple trends continue to foster growth of the
data storage segment of the client/server network computing environment.
Personal computer and workstation microprocessors continue to achieve
substantial increases in performance, both absolutely and relative to their
cost. Enabled by this increased processing power and the increasing
sophistication of both network operating systems and relational databases,
organizations are migrating core business processes (such as financial
transaction processing, materials requirements planning, document imaging and
management of patient records, engineering drawings and customer databases) from
manual processes or mainframes to lower-cost client/server computer networks. In
addition, the growth of the Internet, electronic mail, and groupware continue to
foster further client/server network computing growth. The combination of these
trends is driving a proliferation of client/server network computing.
Each of the trends outlined above is driving an increase not only in the
installed base of networks, but also in the data storage requirements of these
networks. The data stored on client/server networks is growing both in volume
and in value. As an organization migrates its core processes to client/server
computer networks, the electronic data stored on these networks, such as a
customer or patient database, a set of engineering drawings, or a record of
financial transactions, becomes an increasingly vital asset. The opportunity
cost of data loss has become extraordinarily high, with potentially large and
long-term negative impacts on an organization. Data loss can result from a wide
variety of causes, including human error, equipment failure, database
corruption, computer viruses, and man-made or natural disasters. Systematic
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and cost-effective backup and archiving of data stored on client/server networks
is essential to protecting one of a firm's most important assets.
Increases in both the volume and value of data, coupled with increasingly
data-intensive software applications, are driving an increase in demand for data
storage capacity and a growing need for data backup and archiving in
client/server network computing environments.
AUTOMATED TAPE LIBRARIES
The Company believes automated tape libraries, which operate in conjunction
with storage management software and incorporate magnetic tape drive technology,
provide the best systematic and cost-effective backup solution for client/server
networks. These products provide client/server networks with software-controlled
access to multiple magnetic tape cartridges for storage and retrieval of
digitally stored data. These backups occur automatically and minimize human
intervention. Automated tape libraries, housing these tapes and one or more tape
drives, utilize an electro-mechanical robotic mechanism to manipulate the tape
cartridges, loading and unloading specific tape cartridges into and out of the
tape drive or drives as directed by the storage management software.
Automated tape libraries efficiently systematize the network backup process
through a number of features. An automated tape library, directed by storage
management software, can perform sophisticated backups of a network's data
without human intervention, automatically backing up specific network data to
specific tapes at specific times. This process operates in a "lights out" mode,
backing up the network at any time, thereby eliminating the need for system
administrator staffing when the network is backed up, generally at night. Access
to multiple tape cartridges enables the library to automatically store much more
data than a standalone drive, eliminating the need for a system administrator to
swap tapes in order to back-up all the data. Unlike a typical hard disk drive,
magnetic tape drives utilize removable cartridges containing a robust medium.
Therefore, data backed up by an automatic tape library can be reliably stored
offsite as an element of a disaster recovery scheme.
Within the library, tape cartridges are typically organized in magazines. In
some cases, these tape magazines are removable, easing storage and offsite
transfer of the tapes. A library with multiple tape drives can backup data with
all drives simultaneously, significantly speeding up the backup process. Some
larger libraries feature a barcode system which, in conjunction with the storage
management software, can catalog each tape, further enhancing the management of
the data. Libraries often feature key lock access to the tapes, providing
security protection for the data by preventing undesired human access. Some
libraries feature a software and password-controlled access feature which allows
for controlled addition or removal of selected cartridges without providing open
access to all tapes housed within the library or taking the library off-line.
Backup and archival storage needs differ somewhat from the demands of other
storage applications, such as online data storage, with overall capacity and
data transfer rate being more important than the speed of data access and
retrieval. As a result of relatively high transfer rates, high capacity and low
cost per gigabyte, tape drive technologies are used for backup or archival
purposes in a large proportion of client server networks in commercial and
government organizations. The Company believes that, assuming continued
investment by tape drive manufacturers, magnetic tape drives will continue to be
a cost-effective solution for data backup and archival purposes in terms of cost
per unit of data storage. Automated tape libraries leverage the
cost-effectiveness of magnetic tape drives by automating the access to multiple
data cartridges by each tape drive, decreasing further the dollar-per-gigabyte
of storage cost relative to other technologies.
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ADIC STRATEGY
The Company's goal is to continue expanding its position as a market leader
in providing automated tape libraries and complementary products to the
client/server network computing marketplace. Key components of the Company's
strategy include:
OFFER A FULL RANGE OF LIBRARY PRODUCTS. The Company believes it currently
offers the most complete range of automated tape library and standalone drive
products available for the client/server network marketplace. Available storage
capacities range from four gigabytes to over 50 terabytes. Although different
types and sizes of client/server networks require different levels of tape
library capacity and performance, the Company's broad product family provides
both end users and channel partners with "one-stop-shopping" for products,
service, and support. By offering standalone drive products in addition to
libraries, the Company is able to further enhance the breadth of its product
line, familiarizing customers with entry-level backup and archiving data storage
needs with its brand name and products and providing them with migration and
upgrade paths to the Company's other products. In addition, the Company's broad
product line allows it to purchase tape drives in large volumes, which may
enhance its ability to negotiate with key magnetic tape drive suppliers.
OFFER PRODUCTS IN MULTIPLE DRIVE TECHNOLOGIES. The Company offers automated
tape libraries based on major magnetic tape drive technologies, including DLT,
8mm/SDX, 4mm/DAT and 8mm, and maintains compatibility with a wide variety of
storage management software platforms. The Company's strategy is to work closely
with leading tape drive manufacturers in order to rapidly develop products
incorporating state-of-the-art technologies. The Company's strategy of
developing products based on multiple drive technologies allows the Company to
reduce its dependence on any single tape drive technology, as well as offer
products that target the specific technology needs of different market segments.
In addition, the Company's products are compatible with over 50 storage
management software applications.
LEVERAGE TECHNOLOGY ACROSS PRODUCTS. The Company is able to leverage nearly
a decade of automated tape library research and development investment across a
number of products. The Company has launched multiple generations of products
which build on an existing foundation of technology and knowledge, including
operating systems software, electronic hardware, and electro-mechanical
hardware. The Company's most recently launched product, the FastStor tape
storage system, features sixth-generation technology in many of these elements.
Leveraging its existing technology to build a broad product line enables the
Company to decrease both the time-to-market and development costs of new
products. In addition, this strategy enhances manufacturing leverage and
flexibility, as the Company is able to share common parts, manufacturing
resources and suppliers across a wide range of products.
FURTHER DEVELOP BRAND NAME AND STRONG WORLDWIDE DISTRIBUTION CHANNELS. The
Company has established and continues to develop strong distribution channels in
the North American, European, and Pacific Rim markets. The Company has numerous
long-standing relationships with national distributors and individual resellers
that have experience in offering the Company's line of products. These
distribution channels enable the Company to cost-effectively offer its broad
range of branded products to multiple market segments and provide an immediate
outlet for new products as they are developed. In addition, the Company believes
that as a result of its investments in advertising, promotion and brand
development, it will continue to develop brand recognition and customer loyalty,
increasing the level of recurring business from its customers. In particular,
the Company believes that its distribution relationships and brand name
recognition position it well to take advantage of the growth of PC-based
client/server networks, including those based on Windows NT. As appropriate, the
Company intends to pursue additional channel partnerships to address untapped or
under-penetrated market segments.
OFFER BROAD TECHNICAL SUPPORT. The Company views customer service and
support as strategically important elements of its business. During the sales
process, the Company's sales force and systems engineers provide technical
recommendations to its channel partners and end users. After the sale, the
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Company provides 24-hour-a-day technical support. The Company's technical
support staff, which is knowledgeable about storage management software and
systems, is able to address customers' inquiries beyond the automated tape
library hardware level. In situations where problems grow in sophistication
beyond the scope of the Company's technical support staff, systems engineers can
be made available for telephone or on-site consultation. The Company also offers
customers various levels of on-site service programs through third-party
providers. Finally, the Company offers a comprehensive training program to
resellers and end users.
DEVELOP OR ACQUIRE RELATED SPECIALIZED STORAGE PRODUCTS. The Company
believes that growth of the client/server network data storage market will
create opportunities for it to expand its product offerings. Under an agreement
signed in August 1997, the Company will market Fibre Channel interconnection
solution products developed with Crossroads Systems, Inc. ("Crossroads") under
the ADIC brand name. This partnership will allow the Company to offer products
to integrate a wide variety of SCSI-based storage devices with Fibre Channel
networks. The Company intends to continue to seek out related market niches
which leverage its strengths. The Company has over a decade of research and
development and sales and marketing experience in client/server network data
storage and it believes this experience may be readily applied beyond automated
tape libraries to other specialized storage products. In addition, the Company
believes its distribution channels can be leveraged to distribute related data
storage products to end customers. New, related storage products could originate
from internal research and development or through acquisitions.
PRODUCTS
The Company's principal products, automated tape libraries, integrate
proprietary electro-mechanical robotics, electronic hardware, and firmware with
industry standard technologically advanced tape drives supplied by third
parties. The automated tape libraries are housed in a desktop, rackmount, or
floor-standing enclosure. When operated in conjunction with third-party storage
management software, the Company's libraries provide a complete solution for
systematically and cost-effectively automating data storage backup and archiving
in client/server network computing environments.
The Company offers a family of automated tape libraries and standalone tape
drive products with different data storage capacity and data transfer rate
characteristics. In addition to automated tape library and standalone tape drive
products, the Company supplies its channels and end users with a range of
supplemental products, including tape cartridge media, tape magazines, rackmount
kits and cables.
The Company's products vary by tape technology, number of tape drives, and
number of tape cartridges. New library product development is driven by two
sources, the identification of new market opportunities and the availability of
new tape drive technologies. The identification of new market opportunities
results from ongoing work by the Company's sales, marketing, and product
management organizations to identify new products to fulfill customer and
marketplace needs. In addition, the Company maintains close relationships with
tape drive manufacturers in order to stay abreast of technology developments.
Storage product prices vary from approximately $1,000 to more than $100,000,
depending on the drive technology, number of drives and capacity selected. Drive
technologies include DLT, 8mm/SDX, 4mm/ DAT and 8mm formats with the number of
drives per unit varying from one to 48 drives. Capacities range from four
gigabytes to over 50 terabytes.
STORAGE MANAGEMENT SOFTWARE
The majority of the Company's products are installed on client/server
computer networks in conjunction with storage management software. Currently,
over 50 different storage management software packages support one or more of
the Company's products. On Microsoft Windows NT and Novell NetWare platforms,
these packages include products from Cheyenne Software, Legato Systems, Network
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Integrity, Seagate Software (Arcada and Palindrome) and STAC. On UNIX platforms,
these packages include products from Cheyenne Software, IBM ADSM, Legato
Systems, OpenVision Technologies, Spectra Logic (Alexandria) and VERITAS
Software.
The Company works closely with storage management software companies in a
number of ways. It periodically engages in discussions with developers at these
companies regarding the marketplace, end-user needs, and potential solutions to
these needs combining the Company's products and the developer's storage
management software. The Company partners with storage management software
companies to offer promotional product bundles, offering customers a special
price on the combination of a Company product and a storage management software
product. In addition, the Company's field sales force strives to maintain
relationships with its counterparts from each of the storage management software
companies and frequently participates in joint sales calls and seminars. The
Company also maintains technical relationships with developers at these
companies, in most cases providing Company products for their use in developing
software for these products. The Company's system engineering lab has a large
variety of storage management software products running in-house in order to
perform ongoing compatibility testing.
SALES AND MARKETING
The Company's strategy is to deploy a comprehensive sales, marketing, and
support infrastructure to address the market for client/server network storage
peripherals both domestically and internationally. The Company relies on
multiple distribution channels to reach end-user customers ranging in size from
small businesses to large multinational corporations. The Company's channels
include distributors, VARs and OEMs. The Company supports these channels with a
field sales force operating out of its headquarters office in Redmond,
Washington, plus more than one dozen regional field sales offices in the United
States and three international offices in London, Munich and Paris. The large
majority of Company products are sold under the ADIC brand name.
RESELLERS
NORTH AMERICAN DISTRIBUTORS. The Company sells its products to large
regional and national distributors who in turn resell the Company's products to
national, regional, or local VARs with expertise in integrating network
solutions for end customers. The Company provides support for these VARs through
its authorized reseller programs. In the case of larger, more complex sales
situations, the Company's field sales force may work in conjunction with a VAR
to support the sale. The Company currently has relationships with several major
North American distributors, including Access Graphics, Inc., Arrow ICP,
Gates/Arrow Distributing, Ingram Micro Incorporated, Tech Data Corporation, and
Tenex Data Corporation. For the fiscal year ended October 31, 1997, Ingram Micro
Incorporated and Tech Data Corporation represented 28% and 19%, respectively, of
the Company's net sales.
INTERNATIONAL DISTRIBUTORS. Similar to North America, the Company also has
relationships with a number of large regional and national distributors
internationally. International sales represented 33% of net sales in fiscal year
1997, the majority of which occurred in Europe. The Company believes that
international markets represent an attractive growth opportunity and intends to
expand the scope of its international sales efforts in part by continuing to
actively pursue additional international distributors and resellers.
PREMIER VAR PROGRAM. The Company has direct sales relationships with more
than 25 "Premier VARs" throughout North America and Europe. These Premier VARs
are typically larger VARs specializing in data storage and network solutions for
client/server networks. Premier VARs assume increased levels of responsibility
for sales and support, although they are still occasionally assisted by the
Company's field sales force in certain large, complex sales situations.
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OEMS
The Company sells its products to several companies under a private label or
OEM relationship. These companies resell the products under their own brand
name, sometimes after enhancing the product technically to target a specific
market, performance, or application niche. Private labelers and OEMs assume
responsibility for product sales, service and support. These relationships
enable the Company to reach end user market niches not served by its other
reseller distribution channels. Although not a key component to its strategy,
the Company maintains ongoing discussions with private labelers and OEMs,
including leading systems suppliers, regarding opportunities with the Company's
products. The large majority of Company products are sold through non-OEM
channels under the ADIC brand name.
CORPORATE SALES
The Company maintains corporate sales relationships with a number of large
national and multinational companies, including financial institutions,
telecommunications companies, large industrial corporations and professional
service firms. In these sales situations, the Company typically works with such
company's central information services organization to assess data storage
backup needs and then recommend a solution incorporating the Company's products.
The successful culmination of this recommendation may be the creation of a
corporate standard, including a selection of the Company's products. Once this
standard is established, organizations throughout the company can purchase the
Company's products to meet their needs.
CORPORATE MARKETING
The Company supports its channel sales and its field sales force efforts
with a broad array of marketing programs designed to build the Company's brand
name, attract additional resellers and generate end user demand. Resellers are
provided with a full range of marketing materials, including product
specification literature and application notes. The Company advertises in key
network systems publications and participates in national and regional
tradeshows both domestically and internationally. The Company's World Wide Web
page features a comprehensive collection of marketing information, including
product specification sheets, product user manuals and application notes. The
Company's field sales force conducts seminars targeting end users, often with a
sales representative from one of the storage management software companies. The
Company also conducts sales and technical training classes for its resellers.
The Company periodically engages in various promotional activities for resellers
and end users, including product-specific rebates, bundling its products with
selected storage management software, and certificates for free tape drive
cleaning cartridges.
In addition to the activities outlined above, the Company's marketing
organization, specifically its product management team, is responsible for
initiating development of new products and product line extensions. In order to
create the Company's product development plan, the product management team
combines its assessment of end-user needs, channel requirements, technology
developments and competitive factors with input from the engineering, sales, and
manufacturing organizations.
CUSTOMER SERVICE AND SUPPORT
The Company views customer service and support as strategically important
elements of its business. The Company's customer service and support effort
consists of five components.
TECHNICAL SUPPORT. The Company maintains an internal technical support
organization. Technical support personnel are available to all customers at no
charge via telephone, facsimile, and Internet electronic mail to answer
questions and solve problems relating to the Company's products. Technical
support personnel are not only trained with respect to the Company's products,
but are also experienced with storage management and network operating system
software. Products with problems not resolved via telephone support may be
returned to the Company for repair or replacement during the warranty period.
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For a nominal fee, customers may choose to receive a "hot swap" exchange unit
which will be shipped via express mail within 24 hours.
SYSTEMS ENGINEERING. The Company also maintains a staff of systems
engineers who provide both pre-and post-sales support to resellers and end
users. Systems engineers typically become involved in more complex
problem-solving situations involving interactions between the Company's
products, the storage management software, the network server hardware, and the
network operating system. System engineers work with resellers and end users
both over the telephone and on-site.
ON-SITE SERVICE. The Company contracts with third-party service providers
to offer on-site service for its products. A wide variety of programs are
available, up to and including 24-hour-a-day, seven-day-a-week on-site service.
The Scalar series products, which represent the high end of the product line,
are sold including one year of on-site service.
TRAINING. The Company offers a comprehensive training program to resellers
and end users. Training classes are conducted at the Company's headquarters
location and on-site at reseller and end-user locations worldwide.
WARRANTY. For standard Company products, parts and labor are covered by a
two-year or three-year warranty. With respect to drives and tapes used in the
Company's products but manufactured by a third party, the Company passes on to
the customer the warranty on such drives and tapes provided by the manufacturer.
RESEARCH AND DEVELOPMENT
The Company's research and development team has developed multiple product
generations of automated tape library products. The Company's research and
development efforts rely on the integration of multiple engineering disciplines
to generate products that competitively meet market needs in a timely fashion.
Successful development of automated tape libraries requires the melding of
firmware design, electro-mechanical design, electronic design, and engineering
packaging into a single, integrated product. Product success also relies on the
engineering team's thorough knowledge of each of the different tape drive
technologies as well as SCSI and Fibre Channel protocols.
The Company's new product development is frequently stimulated by the
availability of an enhanced or new tape drive technology. As they compete in the
marketplace, tape drive manufacturers continually invest in research and
development to gain performance leadership either by offering increasingly
enhanced versions of their current drive products or by introducing an entirely
new drive technology. The Company benefits from these industry developments by
utilizing these new tape drive technologies in its products. If a new drive is
an enhanced version of one already incorporated in one or more of the Company's
products, the Company's time and dollar investment to incorporate the new drive
can be quite small, with the focus being on verification testing. With new tape
drive technology introductions, the level of effort required to develop a
corresponding product depends somewhat on the form factors of the drive and
media. In cases where the form factors match a drive technology currently
supported, again the time and investment required can be quite low. When the
form factors differ, the time and investment requirements can grow
substantially, and may require development of a new product altogether. Given
the importance of relationships with tape drive manufacturers to the Company's
success, the Company strives to, and believes it does, maintain close,
high-level relationships on both a management and technical level with several
tape drive manufacturers. These relationships at times provide early warning of
new tape drive technologies and assist the Company in reducing the
time-to-market for new product development.
The Company also identifies and defines new products based on the more
traditional identification of a market need which the Company believes it can
successfully fill. The Company's sales, marketing, product development, and
engineering organizations all contribute to this identification process. With
these product development efforts, time and investment requirements tend to be
significant, both in terms
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of engineering and tooling for manufacturing. However, the Company has found
that it has been able to leverage its previous engineering investments into new
products. For example, the firmware, or operating system, of the Scalar library
product is based on successive generations of the operating system developed for
the Company's first library. Similarly, the Company's engineers have been able
to leverage its electro-mechanical and electronic hardware designs from previous
products into next-generation designs. In some cases, entire subassemblies are
transferable, leveraging not only engineering time but also tooling investments,
materials purchasing, inventory stocking, and manufacturing.
The Company's research and development expenses were $2,909,000, $1,542,000
and $1,097,000 for fiscal years 1997, 1996, and 1995, respectively. The Company
anticipates making comparable or increased investments in research and
development efforts in the future.
MANUFACTURING
The Company's manufacturing processes, which are ISO 9001 certified, entail
manufacturing electro-mechanical robotic devices, integrating into them
third-party tape drives, and performing testing on the completed device. The
Company's manufacturing strategy is to perform product assembly, integration and
testing, leaving component and piece part manufacturing to its supplier
partners. The Company works closely with a group of regional, national, and
international suppliers to obtain quality parts and components meeting its
specifications. Though the Company's designs are proprietary, the various
components are available off the shelf or are manufactured using standard,
readily-available techniques, limiting supplier base risk and easing volume
increases. Inventory planning and management is coordinated closely with
suppliers and customers to match the Company's production to market demand.
Product orders are confirmed and, in most cases, shipped to the customer within
one week. The Company fills orders as they are received and therefore believes
that its backlog levels are not indicative of future sales.
COMPETITION
The market for network data storage peripherals in general, and automated
tape libraries in particular, is intensely competitive, highly fragmented, and
characterized by rapidly changing technology and evolving standards. Competitors
vary in size and in the scope and breadth of the products they offer. As the
Company offers a broad range of automated tape library and complementary
products, it tends to have a large number of competitors that differ depending
on the particular product format and performance level. Since there are
relatively low barriers to entry into the automated tape library market, the
Company anticipates increased competition from other sources, ranging from
emerging to established companies, including large system OEMs. Many of the
Company's competitors have substantially greater financial and other resources,
larger research and development staffs, and more experience and capabilities in
manufacturing, marketing and distributing products than the Company. The
Company's competitors may develop new technologies and products that are more
effective than the Company's products. In addition, competitive products may be
manufactured and marketed more successfully than the Company's products. The
Company believes the primary competitive factors in the market for network data
storage products are performance, reliability, breadth of product line,
distribution strength, product availability and price, as well as customer
issues, including technical and sales support. See "Risk Factors--Increasing
Competition and Potentially Declining Prices."
PROPRIETARY RIGHTS
Although the Company relies predominately on its full product line, strong
channel structure, and nearly a decade of library development experience to
compete in its marketplace, it has or is pursuing numerous patents on various
design elements of its automated tape library products. There can be no
assurance that pending patent applications will ultimately issue as patents or,
if patents do issue, that the claims allowed will be sufficiently broad to
protect the Company's proprietary rights. In addition, there can
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be no assurance that issued patents or pending applications will not be
challenged or circumvented by competitors, or that the rights granted thereunder
will provide competitive advantages to the Company.
The Company relies on a combination of patent and trademark laws, trade
secrecy, confidentiality procedures, and contractual provisions to protect its
intellectual property rights. There can be no assurance that these procedures
will be successful, that the Company would have adequate remedies for any breach
or that the Company's trade secrets and know-how will not otherwise become known
to or independently developed by competitors. See "Risk Factors--Proprietary
Technology."
FOREIGN OPERATIONS AND EXPORT SALES
Export sales of ADIC products during the fiscal years ended October 31,
1997, 1996, and 1995 totaled $30,611,000, $21,216,000 and $14,930,000,
respectively, with the majority of these sales occurring in Europe. European
sales are transacted out of ADIC Europe, a wholly owned subsidiary acquired in
June 1994. See Note 13 to the Company's Consolidated Financial Statements
included as Item 8 of this Form 10-K and "Risk Factors--International
Operations."
EMPLOYEES (TEAM MEMBERS)
As of October 31, 1997, the Company had 208 full-time Team Members,
including 53 in sales and marketing, 25 in research and development, systems
engineering and technical support, 109 in manufacturing and operations, and 21
in finance, general administration, and management. None of the Company's Team
Members is covered by collective bargaining agreements, and management believes
its relationship with Team Members is good.
The Company's success depends in large part on its ability to attract and
retain key Team Members. Competition among network data storage peripheral
companies for highly skilled technical and management personnel is intense.
There can be no assurance that the Company will be successful in retaining its
existing Team Members, or in attracting additional qualified Team Members. See
"Risk Factors-- Dependence on Key Employees (Team Members)."
RISK FACTORS
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's quarterly operating results have varied in the past, and may
vary significantly in the future, depending on factors such as increased
competition and pricing pressure, timing of new product announcements and
releases by the Company and its competitors, shifts in product or channel mix,
the rate of growth in the data storage market, market acceptance of new and
enhanced versions of the Company's products, timing and levels of operating
expenses, size and timing of significant customer orders, gain or loss of
significant customers or distributors, currency fluctuations, personnel changes
and economic conditions in general. Any unfavorable change in these or other
factors could have a material adverse effect on the Company's results of
operations for a particular quarter.
In particular, quarterly revenue and operating results depend on the volume
and timing of orders received during the quarter. A significant majority of the
Company's revenue in each quarter results from orders during that quarter. The
Company historically has operated with little order backlog and, due to the
nature of its business, does not anticipate that it will have significant
backlog in the future. The Company's operating expense levels are, in the short
term, largely fixed and are based, in part, on expectations regarding future
revenue. Thus, if the Company's revenue falls below its expectations, the
Company's results of operations could be disproportionately affected. Because of
the relatively large dollar size of orders from the Company's distributors,
delay in the placing of a small number of orders could have a significant impact
on the Company's results of operations for a particular period.
10
The Company's quarterly revenue and results of operations have been, and are
expected in the future, to be affected by seasonal trends, which often result in
lower revenue in the first quarter of each fiscal year compared to the fourth
quarter of the previous year, due to customer purchasing and budgetary practices
and the Company's sales commission and budgetary structure. There can be no
assurance that seasonal trends in customer purchasing will not materially
adversely affect the Company's results of operations in future quarters.
Consequently, operating results in any period should not be considered
indicative of the results to be expected for any future period. There can be no
assurance that the Company's revenue will increase, that its recent levels of
quarterly revenue and net income will be sustained, or that the Company will
achieve profitability in any future period. In addition, it is likely that in
some future quarter the Company's results of operations will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock would likely be materially adversely affected.
INCREASING COMPETITION AND POTENTIALLY DECLINING PRICES
The markets for network data storage peripherals in general, and automated
tape libraries in particular, is intensely competitive, fragmented and
characterized by rapidly changing technology and evolving standards. Important
competitive factors include price, performance, diversity of product line,
reliability, delivery capabilities, customer support and service. As the Company
offers a broad range of automated tape library and complementary products, it
tends to have a large number of competitors that differ depending on the
particular product format and performance level. Some competitors of the Company
have significantly greater financial, technical, manufacturing, marketing and
other resources than the Company. Potential and actual competitors include the
suppliers of the data storage drives that the Company incorporates into its own
products as well as major providers of computer hardware. Competitors may
develop products and technologies that are less expensive or technologically
superior to the Company's products. In addition, competitive products may be
manufactured and marketed more successfully than the Company's products. Such
developments could render the Company's products less competitive or obsolete,
and could have a material adverse effect on the Company's business, financial
condition and ability to market the Company's product as currently contemplated.
The Company believes the primary competitive factors in the market for network
data storage products are performance, reliability, breadth of product line,
distribution strength, product availability and price, as well as customer
issues, including technical and sales support.
The markets for the Company's products are characterized by significant
price competition, and the Company anticipates that its products will face
increasing price pressure. This pressure could result in significant price
erosion, reduced gross profit margins and loss of market share, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT CONCENTRATION
The Company derived a significant majority of its revenue in fiscal 1997 and
1996 from the sale of its DLT-related products, including associated media, and
the Company expects to continue to derive a substantial portion of its revenue
from these products for the foreseeable future. As a result, the Company's
future operating results are significantly dependent upon continued market
acceptance of such products. There can be no assurance that the Company will
successfully develop new products utilizing DLT technology or that such products
will find market acceptance or meet customer expectations or that other
technologies will not replace, in whole or in part, DLT technology. The
Company's DLT products may be rendered obsolete by future technical advances by
the Company's competitors or by certain of its suppliers, distributors or
resellers. The failure of the Company to maintain and enhance the capabilities
of its current DLT products or to introduce new products successfully into the
market could have a material adverse effect on the Company's business, financial
condition and results of operations.
11
DEPENDENCE ON CERTAIN SUPPLIERS
The Company does not possess proprietary data storage drive technology and,
consequently, depends on a limited number of third-party manufacturers for the
drives that are incorporated into its products. In some cases, these
manufacturers are sole source providers of the drive technology and competitors
of the Company in that they market their own tape library products. In
particular, Quantum Corporation ("Quantum") is the sole supplier of DLT drives
and the primary supplier of DLT media, both of which have previously been
subject to allocation by Quantum. As a result, the Company's requirement for DLT
drives and media may not be met. In addition, Company sales of certain DLT-based
products may also have benefited as a result of industry-wide shortages in prior
periods due to the Company's relatively high volume of purchases and relatively
good access to scarce tape drive types. Subsequent broadly increased
availability of DLT drives could adversely affect sales of certain Company
products. The Company believes such affected products would likely be at the low
end of the product range where gross margins are relatively small.
The Company's other suppliers have, in the past, and may, in the future, be
unable to ensure that the Company's supply needs will be adequately met. The
Company does not have any long-term contracts with any of its significant
suppliers, and if these suppliers were to decide to pursue the tape library
market aggressively, they could cease supplying tape drives and media directly
to the Company. Thus, there can be no assurance that the Company will be able to
obtain adequate supplies of tape drives and media at acceptable prices, if at
all. The partial or complete loss of certain of these sources could result in
significant lost revenue, added costs and production delays or otherwise have a
material adverse effect on the Company's business, financial condition, results
of operations and customer relationships.
TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards and is highly competitive with
respect to timely innovation. The introduction of new products embodying new or
alternative technology and the emergence of new industry standards could render
existing products obsolete or unmarketable. The Company's future success will
depend on its ability to anticipate changes in technology, to gain access to
such technology for incorporation into the Company's products and to develop new
and enhanced products on a timely and cost-effective basis. In particular, the
Company must be able to maintain compatibility of its products with significant
future drive technologies and relies on producers of such drive technologies to
achieve and sustain market acceptance of such technologies. Development
schedules for high-technology products are subject to uncertainty, and there can
be no assurance that the Company will be able to meet its product development
schedules. If the Company is unable for technological or other reasons to
develop products in a timely manner or if the products or product enhancements
that it develops do not achieve market acceptance, the Company's business will
be materially adversely affected. New products introduced in the last six
months, including FastStor, Scalar 1000, Scalar 218M and FCR Fibre Channel
products, are expected to contribute significantly to sales over the next twelve
months. If these products do not achieve market acceptance, the Company's
business will be materially adversely affected. Additionally, there can be no
assurance that the Company will be able to continue to develop new products in
response to product introduction by competitors, including both automated taped
libraries and other sequential or random access mass storage devices that may be
developed in the future, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
CUSTOMER CONCENTRATION
The majority of the Company's end users purchase the Company's products from
VARs that, in turn, purchase the Company's products from large distributors such
as Ingram Micro Incorporated ("Ingram Micro"), Tech Data Corporation ("Tech
Data") and others. For the fiscal year ended October 31, 1997, Ingram Micro and
Tech Data represented 28% and 19%, respectively, of the Company's net sales. The
12
Company has no long-term contracts with any of its significant customers or
distributors, and sales are generally made pursuant to purchase orders. The
Company's distributors carry competing product lines. There can be no assurance
that distributors will continue to purchase the Company's products or be able to
market them effectively. The Company allows distributors to return unsold
products, generally within certain limitations. The reduction, delay or
cancellation of orders or the return of a significant amount of products by one
or more of its major distributors or customers, the loss of one or more of such
distributors or customers, or any financial difficulties or such distributors or
customers resulting in their inability to pay amounts owing to the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations.
SUSTAINING AND MANAGING GROWTH
The Company is currently undergoing a period of rapid growth and there can
be no assurance that such growth can be sustained or managed successfully. This
growth has resulted in, and may possibly create in the future, additional
capacity requirements, new and increased responsibilities for management
personnel, and added pressures on the Company's operating and financial systems.
There can be no assurance that the Company's facilities, personnel and operating
and financial systems will be sufficient to manage and sustain its current or
future growth. The Company's ability to manage any future growth effectively and
accomplish its overall goals will depend on its ability to hire and retain
qualified management, sales and technical personnel. If the Company is unable to
manage growth effectively or hire and retain qualified personnel, the Company's
business and results of operations could be materially and adversely affected.
In addition, to the extent expected revenue growth does not materialize,
increases in the Company's selling and administrative costs that are based on
anticipated revenue growth could negatively impact the Company's results of
operations.
INTERNATIONAL OPERATIONS
Net sales to customers outside the United States accounted for approximately
33% of net sales in fiscal 1997. The Company expects that international sales
will continue to represent a significant portion of the Company's net sales.
Sales to customers outside the United States are subject to a number of risks,
including the imposition of governmental controls, the need to comply with a
wide variety of foreign and U.S. export laws, political and economic
instability, trade restrictions, changes in tariffs and taxes, longer payment
cycles typically associated with international sales, and the greater difficulty
of administering business overseas. Furthermore, although the Company endeavors
to meet standards established by foreign regulatory bodies, there can be no
assurance that the Company will be able to comply with changes in foreign
standards in the future. The inability of the Company to design products to
comply with foreign standards could have a material adverse effect on the
Company's business, financial condition and results of operations. Most of the
Company's international sales are denominated in U.S. dollars and fluctuations
in the value of foreign currencies relative to the U.S. dollar could therefore
make the Company's products less price competitive. A portion of the Company's
international sales are denominated in foreign currencies. Consequently a
decrease in the value of a relevant foreign currency in relation to the U.S.
dollar after establishing prices and before receipt of payment by the Company
would have an adverse effect on the Company's results of operations. Further,
the expenses of ADIC Europe, the Company's wholly owned subsidiary, are
denominated in French francs. The Company currently engages in only limited
foreign currency hedging transactions, and is therefore exposed to some level of
currency risk. In addition, the laws of certain foreign countries may not
protect the Company's intellectual property to the same extent as do the laws of
the United States.
13
DEPENDENCE ON KEY EMPLOYEES (TEAM MEMBERS)
The Company's future success depends in large part on its ability to retain
certain key executives and other personnel, some of whom have been instrumental
in establishing and maintaining strategic relationships with certain of the
Company's suppliers and customers. The Company does not have any employment
agreements with its domestic Team Members. The Company's growth and future
success will depend in large part on its continuing ability to hire, motivate
and retain highly qualified management, technical, sales and marketing Team
Members. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain its existing personnel or
attract additional qualified personnel in the future.
PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively depends in part on its ability
to develop and maintain proprietary aspects of its technology. The Company
currently holds two U.S. patents and has applications for additional patents
pending. There can be no assurance, however, that any future patents will be
granted or that any patents will be valid or provide meaningful protection for
the Company's product innovations. The Company also relies on a combination of
copyright, trademark, trade secret and other intellectual property laws to
protect its proprietary rights. Such rights, however, may not preclude
competitors from developing products that are substantially equivalent or
superior to the Company's products. In addition, many aspects of the Company's
products are not subject to intellectual property protection.
While the Company is not currently engaged in any intellectual property
litigation or proceedings, there can be no assurance that it will not become so
involved in the future. An adverse outcome in litigation or similar proceedings
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from others or require the Company to cease
marketing or using certain products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
If the Company is required to seek licenses under patents or proprietary rights
of others, there can be no assurance that any required licenses would be made
available on terms acceptable to the Company, if at all. In addition, the cost
of responding to an intellectual property litigation claim, in terms of legal
fees and expenses and the diversion of management resources, whether or not the
claim is valid, could have a material adverse effect on the Company's business,
financial condition and results of operations.
WARRANTY EXPOSURE
The Company generally provides a two-year warranty on its products, with the
exception of the tapes and the tape drives used in its products but manufactured
by a third party. The Company passes on to the customer the manufacturer's
warranty with respect to these tapes and tape drives. In the past, the Company
has incurred higher warranty expenses relating to new products than it typically
incurs with established products. The Company establishes allowances for the
estimated liability associated with product warranties, but there can be no
assurance that such allowances will be adequate or that the Company will not
incur substantial warranty expenses in the future with respect to new or
established products.
CERTAIN ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors (the "Board of Directors") has the
authority, without any action by the shareholders, to issue up to 2,000,000
shares of Preferred Stock and to fix the rights and preferences of such shares.
In addition, the Company has adopted a shareholder rights plan (the "Shareholder
Rights Plan") involving the issuance of preferred stock purchase rights designed
to protect the Company's shareholders from abusive takeover tactics by causing
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors. Certain provisions in
14
the Company's Restated Articles of Incorporation, Restated Bylaws and the
Shareholder Rights Plan, as well as Washington law, and the ability of the Board
of Directors to issue Preferred Stock, may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price, and the voting and other rights of the
holders of Common Stock.
LIMITED TRADING HISTORY; POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has experienced fluctuations since it
commenced trading in October 1996. There can be no assurance that the market
price of the Common Stock will not fluctuate significantly. Announcements
concerning the Company or its competitors, quarterly variations in operating
results, the introduction of new technology or products or changes in product
pricing policies by the Company or its competitors, changes in earnings
estimates by analysts or changes in accounting policies, among other factors,
could cause the market price of the Common Stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years. This volatility has had a substantial effect on the market prices
of securities of many smaller public companies for reasons frequently unrelated
or disproportionate to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock.
ITEM 2. FACILITIES
The Company currently leases a 41,000 square foot facility in Redmond,
Washington, under a lease which expires in 2005. This facility currently houses
the primary executive offices of the Company, as well as its marketing, sales,
customer support, research and development, systems engineering, and
manufacturing organizations. In addition, the Company leases a 20,000 square
foot facility in Redmond, Washington, for its warehouse needs, as well as office
space throughout the United States for its regional sales offices and in Paris,
France for the sales, marketing, and customer support organizations serving
Europe, the Middle East, and Africa.
The Company has leased a 64,780 square foot building, located approximately
one mile from its primary facility, which is currently under construction. The
expected construction completion and rent commencement date is April 1, 1998 and
the lease has a term of ten years. The Company is negotiating with the owner of
the facility it currently occupies regarding possible early lease termination.
In addition, the Company is reviewing the possibility of sub-leasing the
facility to a third party. Because the lease for the current facility is at
below market rental rates, the Company believes that it will be successful in
one of these efforts. The Company is liable, however, on both leases, and there
can be no assurance that it will be successful in reducing its obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company has no legal proceedings of a material nature underway.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the Company's
fourth quarter.
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDERS
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol ADIC on October 17, 1996. As of October 31, 1997, there were
approximately 296 shareholders of
15
record. The following table shows the high and low sales prices for the Common
Stock for the periods indicated, as reported by the Nasdaq National Market
System.
HIGH LOW
------- -------
October 17, 1996 to October 31, 1996........................................... $14 3/4 $10
Fiscal Year 1997
1st Quarter.................................................................. $23 $10
2nd Quarter.................................................................. $22 1/4 $12 1/8
3rd Quarter.................................................................. $19 1/4 $13 3/4
4th Quarter.................................................................. $22 3/4 $14 5/8
It is not anticipated that cash dividends will be paid on shares of the
Company's Common Stock in the foreseeable future.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company are derived from the
Company's historical financial statements and notes thereto. For the
approximately three-year period from November 1, 1993 to October 15, 1996, the
selected consolidated financial data relate to the operations of the Company as
part of Interpoint. For the year ended September 30, 1993 and the period
subsequent to October 15, 1996, the selected financial data relate to the
operation of the Company as an independent company. The information set forth
below should be read in conjunction with the Company's financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
AT OR FOR AT OR FOR
FISCAL YEAR ENDED FISCAL YEAR
OCTOBER 31, ENDED
-------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994(1)(2) 1993(1)
--------- --------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales............................................. $ 93,204 $ 58,957 $ 31,716 $ 20,083 $ 17,108
Gross profit.......................................... 27,648 17,070 9,609 6,588 6,333
Acquisition expenses.................................. -- -- -- 590 --
Income (loss) before provision (benefit) for income
taxes............................................... 12,663 5,288 215 (142) 1,593
Net income (loss)..................................... 8,497 3,430 292 (42) 1,285
Net income per share.................................. $ 0.91
Pro forma net income per share(3) (unaudited)......... $ 0.41 $ 0.04
CONSOLIDATED BALANCE SHEETS:
Working capital....................................... $ 53,358 $ 24,596 $ 7,249 $ 4,156 $ 3,004
Total assets.......................................... 75,194 36,710 13,943 8,710 5,895
Long-term debt and loan from Interpoint, excluding
current portion..................................... -- -- 5,434 2,358 672
Shareholders' equity.................................. 60,110 26,387 3,387 3,027 2,808
- ------------------------
(1) In order to conform the Company's fiscal year to Interpoint's fiscal year
upon the merger of the Company into Interpoint in February 1994, in a
transaction accounted for as a pooling of interests, the Company's financial
statements for the month of October 1993 are not included in either the
fiscal year ended September 30, 1993 or the fiscal year ended October 31,
1994.
(2) In February 1994, the Company incurred $590,000 in acquisition-related
expenses associated with its acquisition by Interpoint. Also, in June 1994,
the Company acquired its wholly owned subsidiary, ADIC Europe, in a
transaction accounted for as a purchase.
(3) Unaudited pro forma net income per share for the fiscal year ended October
31, 1995 is calculated based on the number of shares of Interpoint Common
Stock outstanding at June 30, 1996, plus the incremental shares outstanding,
as calculated under the treasury stock method, based on the number of ADIC
stock options outstanding as a result of the distribution of shares of ADIC
Common Stock to Interpoint shareholders (the "Distribution"). Unaudited pro
forma net income per share for the fiscal year ended October 31, 1996 is
based on the number of shares of ADIC common stock outstanding at October
31, 1996, plus the incremental shares outstanding, as calculated under the
treasury stock method, at the same date.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
GENERAL
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THIS
DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. THE CAUTIONARY STATEMENTS MADE IN THIS
ANNUAL REPORT ON FORM 10-K SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY RELEASE THE RESULT OF 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.
The Company was incorporated in 1984 to develop data backup and storage
subsystems for computer systems, and introduced its first product that same
year. The Company's initial products used a variety of data storage technologies
and media supplied by third parties, including large-capacity hard disks. In
1988, with the objective of increasing the proprietary features of its product
line, the Company introduced a random access automatic tape changer, the
LANbacker. Building on the proprietary electro-mechanical robotics and firmware
incorporated into the LANbacker, in November 1991 the Company introduced a data
backup tape changer product utilizing 4mm/DAT technology, the first product in
its automated tape library family. Subsequently, the Company has pursued a
strategy of offering the market a full range of automated tape library products
through development of new library platforms that incorporate DLT, 8mm/SDX,
4mm/DAT and 8mm magnetic tape drive technologies. In addition to automated tape
libraries, the Company also markets tape products such as standalone tape drives
and tape media in order to offer its customers a complete line of tape products
for their backup and archiving needs.
FISCAL YEAR 1997 COMPARED TO 1996
NET SALES. Net sales for the year ended October 31, 1997 increased 58% to
$93.2 million as compared to $59.0 million for fiscal 1996. The increase in net
sales was due primarily to strong unit sales volume of the Company's DLT-based
products, particularly the VLS DLT and Scalar automated tape libraries, and the
DS9000 series standalone tape drives. Net sales of older products, including
4mm/DAT and 8mm tape libraries decreased in fiscal 1997. The Company reduced its
prices on selected products at various times throughout the year. Sales outside
the United States were $30.6 million or 33% of net sales for the year ended
October 31, 1997 compared to $21.2 million or 36% of net sales for fiscal 1996.
International sales are typically made in U.S. dollars but may also be made in
foreign currencies.
GROSS PROFIT. Gross profit was $27.6 million or 30% of net sales for the
year ended October 31, 1997 compared to $17.1 million or 29% of net sales in
fiscal 1996. Gross profit margin for the current year was higher than fiscal
1996 due to a shift in product mix toward higher-margin Scalar libraries and
product cost reduction efforts. The cost of direct material, specifically the
DLT tape drives, comprised a substantial majority of cost of sales in both
fiscal 1997 and 1996. Gross profit margins are dependent on a number of factors,
including customer and product mix, price competition and tape drive costs.
There can be no assurance that the Company can improve upon or maintain the
current gross margin levels, given that tape drives purchased from third-party
suppliers are a significant component of the Company's product costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $13.6 million or 15% of net sales for the year ended October 31, 1997
compared to $9.8 million or 17% of net sales for fiscal 1996. Selling and
administrative expenses for the year ended October 31, 1997 decreased as a
percentage of net sales as increased net sales reflected the benefits of the
Company's significant investments in sales and marketing resources in fiscal
years 1996 and 1995. Net sales volume in the fiscal year increased 58%
18
compared to a corresponding 38% increase in selling and administrative expenses.
The dollar increase in selling and administrative expenses over fiscal 1996 was
primarily due to additions to sales and marketing staff, increased advertising
costs and increased administrative overhead. The Company does not expect selling
and administrative expenses as a percentage of net sales to decline from the
levels experienced in fiscal 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$2.9 million or 3% of net sales for the year ended October 31, 1997 compared to
$1.5 million or 3% of net sales for fiscal 1996. Actual dollar spending during
the current year was higher than fiscal 1996 due to increases in development
expenses for the new FastStor products released in the final quarter of fiscal
1997 as well as the Scalar 218 series, and additions to research and engineering
staff. Research and development expenses are expected to continue at
approximately 3% of net sales.
OTHER INCOME (EXPENSE). Other income for the year ended October 31, 1997
was $1.5 million compared to expense of $395,000 for fiscal 1996. As a result of
the proceeds from issuance of common stock received in March as well as
Interpoint's forgiveness of all intercompany loans to ADIC and contribution of
cash to ADIC in October 1996, the Company realized $1.1 million of interest
income in the fiscal year ended October 31, 1997, rather than $508,000 of
interest expense incurred in fiscal 1996. Net foreign currency translation gains
increased approximately $271,000 between the comparison periods. Foreign
currency gains or losses arise as a result of the operation of ADIC Europe, the
functional currency of which is French francs. ADIC Europe buys products from
ADIC in U.S. dollars and resells a significant majority of such products in U.S.
dollars. However, because francs are used as the functional accounting currency,
all monetary assets and liabilities are translated into francs on ADIC Europe's
financial statements. To the extent that these monetary assets and liabilities
do not fully offset each other and the franc-to-U.S.-dollar exchange rate
changes, transaction gains or losses may result. For large sales denominated in
other currencies, the Company attempts to implement appropriate hedging
strategies.
PROVISION FOR INCOME TAXES. Income tax expense for the year ended October
31, 1997 was $4.2 million compared to $1.9 million for fiscal 1996. The 32.9%
effective tax rate reflects the Company's investment in certain non-taxable
bonds, as well as the utilization of certain credits for increasing research
activities. The provision includes taxes paid in various federal, state and
international jurisdictions.
FISCAL YEAR 1996 COMPARED TO 1995
NET SALES. Net sales increased 86% to $59.0 million in fiscal 1996 from
$31.7 million in fiscal 1995. The increase resulted primarily from strong sales
volume in the Company's DLT-based products, which were introduced beginning late
in fiscal 1995, and related media. Net sales of older products, including
certain 4mm and 8mm tape libraries, decreased somewhat in fiscal 1996. Several
times during fiscal 1996 the Company reduced its end-user list prices on
selected products. Sales outside the United States were $21.2 million or 36% of
net sales in fiscal 1996 compared to $14.9 million or 47% of net sales in fiscal
1995.
GROSS PROFIT. Gross profit increased to $17.1 million in fiscal 1996 from
$9.6 million in fiscal 1995. Gross profit as a percentage of net sales decreased
to 29% in fiscal 1996 from 30% of sales in fiscal 1995 due to the shift in
product mix to DLT-based products, which have a higher per-unit tape drive cost
than products incorporating 4mm/DAT or 8mm drives. The cost of direct material
comprised a substantial majority of cost of sales in both years with the most
significant cost item being the tape drives purchased from third parties.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
totaled $9.8 million or 17% of sales in fiscal 1996 compared to $8.0 or 25% of
net sales in fiscal 1995. This increased dollar spending reflected a strategic
decision to increase the Company's investment in sales and marketing. These
investments include costs of European sales activities acquired in the purchase
of ADIC Europe and the addition of experienced sales and marketing personnel in
the United States. These expenses decreased as a
19
percentage of net sales in fiscal 1996 compared to fiscal 1995 as the Company
was able to leverage its investment in these resources with larger sales volume.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
totaled $1.5 million or 3% of net sales in fiscal 1996 compared to $1.1 million
or 3% of net sales in fiscal 1995. The increase in dollar spending in fiscal
1996 was due to increases in development expenses for the Company's VLS DLT and
Scalar DLT products.
OTHER INCOME (EXPENSE). Other expense was $395,000 in fiscal 1996 compared
to $296,000 in fiscal 1995. Interest expense increased by $231,000 from fiscal
1995 to fiscal 1996 because of increased borrowings from Interpoint which were
forgiven prior to the effective date of the Distribution. Offsetting these
expenses in fiscal 1996 were gains from foreign currency transactions of
$114,000.
PROVISION FOR INCOME TAXES. The provision for income tax expense for fiscal
1996 was $1.9 million, which represented an effective tax rate of 35.1% compared
to a benefit for income taxes of $78,000 in fiscal 1995. The benefit for income
taxes in fiscal 1995 was due primarily to the recognition of certain operating
loss carryforwards at ADIC Europe. In addition, certain federal tax credits
reduced the effective tax rate in both years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $2.7 million of cash in fiscal
1997 compared to net usage of cash from operating activities of $3.5 million and
$1.9 million in fiscal 1996 and 1995, respectively. In each of the three years,
cash was used primarily to fund increases in accounts receivable and inventories
and was offset by net income and increases in accounts payable and other accrued
liabilities. In fiscal 1996 and 1995, the Company financed its growth through
loans from Interpoint, and the net increases in the amount of such loans was
$4.2 million and $3.1 million, respectively. Prior to the Distribution,
Interpoint made a contribution to the working capital of the Company through the
cancellation of all $9.6 million of Company indebtedness to Interpoint.
Interpoint also contributed an additional $10.0 million in cash to the working
capital of the Company at the time of the Distribution. During fiscal 1997, the
Company realized $1.5 million due to the exercise of stock options by Team
Members, including tax benefits of $1.1 million.
In fiscal 1997, the Company used $4.0 million to acquire a minority equity
position in Crossroads Holding Corp. the parent company of Crossroads Systems,
Inc. a provider of Fibre Channel interconnection products. In addition, the
Company used cash in the amounts of $1.8 million, $911,000 and $757,000 to
acquire property, plant and equipment in fiscal years 1997, 1996 and 1995,
respectively.
At October 31, 1997, the Company had cash and cash equivalents of $32.8
million. As of that date, ADIC also had a $10.0 million bank line of credit that
expires at the end of fiscal 1998, all of which was available. Any borrowings
under this line of credit would bear interest at the bank's prime rate or
adjusted LIBOR rate. The Company had no material or unusual commitments as of
October 31, 1997 other than annual rental commitments under noncancellable
operating leases for the Company's facilities.
The Company believes that its existing cash and cash equivalents and bank
line of credit, together with the results of operations, will be sufficient to
fund its working capital and capital expenditure needs for at least the next 12
months. The Company's significant computer systems recognize the year 2000,
therefore, the Company does not expect to have a material cost or disruption of
business due to this change. The Company may utilize cash to acquire or invest
in businesses, products or technologies that it believes are strategic. From
time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies. However,
the Company has no present understanding, commitments or agreements with respect
to any material acquisition of other businesses, products or technologies.
20
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Accountants.......................................................................... 22
Consolidated Balance Sheets at October 31, 1997 and October 31, 1996....................................... 23
Consolidated Statements of Income for each of the three years in the period ended October 31, 1997......... 24
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended
October 31, 1997......................................................................................... 25
Consolidated Statements of Cash Flows for each of the three years in the period ended October 31, 1997..... 26
Notes to Consolidated Financial Statements................................................................. 27
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Advanced Digital Information Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) present fairly, in all material respects,
the financial position of Advanced Digital Information Corporation and its
subsidiary at October 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended October 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1, Advanced Digital Information Corporation was a
wholly owned subsidiary of Interpoint Corporation prior to October 15, 1996.
Price Waterhouse LLP
Seattle, Washington
November 26, 1997
22
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
----------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 32,806,822 $ 10,436,783
Accounts receivable, net of allowances of $324,000 in 1997 and $187,000 in
1996........................................................................... 18,078,302 12,789,415
Inventories, net................................................................. 16,074,787 10,935,520
Prepaid expenses and other....................................................... 714,979 282,183
Deferred income taxes............................................................ 767,688 474,456
------------- -------------
Total current assets........................................................... 68,442,578 34,918,357
------------- -------------
Property, plant and equipment, at cost:
Machinery and equipment.......................................................... 4,366,343 2,713,682
Office equipment................................................................. 417,116 350,700
Leasehold improvements........................................................... 415,493 357,282
------------- -------------
5,198,952 3,421,664
Less: accumulated depreciation and amortization.................................. (2,689,685) (1,855,457)
------------- -------------
Net property, plant and equipment.............................................. 2,509,267 1,566,207
------------- -------------
Deferred income taxes.............................................................. 89,414 10,370
------------- -------------
Investment in Crossroads Holding Corp. and other assets............................ 4,152,634 214,739
------------- -------------
$ 75,193,893 $ 36,709,673
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 11,237,131 $ 8,460,723
Accrued liabilities.............................................................. 2,594,831 1,608,132
Income taxes payable............................................................. 1,252,324 253,716
------------- -------------
Total current liabilities...................................................... 15,084,286 10,322,571
------------- -------------
Commitments (Note 11).............................................................. -- --
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized; none issued and
outstanding.................................................................... -- --
Common stock, no par value; 40,000,000 shares authorized, 9,699,824 issued and
outstanding at October 31, 1997 (8,001,992 in 1996)............................ 45,808,291 20,329,806
Retained earnings................................................................ 14,479,104 5,981,906
Cumulative translation adjustment................................................ (177,788) 75,390
------------- -------------
Total shareholders' equity..................................................... 60,109,607 26,387,102
------------- -------------
$ 75,193,893 $ 36,709,673
------------- -------------
------------- -------------
See the accompanying notes to these consolidated financial statements.
23
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
Net sales........................................................... $ 93,203,531 $ 58,956,993 $ 31,716,372
Cost of sales....................................................... 65,555,559 41,886,619 22,107,341
------------- ------------- -------------
Gross profit...................................................... 27,647,972 17,070,374 9,609,031
------------- ------------- -------------
Operating expenses:
Selling and administrative........................................ 13,556,059 9,846,324 8,001,290
Research and development.......................................... 2,909,460 1,541,647 1,097,090
------------- ------------- -------------
16,465,519 11,387,971 9,098,380
------------- ------------- -------------
Operating profit.................................................... 11,182,453 5,682,403 510,651
------------- ------------- -------------
Other income (expense):
Interest income (expense), net.................................... 1,095,991 (508,492) (277,451)
Foreign currency transaction gains (losses)....................... 384,972 113,821 (18,476)
------------- ------------- -------------
1,480,963 (394,671) (295,927)
------------- ------------- -------------
Income before provision for income taxes............................ 12,663,416 5,287,732 214,724
------------- ------------- -------------
Provision (benefit) for income taxes:
Current........................................................... 4,538,494 1,981,631 176,422
Deferred.......................................................... (372,276) (124,098) (254,104)
------------- ------------- -------------
4,166,218 1,857,533 (77,682)
------------- ------------- -------------
Net income.......................................................... $ 8,497,198 $ 3,430,199 $ 292,406
------------- ------------- -------------
------------- ------------- -------------
Average number of common and common equivalent shares outstanding... 9,389,000
-------------
-------------
Net income per share................................................ $ .91
-------------
-------------
Pro forma average number of common and common equivalent shares
outstanding (unaudited)........................................... 8,274,000 8,010,000
------------- -------------
------------- -------------
Pro forma net income per share (unaudited).......................... $ .41 $ .04
------------- -------------
------------- -------------
See the accompanying notes to these consolidated financial statements.
24
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995
COMMON STOCK CUMULATIVE
------------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1994............... 1,000 $ 701,752 $ 2,259,301 $ 66,391 $ 3,027,444
Net income................................ 292,406 292,406
Foreign currency translation adjustment... 66,928 66,928
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1995............... 1,000 701,752 2,551,707 133,319 3,386,778
Stock dividend to Interpoint.............. 8,000,992
Contribution of capital from Interpoint... 19,628,054 19,628,054
Net income................................ 3,430,199 3,430,199
Foreign currency translation adjustment... (57,929) (57,929)
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1996............... 8,001,992 20,329,806 5,981,906 75,390 26,387,102
Shares issued, net of costs............... 1,500,000 23,708,784 23,708,784
Contribution of capital................... 266,503 266,503
Exercise of stock options, including tax
benefit of $1,064,197................... 197,832 1,503,198 1,503,198
Net income................................ 8,497,198 8,497,198
Foreign currency translation adjustment... (253,178) (253,178)
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1997............... 9,699,824 $ 45,808,291 $ 14,479,104 $ (177,788) $ 60,109,607
---------- ------------- ------------- ----------- -------------
---------- ------------- ------------- ----------- -------------
See the accompanying notes to these consolidated financial statements.
25
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 8,497,198 $ 3,430,199 $ 292,406
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................... 847,234 607,479 483,739
Deferred taxes.................................................. (372,276) (124,098) (254,104)
Assets retired.................................................. -- -- 2,156
Change in assets and liabilities:
Accounts receivable............................................. (5,425,020) (6,999,440) (1,662,846)
Inventories..................................................... (5,278,505) (5,603,131) (2,563,452)
Prepaid expenses and other...................................... (443,687) (60,355) (39,788)
Income taxes receivable......................................... -- -- 161,344
Other assets.................................................... 39,424 24,221 (59,474)
Accounts payable................................................ 2,824,342 4,544,059 1,418,558
Accrued liabilities............................................. 1,052,028 649,061 122,416
Income taxes payable............................................ 1,006,809 49,692 204,024
------------- ------------- -------------
Net cash provided by (used in) operating activities................. 2,747,547 (3,482,313) (1,895,021)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................... (1,831,493) (910,718) (756,935)
Investment in Crossroads Holding Corp............................. (4,000,000) -- --
------------- ------------- -------------
Net cash used in investing activities............................... (5,831,493) (910,718) (756,935)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net....................... 23,708,784
Capital contribution from Interpoint, net of loans forgiven....... 266,503 10,000,000 --
Proceeds from issuance of common stock for stock option........... 1,503,198 -- --
Net increase in loans from Interpoint............................. -- 4,218,366 3,076,418
------------- ------------- -------------
Net cash provided by financing activities........................... 25,478,485 14,218,366 3,076,418
------------- ------------- -------------
Effect of exchange rate changes on cash............................. (24,500) (12,390) 15,391
------------- ------------- -------------
Net increase in cash and cash equivalents........................... 22,370,039 9,812,945 439,853
Cash and cash equivalents at beginning of period.................... 10,436,783 623,838 183,985
------------- ------------- -------------
Cash and cash equivalents at end of period.......................... $ 32,806,822 $ 10,436,783 $ 623,838
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for:
Interest.......................................................... $ -- $ 508,492 $ 277,451
Income taxes...................................................... $ 2,467,469 $ 404,668 $ (147,746)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans from Interpoint Corporation, in the amount of $9,628,054, were
forgiven just prior to the Distribution (Note 1).
See the accompanying notes to these consolidated financial statements.
26
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Advanced Digital Information Corporation ("ADIC" or the "Company"),
including its wholly owned subsidiary ADIC Europe SARL ("ADE"), designs,
manufactures and markets automated high performance data storage products used
to file or archive electronic data in conjunction with integrated computer
systems, including local area networks, workstations and other microcomputer
systems. The Company sells its products on an international basis to resellers,
original equipment manufacturers ("OEMs") and end users.
On February 11, 1994, the Company was acquired by Interpoint Corporation
("Interpoint") pursuant to an Agreement and Plan of Merger dated October 29,
1993, in which the Company was merged into a wholly owned subsidiary of
Interpoint. According to the terms of the merger agreement, each outstanding
share of common stock of ADIC was converted into .55 shares of Interpoint common
stock. A total of 1,340,255 shares of Interpoint common stock were issued to
ADIC shareholders. The acquisition was accounted for as a pooling-of-interest in
accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations."
On October 15, 1996, Interpoint distributed to its shareholders all of the
outstanding shares of ADIC (the "Distribution"). The Distribution was made in
connection with, and was a condition precedent to, the merger of Interpoint with
a wholly owned subsidiary of Crane Co., a Delaware corporation. Prior to the
Distribution, Interpoint made a contribution to the working capital of ADIC
through the cancellation of all intercompany indebtedness of ADIC and ADE to
Interpoint, transferred certain other assets to ADIC, including its ownership of
ADE, and contributed additional cash to ADIC for working capital of $10 million.
Total capital contributions were $19,628,054.
The consolidated financial statements for all periods prior to October 15,
1996 reflect the results of operations, financial position, and cash flows of
ADIC as a wholly owned subsidiary of Interpoint and may not be indicative of
actual results of operations and financial position of the Company under other
ownership.
The consolidated statements of income for the fiscal years ended October 31,
1996 and 1995 reflect certain expense items incurred by Interpoint which were
allocated to the Company on a basis which management believes represents a
reasonable allocation of such costs to present ADIC as a stand-alone company.
These allocations consist primarily of corporate expenses such as executive and
other compensation and interest expense on intercompany borrowings. Compensation
has been allocated based on an estimate of Interpoint personnel time dedicated
to the operations and management of ADIC. Interest expense has been allocated
based on Interpoint's borrowing rate and actual intercompany borrowings. A
summary of these allocations is as follows:
CORPORATE INTEREST
YEAR ENDED: EXPENSES EXPENSE
- ---------------------------------------------------------------------- ---------- ----------
October 31, 1996...................................................... $ 177,292 $ 528,524
---------- ----------
---------- ----------
October 31, 1995...................................................... $ 175,400 $ 279,279
---------- ----------
---------- ----------
27
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of ADIC and its wholly
owned subsidiary ADIC Europe SARL. All intercompany transactions have been
eliminated.
EARNINGS PER SHARE
Given the Company's historical capital structure as a wholly owned
subsidiary of Interpoint, historical earnings per share amounts are not
presented in the consolidated financial statements for the fiscal years ended
October 31, 1996 and 1995 as they are not considered to be meaningful. For the
fiscal year ended October 31, 1997, primary earnings per share is computed by
dividing net income available to common shareholders by the weighted average
number of shares outstanding plus the common stock equivalents attributable to
dilutive stock options during the period. Fully diluted earnings per share does
not differ materially from primary earnings per share.
UNAUDITED PRO FORMA EARNINGS PER SHARE
In connection with the spin-off of ADIC by Interpoint as previously
described, Interpoint shareholders received one share of ADIC common stock for
each share of Interpoint stock held. Additionally, Interpoint stock options held
by ADIC Team Members and Directors were converted in part to cash and in part to
ADIC stock options.
Unaudited pro forma net income per share for the fiscal year ended October
31, 1996 is based on the number of shares of ADIC stock outstanding at October
31, 1996, plus the incremental shares outstanding, as calculated under the
treasury stock method at the same date. For the fiscal year ended October 31,
1995 it is calculated based on the number of shares of Interpoint stock
outstanding at June 30, 1996, plus the incremental shares outstanding, as
calculated under the treasury stock method, of the ADIC stock options
outstanding as a result of the spin-off.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments in commercial paper and marketable
debt securities which are readily convertible to cash without penalty and
subject to insignificant risk of changes in value. The Company's cash and cash
equivalents balance consists of the following:
OCTOBER 31, OCTOBER 31,
1997 1996
------------- -------------
Cash........................................................... $ 8,091,286 $ 10,436,783
Commercial paper............................................... 4,457,558 --
Marketable debt securities..................................... 20,257,978 --
------------- -------------
$ 32,806,822 $ 10,436,783
------------- -------------
------------- -------------
The marketable debt securities are variable rate instruments which are
readily convertible to cash. However, the remaining contractual maturities of
these instruments range from 3 to 27 years.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
28
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation and
amortization are computed on the straight-line method over the estimated useful
lives of the assets as follows: machinery and equipment and office equipment, 3
to 10 years; leasehold improvements, the life of the lease. Amortization of
leasehold improvements with a net book value of $165,000 has been accelerated
due to the planned move of Company headquarters during fiscal year 1998 (Note
11).
INCOME TAXES
Provision for income taxes has been recorded in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS
109"). Under the liability method of FAS 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to be recovered or
settled.
Commencing February 12, 1994 through October 15, 1996, the Company's
operations have been included in consolidated income tax returns filed by
Interpoint. Income taxes in the accompanying financial statements for the
associated periods have been computed assuming the Company filed separate income
tax returns worldwide. Deferred taxes result primarily from the use of
accelerated depreciation for tax purposes and from the timing of tax deductions
for allowances and accrued expenses.
FOREIGN CURRENCY TRANSLATION
The financial statements of ADE have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation." Under the provisions of this Statement, all assets and
liabilities in the balance sheets of ADE, whose functional currency is the
French franc, are translated at year-end exchange rates, and translation gains
and losses are accumulated in a separate component of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS AND FORWARD CONTRACTS
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency, including U.S. dollars. Gains and losses on those foreign
currency transactions are included in determining net income or loss for the
period in which exchange rates change. The effect of exchange rate fluctuations
on the results of operations is minimized by the offsetting nature of ADE
foreign currency transactions. In addition, the Company may enter into foreign
currency forward contracts to hedge transactions which are not otherwise offset.
Foreign currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method, and are typically three
months or less in length. There were no outstanding contracts at October 31,
1997 or 1996.
CONCENTRATION OF CREDIT RISK
The Company sells products to a wide variety of industries on a worldwide
basis. In countries or industries where the Company is exposed to material
credit risk, sufficient collateral, including cash deposits and/or letters of
credit, is required prior to the completion of a transaction. The Company does
29
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not believe there is a material credit risk beyond that provided in the
financial statements in the ordinary course of business.
The Company sells a significant portion of its products through third-party
resellers and, as a result, experiences individually significant annual sales
volumes with major distributors. Approximately $25,707,000 (28%) and $18,101,000
(19%) of the Company's fiscal 1997 revenues were from one customer and a second
customer, respectively. The same two customers accounted for fiscal 1996 and
1995 revenues of $13,315,000 (23%) and $12,610,000 (21%), and $4,329,000 (14%)
and $5,151,000 (16%), respectively. These two customers represented 58% and 48%
of the accounts receivable balance at October 31, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the short-term nature of these instruments.
REVENUE RECOGNITION
Revenue from product sales is recorded by the Company when products are
shipped to customers. Certain distributors have the right, on a quarterly basis,
to return products according to a stock rotation policy. Typically, the value of
the products returned can not exceed 15% of the previous quarter's purchases,
the returns must be accompanied by offsetting orders of commensurate value, and
the products returned must be new and in sealed cartons. The Company accrues a
provision for the estimated sales returns, allowances and discounts in the
period the products are shipped to customers.
WARRANTY EXPENSE
For standard Company products, parts and labor are covered under warranty
for two years. With respect to drives and tapes used in the Company's products
but manufactured by a third party, the Company passes on to the customer the
warranty on such drives and tapes provided by the manufacturer.
ADVERTISING EXPENSE
The Company accrues for co-operative advertising as the related revenue is
earned, and other advertising expense is recorded as incurred. Advertising
expense for the years ended October 31, 1997, 1996 and 1995 was $1,421,000
$959,000 and $506,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which was effective for the Company beginning in
fiscal 1997. Under the provisions of FAS 123, employee stock-based compensation
expense is measured using either the intrinsic-value method as prescribed by
Accounting Principles Board
30
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") or the
fair value method described in FAS 123. Companies choosing the intrinsic-value
method are required to disclose the pro forma impact of the fair value method on
net income and net income per share. The Company has elected to continue
accounting for its team member stock-based compensation under the provisions of
APB 25. The Company is required to implement FAS 123 for stock-based awards to
other than team members and directors; however, the impact on the Company's
financial position at October 31, 1997 and results of operations for the year
then ended is immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), was issued. This pronouncement modifies the
calculation and disclosure of earnings per share and will be adopted by the
Company in its financial statements for the year ending October 31, 1998.
Adoption of FAS 128 is not expected to have a material impact on the Company's
earnings per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change in the
near term are the adequacy of the allowances for sales returns, inventory
obsolescence and warranty costs.
3. INVENTORIES
Inventories are comprised of the following:
OCTOBER 31, OCTOBER 31,
1997 1996
------------- -------------
Finished goods................................................. $ 8,231,656 $ 4,688,604
Work-in-process................................................ 1,416,067 1,503,691
Raw materials.................................................. 7,557,748 5,602,312
------------- -------------
17,205,471 11,794,607
Allowance for inventory obsolescence........................... (1,130,684) (859,087)
------------- -------------
$ 16,074,787 $ 10,935,520
------------- -------------
------------- -------------
31
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
OCTOBER 31, OCTOBER 31,
1997 1996
------------ ------------
Accrued payroll and related liabilities........................... $ 1,646,813 $ 1,057,472
Allowance for warranty returns.................................... 375,497 354,557
Taxes, other than income.......................................... 254,564 41,001
Other............................................................. 317,957 155,102
------------ ------------
$ 2,594,831 $ 1,608,132
------------ ------------
------------ ------------
5. INVESTMENT IN CROSSROADS HOLDING CORP.
In August 1997, the Company purchased an approximately 15% interest in
Crossroads Holding Corp. for an aggregate purchase price of $4,000,000. This
investment is accounted for under the cost method. Crossroads Systems, Inc.
("Crossroads"), a wholly owned subsidiary of Crossroads Holding Corp., develops
products that provide interconnectivity between various network protocols and
Fibre Channel networks. Under an OEM agreement with Crossroads also entered into
in August, the Company will market interconnectivity products developed by
Crossroads under the ADIC brand name and serve as a master distributor for
Crossroads products.
6. CREDIT AGREEMENT
ADIC has a $10 million unsecured line of credit with a bank expiring October
31, 1998. All of this line was available at October 31, 1997. Borrowings against
the line of credit will bear interest at the bank's prime rate or adjusted LIBOR
rate.
7. CAPITAL STOCK
STOCK ISSUANCE
On March 12, 1997, ADIC completed a public offering of 1,525,000 shares of
its common stock. Of the total, 1,500,000 were sold by the Company and 25,000
shares were sold by a selling shareholder. Net proceeds of $23,709,000 were
received and will be used for working capital and other general corporate
purposes.
SHAREHOLDER RIGHTS PLAN
In July 1996, the Board of Directors adopted a shareholder rights plan
("Shareholder Rights Plan") in which preferred stock purchase rights were
distributed as a dividend at the rate of one right for each share of ADIC common
stock. The Shareholder Rights Plan is designed to deter coercive takeover
tactics and ensure that the Board of Directors can adequately protect the
interests of the shareholders in the event of a takeover attempt.
8. STOCK-BASED COMPENSATION PLANS
At October 31, 1997, the Company had two stock option plans. The 1996
Transition Plan comprises the stock options held by ADIC team members and
directors which were converted in connection with the
32
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
spin-off. There were 476,092 options issued under this plan at exercise prices
ranging from $.4397 to $5.2328. Some of these options were granted by ADIC prior
to its acquisition in February 1994 and were converted to options to purchase
shares of Interpoint common stock at that time. No further options may be issued
under this plan.
In addition, 625,000 shares are reserved under the Company's 1996 Stock
Option Plan for team members, directors, officers, consultants, agents, advisors
and independent contractors of the Company. Terms of both plans require the
option price to be equal to the fair market value on the date of grant. Options
may be exerciseable for all or part of the shares as determined by the option
and the majority of the options issued under these plans expire five years from
the date of grant.
The Company accounts for the above described stock option plans (the
"Plans") following the guidelines of APB 25 and related interpretations. No
compensation cost has been recognized for stock options granted under these
Plans. Had compensation cost for the Company's Plans been determined based on
the fair value at the grant dates for awards under those Plans consistent with
the method of FAS 123, the Company's net income, net income per share and pro
forma net income per share would have been reduced to the pro forma amounts
indicated below.
YEAR ENDED OCTOBER 31,
--------------------------
1997 1996
------------ ------------
Net income:
As reported..................................................... $ 8,497,198 $ 3,430,199
Pro forma....................................................... $ 7,563,013 $ 3,367,350
Net income and pro forma net income per share:
As reported..................................................... $ .91 $ .41
Pro forma....................................................... $ .81 $ .41
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:
YEAR ENDED OCTOBER
31,
--------------------
1997 1996
--------- ---------
Weighted average risk free interest rates....................................... 6.00% 6.01%
Expected dividend yield......................................................... 0% 0%
Expected volatility............................................................. 65% 65%
Expected lives (in years)....................................................... 4 4
The Black-Scholes option pricing model requires the input of highly
subjective assumptions and does not necessarily provide a reliable measure of
fair value.
33
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Options granted, exercised and canceled under the Plans are summarized as
follows:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- -----------
Balance at October 31, 1995............................................ -- --
Options converted in spin-off from Interpoint Corporation............ 476,092 $ 2.73
Options granted...................................................... 368,500 13.23
----------
Balance at October 31, 1996............................................ 844,592 7.31
Options granted...................................................... 254,851 17.38
Options exercised.................................................... (197,832) 2.21
Options canceled..................................................... (16,575) 11.83
----------
Balance at October 31, 1997............................................ 885,036 11.26
----------
----------
At October 31, 1997, a total of 247,990 options were exercisable, the
weighted average exercise price of these options was $6.40. The weighted average
grant date fair value of options granted in fiscal 1997 and fiscal 1996 was
$9.47 and $6.38 respectively.
The following table summarizes information about stock options outstanding
at October 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- -------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISEABLE PRICE
- --------------------------- ----------- -------------- ----------- ----------- -----------
$0.7995 - $1.8029 78,700 23 mos $ 1.43 76,500 $ 1.42
$2.4625 - $5.2328 195,110 37 mos $ 3.76 80,550 $ 3.44
$10.7500 - $13.5000 369,375 48 mos $ 13.22 90,940 $ 13.23
$14.9375 - $20.3750 241,851 57 mos $ 17.53 -- --
9. FEDERAL INCOME TAXES
Income before provision (benefit) for income taxes was taxed under the
following jurisdictions:
YEARS ENDED OCTOBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
Current income tax:
U.S. Federal....................................... $ 3,692,339 $ 1,881,631 $ 166,422
Foreign............................................ 832,155 -- --
State and local.................................... 14,000 100,000 10,000
------------ ------------ -----------
Total current...................................... 4,538,494 1,981,631 176,422
------------ ------------ -----------
Deferred income tax:
U.S. Federal....................................... (372,276) (267,260) (97,456)
Foreign............................................ -- 143,162 (156,648)
------------ ------------ -----------
Total deferred..................................... (372,276) (124,098) (254,104)
------------ ------------ -----------
Total provision (benefit) for income taxes........... $ 4,166,218 $ 1,857,533 $ (77,682)
------------ ------------ -----------
------------ ------------ -----------
34
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FEDERAL INCOME TAXES (CONTINUED)
The provision (benefit) for federal income tax differs from the amount
computed by applying the statutory federal income tax rate to income before
provision for income taxes for the following reasons:
YEARS ENDED OCTOBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
Federal income tax at statutory rate of 34%.......... $ 4,305,561 $ 1,797,829 $ 73,006
Change in valuation allowance........................ -- -- (139,326)
Tax exempt interest income........................... (130,827) -- --
Tax credits.......................................... (127,604) (1,000) (44,874)
Activity of foreign subsidiaries..................... 126,686 (35,344) 17,848
State income taxes................................... 14,000 100,000 10,000
Other................................................ (21,598) (3,952) 5,664
------------ ------------ -----------
$ 4,166,218 $ 1,857,533 $ (77,682)
------------ ------------ -----------
------------ ------------ -----------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1997 and 1996 are:
OCTOBER 31, OCTOBER 31,
1997 1996
----------- -----------
Deferred tax assets:
Inventories....................................................... $ 399,509 $ 297,951
Team member compensated absences.................................. 25,845 25,081
Allowance for warranty returns.................................... 85,193 67,671
Allowances for bad debt and sales returns......................... 202,303 83,753
Plant and equipment............................................... 89,414 10,370
Other............................................................. 54,838 --
----------- -----------
Gross deferred tax assets....................................... $ 857,102 $ 484,826
----------- -----------
----------- -----------
Deferred U.S. income taxes are not provided for the earnings of the
Company's foreign subsidiary because the Company expects those earnings will be
permanently reinvested. Net pretax operating results from the foreign subsidiary
are income of $2,075,000 and $407,000 for fiscal 1997 and 1996, respectively,
and loss of $51,000 for fiscal 1995.
10. PROFIT INCENTIVE AND BONUS PLANS
The Company currently has a non-contributory bonus plan for certain
high-level team members and a non-contributory profit sharing plan for all other
domestic team members. These plans are generally based upon a combination of
team member salaries and performance. No distributions are made under the bonus
plan if budgeted income is not achieved. Contributions to both plans combined
totaled $740,000 for fiscal 1997.
In fiscal 1995 and 1996, the Company's team members participated in
Interpoint's non-contributory profit incentive plan for key team members and a
non-contributory profit sharing plan for all regular full-time domestic team
members. These plans were generally based upon team member compensation and
pre-tax profits. The profit incentive plan allowed the Board of Directors to
provide between 5 and 35 percent of participating team members' salaries, after
a set minimum profitability was achieved, for
35
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PROFIT INCENTIVE AND BONUS PLANS (CONTINUED)
distribution to the plan's participants. The profit sharing plan provided that
15 percent of pretax profits would be contributed to the plan up to a maximum of
one month's pay. Contributions to the plans were $433,000 and $123,000 for the
years ended October 31, 1996 and 1995.
11. COMMITMENTS
The Company currently leases facilities in Redmond, Washington for
administrative, sales and marketing, research and development, operations and
warehouse activities. Sales offices are leased at various sites in the United
States and Europe. In addition, in October 1997 the Company committed to lease
additional facilities in Redmond, Washington with an expected lease commencement
date of April 1, 1998. The Company is negotiating with the owner of the facility
it currently occupies regarding possible early lease termination. In addition,
the Company is reviewing the possibility of sub-leasing the facility to a third
party. Because the lease for the existing facility is at below-market rental
rates, the Company believes that it will be successful in one of these efforts.
Minimum annual rental commitments at October 31, 1997, for noncancelable
operating leases, are shown in the following table. This table excludes
commitments on the current facility after March 1998. Total commitments under
this lease from April 1998 through August 2005, the lease termination date, are
$3,406,000.
YEAR ENDED OCTOBER 31, AMOUNT
- ---------------------------------------------------------------------- ------------
1998.................................................................. $ 974,640
1999.................................................................. $ 1,084,083
2000.................................................................. $ 1,072,775
2001.................................................................. $ 998,259
2002.................................................................. $ 1,033,884
Rent expense aggregated $571,000 in fiscal 1997, $400,000 in fiscal 1996 and
$253,000 in fiscal 1995.
12. RELATED PARTY TRANSACTIONS
The Company leases its current headquarters facility from K-M Properties, a
general partnership of which Walter P. Kistler, a director, is a partner. The
lease began in September 1995. Rent payments for fiscal 1997, 1996 and 1995 were
$348,000, $301,000 and $50,000, respectively.
13. GEOGRAPHIC SEGMENT INFORMATION
Major operations outside the United States consist of ADE, the Company's
wholly owned subsidiary in France. Certain information regarding operations in
this geographic segment is presented in the table below. Transfers between
geographic segments are made at arms-length prices consistent with rules and
regulations of governing tax authorities. The profits on these transfers are not
recognized until sales are made to non-affiliated customers.
Excluded from U.S. net sales are transfers from the U.S. to ADE of
$14,488,000, $6,404,000 and $2,925,000 in 1997, 1996 and 1995, respectively.
Included in U.S. sales are export sales to unaffiliated customers of $7,329,000,
$4,666,000 and $2,495,000 in 1997, 1996 and 1995, respectively.
36
13. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Total international sales were $30,611,000, $21,216,000 and $14,930,000 in
fiscal 1997, 1996 and 1995, respectively.
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
------------- ------------- -------------
Net sales:
United States................................. $ 69,921,043 $ 42,406,762 $ 19,281,763
Europe........................................ 23,282,488 16,550,231 12,434,609
------------- ------------- -------------
$ 93,203,531 $ 58,956,993 $ 31,716,372
------------- ------------- -------------
------------- ------------- -------------
Operating profit:
United States................................. $ 9,425,633 $ 5,209,722 $ 432,601
Europe........................................ 1,756,820 472,681 78,050
------------- ------------- -------------
$ 11,182,453 $ 5,682,403 $ 510,651
------------- ------------- -------------
------------- ------------- -------------
Identifiable assets:
United States................................. $ 66,394,754 $ 31,797,515 $ 8,930,769
Europe........................................ 8,799,139 4,912,158 5,012,261
------------- ------------- -------------
$ 75,193,893 $ 36,709,673 $ 13,943,030
------------- ------------- -------------
------------- ------------- -------------
14. QUARTERLY INFORMATION (UNAUDITED)
1997
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
Net sales................................................... $ 20,069 $ 22,073 $ 24,463 $ 26,599
Gross profit................................................ $ 5,971 $ 6,511 $ 7,066 $ 8,100
Net income.................................................. $ 1,661 $ 1,901 $ 2,262 $ 2,673
Net income per share........................................ $ 0.20 $ 0.21 $ 0.23 $ 0.27
1996
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
Net sales................................................... $ 10,606 $ 13,779 $ 15,186 $ 19,386
Gross profit................................................ $ 2,994 $ 3,735 $ 4,253 $ 6,088
Net income.................................................. $ 292 $ 716 $ 933 $ 1,489
Pro forma net income per share.............................. $ 0.04 $ 0.09 $ 0.11 $ 0.17
The fiscal year through October 15, 1996 reflects the Company's results of
operations as a wholly owned subsidiary of Interpoint.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III (Item 10, 11, 12 and 13) will be
included in the Registrant's Proxy Statement and is incorporated herein by
reference. Such Proxy Statement will be filed within 120 days of the
Registrant's last fiscal year end, October 31, 1997.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----
a. The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Accountants............................................................... 22
Consolidated Balance Sheets at October 31, 1997 and 1996........................................ 23
Consolidated Statements of Income for each of the three years in the period ended October 31,
1997.......................................................................................... 24
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the
period ended October 31, 1997................................................................. 25
Consolidated Statements of Cash Flows for each of the three years in the period ended October
31, 1997...................................................................................... 26
Notes to Consolidated Financial Statements...................................................... 27
(2) Supplemental Financial Statement Schedule for each of the three years in the period ended
October 31, 1997:
VIII--Valuation and Qualifying Accounts......................................................... 39
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
b. REPORTS ON FORM 8-K. None.
c. EXHIBITS. See page 40 for index to exhibits.
38
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR INCOME DEDUCTIONS* END OF YEAR
---------- ------------ ----------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE:
1997...................................................... $ 187,063 $ 166,666 $ 29,988 $ 323,741
1996...................................................... 53,455 212,205 78,597 187,063
1995...................................................... 54,008 26,450 27,003 53,455
ALLOWANCE FOR INVENTORY OBSOLESCENCE:
1997...................................................... 859,087 651,125 379,528 1,130,684
1996...................................................... 271,753 1,214,937 627,603 859,087
1995...................................................... 141,584 199,000 68,831 271,753
- ------------
* Deductions represent amounts written off against the allowance, net of
recoveries.
39
INDEX TO EXHIBITS
(ITEM 14C)
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
3.1 Restated Articles of Incorporation of ADIC (Exhibit 3.1)......................................... (A)
3.2 Restated Bylaws of ADIC (Exhibit 3.2)............................................................ (A)
4.1 Rights Agreement, dated as of August 12, 1996, between ADIC and ChaseMellon Shareholders
Services, L.L.C., as Rights Agent (Exhibit 4.2)................................................ (A)
10.1 Lease Agreement and Work Letter Agreement between The Quadrant Corporation and ADIC, dated as of
November 5, 1997...............................................................................
10.2* ADIC Bonus Plan..................................................................................
10.3 Lease Agreement between K-M Properties and ADIC, dated as of May 11, 1995........................ (B)
10.4 Tax Allocation Agreement between ADIC and Interpoint Corporation (Exhibit 10.2).................. (A)
10.5* ADIC 1996 Stock Option Plan (Exhibit 10.3)....................................................... (A)
10.6* ADIC 1996 Transition Plan (Exhibit 10.4)......................................................... (A)
10.7 Form of Indemnification Agreement, together with schedule of agreements.......................... (C)
21.1 Subsidiaries of the Registrant...................................................................
23.1 Consent of Independent Accountants...............................................................
27.1 Financial Data Schedule..........................................................................
- ------------------------
* Management contract or compensatory plan or arrangement.
(A) Incorporated herein by reference to designated exhibit to Form 10
Information Statement filed September 10, 1996.
(B) Incorporated by reference to Exhibit 10.3 of the Interpoint Corporation
Annual Report on Form 10-K for the fiscal year ended October 31, 1995.
(C) Incorporated herein by reference to Exhibit 10.5 of the Advanced Digital
Information Corporation Annual Report on Form 10-K for the fiscal year ended
October 31, 1996.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADVANCED DIGITAL INFORMATION
CORPORATION
(REGISTRANT)
By:/s/ PETER H. VAN OPPEN
----------------------------------------
Peter H. van Oppen
Chairman and
Chief Executive Officer
Dated: January 8, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
By /s/ LESLIE S. Treasurer and Chief January 8, 1998
ROCK Accounting Officer
- ------------------------------
Leslie S.
Rock
By /s/ CHRISTOPHER T. Director January 8, 1998
BAYLEY
- ------------------------------
Christopher T.
Bayley
By /s/ WALTER P. Director January 8, 1998
KISTLER
- ------------------------------
Walter P.
Kistler
By /s/ RUSSELL F. Director January 8, 1998
MCNEILL
- ------------------------------
Russell F.
McNeill
By /s/ JOHN W. Director January 8, 1998
STANTON
- ------------------------------
John W.
Stanton
By /s/ PETER H. VAN Chairman of the Board and January 8, 1998
OPPEN Chief Executive Officer
- ------------------------------
Peter H. van
Oppen
By /s/ WALTER F. Director January 8, 1998
WALKER
- ------------------------------
Walter F.
Walker
41