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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, 1998
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
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ADVANCED DIGITAL INFORMATION CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1618616
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
P.O. BOX 97057
11431 WILLOWS ROAD N.E. 98073-9757
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:
NAME OF EACH EXCHANGE
TITLE OF EACH 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 $146,072,880 as of December 31, 1998, based on the closing sale
price of such stock on the Nasdaq National Market on that date.
There were 9,776,349 shares of common stock outstanding as of December 31,
1998.
The Index to Exhibits appears on page 50.
Part III is incorporated by reference from the proxy statement to be filed
in connection with the 1999 Annual Meeting of Shareholders.
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ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including, without
limitation, statements containing the words "believes", "estimates", "expects",
"anticipates" and words of similar import. These statements constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements are subject to
numerous risks and are inherently uncertain as they are based on various
expectations and assumptions concerning future events. These uncertainties could
cause actual results to differ materially from those expected for the reasons
described below in Risk Factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
GENERAL
Advanced Digital Information Corporation and its subsidiaries ("ADIC" or the
"Company") is a leading provider of automated tape libraries, standalone storage
devices, software and technical services used to organize, protect and retrieve
electronic data. Primary applications for the Company's products include storage
of replicated backup copies and storage of archived or infrequently retrieved
information in client/server network and mainframe computing environments. The
Company integrates proprietary electro-mechanical robotics, library management
software, electronics hardware and firmware with technologically advanced tape
drives manufactured by third parties to provide highly automated data storage
protection. When used with the Company's storage management software or
third-party storage management software, these 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 PC-based (Windows NT and Novell NetWare), UNIX and
mainframe environments. The Company believes it offers the broadest product
range in its industry and has approximately 35,000 tape libraries installed.
Customers have implemented ADIC storage systems with typical capacities ranging
from 4 gigabytes to approximately 100 terabytes. The largest ADIC installations
extend up to multiple petabytes in capacity.
The Company's customers are located worldwide and range in size from large
multinational companies and major governmental and research installations to
small businesses. ADIC 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 30 regional field sales offices,
centralized systems engineering support in the U.S. and Europe as well as
approximately 80 field technical support personnel. Multiple third-party on-site
service agreements supplement the internal field service organization.
The Company was incorporated under the laws of the state of Washington in
August 1984. The Company's executive offices are located at 11431 Willows Road
N.E., Redmond, Washington 98052, and its telephone number at that location is
(425) 881-8004. ADIC can be also be reached by visiting its website at
WWW.ADIC.COM. ADIC acquired ADIC Europe SARL ("ADIC Europe" or "ADE") in June
1994 and acquired its ADIC Denver operation, formerly EMASS, Inc., ("EMASS") in
August 1998. As part of this acquisition, the Company also acquired 80 percent
of German-based ADIC/GRAU Storage Systems GmbH & Co. KG ("Grau") in August 1998.
INDUSTRY
CLIENT/SERVER NETWORK AND INTERNET 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.
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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 commerce, electronic mail, and groupware
continue to foster further client/server network computing growth. Rapid
escalation in the growth of electronic commerce creates significant demand for
on-line transaction processing as well as near-line retrieval and backup of this
transaction volume. The combination of these trends is driving a proliferation
of client/server network computing and related opportunities for ADIC products.
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 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.
MAINFRAME AND VERTICAL MARKET APPLICATIONS
The Company continues to participate in backup and archiving solutions for
traditional mainframe environments and sees substantial opportunity in specific
vertical markets. Automated storage solutions have long been established in the
mainframe computer markets and, while experiencing slower growth rates than the
client/server applications, are expected to continue to grow. The Company
pioneered development of software and hardware to support automated storage
applications for many highly demanding military and telecommunications
applications. In particular, ADIC products provide both the large capacities and
the complex hardware and software required to support multiple storage media
solutions in a single storage system. Many installations include optical,
half-inch, DLT or other storage formats adapted to suit a particular customer
requirement. Specific vertical markets where the Company believes it has
significant market share or opportunity include fossil fuel exploration,
governmental, scientific research and audio/visual applications. Such
applications require specialized focus and support from systems engineering and
technical service resources.
AUTOMATED TAPE LIBRARIES
The Company believes automated tape libraries, which operate in conjunction
with storage management software and incorporate magnetic tape drive or other
storage technology, provide the best systematic and cost-effective backup
solution for client/server networks and certain mainframe applications. 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.
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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 or other removable media 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. Certain large libraries are designed to allow incorporation
of more than one type of tape or optical media. Other libraries feature a
barcode system which, in conjunction with the storage management software, can
catalog each tape or optical disk, 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
governmental 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. In addition, the Company
continually monitors progress among the leading companies developing high
density storage devices and attempts to work with such developers to assure
long-term compatibility between the Company's products and whatever removable
storage technologies that may emerge.
STORAGE MANAGEMENT SOFTWARE
Although the Company expects that the majority of storage solutions based on
its hardware products will rely on third-party storage management software, ADIC
does expect to substantially grow the installed base of its own proprietary
software products and increase the capability and market potential of those
products. The Company's AMU library management product enables enhanced library
utilization across multiple, heterogeneous host servers. The AMASS Storage
Management System is an integrated family of products for data intensive
computing environments. AMASS provides network storage management functionality
including high performance direct access to libraries and distributed
client/server Hierarchical Storage Management ("HSM"). It is presently available
and installed in major UNIX applications world-wide and the Company has
announced a Windows NT version for delivery during calendar 1999.
Development of enhanced software tools is an integral part of the Company's
product strategy. Future library management software products may enable
additional functionality including remote diagnostics and "call home" error
reporting. A substantial proportion of research and development expenses are
focused in the storage management software area. ADIC's objective is to
supplement and enhance, rather than displace, available third-party storage
management software.
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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 software products to the
client/server network and mainframe 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, software and
standalone drive products available for the client/server network marketplace.
Available storage capacities range from four gigabytes to multiple petabytes.
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 INTEGRATED SOFTWARE SOLUTIONS. The Company believes that a
combination of state-of-the-art hardware and software provides the highest value
to the end user. Further, the Company believes that software is an increasingly
important element in the management of data and of storage peripherals. ADIC has
announced agreements to resell specialized storage software from other
suppliers, has invested in software vendors, has cultivated partnership
relationships with the major backup software providers and is investing heavily
in the development and enhancement of its own proprietary software products.
OFFER PRODUCTS IN MULTIPLE DRIVE TECHNOLOGIES. The Company offers automated
tape libraries based on major magnetic tape drive technologies, including D2,
half-inch, 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 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 in addition to its own software products.
LEVERAGE TECHNOLOGY ACROSS PRODUCTS. The Company is able to leverage
approximately a decade of automated tape library and software 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, programming
languages and structure, communications protocols, electronic hardware, and
electro-mechanical hardware. The Company's FastStor tape storage system and
forthcoming AMASS NT storage management software feature the most recent
generations of technology in many of these respects. 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, common programming code, 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
5
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
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. It markets Fibre
Channel interconnection solution products developed with Crossroads Systems,
Inc. ("Crossroads") under the ADIC brand name. This partnership allows 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, and has announced
partnerships with VERITAS Software, Inc. and Network Integrity, Inc. 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 automated tape libraries integrate proprietary
electro-mechanical robotics, library management software, 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 or with the Company's proprietary
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.
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Storage product prices vary from approximately $1,000 to more than
$1,000,000, depending on the drive technology, number of drives and capacity
selected. Drive technologies include D2, half-inch, DLT, 8mm/SDX, 4mm/DAT and
8mm formats with the number of drives per unit varying from one to dozens of
drives. Capacities range from four gigabytes to multiple petabytes.
STORAGE MANAGEMENT SOFTWARE
The majority of the Company's products are installed on client/server
computer networks in conjunction with storage management software provided by a
third party. 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 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 systems engineering lab has a large
variety of storage management software products running in-house in order to
perform ongoing compatibility testing.
The Company's in-house software development team is actively engaged in
developing and enhancing proprietary software products which, when used with
hardware products from ADIC or other vendors, may provide an integrated storage
solution. Such products include AMASS, AMASS for NT, Data Manager, File Manager
and other software designed to organize, protect and retrieve electronic data in
an automated file system. All of the Company's software products are certified
to operate in conjunction with the Company's hardware products but may also be
certified to operate with hardware products provided by competitors.
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
sales force operating out of its headquarters office in Redmond, Washington plus
more than 20 regional field sales offices in North America and ten international
offices located across Europe. The majority of Company products are sold under
the ADIC brand name but significant quantities may be sold under the names of
various OEM customers including Dell Computer, Siemens, Unisys and Exabyte. In
addition, certain products produced under the recently acquired EMASS or Grau
name are still undergoing a re-badgeing to the ADIC name which will be completed
during the first calendar quarter of 1999.
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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
Bell Micro Corporation. For the fiscal year ended October 31, 1998, Ingram Micro
Incorporated and Tech Data Corporation represented 22% and 15%, 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
1998, 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.
OEMS
The Company sells its products to several companies under a private label or
OEM relationship. These companies generally resell the products under their own
brand name, sometimes after technically enhancing the product to target a
specific market, performance, or application niche. Private labelers and OEMs
typically assume responsibility for product sales, service and support. These
relationships enable the Company to reach end users not served by its other
reseller distribution channels and to serve select geographic or vertical
markets where specific OEMs have exceptional strength. In certain cases, OEMs
may sell product under the ADIC name like a reseller as well as under their own
name. The Company maintains ongoing discussions with private labelers and OEMs,
including leading systems suppliers, regarding opportunities with the Company's
products. Existing OEM relationships include Dell Computer, Siemens, Unisys,
Exabyte and other companies.
CORPORATE SALES
The Company maintains direct corporate sales relationships with a number of
large national and multinational companies based in North America and Europe,
including financial institutions, oil companies, 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 and archival needs and then
recommends 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.
ADIC also maintains direct sales relationships with a number of large
government and private entities where the scale or confidentiality of required
storage solutions is such that the customer's needs are best served by working
directly with the Company.
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CORPORATE MARKETING
The Company supports its channel sales and its direct field sales 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 a 24-hour internal technical
support organization. Technical support personnel are available to all customers
at no charge via telephone, facsimile, and email 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. Support staff is
located principally in Washington, Colorado and Germany with phone calls being
routed to the location with the most timely available expertise. Smaller library
products with problems not resolved via telephone support may be returned to the
Company for repair or replacement during the warranty period. 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, third-party 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. The Company views this system
engineering capability as opportunity for growth as it allows ADIC to provide
and support storage solutions with the highest level of complexity and value to
the customer.
ON-SITE SERVICE. The Company uses its own 80-person field service team and
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. Most of the mid-range and larger automated
libraries are sold including at least one year of on-site service. Post-warranty
service has become an increasingly important source of customer loyalty and
revenue as the Company's installed base has grown. Between five and ten percent
of overall fiscal 1999 Company revenue is expected to be service related.
TRAINING. The Company offers a comprehensive training program to resellers
and end users. Training classes are conducted at the Company's Denver location
as well as at the headquarters location and on-site at reseller and end-user
locations worldwide.
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WARRANTY. For standard Company products, parts and labor are covered under
warranty for periods between three months and three 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.
RESEARCH AND DEVELOPMENT
The Company's research and development team has developed multiple product
generations of automated tape library and software 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. Software
products rely on a comprehensive understanding of multiple operating system
environments, programming techniques, file management structures, communication
protocols, user applications and needs as well as other potentially conflicting
applications.
The Company's new product development is frequently stimulated by the
availability of an enhanced or new tape drive or other removable media
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 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 continually monitors
progress in development of alternative removable media technologies which may be
incorporated into its products.
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 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 AMASS NT storage management system is entirely new software but
the logic and structure are based heavily on AMASS UNIX products which have been
through multiple generations of development over the past several years. Company
engineers also 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 $4,483,000, $2,909,000
and $1,542,000 for fiscal years 1998, 1997, and 1996, respectively and are
expected to be significantly higher in fiscal 1999.
10
MANUFACTURING
The Company has manufacturing facilities in Washington, Colorado and
Germany. The Redmond, Washington factory is ISO 9001 certified and responsible
for building all mid-range to lower-range libraries including the FastStor
product. Numerous existing and potential OEM customers, including Dell Computer
have audited the Redmond plant. Scalar 1000 tape libraries are built in our
Englewood, Colorado facility while the high-end libraries are built in
Bohmenkirch, Germany. All these plants have processes that 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 facilitating 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. Larger
libraries often have longer lead times and include on-site integration and
acceptance. However, the Company fills the majority of its orders as they are
received and therefore believes that its backlog levels are not indicative of
future sales. See "Risk Factors--Dependence on Certain Suppliers."
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. The market
for storage management software is similarly fragmented and competitive.
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, software
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 over a decade of library and software 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 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, copyright and trademark laws,
trade secrecy, confidentiality procedures, and contractual provisions to protect
its intellectual property rights. There can
11
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,
1998, 1997, and 1996 totaled $37,929,000, $30,611,000 and $21,216,000
respectively, with the majority of these sales occurring in Europe. European
sales are transacted out of ADIC Europe for all three fiscal years as well as
from Grau subsequent to the acquisition of EMASS, Inc. (now ADIC Denver) in
August 1998. See Note 17 to the Company's Consolidated Financial Statements
included as Item 8 of this Form 10-K and "Risk Factors-- International
Operations."
TEAM MEMBERS (EMPLOYEES)
As of October 31, 1998, the Company had 566 full-time Team Members,
including 112 in sales and marketing, 84 in engineering and research and
development, 118 in systems engineering, customer service and technical support,
189 in manufacturing and operations, and 63 in finance, general administration,
and management. None of the Company's North American Team Members are 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 Team Members (Employees)."
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, shipped and accepted during the quarter. A large
portion 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.
The Company's quarterly revenue and results of operations have been 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
12
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 recent levels of quarterly
revenue and net income, as normalized for unusual or one-time items, will be
sustained, or that the Company will maintain 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 and storage management software in particular are 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,
software 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 markets for the Company's products are characterized by significant
price competition. During fiscal year 1998, the Company reduced prices on
certain library and other products, and the Company anticipates that its
products will face increasing price pressure in the future. 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 1998,
1997 and 1996 from the sale of its DLT tape-related products, including
associated media, and the Company expects to continue to derive a substantial
amount of 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.
DEPENDENCE ON CERTAIN SUPPLIERS
The Company does not possess proprietary magnetic tape drive or other
storage 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
13
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.
Additionally, in September 1998, Quantum acquired ATL Products, Inc.
("ATL"). ATL designs, manufactures, markets and services automated tape
libraries which compete with certain of the Company's small and mid-range
library products. In addition to the risk that these competitive products may be
manufactured and marketed more successfully than the Company's products,
especially with greater access to financial and other resources, there is an
additional risk that ATL's ownership by Quantum may cause Quantum not to be able
to meet the Company's demand for DLT drives and media, or may cause such drives
and media to be provided at less competitive prices.
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 being developed may not be
introduced on a timely basis, which may cause the Company's business to 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 automated tape libraries, storage
management software 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. For the smaller and mid-range libraries, these VARs 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, 1998, Ingram Micro and Tech Data represented 22% and 15%,
respectively, of the Company's net sales. The Company has no long-term orders
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
14
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 of 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.
The Company expects to realize significant growth from individual partnering
and OEM sales agreements including those with Dell Computer, Siemens, Crossroads
Systems, Network Integrity, Inc., Exabyte, Unisys and other companies. These
relationships are vulnerable to changes in technology, competitive factors,
management disruption, delivery disruptions, delayed product development and
other events that may prevent such relationships from fulfilling their
potential.
Sales of the Company's large libraries, and the revenue associated with the
on-site service of those libraries are somewhat concentrated in specific
customers, including Raytheon Company, the former parent company of EMASS. There
can be no assurance that these customers will continue to purchase the Company's
products or that the change of ownership of EMASS will not negatively affect the
customer relationship. The lack of future sales to these customers could have a
material adverse effect on the successful integration of the former EMASS
business and on the Company's business, financial condition and results of
operations.
ACQUISITIONS
During fiscal 1998, the Company acquired EMASS, now known as ADIC Denver,
along with its subsidiary Grau and may consider additional acquisitions in the
future. The acquisition of ADIC Denver entails a number of risks, including
successful integration of its operations, technologies and products, retention
of key customers and Team Members, and managing a larger and more diverse
business, a portion of which is in markets where the Company has no or limited
direct prior experience. In addition, acquisitions risk diverting management
attention from normal daily operations of the business. Failure to successfully
integrate this and other acquisitions the Company may make could materially
adversely affect the Company's business, financial condition and results of
operations.
ACQUIRED IN-PROCESS TECHNOLOGY
In accordance with applicable accounting rules, the cost to acquire ADIC
Denver and Grau was allocated to their respective assets and liabilities based
on their fair value. The Company's analysis of fair value included a valuation
of acquired in-process technology and other intangible assets. Valuation of
these assets was performed by an independent third-party appraisal company.
While the Company believes that the allocation of the purchase price to acquired
in-process technology was correct and conservative, allocations by technology
companies to acquired in-process technology in other purchase accounting
applications have recently received increased scrutiny by the Securities and
Exchange Commission. If the SEC questions the valuation, there can be no
assurance that the Company's allocation of approximately $4.5 million will
remain unchanged. A change in the valuation of acquired in-process technology
may have a material adverse effect on the Company's results of operations.
SUSTAINING AND MANAGING GROWTH
The Company has undergone 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
15
technical personnel. If the Company is unable to manage growth effectively or
hire and retain qualified personnel, the Company's business, financial condition
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 1998. 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. Currently,
approximately one-half 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.
The remaining portion of the Company's international sales are denominated in
foreign currencies, primarily the German deutsche mark. 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 the Company's
international subsidiaries, are denominated in their local currencies. 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.
CONVERSION TO SINGLE EUROPEAN CURRENCY
On January 1, 1999, certain member states of the European Economic Community
fixed their respective currencies to a new currency, commonly known as the Euro.
During the three years beginning January 1, 1999, business in these countries
will be conducted both in the existing national currency, such as the French
franc or the German deutsche mark, as well as the Euro. ADIC will need to ensure
that its financial and other software systems are capable of processing
transactions and properly handling the existing currencies and the Euro. The
Company is still assessing the impact that the introduction and use of the Euro
will have on its internal systems. The Company does not presently expect the
introduction and use of the Euro will materially affect the Company's business.
However, if the Company encounters unexpected difficulties, the Company's
business could be adversely affected.
DEPENDENCE ON KEY TEAM MEMBERS (EMPLOYEES)
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.
16
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 certain 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 warranties on its products for varying
lengths of time, but excludes 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 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
17
significantly in the future. 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 Company's Common Stock.
YEAR 2000
The Company believes that purchasing patterns of customers and potential
customers of the Company may be affected by Year 2000 compliance issues as
organizations expend significant resources to correct their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funding available to such entities for other information technology purchases,
such as those products and services offered by the Company. Furthermore,
customers and potential customers may defer information technology purchases
generally until early in the next millennium to avoid Year 2000 compliance
problems. Any such deferral of purchases by the Company's customers or potential
customers could have a material adverse effect on the Company's business,
operating results and financial condition. See additional Year 2000 risk factors
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company--Year 2000."
ITEM 2. FACILITIES
The Company currently leases facilities in Redmond, Washington and
Englewood, Colorado for 65,000 square feet and 86,000 square feet, respectively.
The Redmond facility currently houses the primary executive offices of the
Company; both facilities house marketing, sales, customer support, research and
development, systems engineering, and manufacturing organizations. The Company
owns a manufacturing facility in Bohmenkirch, Germany for the production of its
large libraries. There are additional leased facilities throughout the United
States for the Company's regional sales offices and customer service and support
personnel. An additional leased facility in Redmond, Washington serves certain
warehouse needs. Finally, the Company leases regional sales offices in Paris,
France, Frankfurt, Germany and London, UK for the sales, marketing, and customer
support organizations serving Europe, the Middle East, and Africa.
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.
18
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDERS MATTERS
The Company's Common Stock commenced trading on the Nasdaq Stock National
Market under the symbol ADIC on October 17, 1996. As of October 31, 1998, there
were approximately 285 shareholders of 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.
HIGH LOW
--------- --------
Fiscal Year 1998
1st Quarter............................. $20 1/2 $13 9/16
2nd Quarter............................. $19 15/16 $14
3rd Quarter............................. $20 1/2 $ 8 3/4
4th Quarter............................. $13 7/8 $ 6 1/8
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.
19
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 Corporation. Subsequent to October 15, 1996, the selected
financial data relates 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
FISCAL YEAR ENDED
OCTOBER 31,
--------------------------------------------
1998(1) 1997 1996 1995 1994(2)
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales....................................................................... $114,557 $93,204 $58,957 $31,716 $20,083
Gross profit.................................................................... 33,168 27,648 17,070 9,609 6,588
Acquired in-process technology.................................................. 4,492 -- -- -- --
Acquisition expenses............................................................ -- -- -- -- 590
Income (loss) before provision (benefit) for income taxes....................... 4,729 12,663 5,288 215 (142)
Net income (loss)............................................................... 1,530 8,497 3,430 292 (42)
Basic net income per share(3)................................................... $ 0.16 $ 0.94
Diluted net income per share(3)................................................. $ 0.16 $ 0.92
Basic pro forma net income per share(3)(4) (unaudited).......................... $ 0.43 $ 0.04
Diluted pro forma net income per share(3)(4) (unaudited)........................ $ 0.42 $ 0.04
CONSOLIDATED BALANCE SHEETS:
Working capital................................................................. $ 66,582 $53,358 $24,596 $ 7,249 $ 4,156
Total assets.................................................................... 112,407 75,194 36,710 13,943 8,710
Long-term debt and loan from Interpoint, excluding current portion.............. 18,368 -- -- 5,434 2,358
Shareholders' equity............................................................ 63,003 60,110 26,387 3,387 3,027
- ------------------------
(1) The Statement of Operations for fiscal year 1998 includes the results of
EMASS, Inc. for the period from August 19, 1998, date of EMASS' acquisition,
to October 31, 1998.
(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) Earnings per share and pro forma earnings per share data has been restated
for fiscal years 1997, 1996 and 1995 to conform with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
(4) 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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
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.
GENERAL
Advanced Digital Information Corporation is a leading drive-independent
manufacturer of innovative tape-based storage products and specialized storage
management software that integrate into a wide range of rapidly evolving network
computing environments. Our products are designed to help our customers
organize, protect and retrieve electronic information. The Company designs,
manufactures, sells and supports specialized data storage hardware and software
products.
In August 1998, the Company acquired EMASS, Inc. in a transaction accounted
for as a purchase. The operating results of EMASS, now operated as ADIC Denver
and ADIC/Grau have been included since the date of the acquisition.
FISCAL YEAR 1998 COMPARED TO 1997
NET SALES. Net sales in fiscal year 1998 increased 23% to $114.6 million
compared with net sales of $93.2 million in fiscal year 1997. The increase in
net sales relates both to an increase in sales of small libraries and to the
inclusion of EMASS sales in the fourth quarter of the year. The increase in
small library sales is due in part to the Company's OEM sales under agreements
entered into during the fiscal year. These OEM sales consisted primarily of the
FastStor products introduced in the final quarter of fiscal 1997. The transition
during the year of DLT tape drives, supplied by Quantum, from a condition of
supply constraint to one of general availability resulted in a reduction in the
Company's sales of standalone DLT tape drives and a reduction in sales to the
Company's distributors and resellers as they reduced their inventories. In
addition, the Company lowered prices on certain library and other products,
further decreasing sales dollars. Sales to the Company's top two customers were
37% of net sales in fiscal 1998 compared to 47% in fiscal year 1997.
International sales were $37.9 million in fiscal 1998, accounting for 33% of net
sales in both fiscal years 1998 and 1997.
GROSS PROFIT. Gross profit decreased to 29% in fiscal year 1998 from 30% in
fiscal 1997. The decrease is the result of many factors including higher
overhead associated with the new Redmond facility, increases in personnel to
support the OEM business, and lower than anticipated product revenues,
particularly in the third quarter. It is further decreased by the effect of
certain product price reductions. These factors more than offset the benefit of
the shift in product mix toward higher-margin libraries and away from
lower-margin standalone products. The gross profit percentage in the fourth
quarter benefited from the larger libraries and software sales of EMASS but also
reflected a $513,000 charge to cost of goods sold as a result of purchase
accounting adjustments to record EMASS acquired inventory at its fair market
value. 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 it's current gross
margin levels, given that tape drives purchased from third-party suppliers are a
significant component of the Company's product costs.
21
SELLING AND ADMINISTRATIVE EXPENSES. Sales and administrative expenses in
fiscal 1998 were $20.8 million or 18% of sales, compared with $13.6 million or
15% of sales in fiscal year 1997. The increase is due in part to the inclusion
of EMASS expenses from August 19 to October 31, 1998, but also to an increase in
costs in the previous ADIC business. This increase related to increased sales
personnel in the headquarters, regional and international sales offices,
increased advertising and promotion costs and also increased costs associated
with the new headquarters facility. In addition, the acquisition of EMASS caused
the Company to have certain duplicative assets. These assets consequently were
written off subsequent to the acquisition.
ACQUIRED IN-PROCESS TECHNOLOGY. In connection with the purchase of EMASS,
the existence of acquired in-process technology was determined and valued by an
independent third-party appraisal. The value associated with this intangible
asset, $4.5 million, was expensed immediately. This valuation is based upon
estimates by the Company and actual results may change. If the estimate of the
in-process technology were to decrease, the value assigned to property, plant
and equipment and intangible and other assets acquired would increase. The
Company expects to incur significant costs to develop the acquired in-process
technology into commercially viable products. Such expenses subsequent to August
1998 are included in research and development expenses. See "Risk
Factors--Acquired In-Process Technology."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$4.5 million or 4% of net sales for the year ended October 31, 1998 compared to
$2.9 million or 3% of net sales for fiscal 1997. The dollar and percentage
increases are both related to EMASS which has significant expenditures
associated with both hardware and software in-process technology. The Company
expects that research and development expenses in fiscal 1999 will be
significantly greater both in absolute dollars and as a percentage of net sales
than previously recorded.
OTHER INCOME (EXPENSE). Interest income of $1.0 million for fiscal 1998 was
comparable to fiscal 1997 interest income of $1.1 million. Interest expense
incurred in fiscal 1998 of $311,000 represented interest from August 19 to
October 31, 1998 on a bank loan, the proceeds of which were used to finance the
acquisition of EMASS. The gain on sale of marketable securities relates to
investments in certain equity securities made and sold in fiscal 1998. Foreign
currency gains or losses arise as a result of the operation of the Company's
European subsidiaries, ADIC Europe and Grau, the functional currencies of which
are the French franc and German deutsche mark, respectively. All monetary assets
are translated into the functional currencies on the financial statements of
ADIC Europe and Grau. ADIC Europe buys products from ADIC in U.S. dollars and
resells a significant majority of such products in U.S. dollars. Grau both buys
and sells products to EMASS in U.S. dollars. Grau's sales are primarily in
deutsche marks, the sales of its subsidiaries in U.K. and France, which act as
sales offices in those countries, are made primarily in British pound sterling
and French francs, respectively. Certain of the U.S. dollar receivables and
payables in these entities offset. To the extent that these monetary assets and
liabilities do not fully offset each other and the U.S. dollar exchange rate
changes with respect to these currencies, 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. The effective tax rate for fiscal year 1998 was
67%. The expense associated with the write-off of acquired in-process technology
is not deductible for state or federal income tax purposes. Without this
expense, the effective tax rate would be 34%. There are significant deferred tax
assets associated with net operating loss carryforwards and other timing
differences of EMASS and Grau. A valuation allowance has been established on
these deferred tax assets because it is more likely than not that the deferred
assets related to EMASS and Grau will not be realized. In the event that future
earnings of these companies allows the Company to deduct these expenses for tax
purposes and recognize these assets, the Company will reallocate the purchase
price to reduce noncurrent intangible assets related to the acquisition.
22
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.
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% 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.
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
fiscal 1997 was higher than fiscal 1996 due to increases in development expenses
for the FastStor products released in the final quarter of fiscal 1997 as well
as the Scalar 218 series, and additions to research and engineering staff.
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 1997 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $28.2 million at October 31,
1998 and represented 25% of total assets. Its working capital, the difference
between current assets and current liabilities is $66.6 million, with a ratio of
current assets to current liabilities of over 3:1. The Company's operating
activities generated $4.4 million of cash in fiscal 1998 compared to $2.7
million generated in fiscal 1997 and net usage of cash from operating activities
of $3.5 million in fiscal 1996. In each of the three years, operating cash was
used primarily to fund increases in accounts receivable and inventories and was
offset by net income, depreciation and other reserves and accounts payable.
Additionally, in fiscal 1998, net income was reduced by the write-off of
acquired in-process technology, a non-cash item.
23
The Company's investing activities used cash of $28.7 million in fiscal
1998, primarily associated with the acquisition of EMASS in August 1998. In
connection with this acquisition, the Company acquired assets with a fair value
of $38.9 million, and assumed $13.9 million of liabilities. Included with EMASS'
assets was $1.6 million in cash. Additionally, the Company invested in property,
plant and equipment, primarily associated with the new headquarters facility and
various technology additions and upgrades and also invested in certain
marketable equity securities, some of which were sold later in the year. In
August 1998, the Company received proceeds from long-term borrowings of $20.0
million.
In August 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 March 1997, the
Company completed a public offering of stock which provided cash of $23.7
million. In fiscal 1996 the Company financed its growth through loans from
Interpoint, and the net increases in the amount of such loans was $4.2 million.
Prior to Interpoint's distribution of Company stock, 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 October 31, 1998, ADIC had a $10.0 million bank line of credit that
expires in February 2001, all of which was available. Any borrowings under this
line of credit would bear interest at the bank's reference (prime) rate or
adjusted LIBOR rate. The Company had no material or unusual commitments as of
October 31, 1998 other than annual rental commitments.
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 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.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems and the inability of many of these products to
distinguish between twentieth-century dates and twenty-first century dates to
determine the applicable year. This error could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company is actively assessing the
impact of the upcoming change on its business, financial condition and results
of operations.
Based on the Company's assessment to date, the Company believes the current
versions of its software and hardware products and services are Year 2000
compliant. New products are being designed to be Year 2000 compliant. While most
of the Company's internally manufactured library products have no date
functionality built into them, this is not true for certain software and large
library products. Year 2000 compliant updates are available for most of these
products, those that are currently unavailable are scheduled for release early
in 1999. The Company is reviewing hardware used in connection with its products
for those customers with current service maintenance contracts. Plans exist to
replace certain systems that can not be made compliant and upgrade those that
can. There can be no assurance, however, that all existing Company products will
contain all necessary date codes. Further, use of the Company's products in
connection with other products which are not Year 2000 compliant, including
non-compliant hardware, software and firmware may result in the inaccurate
exchange of dates and result in performance problems or system failure. Any
failure of the Company's products to perform could result in claims against the
Company. The cost of defending any such claim which may arise, as well as any
liability of the
24
Company for Year 2000 related damages could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company's business depends on numerous systems that could potentially be
impacted by Year 2000 related problems. The Company is assessing the possible
effects on the Company's operations of the Year 2000 readiness of its enterprise
resource planning computer systems and other internal systems. The Company
believes that the enterprise resource planning computer systems at its various
manufacturing sites are either Year 2000 compliant currently or can be modified
to ensure compliance. Other internal systems are currently being assessed, and
based on such assessment the Company will modify or replace such systems. The
Company expects the assessments and tests of these systems to be completed in
mid-1999.
The Company's reliance on key suppliers, and therefore on the proper
function of their information systems and software, means that their failure to
address Year 2000 issues could have a material impact on the Company's
operations and financial results. The Company has asked key suppliers to provide
information regarding their readiness for Year 2000 related issues. The Company
is reviewing the responses and will determine what further actions are required
to mitigate vulnerability to problems with suppliers and other third parties'
systems.
The Company expects to incur primarily internal staff cost and other
expenses related to infrastructure and facilities enhancements necessary to
prepare the systems for Year 2000. To date there have been no material direct
out-of-pocket costs. Although the total cost of these Year 2000 compliance
activities is not yet determined, it is not anticipated to be material to the
Company's business, results of operations and financial condition. The Company
has not completed a contingency plan for handling Year 2000 problems that are
not detected and corrected prior to their occurrence. Any failure of the Company
to address any unforeseen Year 2000 issue could adversely affect the Company's
business, financial condition and results of operations.
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Accountants...................................................... 26
Consolidated Balance Sheets at October 31, 1998 and October 31, 1997................... 27
Consolidated Statements of Income for each of the three years in the period ended
October 31, 1998..................................................................... 28
Consolidated Statements of Changes in Shareholders' Equity for each of the three years
in the period ended October 31, 1998................................................. 29
Consolidated Statements of Cash Flows for each of the three years in the period ended
October 31, 1998..................................................................... 30
Notes to Consolidated Financial Statements............................................. 32
25
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
subsidiaries at October 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
1998, 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.
PricewaterhouseCoopers LLP
Seattle, Washington
December 8, 1998
26
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
------------------------------
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 28,225,892 $ 32,806,822
Accounts receivable, net of allowances of $476,000 in 1998 and $324,000 in
1997......................................................................... 31,797,375 18,078,302
Inventories, net............................................................... 32,293,526 16,074,787
Marketable equity securities................................................... 2,135,449 --
Prepaid expenses and other..................................................... 1,500,145 714,979
Deferred income taxes.......................................................... 1,339,879 767,688
-------------- --------------
Total current assets......................................................... 97,292,266 68,442,578
Property, plant and equipment, net............................................... 7,351,305 2,509,267
Deferred income taxes............................................................ 62,681 89,414
Investment in Crossroads Holding Corp............................................ 4,000,000 4,000,000
Intangible and other assets...................................................... 3,700,374 152,634
-------------- --------------
$ 112,406,626 $ 75,193,893
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 16,986,445 $ 11,237,131
Accrued liabilities............................................................ 7,901,981 2,594,831
Income taxes payable........................................................... 397,539 1,252,324
Deferred revenue............................................................... 2,252,106 --
Current portion of long-term debt.............................................. 3,172,328 --
-------------- --------------
Total current liabilities.................................................... 30,710,399 15,084,286
Long-term debt................................................................... 18,368,092 --
Other long-term liabilities...................................................... 300,000 --
Minority interest................................................................ 24,744 --
Commitments (Note 15)............................................................ -- --
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, 9,766,161 issued and
outstanding at October 31, 1998 (9,699,824 in 1997).......................... 46,231,387 45,808,291
Retained earnings.............................................................. 16,009,334 14,479,104
Cumulative translation adjustment.............................................. 762,670 (177,788)
-------------- --------------
Total shareholders' equity................................................... 63,003,391 60,109,607
-------------- --------------
$ 112,406,626 $ 75,193,893
-------------- --------------
-------------- --------------
See the accompanying notes to these consolidated financial statements
27
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31,
--------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Net sales.......................................................... $ 114,556,941 $ 93,203,531 $ 58,956,993
Cost of sales...................................................... 81,388,832 65,555,559 41,886,619
-------------- ------------- -------------
Gross profit..................................................... 33,168,109 27,647,972 17,070,374
-------------- ------------- -------------
Operating expenses:
Selling and administrative....................................... 20,792,883 13,556,059 9,846,324
Acquired in-process technology................................... 4,492,056 -- --
Research and development......................................... 4,483,145 2,909,460 1,541,647
-------------- ------------- -------------
29,768,084 16,465,519 11,387,971
-------------- ------------- -------------
Operating profit................................................... 3,400,025 11,182,453 5,682,403
-------------- ------------- -------------
Other income (expense):
Interest income.................................................. 1,027,934 1,095,991 19,459
Interest expense................................................. (311,054) -- (527,951)
Gain on sale of marketable equity securities..................... 247,814 -- --
Foreign currency transaction gains, net.......................... 364,020 384,972 113,821
-------------- ------------- -------------
1,328,714 1,480,963 (394,671)
-------------- ------------- -------------
Income before provision for income taxes........................... 4,728,739 12,663,416 5,287,732
-------------- ------------- -------------
Provision (benefit) for income taxes:
Current.......................................................... 3,719,222 4,538,494 1,981,631
Deferred......................................................... (545,457) (372,276) (124,098)
-------------- ------------- -------------
3,173,765 4,166,218 1,857,533
-------------- ------------- -------------
Minority interest.................................................. 24,744 -- --
-------------- ------------- -------------
Net income......................................................... $ 1,530,230 $ 8,497,198 $ 3,430,199
-------------- ------------- -------------
-------------- ------------- -------------
Basic net income per share......................................... $ 0.16 $ 0.94
-------------- -------------
-------------- -------------
Diluted net income per share....................................... $ 0.16 $ 0.92
-------------- -------------
-------------- -------------
Pro forma basic net income per share (unaudited)................... $ 0.43
-------------
-------------
Pro forma diluted net income per share (unaudited)................. $ 0.42
-------------
-------------
See the accompanying notes to these consolidated financial statements
28
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996
COMMON STOCK CUMULATIVE
------------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
---------- ------------- ------------- ----------- -------------
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
Shares repurchased........................ (29,500) (200,258) (200,258)
Purchases under Stock Purchase Plan....... 22,499 142,236 142,236
Exercise of stock options, including tax
benefit of $317,472..................... 73,338 481,118 481,118
Net income................................ 1,530,230 1,530,230
Foreign currency translation adjustment... 940,458 940,458
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1998............... 9,766,161 $ 46,231,387 $ 16,009,334 $ 762,670 $ 63,003,391
---------- ------------- ------------- ----------- -------------
---------- ------------- ------------- ----------- -------------
See the accompanying notes to these consolidated financial statements
29
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $1,530,230 $8,497,198 $3,430,199
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 1,614,373 847,234 607,479
Allowance for doubtful accounts receivable............................. 151,909 136,678 133,608
Allowance for inventory obsolescence................................... 1,014,051 271,597 587,334
Acquired in-process technology......................................... 4,492,056 -- --
Gain on sale of marketable equity securities........................... (247,814) -- --
Deferred income taxes.................................................. 1,229 (372,276) (124,098)
Assets retired......................................................... 89,177 -- --
Change in assets and liabilities, net of effects from purchase of EMASS,
Inc.:
Accounts receivable.................................................... (3,202,489) (5,561,698) (7,133,048)
Inventories............................................................ (1,974,716) (5,550,102) (6,190,465)
Prepaid expenses and other............................................. 225,322 (443,687) (60,355)
Other assets........................................................... (71,123) 39,424 24,221
Accounts payable....................................................... 2,710,791 2,824,342 4,544,059
Accrued liabilities.................................................... (1,679,326) 1,052,028 649,061
Income taxes payable................................................... (489,382) 1,006,809 49,692
Deferred revenue....................................................... 194,755 -- --
---------- ---------- ----------
Net cash provided by (used in) operating activities........................ 4,359,043 2,747,547 (3,482,313)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................................ (3,362,582) (1,831,493) (910,718)
Investment in marketable equity securities............................... (3,003,908) -- --
Proceeds from sale of marketable equity securities....................... 1,116,273 -- --
Acquisition of EMASS, Inc., net of cash acquired......................... (23,472,834) -- --
Investment in Crossroads Holding Corp.................................... -- (4,000,000) --
---------- ---------- ----------
Net cash used in investing activities...................................... (28,723,051) (5,831,493) (910,718)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings....................................... 20,000,000 -- --
Repayment of long-term debt.............................................. (544,858) -- --
Proceeds from issuance of common stock, net.............................. -- 23,708,784
Repurchase of common stock............................................... (200,258) -- --
Capital contribution from Interpoint, net of loans forgiven.............. -- 266,503 10,000,000
Proceeds from issuance of common stock for stock options and stock
purchase plan.......................................................... 305,882 1,503,198 --
Net increase in loans from Interpoint.................................... -- -- 4,218,366
---------- ---------- ----------
Net cash provided by financing activities.................................. 19,560,766 25,478,485 14,218,366
---------- ---------- ----------
Effect of exchange rate changes on cash.................................... 222,312 (24,500) (12,390)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....................... (4,580,930) 22,370,039 9,812,945
Cash and cash equivalents at beginning of period........................... 32,806,822 10,436,783 623,838
---------- ---------- ----------
Cash and cash equivalents at end of period................................. $28,225,892 $32,806,822 $10,436,783
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................................. $ 195,720 $ -- $ 508,492
Income taxes............................................................. $3,722,491 $2,467,469 $ 404,668
See the accompanying notes to these consolidated financial statements
30
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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 at October 16, 1996 (Note 18).
The Company purchased all of the outstanding stock of EMASS, Inc. in August
1998 (Note 2). In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired.................................. $38,908,639
Cash paid...................................................... 25,056,549
----------
Liabilities assumed............................................ $13,852,090
----------
----------
See the accompanying notes to these consolidated financial statements
31
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of Advanced Digital
Information Corporation, its wholly owned subsidiaries EMASS, Inc. ("EMASS") and
ADIC Europe SARL ("ADE") and EMASS' 80% owned subsidiary ADIC/GRAU Storage
Systems GmbH & Co. KG ("Grau"). The companies are collectively hereinafter
referred to as "ADIC" or the "Company". All intercompany transactions have been
eliminated.
NATURE OF OPERATIONS
ADIC designs, manufactures, markets and services automated high performance
data storage products used to backup and archive electronic data in
client/server network computing environments. The Company's storage management
software is an integrated family of software products. The Company sells its
products on an international basis to resellers, original equipment
manufacturers ("OEMs") and end users.
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 allocation of purchase price and estimated valuation of
purchased, developed and in-process technology.
REVENUE RECOGNITION
The Company records revenue from sales of small libraries and software
products when products are shipped to customers. Revenue from large library
product sales is recognized upon customer acceptance. Revenue from sales of
services is recognized when services are performed and billable, except for
extended service agreements. Revenue under extended service agreements is
deferred and recognized ratably over the life of the service agreement.
Certain distributors of small libraries 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 periods between three months and three 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. A provision for costs related to warranty expense is
recorded when revenue is recognized.
32
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
The Company accrues for co-operative advertising as the related revenue is
earned, and other advertising expense is recorded as incurred.
RESEARCH AND DEVELOPMENT COSTS
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
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. The carrying value
of the Company's long-term debt approximates fair value as the debt bears
interest that adjusts based upon market interest rates.
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
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 $25,566,000 (22%) and $16,945,000
(15%) of the Company's fiscal 1998 revenues were from one customer and a second
customer, respectively. The same two customers accounted for fiscal 1997 and
1996 revenues of $25,707,000 (28%) and $18,101,000 (19%), and $13,315,000 (23%)
and $12,610,000 (21%), respectively. These two customers represented 20% and 58%
of the accounts receivable balance at October 31, 1998 and 1997, respectively.
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,
1998 1997
------------- -------------
Cash........................................................... $ 18,998,750 $ 8,091,286
Commercial paper............................................... 7,973,553 4,457,558
Marketable debt securities..................................... 1,253,589 20,257,978
------------- -------------
$ 28,225,892 $ 32,806,822
------------- -------------
------------- -------------
33
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, except for property,
plant and equipment of EMASS and Grau which have been reduced for certain
negative goodwill associated with the acquisition of EMASS by ADIC. 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.
Expenditures for maintenance and repairs are charged to income as incurred.
INTANGIBLE ASSETS
Intangible assets resulting from the acquisition of EMASS include acquired
developed technology and assembled workforce which were recorded at their fair
value less a pro rata reduction for negative goodwill as of the date of the
acquisition. These assets are amortized over the periods estimated to be
benefited, five years and three years, respectively.
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.
Through October 15, 1996, ADIC's operations have been included in
consolidated income tax returns filed by Interpoint. Income taxes in the
accompanying financial statements for the associated period has been computed
assuming the Company filed separate income tax returns worldwide.
Deferred taxes result from the difference between the tax basis and fair
value of EMASS assets, the use of accelerated depreciation for tax purposes and
from the timing of tax deductions for allowances and accrued expenses.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of ADE and Grau 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 and Grau, whose functional
currency is the French franc and German deutsche mark, respectively, 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
34
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and
Grau 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, 1998 or 1997.
STOCK-BASED COMPENSATION
Stock-based compensation plans are accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25").
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("FAS 128") in the first quarter of fiscal 1998. Basic
earnings per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of shares of common stock
outstanding during the period increased by the weighted average number of common
stock equivalents outstanding during the period, using the treasury stock
method.
Given the Company's structure as a wholly owned subsidiary of Interpoint
prior to October 16, 1996, historical earnings per share amounts are not
presented in the consolidated financial statements for the fiscal year ended
October 31, 1996 as it is not considered to be meaningful.
UNAUDITED PRO FORMA EARNINGS PER SHARE
In connection with the spin-off of ADIC by Interpoint as described in Note
18, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130, which is effective for all periods beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statements. The Company expects that adoption in fiscal year 1999 will
have no material impact on the Company's reported financial results.
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131, which is effective for fiscal years beginning after December 15,
1997, establishes new disclosure requirements for operating
35
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
segments, including products, services, geographic area, and major customers.
The Company will adopt FAS 131 for its 1999 fiscal year, but does not expect the
new accounting standard to have a material effect on the Company's reported
financial results.
In June 1998, Statement of Financial Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") was issued. FAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company will adopt FAS 133 for its 2000 fiscal year,
but expects that adoption will have no material impact on its financial
statements.
2. ACQUISITION OF EMASS, INC.
In July 1998, ADIC entered into a Stock Purchase Agreement ("Agreement")
with Raytheon E-Systems, Inc. ("RES") to purchase all of the outstanding stock
of EMASS, Inc. ("EMASS") a wholly-owned subsidiary of RES (the "Acquisition").
EMASS is a provider of large-scale libraries and open systems storage software.
The Acquisition was accounted for by the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16") and, accordingly, the operating results of EMASS have
been included in the consolidated operating results since the date of
Acquisition, August 19, 1998. Pursuant to the terms of the Agreement, ADIC made
a cash payment of $24,766,000 to RES and assumed approximately $2,000,000 in
mortgage indebtedness. The Acquisition was funded through a combination of cash
and debt.
A summary of assets acquired and liabilities assumed at the date of the
Acquisition, as determined in accordance with APB 16, is presented in the table
below. The acquired in-process technology has not yet reached technological
feasibility and has no alternative future use. The fair value of the net assets
exceeded the purchase price, consequently, no goodwill has been recorded and the
excess has been allocated to reduce proportionately the initial values assigned
to noncurrent assets.
Cash................................................................ $ 1,583,715
Accounts receivable................................................. 10,493,341
Inventories......................................................... 14,632,283
Prepaid expenses and other.......................................... 1,522,661
Property, plant and equipment....................................... 2,517,408
Acquired in-process technology...................................... 4,492,056
Intangible and other assets......................................... 3,667,175
Accounts payable and other current liabilities...................... (11,913,016)
Long-term debt...................................................... (1,639,074)
Other long-term liabilities......................................... (300,000)
Minority interest of 80% owned subsidiary........................... --
------------
Net assets acquired............................................... $ 25,056,549
------------
------------
The valuation of the acquired in-process technology is based upon estimates
by the Company and a valuation by a third-party appraiser. Given that the
valuation of the acquired in-process technology is an estimate, actual results
may change. If the estimate of the in-process technology were to decrease, the
value assigned to property, plant and equipment and intangible and other assets
acquired would increase.
36
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF EMASS, INC. (CONTINUED)
The following summary (unaudited), prepared on a pro forma basis, combines
the consolidated results of operations for the years ended October 31, 1998 and
1997 as if EMASS had been acquired at November 1, 1997 and 1996, respectively.
YEARS ENDED OCTOBER 31,
------------------------------
1998 1997
-------------- --------------
Net sales.................................................... $ 167,667,000 $ 157,675,000
Net loss..................................................... $ (3,055,000) $ (1,614,000)
Basic net loss per share..................................... $ (0.31) $ (0.18)
Diluted net loss per share................................... $ (0.31) $ (0.18)
The pro forma results are not necessarily indicative of what actually would
have occurred if the Acquisition had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from consolidated operations.
3. MARKETABLE EQUITY SECURITIES
In January 1998, the Company began investing in certain equity securities.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115")
these investments are classified as available-for-sale. Under FAS 115,
unrealized holding gains and losses are reflected as a net amount in a separate
component of shareholder's equity until realized. For the purpose of computing
realized gains and losses, costs are identified on a specific identification
basis. There is no significant difference between the cost basis and fair value
of these securities at October 31, 1998. During April 1998, the company sold
certain of these securities and realized a gain of approximately $248,000.
4. INVENTORIES
Inventories are comprised of the following:
OCTOBER 31, OCTOBER 31,
1998 1997
------------- -------------
Finished goods................................................. $ 13,104,058 $ 8,231,656
Work-in-process................................................ 3,382,683 1,416,067
Raw materials.................................................. 17,951,520 7,557,748
------------- -------------
34,438,261 17,205,471
Allowance for inventory obsolescence........................... (2,144,735) (1,130,684)
------------- -------------
$ 32,293,526 $ 16,074,787
------------- -------------
------------- -------------
37
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
OCTOBER 31, OCTOBER 31,
1998 1997
------------- -------------
Land and building.............................................. $ 1,490,023
Machinery and equipment........................................ 6,923,443 $ 4,366,343
Office equipment............................................... 3,315,244 417,116
Leasehold improvements......................................... 618,592 415,493
------------- -------------
12,347,302 5,198,952
Accumulated depreciation and amortization...................... (4,995,997) (2,689,685)
------------- -------------
$ 7,351,305 $ 2,509,267
------------- -------------
------------- -------------
6. INTANGIBLE ASSETS
Intangible assets consists of the following:
OCTOBER 31,
1998
-------------
Developed technology........................................................... $ 3,016,088
Assembled workforce............................................................ 627,272
-------------
3,643,360
Accumulated amortization....................................................... (169,231)
-------------
$ 3,474,129
-------------
-------------
7. 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 1997, the Company markets interconnectivity products developed by
Crossroads under the ADIC brand name and serves as a master distributor for
Crossroads products.
38
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
OCTOBER 31, OCTOBER 31,
1998 1997
------------ ------------
Accrued payroll and related liabilities........................... $ 4,548,151 $ 1,646,813
Allowance for warranty returns.................................... 762,669 375,497
Taxes, other than income.......................................... 329,303 254,564
Interest.......................................................... 115,334 --
Other............................................................. 2,146,524 317,957
------------ ------------
$ 7,901,981 $ 2,594,831
------------ ------------
------------ ------------
9. CREDIT AGREEMENT AND LONG-TERM DEBT
CREDIT AGREEMENT
ADIC has a $10 million unsecured line of credit with a bank expiring
February 28, 2001. All of this line was available at October 31, 1998.
Borrowings against the line of credit will bear interest at the bank's prime
rate or adjusted LIBOR rate.
LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1998:
Unsecured note payable to a bank in monthly installments of
$235,000 through August 2003 plus interest at the bank's
prime rate or adjusted LIBOR rate, 6.758% at October 31,
1998......................................................... $19,529,412
Local borrowings comprised of various notes payable by Grau and
collateralized by the Grau manufacturing facility in Germany
with interest rates ranging from 4.05% to 6.70% at October
31, 1998..................................................... 2,011,008
----------
$21,540,420
----------
----------
As of October 31, 1998, the maturities of long-term debt were as follows:
YEAR ENDED OCTOBER 31, AMOUNT
- ------------------------------------------------------------------------------- -------------
1999........................................................................... $ 3,172,328
2000........................................................................... 3,192,791
2001........................................................................... 3,206,439
2002........................................................................... 3,097,995
2003........................................................................... 8,358,239
Thereafter..................................................................... 512,628
-------------
21,540,420
Less: current maturities....................................................... (3,172,328)
-------------
$ 18,368,092
-------------
-------------
39
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FEDERAL INCOME TAXES
Income before provision for income taxes was taxed under the following
jurisdictions:
YEARS ENDED OCTOBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Current income tax:
U.S. Federal...................................... $ 2,640,109 $ 3,692,339 $ 1,881,631
Foreign........................................... 1,069,113 832,155 --
State and local................................... 10,000 14,000 100,000
------------ ------------ ------------
Total current..................................... 3,719,222 4,538,494 1,981,631
------------ ------------ ------------
Deferred income tax:
U.S. Federal...................................... (545,457) (372,276) (267,260)
Foreign........................................... -- -- 143,162
------------ ------------ ------------
Total deferred.................................... (545,457) (372,276) (124,098)
------------ ------------ ------------
Total provision for income taxes.................... $ 3,173,765 $ 4,166,218 $ 1,857,533
------------ ------------ ------------
------------ ------------ ------------
The provision 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,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Federal income tax at statutory rate of 34%......... $ 1,607,771 $ 4,305,561 $ 1,797,829
Change in valuation allowance....................... 68,000 -- --
Acquired in-process technology...................... 1,527,299 -- --
Tax exempt interest income.......................... (123,323) (130,827) --
Tax credits......................................... (68,046) (127,604) (1,000)
Activity of foreign subsidiaries.................... 61,050 126,686 (35,344)
State income taxes.................................. 10,000 14,000 100,000
Other............................................... 91,014 (21,598) (3,952)
------------ ------------ ------------
$ 3,173,765 $ 4,166,218 $ 1,857,533
------------ ------------ ------------
------------ ------------ ------------
40
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FEDERAL INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1998 and 1997 are:
OCTOBER 31, OCTOBER 31,
1998 1997
------------- -----------
Deferred tax assets:
Inventories..................................................... $ 3,554,271 $ 399,509
Team member compensated absences................................ 24,763 25,845
Allowance for warranty returns.................................. 134,467 85,193
Allowances for bad debt and sales returns....................... 654,049 202,303
Plant and equipment............................................. 1,305,481 89,414
Net operating loss carryforwards................................ 969,000 --
Other........................................................... 238,809 54,838
------------- -----------
Deferred tax assets........................................... 6,880,840 857,102
Deferred tax liability--intangible and other assets............... (693,260) --
Net valuation allowance........................................... (4,785,020) --
------------- -----------
Net deferred tax assets....................................... $ 1,402,560 $ 857,102
------------- -----------
------------- -----------
The net valuation allowance relates to certain timing differences and net
operating loss carryforwards for EMASS and Grau and was recorded at the date of
acquisition of EMASS. Tax benefits associated with any portion of this allowance
that is subsequently relieved will be allocated to further reduce noncurrent
intangible and other assets of EMASS.
Deferred U.S. income taxes are not provided for the earnings of the
Company's foreign subsidiaries because the Company expects those earnings will
be permanently reinvested. Net pretax operating results from the foreign
subsidiaries are income of $2,428,000, $2,075,000 and $407,000 for fiscal 1998,
1997 and 1996, respectively.
Grau has net operating loss carryforwards of approximately $4 million which
have no expiration date.
11. NET INCOME PER SHARE
Effective for the fiscal year ended October 31, 1998, net income per common
share is computed using FAS 128. All prior periods have been restated to conform
to the requirements of FAS 128. The adoption of FAS 128 did not have a material
impact on the Company's net income per share.
41
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted net
income per share for fiscal 1998 and 1997 and pro forma basic and diluted net
income per share for fiscal 1996:
YEARS ENDED OCTOBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Numerator:
Net income........................................ $ 1,530,230 $ 8,497,198 $ 3,430,199
Denominator:
Denominator for basic net income per
share--weighted average shares.................. 9,742,263 9,084,274 8,001,992
Dilutive potential common shares from Team Member
(employee) stock options........................ 122,741 200,950 179,379
------------ ------------ ------------
Denominator for diluted net income per
share--adjusted weighted average shares and
assumed conversions............................. 9,865,004 9,285,224 8,181,371
------------ ------------ ------------
------------ ------------ ------------
Basic net income per share.......................... $ 0.16 $ 0.94
------------ ------------
------------ ------------
Diluted net income per share........................ $ 0.16 $ 0.92
------------ ------------
------------ ------------
Pro forma basic net income per share (unaudited).... $ 0.43
------------
------------
Pro forma diluted net income per share
(unaudited)....................................... $ 0.42
------------
------------
12. 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.
13. STOCK-BASED COMPENSATION PLANS
At October 31, 1998, the Company had three 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 spin-off from Interpoint.
There were 476,092 options issued under this plan at exercise prices ranging
from
42
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
$.4397 to $5.2328. No further options may be issued under this plan. In
addition, 1,032,500 shares are reserved under the Company's 1996 and Alberg
Stock Option Plans for Team Members, directors, officers, consultants, agents,
advisors and independent contractors of the Company. Terms of the 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.
During fiscal year 1998, certain non-executive Team Members were given the
opportunity to cancel existing grants and receive new grants. In each case, the
new option price was equal to or greater than the fair market value on the date
of grant and the vesting and expiration schedules were the same as for any new
grant, i.e. any vesting associated with the canceled grant was forfeited.
In February 1998, the shareholders approved a Stock Purchase Plan to provide
eligible Team Members to purchase shares of Common Stock on favorable terms
through payroll deductions. In accordance with this plan, 22,499 shares of stock
were issued during fiscal 1998.
The Company accounts for the above described stock option and stock purchase
plans (the "Plans") following the guidelines of APB 25 and related
interpretations. No compensation cost has been recognized for stock options
granted and stock purchased 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, basic and diluted net income per share and pro forma basic and
diluted net income per share would have been reduced to the pro forma amounts
indicated below.
YEARS ENDED OCTOBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Net income(loss):
As reported....................................... $ 1,530,230 $ 8,497,198 $ 3,430,199
Pro forma......................................... $ (344,763) $ 7,563,013 $ 3,367,350
Basic net income and pro forma net income (loss) per
share:
As reported....................................... $ 0.16 $ 0.94 $ 0.43
Pro forma......................................... $ (0.04) $ 0.83 $ 0.42
Diluted net income and pro forma net income (loss)
per share:
As reported....................................... $ 0.16 $ 0.92 $ 0.42
Pro forma......................................... $ (0.03) $ 0.81 $ 0.41
43
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
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:
YEARS ENDED OCTOBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Weighted average risk free interest rates............................ 4.98% 6.00% 6.01%
Expected dividend yield.............................................. 0% 0% 0%
Expected volatility.................................................. 65% 65% 65%
Expected lives (in years)............................................ 4 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. 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
Options granted...................................................... 758,165 12.06
Options exercised.................................................... (73,338) 2.25
Options canceled..................................................... (414,256) 16.58
----------
Balance at October 31, 1998............................................ 1,155,607 10.45
----------
----------
At October 31, 1998 a total of 326,754 options were exercisable, the
weighted average exercise price of these options was $9.21. The weighted average
grant date fair value of options granted in fiscal years 1998, 1997 and 1996 was
$6.18, $9.47 and $6.38 respectively.
The following table summarizes information about stock options outstanding
at October 31, 1998.
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISEABLE PRICE
- ------------------------------ ----------- -------------- ----------- ----------- -----------
$0.8953 - $1.6270............. 19,600 41 mos $ 1.36 19,600 $ 1.36
$2.5504 - $5.2328............. 181,687 25 mos $ 3.76 122,189 $ 3.57
$8.7500 - $13.5000............ 769,290 49 mos $ 10.68 165,125 $ 13.22
$14.9375 - $19.5625........... 185,030 50 mos $ 17.07 19,840 $ 18.29
44
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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, other than those employed by EMASS. 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.
EMASS Team Members had a separate plan based on certain EMASS financial
performance criteria. Contributions to all plans combined totaled $291,000 and
$740,000 for fiscal 1998 and 1997, respectively.
In fiscal 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. Contributions to the plans were $433,000 for the year ended October
31, 1996.
15. COMMITMENTS
LEASE COMMITMENTS
The Company currently leases facilities in Redmond, Washington and
Englewood, Colorado for administrative, sales and marketing, research and
development, operations and warehouse activities. Sales and service offices are
leased at various sites in the United States and Europe.
Minimum annual rental commitments at October 31, 1998, for noncancelable
operating leases, are shown in the following table:
YEAR ENDED OCTOBER 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
1999............................................................................ $ 2,183,000
2000............................................................................ $ 1,615,000
2001............................................................................ $ 1,313,000
2002............................................................................ $ 1,049,000
2003............................................................................ $ 1,034,000
Rent expense aggregated $1,255,000 in fiscal 1998, $571,000 in fiscal 1997
and $400,000 in fiscal 1996.
OTHER COMMITMENTS
In connection with the purchase of Grau by EMASS in 1994, EMASS entered into
an agreement with the minority shareholder of Grau whereby the minority
shareholder has the option to "put" his 20% interest in Grau to the Company for
an amount based on Grau profitability, but not to be less than $2,000,000. This
option is effective for the period January 1, 2000 to March 31, 2000.
16. RELATED PARTY TRANSACTIONS
Other accrued liabilities at October 31, 1998 include $708,000 due under an
employment separation agreement with the minority interest stockholder of Grau.
A company in which the Grau minority interest stockholder has an equity
ownership provides certain support services in Europe. Cost of these services
totaled $18,000 for the period August 19, 1998 to October 31, 1998.
45
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. GEOGRAPHIC SEGMENT INFORMATION
Major operations outside the United States consist of ADE, the Company's
wholly owned subsidiary in France and Grau, a subsidiary in Germany, which has
further subsidiaries operating as branch offices in both France and the United
Kingdom. 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 and Grau of
$14,794,000, $14,488,000 and $6,404,000 in 1998, 1997 and 1996, respectively.
Included in U.S. sales are export sales to unaffiliated customers of $7,404,000,
$7,329,000 and $4,666,000 in 1998, 1997 and 1996, respectively. Included in U.S.
operating profit is the expense associated with the acquired in-process
technology.
Total international sales were $37,929,000, $30,611,000 and $21,216,000 in
fiscal 1998, 1997 and 1996, respectively.
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996
-------------- ------------- -------------
Net sales:
United States................................ $ 84,032,381 $ 69,921,043 $ 42,406,762
Europe....................................... 30,524,560 23,282,488 16,550,231
-------------- ------------- -------------
$ 114,556,941 $ 93,203,531 $ 58,956,993
-------------- ------------- -------------
-------------- ------------- -------------
Operating profit:
United States................................ $ 776,182 $ 9,425,633 $ 5,209,722
Europe....................................... 2,623,843 1,756,820 472,681
-------------- ------------- -------------
$ 3,400,025 $ 11,182,453 $ 5,682,403
-------------- ------------- -------------
-------------- ------------- -------------
Identifiable assets:
United States................................ $ 80,320,412 $ 66,394,754 $ 31,797,515
Europe....................................... 32,086,214 8,799,139 4,912,158
-------------- ------------- -------------
$ 112,406,626 $ 75,193,893 $ 36,709,673
-------------- ------------- -------------
-------------- ------------- -------------
18. BASIS OF PRESENTATION FOR FISCAL 1996
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. 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 the period 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
46
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. BASIS OF PRESENTATION FOR FISCAL 1996 (CONTINUED)
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 year ended October 31,
1996 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
---------- ----------
---------- ----------
19. QUARTERLY INFORMATION (UNAUDITED)
1998
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
Net sales......................................... $ 22,866 $ 24,806 $ 25,314 $ 41,571
Gross profit...................................... $ 7,415 $ 7,010 $ 6,770 $ 11,973
Net income (loss)................................. $ 2,361 $ 1,934 $ 752 $ (3,517)
Basic net income (loss) per share................. $ 0.24 $ 0.20 $ 0.08 $ (0.36)
Diluted net income (loss) per share............... $ 0.24 $ 0.20 $ 0.08 $ (0.36)
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
Basic net income per share........................ $ 0.21 $ 0.21 $ 0.23 $ 0.27
Diluted net income per share...................... $ 0.20 $ 0.21 $ 0.23 $ 0.27
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
47
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998.
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.......................................................... 26
Consolidated Balance Sheets at October 31, 1998 and 1997................................... 27
Consolidated Statements of Income for each of the three years in the period ended October
31, 1998................................................................................. 28
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in
the period ended October 31, 1998........................................................ 29
Consolidated Statements of Cash Flows for each of the three years in the period ended
October 31, 1998......................................................................... 30
Notes to Consolidated Financial Statements................................................. 32
(2) Supplemental Financial Statement Schedule for each of the three years in the period ended
October 31, 1998:
VIII--Valuation and Qualifying Accounts.................................................. 49
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.
On November 2, 1998, the Company filed a Form 8-K/A under Item 7 "Financial
Statements, Pro Forma Financial Information and Exhibits" associated with the
acquisition of EMASS, Inc. from Raytheon E-Systems, Inc. The acquisition was
reported under Item 2 of Form 8-K on September 3, 1998.
c. EXHIBITS. See page 50 for index to exhibits.
48
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
YEAR INCOME DEDUCTIONS* END OF YEAR
------------ ------------ ----------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE:
1998.................................................... $ 323,741 $ 390,678 $ 238,769 $ 475,650
1997.................................................... 187,063 166,666 29,988 323,741
1996.................................................... 53,455 212,205 78,597 187,063
ALLOWANCE FOR INVENTORY OBSOLESCENCE:
1998.................................................... 1,130,684 1,166,415 152,364 2,144,735
1997.................................................... 859,087 651,125 379,528 1,130,684
1996.................................................... 271,753 1,214,937 627,603 859,087
- ------------------------
* Deductions represent amounts written off against the allowance, net of
recoveries.
49
INDEX TO EXHIBITS
(ITEM 14C)
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- ---------
2.1 Stock Purchase Agreement by and between Raytheon E-Systems, Inc. and Advanced Digital
Information Corporation, dated July 21, 1998.............................................. (A)
2.2 Amendment No. 1 to Stock Purchase Agreement by and between Raytheon E-Systems, Inc. and
Advanced Digital Information Corporation, dated July 21, 1998 (Exhibit 2.2)............... (B)
2.3 Letter agreement between Raytheon E-Systems, Inc. and the Company dated August 19, 1998
(Exhibit 2.3)............................................................................. (B)
3.1 Restated Articles of Incorporation of ADIC (Exhibit 3.1).................................... (C)
3.2 Restated Bylaws of ADIC (Exhibit 3.2)....................................................... (C)
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)........................................... (C)
10.1 Credit Agreement between Advanced Digital Information Corporation and Seafirst Bank, dated
August 17, 1998........................................................................... (D)
10.2 Lease Agreement and Work Letter Agreement between The Quadrant Corporation and ADIC, dated
as of November 5, 1997 (Exhibit 10.1)..................................................... (E)
10.3* ADIC Bonus Plan (Exhibit 10.2).............................................................. (E)
10.4* Amended 1997 Stock Purchase Plan (Appendix A)............................................... (F)
10.5* ADIC 1996 Stock Option Plan (Appendix B).................................................... (F)
10.6* ADIC 1996 Transition Plan (Exhibit 10.4).................................................... (C)
10.7 Form of Indemnification Agreement, together with schedule of agreements..................... (G)
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 by reference to Exhibit 2.1 to the Current Report on Form 8-K
dated July 21, 1998.
(B) Incorporated by reference to designated exhibit to the Current Report on
Form 8-K dated August 19, 1998.
(C) Incorporated by reference to designated exhibit to Form 10 Information
Statement filed September 10, 1996.
(D) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarterly period July 31, 1998.
(E) Incorporated by reference to designated exhibit of the Annual Report on Form
10-K for the fiscal year ended October 31, 1997.
(F) Incorporated by reference to designated appendix of the proxy statement
filed in connection with the 1998 Annual Meeting of Shareholders.
(G) Incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K
for the fiscal year ended October 31, 1996.
50
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 15, 1999
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
- ------------------------------ -------------------------- -------------------
/s/ LESLIE S. ROCK
- ------------------------------ Treasurer and Chief January 15, 1999
Leslie S. Rock Accounting Officer
/s/ TOM A. ALBERG
- ------------------------------ Director January 15, 1999
Tom A. Alberg
/s/ CHRISTOPHER T. BAYLEY
- ------------------------------ Director January 15, 1999
Christopher T. Bayley
/s/ RUSSELL F. MCNEILL
- ------------------------------ Director January 15, 1999
Russell F. McNeill
/s/ JOHN W. STANTON
- ------------------------------ Director January 15, 1999
John W. Stanton
/s/ PETER H. VAN OPPEN
- ------------------------------ Chairman of the Board and January 15, 1999
Peter H. van Oppen Chief Executive Officer
/s/ WALTER F. WALKER
- ------------------------------ Director January 15, 1999
Walter F. Walker
51