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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21103
ADVANCED DIGITAL INFORMATION
CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1618616
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10201 WILLOWS ROAD 98052
REDMOND, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 881-8004
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
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(None) (None)
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $170,874,198 as of December 31, 1997, based on the closing sale
price of such stock on the Nasdaq National Market on that date.
There were 9,703,324 shares of common stock outstanding as of December 31,
1997.
The Index to Exhibits appears on page 40.
Part III is incorporated by reference from the proxy statement to be filed
in connection with the 1998 Annual Meeting of Shareholders.
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ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Advanced Digital Information Corporation ("ADIC" or the "Company") is a
leading provider of automated tape libraries and standalone tape drives used to
back up and archive electronic data in client/ server network computing
environments. The Company integrates proprietary electro-mechanical robotics,
electronics hardware and firmware with technologically advanced tape drives
manufactured by third parties to provide highly automated data storage
protection. When used with third-party storage management software, the
Company's products can perform sophisticated backup and archiving of electronic
data residing across a network of PCs, workstations and servers with minimal
human intervention. The Company's product family operates in both PC-based
(Windows NT and Novell NetWare) and UNIX environments and provides data storage
capacity ranging from four gigabytes to over 50 terabytes.
The Company's customers are located worldwide and range in size from large
multinational companies to small businesses. The Company markets its products in
North America, Europe and the Asia Pacific region through multiple distribution
channels, including distributors, VARs and OEMs. The Company supports these
channels and its end users with a combination of more than one dozen regional
field sales offices, systems engineering and technical support personnel, as
well as third-party on-site service organizations.
The Company was incorporated under the laws of the state of Washington in
August 1984 and was acquired by Interpoint Corporation ("Interpoint") in
February 1994. In June 1994, ADIC Europe SARL ("ADIC Europe" or "ADE") was
acquired to provide international sales and distribution support. In October
1996, Interpoint and ADIC finalized a series of transactions whereby Interpoint
made a distribution to its shareholders of all the shares of ADIC Common Stock
and ADIC became an independent publicly traded company. Just prior to the
distribution, Interpoint made certain capital contributions to ADIC and
transferred certain other assets to ADIC. ADIC raised an additional $24 million
through a public offering of 1,500,000 common shares in March 1997.
INDUSTRY
CLIENT/SERVER NETWORK DATA BACKUP
The Company believes that multiple trends continue to foster growth of the
data storage segment of the client/server network computing environment.
Personal computer and workstation microprocessors continue to achieve
substantial increases in performance, both absolutely and relative to their
cost. Enabled by this increased processing power and the increasing
sophistication of both network operating systems and relational databases,
organizations are migrating core business processes (such as financial
transaction processing, materials requirements planning, document imaging and
management of patient records, engineering drawings and customer databases) from
manual processes or mainframes to lower-cost client/server computer networks. In
addition, the growth of the Internet, electronic mail, and groupware continue to
foster further client/server network computing growth. The combination of these
trends is driving a proliferation of client/server network computing.
Each of the trends outlined above is driving an increase not only in the
installed base of networks, but also in the data storage requirements of these
networks. The data stored on client/server networks is growing both in volume
and in value. As an organization migrates its core processes to client/server
computer networks, the electronic data stored on these networks, such as a
customer or patient database, a set of engineering drawings, or a record of
financial transactions, becomes an increasingly vital asset. The opportunity
cost of data loss has become extraordinarily high, with potentially large and
long-term negative impacts on an organization. Data loss can result from a wide
variety of causes, including human error, equipment failure, database
corruption, computer viruses, and man-made or natural disasters. Systematic
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and cost-effective backup and archiving of data stored on client/server networks
is essential to protecting one of a firm's most important assets.
Increases in both the volume and value of data, coupled with increasingly
data-intensive software applications, are driving an increase in demand for data
storage capacity and a growing need for data backup and archiving in
client/server network computing environments.
AUTOMATED TAPE LIBRARIES
The Company believes automated tape libraries, which operate in conjunction
with storage management software and incorporate magnetic tape drive technology,
provide the best systematic and cost-effective backup solution for client/server
networks. These products provide client/server networks with software-controlled
access to multiple magnetic tape cartridges for storage and retrieval of
digitally stored data. These backups occur automatically and minimize human
intervention. Automated tape libraries, housing these tapes and one or more tape
drives, utilize an electro-mechanical robotic mechanism to manipulate the tape
cartridges, loading and unloading specific tape cartridges into and out of the
tape drive or drives as directed by the storage management software.
Automated tape libraries efficiently systematize the network backup process
through a number of features. An automated tape library, directed by storage
management software, can perform sophisticated backups of a network's data
without human intervention, automatically backing up specific network data to
specific tapes at specific times. This process operates in a "lights out" mode,
backing up the network at any time, thereby eliminating the need for system
administrator staffing when the network is backed up, generally at night. Access
to multiple tape cartridges enables the library to automatically store much more
data than a standalone drive, eliminating the need for a system administrator to
swap tapes in order to back-up all the data. Unlike a typical hard disk drive,
magnetic tape drives utilize removable cartridges containing a robust medium.
Therefore, data backed up by an automatic tape library can be reliably stored
offsite as an element of a disaster recovery scheme.
Within the library, tape cartridges are typically organized in magazines. In
some cases, these tape magazines are removable, easing storage and offsite
transfer of the tapes. A library with multiple tape drives can backup data with
all drives simultaneously, significantly speeding up the backup process. Some
larger libraries feature a barcode system which, in conjunction with the storage
management software, can catalog each tape, further enhancing the management of
the data. Libraries often feature key lock access to the tapes, providing
security protection for the data by preventing undesired human access. Some
libraries feature a software and password-controlled access feature which allows
for controlled addition or removal of selected cartridges without providing open
access to all tapes housed within the library or taking the library off-line.
Backup and archival storage needs differ somewhat from the demands of other
storage applications, such as online data storage, with overall capacity and
data transfer rate being more important than the speed of data access and
retrieval. As a result of relatively high transfer rates, high capacity and low
cost per gigabyte, tape drive technologies are used for backup or archival
purposes in a large proportion of client server networks in commercial and
government organizations. The Company believes that, assuming continued
investment by tape drive manufacturers, magnetic tape drives will continue to be
a cost-effective solution for data backup and archival purposes in terms of cost
per unit of data storage. Automated tape libraries leverage the
cost-effectiveness of magnetic tape drives by automating the access to multiple
data cartridges by each tape drive, decreasing further the dollar-per-gigabyte
of storage cost relative to other technologies.
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ADIC STRATEGY
The Company's goal is to continue expanding its position as a market leader
in providing automated tape libraries and complementary products to the
client/server network computing marketplace. Key components of the Company's
strategy include:
OFFER A FULL RANGE OF LIBRARY PRODUCTS. The Company believes it currently
offers the most complete range of automated tape library and standalone drive
products available for the client/server network marketplace. Available storage
capacities range from four gigabytes to over 50 terabytes. Although different
types and sizes of client/server networks require different levels of tape
library capacity and performance, the Company's broad product family provides
both end users and channel partners with "one-stop-shopping" for products,
service, and support. By offering standalone drive products in addition to
libraries, the Company is able to further enhance the breadth of its product
line, familiarizing customers with entry-level backup and archiving data storage
needs with its brand name and products and providing them with migration and
upgrade paths to the Company's other products. In addition, the Company's broad
product line allows it to purchase tape drives in large volumes, which may
enhance its ability to negotiate with key magnetic tape drive suppliers.
OFFER PRODUCTS IN MULTIPLE DRIVE TECHNOLOGIES. The Company offers automated
tape libraries based on major magnetic tape drive technologies, including DLT,
8mm/SDX, 4mm/DAT and 8mm, and maintains compatibility with a wide variety of
storage management software platforms. The Company's strategy is to work closely
with leading tape drive manufacturers in order to rapidly develop products
incorporating state-of-the-art technologies. The Company's strategy of
developing products based on multiple drive technologies allows the Company to
reduce its dependence on any single tape drive technology, as well as offer
products that target the specific technology needs of different market segments.
In addition, the Company's products are compatible with over 50 storage
management software applications.
LEVERAGE TECHNOLOGY ACROSS PRODUCTS. The Company is able to leverage nearly
a decade of automated tape library research and development investment across a
number of products. The Company has launched multiple generations of products
which build on an existing foundation of technology and knowledge, including
operating systems software, electronic hardware, and electro-mechanical
hardware. The Company's most recently launched product, the FastStor tape
storage system, features sixth-generation technology in many of these elements.
Leveraging its existing technology to build a broad product line enables the
Company to decrease both the time-to-market and development costs of new
products. In addition, this strategy enhances manufacturing leverage and
flexibility, as the Company is able to share common parts, manufacturing
resources and suppliers across a wide range of products.
FURTHER DEVELOP BRAND NAME AND STRONG WORLDWIDE DISTRIBUTION CHANNELS. The
Company has established and continues to develop strong distribution channels in
the North American, European, and Pacific Rim markets. The Company has numerous
long-standing relationships with national distributors and individual resellers
that have experience in offering the Company's line of products. These
distribution channels enable the Company to cost-effectively offer its broad
range of branded products to multiple market segments and provide an immediate
outlet for new products as they are developed. In addition, the Company believes
that as a result of its investments in advertising, promotion and brand
development, it will continue to develop brand recognition and customer loyalty,
increasing the level of recurring business from its customers. In particular,
the Company believes that its distribution relationships and brand name
recognition position it well to take advantage of the growth of PC-based
client/server networks, including those based on Windows NT. As appropriate, the
Company intends to pursue additional channel partnerships to address untapped or
under-penetrated market segments.
OFFER BROAD TECHNICAL SUPPORT. The Company views customer service and
support as strategically important elements of its business. During the sales
process, the Company's sales force and systems engineers provide technical
recommendations to its channel partners and end users. After the sale, the
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Company provides 24-hour-a-day technical support. The Company's technical
support staff, which is knowledgeable about storage management software and
systems, is able to address customers' inquiries beyond the automated tape
library hardware level. In situations where problems grow in sophistication
beyond the scope of the Company's technical support staff, systems engineers can
be made available for telephone or on-site consultation. The Company also offers
customers various levels of on-site service programs through third-party
providers. Finally, the Company offers a comprehensive training program to
resellers and end users.
DEVELOP OR ACQUIRE RELATED SPECIALIZED STORAGE PRODUCTS. The Company
believes that growth of the client/server network data storage market will
create opportunities for it to expand its product offerings. Under an agreement
signed in August 1997, the Company will market Fibre Channel interconnection
solution products developed with Crossroads Systems, Inc. ("Crossroads") under
the ADIC brand name. This partnership will allow the Company to offer products
to integrate a wide variety of SCSI-based storage devices with Fibre Channel
networks. The Company intends to continue to seek out related market niches
which leverage its strengths. The Company has over a decade of research and
development and sales and marketing experience in client/server network data
storage and it believes this experience may be readily applied beyond automated
tape libraries to other specialized storage products. In addition, the Company
believes its distribution channels can be leveraged to distribute related data
storage products to end customers. New, related storage products could originate
from internal research and development or through acquisitions.
PRODUCTS
The Company's principal products, automated tape libraries, integrate
proprietary electro-mechanical robotics, electronic hardware, and firmware with
industry standard technologically advanced tape drives supplied by third
parties. The automated tape libraries are housed in a desktop, rackmount, or
floor-standing enclosure. When operated in conjunction with third-party storage
management software, the Company's libraries provide a complete solution for
systematically and cost-effectively automating data storage backup and archiving
in client/server network computing environments.
The Company offers a family of automated tape libraries and standalone tape
drive products with different data storage capacity and data transfer rate
characteristics. In addition to automated tape library and standalone tape drive
products, the Company supplies its channels and end users with a range of
supplemental products, including tape cartridge media, tape magazines, rackmount
kits and cables.
The Company's products vary by tape technology, number of tape drives, and
number of tape cartridges. New library product development is driven by two
sources, the identification of new market opportunities and the availability of
new tape drive technologies. The identification of new market opportunities
results from ongoing work by the Company's sales, marketing, and product
management organizations to identify new products to fulfill customer and
marketplace needs. In addition, the Company maintains close relationships with
tape drive manufacturers in order to stay abreast of technology developments.
Storage product prices vary from approximately $1,000 to more than $100,000,
depending on the drive technology, number of drives and capacity selected. Drive
technologies include DLT, 8mm/SDX, 4mm/ DAT and 8mm formats with the number of
drives per unit varying from one to 48 drives. Capacities range from four
gigabytes to over 50 terabytes.
STORAGE MANAGEMENT SOFTWARE
The majority of the Company's products are installed on client/server
computer networks in conjunction with storage management software. Currently,
over 50 different storage management software packages support one or more of
the Company's products. On Microsoft Windows NT and Novell NetWare platforms,
these packages include products from Cheyenne Software, Legato Systems, Network
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Integrity, Seagate Software (Arcada and Palindrome) and STAC. On UNIX platforms,
these packages include products from Cheyenne Software, IBM ADSM, Legato
Systems, OpenVision Technologies, Spectra Logic (Alexandria) and VERITAS
Software.
The Company works closely with storage management software companies in a
number of ways. It periodically engages in discussions with developers at these
companies regarding the marketplace, end-user needs, and potential solutions to
these needs combining the Company's products and the developer's storage
management software. The Company partners with storage management software
companies to offer promotional product bundles, offering customers a special
price on the combination of a Company product and a storage management software
product. In addition, the Company's field sales force strives to maintain
relationships with its counterparts from each of the storage management software
companies and frequently participates in joint sales calls and seminars. The
Company also maintains technical relationships with developers at these
companies, in most cases providing Company products for their use in developing
software for these products. The Company's system engineering lab has a large
variety of storage management software products running in-house in order to
perform ongoing compatibility testing.
SALES AND MARKETING
The Company's strategy is to deploy a comprehensive sales, marketing, and
support infrastructure to address the market for client/server network storage
peripherals both domestically and internationally. The Company relies on
multiple distribution channels to reach end-user customers ranging in size from
small businesses to large multinational corporations. The Company's channels
include distributors, VARs and OEMs. The Company supports these channels with a
field sales force operating out of its headquarters office in Redmond,
Washington, plus more than one dozen regional field sales offices in the United
States and three international offices in London, Munich and Paris. The large
majority of Company products are sold under the ADIC brand name.
RESELLERS
NORTH AMERICAN DISTRIBUTORS. The Company sells its products to large
regional and national distributors who in turn resell the Company's products to
national, regional, or local VARs with expertise in integrating network
solutions for end customers. The Company provides support for these VARs through
its authorized reseller programs. In the case of larger, more complex sales
situations, the Company's field sales force may work in conjunction with a VAR
to support the sale. The Company currently has relationships with several major
North American distributors, including Access Graphics, Inc., Arrow ICP,
Gates/Arrow Distributing, Ingram Micro Incorporated, Tech Data Corporation, and
Tenex Data Corporation. For the fiscal year ended October 31, 1997, Ingram Micro
Incorporated and Tech Data Corporation represented 28% and 19%, respectively, of
the Company's net sales.
INTERNATIONAL DISTRIBUTORS. Similar to North America, the Company also has
relationships with a number of large regional and national distributors
internationally. International sales represented 33% of net sales in fiscal year
1997, the majority of which occurred in Europe. The Company believes that
international markets represent an attractive growth opportunity and intends to
expand the scope of its international sales efforts in part by continuing to
actively pursue additional international distributors and resellers.
PREMIER VAR PROGRAM. The Company has direct sales relationships with more
than 25 "Premier VARs" throughout North America and Europe. These Premier VARs
are typically larger VARs specializing in data storage and network solutions for
client/server networks. Premier VARs assume increased levels of responsibility
for sales and support, although they are still occasionally assisted by the
Company's field sales force in certain large, complex sales situations.
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OEMS
The Company sells its products to several companies under a private label or
OEM relationship. These companies resell the products under their own brand
name, sometimes after enhancing the product technically to target a specific
market, performance, or application niche. Private labelers and OEMs assume
responsibility for product sales, service and support. These relationships
enable the Company to reach end user market niches not served by its other
reseller distribution channels. Although not a key component to its strategy,
the Company maintains ongoing discussions with private labelers and OEMs,
including leading systems suppliers, regarding opportunities with the Company's
products. The large majority of Company products are sold through non-OEM
channels under the ADIC brand name.
CORPORATE SALES
The Company maintains corporate sales relationships with a number of large
national and multinational companies, including financial institutions,
telecommunications companies, large industrial corporations and professional
service firms. In these sales situations, the Company typically works with such
company's central information services organization to assess data storage
backup needs and then recommend a solution incorporating the Company's products.
The successful culmination of this recommendation may be the creation of a
corporate standard, including a selection of the Company's products. Once this
standard is established, organizations throughout the company can purchase the
Company's products to meet their needs.
CORPORATE MARKETING
The Company supports its channel sales and its field sales force efforts
with a broad array of marketing programs designed to build the Company's brand
name, attract additional resellers and generate end user demand. Resellers are
provided with a full range of marketing materials, including product
specification literature and application notes. The Company advertises in key
network systems publications and participates in national and regional
tradeshows both domestically and internationally. The Company's World Wide Web
page features a comprehensive collection of marketing information, including
product specification sheets, product user manuals and application notes. The
Company's field sales force conducts seminars targeting end users, often with a
sales representative from one of the storage management software companies. The
Company also conducts sales and technical training classes for its resellers.
The Company periodically engages in various promotional activities for resellers
and end users, including product-specific rebates, bundling its products with
selected storage management software, and certificates for free tape drive
cleaning cartridges.
In addition to the activities outlined above, the Company's marketing
organization, specifically its product management team, is responsible for
initiating development of new products and product line extensions. In order to
create the Company's product development plan, the product management team
combines its assessment of end-user needs, channel requirements, technology
developments and competitive factors with input from the engineering, sales, and
manufacturing organizations.
CUSTOMER SERVICE AND SUPPORT
The Company views customer service and support as strategically important
elements of its business. The Company's customer service and support effort
consists of five components.
TECHNICAL SUPPORT. The Company maintains an internal technical support
organization. Technical support personnel are available to all customers at no
charge via telephone, facsimile, and Internet electronic mail to answer
questions and solve problems relating to the Company's products. Technical
support personnel are not only trained with respect to the Company's products,
but are also experienced with storage management and network operating system
software. Products with problems not resolved via telephone support may be
returned to the Company for repair or replacement during the warranty period.
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For a nominal fee, customers may choose to receive a "hot swap" exchange unit
which will be shipped via express mail within 24 hours.
SYSTEMS ENGINEERING. The Company also maintains a staff of systems
engineers who provide both pre-and post-sales support to resellers and end
users. Systems engineers typically become involved in more complex
problem-solving situations involving interactions between the Company's
products, the storage management software, the network server hardware, and the
network operating system. System engineers work with resellers and end users
both over the telephone and on-site.
ON-SITE SERVICE. The Company contracts with third-party service providers
to offer on-site service for its products. A wide variety of programs are
available, up to and including 24-hour-a-day, seven-day-a-week on-site service.
The Scalar series products, which represent the high end of the product line,
are sold including one year of on-site service.
TRAINING. The Company offers a comprehensive training program to resellers
and end users. Training classes are conducted at the Company's headquarters
location and on-site at reseller and end-user locations worldwide.
WARRANTY. For standard Company products, parts and labor are covered by a
two-year or three-year warranty. With respect to drives and tapes used in the
Company's products but manufactured by a third party, the Company passes on to
the customer the warranty on such drives and tapes provided by the manufacturer.
RESEARCH AND DEVELOPMENT
The Company's research and development team has developed multiple product
generations of automated tape library products. The Company's research and
development efforts rely on the integration of multiple engineering disciplines
to generate products that competitively meet market needs in a timely fashion.
Successful development of automated tape libraries requires the melding of
firmware design, electro-mechanical design, electronic design, and engineering
packaging into a single, integrated product. Product success also relies on the
engineering team's thorough knowledge of each of the different tape drive
technologies as well as SCSI and Fibre Channel protocols.
The Company's new product development is frequently stimulated by the
availability of an enhanced or new tape drive technology. As they compete in the
marketplace, tape drive manufacturers continually invest in research and
development to gain performance leadership either by offering increasingly
enhanced versions of their current drive products or by introducing an entirely
new drive technology. The Company benefits from these industry developments by
utilizing these new tape drive technologies in its products. If a new drive is
an enhanced version of one already incorporated in one or more of the Company's
products, the Company's time and dollar investment to incorporate the new drive
can be quite small, with the focus being on verification testing. With new tape
drive technology introductions, the level of effort required to develop a
corresponding product depends somewhat on the form factors of the drive and
media. In cases where the form factors match a drive technology currently
supported, again the time and investment required can be quite low. When the
form factors differ, the time and investment requirements can grow
substantially, and may require development of a new product altogether. Given
the importance of relationships with tape drive manufacturers to the Company's
success, the Company strives to, and believes it does, maintain close,
high-level relationships on both a management and technical level with several
tape drive manufacturers. These relationships at times provide early warning of
new tape drive technologies and assist the Company in reducing the
time-to-market for new product development.
The Company also identifies and defines new products based on the more
traditional identification of a market need which the Company believes it can
successfully fill. The Company's sales, marketing, product development, and
engineering organizations all contribute to this identification process. With
these product development efforts, time and investment requirements tend to be
significant, both in terms
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of engineering and tooling for manufacturing. However, the Company has found
that it has been able to leverage its previous engineering investments into new
products. For example, the firmware, or operating system, of the Scalar library
product is based on successive generations of the operating system developed for
the Company's first library. Similarly, the Company's engineers have been able
to leverage its electro-mechanical and electronic hardware designs from previous
products into next-generation designs. In some cases, entire subassemblies are
transferable, leveraging not only engineering time but also tooling investments,
materials purchasing, inventory stocking, and manufacturing.
The Company's research and development expenses were $2,909,000, $1,542,000
and $1,097,000 for fiscal years 1997, 1996, and 1995, respectively. The Company
anticipates making comparable or increased investments in research and
development efforts in the future.
MANUFACTURING
The Company's manufacturing processes, which are ISO 9001 certified, entail
manufacturing electro-mechanical robotic devices, integrating into them
third-party tape drives, and performing testing on the completed device. The
Company's manufacturing strategy is to perform product assembly, integration and
testing, leaving component and piece part manufacturing to its supplier
partners. The Company works closely with a group of regional, national, and
international suppliers to obtain quality parts and components meeting its
specifications. Though the Company's designs are proprietary, the various
components are available off the shelf or are manufactured using standard,
readily-available techniques, limiting supplier base risk and easing volume
increases. Inventory planning and management is coordinated closely with
suppliers and customers to match the Company's production to market demand.
Product orders are confirmed and, in most cases, shipped to the customer within
one week. The Company fills orders as they are received and therefore believes
that its backlog levels are not indicative of future sales.
COMPETITION
The market for network data storage peripherals in general, and automated
tape libraries in particular, is intensely competitive, highly fragmented, and
characterized by rapidly changing technology and evolving standards. Competitors
vary in size and in the scope and breadth of the products they offer. As the
Company offers a broad range of automated tape library and complementary
products, it tends to have a large number of competitors that differ depending
on the particular product format and performance level. Since there are
relatively low barriers to entry into the automated tape library market, the
Company anticipates increased competition from other sources, ranging from
emerging to established companies, including large system OEMs. Many of the
Company's competitors have substantially greater financial and other resources,
larger research and development staffs, and more experience and capabilities in
manufacturing, marketing and distributing products than the Company. The
Company's competitors may develop new technologies and products that are more
effective than the Company's products. In addition, competitive products may be
manufactured and marketed more successfully than the Company's products. The
Company believes the primary competitive factors in the market for network data
storage products are performance, reliability, breadth of product line,
distribution strength, product availability and price, as well as customer
issues, including technical and sales support. See "Risk Factors--Increasing
Competition and Potentially Declining Prices."
PROPRIETARY RIGHTS
Although the Company relies predominately on its full product line, strong
channel structure, and nearly a decade of library development experience to
compete in its marketplace, it has or is pursuing numerous patents on various
design elements of its automated tape library products. There can be no
assurance that pending patent applications will ultimately issue as patents or,
if patents do issue, that the claims allowed will be sufficiently broad to
protect the Company's proprietary rights. In addition, there can
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be no assurance that issued patents or pending applications will not be
challenged or circumvented by competitors, or that the rights granted thereunder
will provide competitive advantages to the Company.
The Company relies on a combination of patent and trademark laws, trade
secrecy, confidentiality procedures, and contractual provisions to protect its
intellectual property rights. There can be no assurance that these procedures
will be successful, that the Company would have adequate remedies for any breach
or that the Company's trade secrets and know-how will not otherwise become known
to or independently developed by competitors. See "Risk Factors--Proprietary
Technology."
FOREIGN OPERATIONS AND EXPORT SALES
Export sales of ADIC products during the fiscal years ended October 31,
1997, 1996, and 1995 totaled $30,611,000, $21,216,000 and $14,930,000,
respectively, with the majority of these sales occurring in Europe. European
sales are transacted out of ADIC Europe, a wholly owned subsidiary acquired in
June 1994. See Note 13 to the Company's Consolidated Financial Statements
included as Item 8 of this Form 10-K and "Risk Factors--International
Operations."
EMPLOYEES (TEAM MEMBERS)
As of October 31, 1997, the Company had 208 full-time Team Members,
including 53 in sales and marketing, 25 in research and development, systems
engineering and technical support, 109 in manufacturing and operations, and 21
in finance, general administration, and management. None of the Company's Team
Members is covered by collective bargaining agreements, and management believes
its relationship with Team Members is good.
The Company's success depends in large part on its ability to attract and
retain key Team Members. Competition among network data storage peripheral
companies for highly skilled technical and management personnel is intense.
There can be no assurance that the Company will be successful in retaining its
existing Team Members, or in attracting additional qualified Team Members. See
"Risk Factors-- Dependence on Key Employees (Team Members)."
RISK FACTORS
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's quarterly operating results have varied in the past, and may
vary significantly in the future, depending on factors such as increased
competition and pricing pressure, timing of new product announcements and
releases by the Company and its competitors, shifts in product or channel mix,
the rate of growth in the data storage market, market acceptance of new and
enhanced versions of the Company's products, timing and levels of operating
expenses, size and timing of significant customer orders, gain or loss of
significant customers or distributors, currency fluctuations, personnel changes
and economic conditions in general. Any unfavorable change in these or other
factors could have a material adverse effect on the Company's results of
operations for a particular quarter.
In particular, quarterly revenue and operating results depend on the volume
and timing of orders received during the quarter. A significant majority of the
Company's revenue in each quarter results from orders during that quarter. The
Company historically has operated with little order backlog and, due to the
nature of its business, does not anticipate that it will have significant
backlog in the future. The Company's operating expense levels are, in the short
term, largely fixed and are based, in part, on expectations regarding future
revenue. Thus, if the Company's revenue falls below its expectations, the
Company's results of operations could be disproportionately affected. Because of
the relatively large dollar size of orders from the Company's distributors,
delay in the placing of a small number of orders could have a significant impact
on the Company's results of operations for a particular period.
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The Company's quarterly revenue and results of operations have been, and are
expected in the future, to be affected by seasonal trends, which often result in
lower revenue in the first quarter of each fiscal year compared to the fourth
quarter of the previous year, due to customer purchasing and budgetary practices
and the Company's sales commission and budgetary structure. There can be no
assurance that seasonal trends in customer purchasing will not materially
adversely affect the Company's results of operations in future quarters.
Consequently, operating results in any period should not be considered
indicative of the results to be expected for any future period. There can be no
assurance that the Company's revenue will increase, that its recent levels of
quarterly revenue and net income will be sustained, or that the Company will
achieve profitability in any future period. In addition, it is likely that in
some future quarter the Company's results of operations will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock would likely be materially adversely affected.
INCREASING COMPETITION AND POTENTIALLY DECLINING PRICES
The markets for network data storage peripherals in general, and automated
tape libraries in particular, is intensely competitive, fragmented and
characterized by rapidly changing technology and evolving standards. Important
competitive factors include price, performance, diversity of product line,
reliability, delivery capabilities, customer support and service. As the Company
offers a broad range of automated tape library and complementary products, it
tends to have a large number of competitors that differ depending on the
particular product format and performance level. Some competitors of the Company
have significantly greater financial, technical, manufacturing, marketing and
other resources than the Company. Potential and actual competitors include the
suppliers of the data storage drives that the Company incorporates into its own
products as well as major providers of computer hardware. Competitors may
develop products and technologies that are less expensive or technologically
superior to the Company's products. In addition, competitive products may be
manufactured and marketed more successfully than the Company's products. Such
developments could render the Company's products less competitive or obsolete,
and could have a material adverse effect on the Company's business, financial
condition and ability to market the Company's product as currently contemplated.
The Company believes the primary competitive factors in the market for network
data storage products are performance, reliability, breadth of product line,
distribution strength, product availability and price, as well as customer
issues, including technical and sales support.
The markets for the Company's products are characterized by significant
price competition, and the Company anticipates that its products will face
increasing price pressure. This pressure could result in significant price
erosion, reduced gross profit margins and loss of market share, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT CONCENTRATION
The Company derived a significant majority of its revenue in fiscal 1997 and
1996 from the sale of its DLT-related products, including associated media, and
the Company expects to continue to derive a substantial portion of its revenue
from these products for the foreseeable future. As a result, the Company's
future operating results are significantly dependent upon continued market
acceptance of such products. There can be no assurance that the Company will
successfully develop new products utilizing DLT technology or that such products
will find market acceptance or meet customer expectations or that other
technologies will not replace, in whole or in part, DLT technology. The
Company's DLT products may be rendered obsolete by future technical advances by
the Company's competitors or by certain of its suppliers, distributors or
resellers. The failure of the Company to maintain and enhance the capabilities
of its current DLT products or to introduce new products successfully into the
market could have a material adverse effect on the Company's business, financial
condition and results of operations.
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DEPENDENCE ON CERTAIN SUPPLIERS
The Company does not possess proprietary data storage drive technology and,
consequently, depends on a limited number of third-party manufacturers for the
drives that are incorporated into its products. In some cases, these
manufacturers are sole source providers of the drive technology and competitors
of the Company in that they market their own tape library products. In
particular, Quantum Corporation ("Quantum") is the sole supplier of DLT drives
and the primary supplier of DLT media, both of which have previously been
subject to allocation by Quantum. As a result, the Company's requirement for DLT
drives and media may not be met. In addition, Company sales of certain DLT-based
products may also have benefited as a result of industry-wide shortages in prior
periods due to the Company's relatively high volume of purchases and relatively
good access to scarce tape drive types. Subsequent broadly increased
availability of DLT drives could adversely affect sales of certain Company
products. The Company believes such affected products would likely be at the low
end of the product range where gross margins are relatively small.
The Company's other suppliers have, in the past, and may, in the future, be
unable to ensure that the Company's supply needs will be adequately met. The
Company does not have any long-term contracts with any of its significant
suppliers, and if these suppliers were to decide to pursue the tape library
market aggressively, they could cease supplying tape drives and media directly
to the Company. Thus, there can be no assurance that the Company will be able to
obtain adequate supplies of tape drives and media at acceptable prices, if at
all. The partial or complete loss of certain of these sources could result in
significant lost revenue, added costs and production delays or otherwise have a
material adverse effect on the Company's business, financial condition, results
of operations and customer relationships.
TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards and is highly competitive with
respect to timely innovation. The introduction of new products embodying new or
alternative technology and the emergence of new industry standards could render
existing products obsolete or unmarketable. The Company's future success will
depend on its ability to anticipate changes in technology, to gain access to
such technology for incorporation into the Company's products and to develop new
and enhanced products on a timely and cost-effective basis. In particular, the
Company must be able to maintain compatibility of its products with significant
future drive technologies and relies on producers of such drive technologies to
achieve and sustain market acceptance of such technologies. Development
schedules for high-technology products are subject to uncertainty, and there can
be no assurance that the Company will be able to meet its product development
schedules. If the Company is unable for technological or other reasons to
develop products in a timely manner or if the products or product enhancements
that it develops do not achieve market acceptance, the Company's business will
be materially adversely affected. New products introduced in the last six
months, including FastStor, Scalar 1000, Scalar 218M and FCR Fibre Channel
products, are expected to contribute significantly to sales over the next twelve
months. If these products do not achieve market acceptance, the Company's
business will be materially adversely affected. Additionally, there can be no
assurance that the Company will be able to continue to develop new products in
response to product introduction by competitors, including both automated taped
libraries and other sequential or random access mass storage devices that may be
developed in the future, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
CUSTOMER CONCENTRATION
The majority of the Company's end users purchase the Company's products from
VARs that, in turn, purchase the Company's products from large distributors such
as Ingram Micro Incorporated ("Ingram Micro"), Tech Data Corporation ("Tech
Data") and others. For the fiscal year ended October 31, 1997, Ingram Micro and
Tech Data represented 28% and 19%, respectively, of the Company's net sales. The
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Company has no long-term contracts with any of its significant customers or
distributors, and sales are generally made pursuant to purchase orders. The
Company's distributors carry competing product lines. There can be no assurance
that distributors will continue to purchase the Company's products or be able to
market them effectively. The Company allows distributors to return unsold
products, generally within certain limitations. The reduction, delay or
cancellation of orders or the return of a significant amount of products by one
or more of its major distributors or customers, the loss of one or more of such
distributors or customers, or any financial difficulties or such distributors or
customers resulting in their inability to pay amounts owing to the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations.
SUSTAINING AND MANAGING GROWTH
The Company is currently undergoing a period of rapid growth and there can
be no assurance that such growth can be sustained or managed successfully. This
growth has resulted in, and may possibly create in the future, additional
capacity requirements, new and increased responsibilities for management
personnel, and added pressures on the Company's operating and financial systems.
There can be no assurance that the Company's facilities, personnel and operating
and financial systems will be sufficient to manage and sustain its current or
future growth. The Company's ability to manage any future growth effectively and
accomplish its overall goals will depend on its ability to hire and retain
qualified management, sales and technical personnel. If the Company is unable to
manage growth effectively or hire and retain qualified personnel, the Company's
business and results of operations could be materially and adversely affected.
In addition, to the extent expected revenue growth does not materialize,
increases in the Company's selling and administrative costs that are based on
anticipated revenue growth could negatively impact the Company's results of
operations.
INTERNATIONAL OPERATIONS
Net sales to customers outside the United States accounted for approximately
33% of net sales in fiscal 1997. The Company expects that international sales
will continue to represent a significant portion of the Company's net sales.
Sales to customers outside the United States are subject to a number of risks,
including the imposition of governmental controls, the need to comply with a
wide variety of foreign and U.S. export laws, political and economic
instability, trade restrictions, changes in tariffs and taxes, longer payment
cycles typically associated with international sales, and the greater difficulty
of administering business overseas. Furthermore, although the Company endeavors
to meet standards established by foreign regulatory bodies, there can be no
assurance that the Company will be able to comply with changes in foreign
standards in the future. The inability of the Company to design products to
comply with foreign standards could have a material adverse effect on the
Company's business, financial condition and results of operations. Most of the
Company's international sales are denominated in U.S. dollars and fluctuations
in the value of foreign currencies relative to the U.S. dollar could therefore
make the Company's products less price competitive. A portion of the Company's
international sales are denominated in foreign currencies. Consequently a
decrease in the value of a relevant foreign currency in relation to the U.S.
dollar after establishing prices and before receipt of payment by the Company
would have an adverse effect on the Company's results of operations. Further,
the expenses of ADIC Europe, the Company's wholly owned subsidiary, are
denominated in French francs. The Company currently engages in only limited
foreign currency hedging transactions, and is therefore exposed to some level of
currency risk. In addition, the laws of certain foreign countries may not
protect the Company's intellectual property to the same extent as do the laws of
the United States.
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DEPENDENCE ON KEY EMPLOYEES (TEAM MEMBERS)
The Company's future success depends in large part on its ability to retain
certain key executives and other personnel, some of whom have been instrumental
in establishing and maintaining strategic relationships with certain of the
Company's suppliers and customers. The Company does not have any employment
agreements with its domestic Team Members. The Company's growth and future
success will depend in large part on its continuing ability to hire, motivate
and retain highly qualified management, technical, sales and marketing Team
Members. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain its existing personnel or
attract additional qualified personnel in the future.
PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively depends in part on its ability
to develop and maintain proprietary aspects of its technology. The Company
currently holds two U.S. patents and has applications for additional patents
pending. There can be no assurance, however, that any future patents will be
granted or that any patents will be valid or provide meaningful protection for
the Company's product innovations. The Company also relies on a combination of
copyright, trademark, trade secret and other intellectual property laws to
protect its proprietary rights. Such rights, however, may not preclude
competitors from developing products that are substantially equivalent or
superior to the Company's products. In addition, many aspects of the Company's
products are not subject to intellectual property protection.
While the Company is not currently engaged in any intellectual property
litigation or proceedings, there can be no assurance that it will not become so
involved in the future. An adverse outcome in litigation or similar proceedings
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from others or require the Company to cease
marketing or using certain products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
If the Company is required to seek licenses under patents or proprietary rights
of others, there can be no assurance that any required licenses would be made
available on terms acceptable to the Company, if at all. In addition, the cost
of responding to an intellectual property litigation claim, in terms of legal
fees and expenses and the diversion of management resources, whether or not the
claim is valid, could have a material adverse effect on the Company's business,
financial condition and results of operations.
WARRANTY EXPOSURE
The Company generally provides a two-year warranty on its products, with the
exception of the tapes and the tape drives used in its products but manufactured
by a third party. The Company passes on to the customer the manufacturer's
warranty with respect to these tapes and tape drives. In the past, the Company
has incurred higher warranty expenses relating to new products than it typically
incurs with established products. The Company establishes allowances for the
estimated liability associated with product warranties, but there can be no
assurance that such allowances will be adequate or that the Company will not
incur substantial warranty expenses in the future with respect to new or
established products.
CERTAIN ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors (the "Board of Directors") has the
authority, without any action by the shareholders, to issue up to 2,000,000
shares of Preferred Stock and to fix the rights and preferences of such shares.
In addition, the Company has adopted a shareholder rights plan (the "Shareholder
Rights Plan") involving the issuance of preferred stock purchase rights designed
to protect the Company's shareholders from abusive takeover tactics by causing
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors. Certain provisions in
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the Company's Restated Articles of Incorporation, Restated Bylaws and the
Shareholder Rights Plan, as well as Washington law, and the ability of the Board
of Directors to issue Preferred Stock, may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price, and the voting and other rights of the
holders of Common Stock.
LIMITED TRADING HISTORY; POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has experienced fluctuations since it
commenced trading in October 1996. There can be no assurance that the market
price of the Common Stock will not fluctuate significantly. Announcements
concerning the Company or its competitors, quarterly variations in operating
results, the introduction of new technology or products or changes in product
pricing policies by the Company or its competitors, changes in earnings
estimates by analysts or changes in accounting policies, among other factors,
could cause the market price of the Common Stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years. This volatility has had a substantial effect on the market prices
of securities of many smaller public companies for reasons frequently unrelated
or disproportionate to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock.
ITEM 2. FACILITIES
The Company currently leases a 41,000 square foot facility in Redmond,
Washington, under a lease which expires in 2005. This facility currently houses
the primary executive offices of the Company, as well as its marketing, sales,
customer support, research and development, systems engineering, and
manufacturing organizations. In addition, the Company leases a 20,000 square
foot facility in Redmond, Washington, for its warehouse needs, as well as office
space throughout the United States for its regional sales offices and in Paris,
France for the sales, marketing, and customer support organizations serving
Europe, the Middle East, and Africa.
The Company has leased a 64,780 square foot building, located approximately
one mile from its primary facility, which is currently under construction. The
expected construction completion and rent commencement date is April 1, 1998 and
the lease has a term of ten years. The Company is negotiating with the owner of
the facility it currently occupies regarding possible early lease termination.
In addition, the Company is reviewing the possibility of sub-leasing the
facility to a third party. Because the lease for the current facility is at
below market rental rates, the Company believes that it will be successful in
one of these efforts. The Company is liable, however, on both leases, and there
can be no assurance that it will be successful in reducing its obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company has no legal proceedings of a material nature underway.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the Company's
fourth quarter.
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDERS
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol ADIC on October 17, 1996. As of October 31, 1997, there were
approximately 296 shareholders of
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record. The following table shows the high and low sales prices for the Common
Stock for the periods indicated, as reported by the Nasdaq National Market
System.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
October 17, 1996 to October 31, 1996........................................... $14 3/4 $10
Fiscal Year 1997
1st Quarter.................................................................. $23 $10
2nd Quarter.................................................................. $22 1/4 $12 1/8
3rd Quarter.................................................................. $19 1/4 $13 3/4
4th Quarter.................................................................. $22 3/4 $14 5/8
</TABLE>
It is not anticipated that cash dividends will be paid on shares of the
Company's Common Stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company are derived from the
Company's historical financial statements and notes thereto. For the
approximately three-year period from November 1, 1993 to October 15, 1996, the
selected consolidated financial data relate to the operations of the Company as
part of Interpoint. For the year ended September 30, 1993 and the period
subsequent to October 15, 1996, the selected financial data relate to the
operation of the Company as an independent company. The information set forth
below should be read in conjunction with the Company's financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
FISCAL YEAR ENDED FISCAL YEAR
OCTOBER 31, ENDED
-------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994(1)(2) 1993(1)
--------- --------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales............................................. $ 93,204 $ 58,957 $ 31,716 $ 20,083 $ 17,108
Gross profit.......................................... 27,648 17,070 9,609 6,588 6,333
Acquisition expenses.................................. -- -- -- 590 --
Income (loss) before provision (benefit) for income
taxes............................................... 12,663 5,288 215 (142) 1,593
Net income (loss)..................................... 8,497 3,430 292 (42) 1,285
Net income per share.................................. $ 0.91
Pro forma net income per share(3) (unaudited)......... $ 0.41 $ 0.04
CONSOLIDATED BALANCE SHEETS:
Working capital....................................... $ 53,358 $ 24,596 $ 7,249 $ 4,156 $ 3,004
Total assets.......................................... 75,194 36,710 13,943 8,710 5,895
Long-term debt and loan from Interpoint, excluding
current portion..................................... -- -- 5,434 2,358 672
Shareholders' equity.................................. 60,110 26,387 3,387 3,027 2,808
</TABLE>
- ------------------------
(1) In order to conform the Company's fiscal year to Interpoint's fiscal year
upon the merger of the Company into Interpoint in February 1994, in a
transaction accounted for as a pooling of interests, the Company's financial
statements for the month of October 1993 are not included in either the
fiscal year ended September 30, 1993 or the fiscal year ended October 31,
1994.
(2) In February 1994, the Company incurred $590,000 in acquisition-related
expenses associated with its acquisition by Interpoint. Also, in June 1994,
the Company acquired its wholly owned subsidiary, ADIC Europe, in a
transaction accounted for as a purchase.
(3) Unaudited pro forma net income per share for the fiscal year ended October
31, 1995 is calculated based on the number of shares of Interpoint Common
Stock outstanding at June 30, 1996, plus the incremental shares outstanding,
as calculated under the treasury stock method, based on the number of ADIC
stock options outstanding as a result of the distribution of shares of ADIC
Common Stock to Interpoint shareholders (the "Distribution"). Unaudited pro
forma net income per share for the fiscal year ended October 31, 1996 is
based on the number of shares of ADIC common stock outstanding at October
31, 1996, plus the incremental shares outstanding, as calculated under the
treasury stock method, at the same date.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
GENERAL
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THIS
DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. THE CAUTIONARY STATEMENTS MADE IN THIS
ANNUAL REPORT ON FORM 10-K SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS THAT MAY BE REQUIRED TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
The Company was incorporated in 1984 to develop data backup and storage
subsystems for computer systems, and introduced its first product that same
year. The Company's initial products used a variety of data storage technologies
and media supplied by third parties, including large-capacity hard disks. In
1988, with the objective of increasing the proprietary features of its product
line, the Company introduced a random access automatic tape changer, the
LANbacker. Building on the proprietary electro-mechanical robotics and firmware
incorporated into the LANbacker, in November 1991 the Company introduced a data
backup tape changer product utilizing 4mm/DAT technology, the first product in
its automated tape library family. Subsequently, the Company has pursued a
strategy of offering the market a full range of automated tape library products
through development of new library platforms that incorporate DLT, 8mm/SDX,
4mm/DAT and 8mm magnetic tape drive technologies. In addition to automated tape
libraries, the Company also markets tape products such as standalone tape drives
and tape media in order to offer its customers a complete line of tape products
for their backup and archiving needs.
FISCAL YEAR 1997 COMPARED TO 1996
NET SALES. Net sales for the year ended October 31, 1997 increased 58% to
$93.2 million as compared to $59.0 million for fiscal 1996. The increase in net
sales was due primarily to strong unit sales volume of the Company's DLT-based
products, particularly the VLS DLT and Scalar automated tape libraries, and the
DS9000 series standalone tape drives. Net sales of older products, including
4mm/DAT and 8mm tape libraries decreased in fiscal 1997. The Company reduced its
prices on selected products at various times throughout the year. Sales outside
the United States were $30.6 million or 33% of net sales for the year ended
October 31, 1997 compared to $21.2 million or 36% of net sales for fiscal 1996.
International sales are typically made in U.S. dollars but may also be made in
foreign currencies.
GROSS PROFIT. Gross profit was $27.6 million or 30% of net sales for the
year ended October 31, 1997 compared to $17.1 million or 29% of net sales in
fiscal 1996. Gross profit margin for the current year was higher than fiscal
1996 due to a shift in product mix toward higher-margin Scalar libraries and
product cost reduction efforts. The cost of direct material, specifically the
DLT tape drives, comprised a substantial majority of cost of sales in both
fiscal 1997 and 1996. Gross profit margins are dependent on a number of factors,
including customer and product mix, price competition and tape drive costs.
There can be no assurance that the Company can improve upon or maintain the
current gross margin levels, given that tape drives purchased from third-party
suppliers are a significant component of the Company's product costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $13.6 million or 15% of net sales for the year ended October 31, 1997
compared to $9.8 million or 17% of net sales for fiscal 1996. Selling and
administrative expenses for the year ended October 31, 1997 decreased as a
percentage of net sales as increased net sales reflected the benefits of the
Company's significant investments in sales and marketing resources in fiscal
years 1996 and 1995. Net sales volume in the fiscal year increased 58%
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compared to a corresponding 38% increase in selling and administrative expenses.
The dollar increase in selling and administrative expenses over fiscal 1996 was
primarily due to additions to sales and marketing staff, increased advertising
costs and increased administrative overhead. The Company does not expect selling
and administrative expenses as a percentage of net sales to decline from the
levels experienced in fiscal 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$2.9 million or 3% of net sales for the year ended October 31, 1997 compared to
$1.5 million or 3% of net sales for fiscal 1996. Actual dollar spending during
the current year was higher than fiscal 1996 due to increases in development
expenses for the new FastStor products released in the final quarter of fiscal
1997 as well as the Scalar 218 series, and additions to research and engineering
staff. Research and development expenses are expected to continue at
approximately 3% of net sales.
OTHER INCOME (EXPENSE). Other income for the year ended October 31, 1997
was $1.5 million compared to expense of $395,000 for fiscal 1996. As a result of
the proceeds from issuance of common stock received in March as well as
Interpoint's forgiveness of all intercompany loans to ADIC and contribution of
cash to ADIC in October 1996, the Company realized $1.1 million of interest
income in the fiscal year ended October 31, 1997, rather than $508,000 of
interest expense incurred in fiscal 1996. Net foreign currency translation gains
increased approximately $271,000 between the comparison periods. Foreign
currency gains or losses arise as a result of the operation of ADIC Europe, the
functional currency of which is French francs. ADIC Europe buys products from
ADIC in U.S. dollars and resells a significant majority of such products in U.S.
dollars. However, because francs are used as the functional accounting currency,
all monetary assets and liabilities are translated into francs on ADIC Europe's
financial statements. To the extent that these monetary assets and liabilities
do not fully offset each other and the franc-to-U.S.-dollar exchange rate
changes, transaction gains or losses may result. For large sales denominated in
other currencies, the Company attempts to implement appropriate hedging
strategies.
PROVISION FOR INCOME TAXES. Income tax expense for the year ended October
31, 1997 was $4.2 million compared to $1.9 million for fiscal 1996. The 32.9%
effective tax rate reflects the Company's investment in certain non-taxable
bonds, as well as the utilization of certain credits for increasing research
activities. The provision includes taxes paid in various federal, state and
international jurisdictions.
FISCAL YEAR 1996 COMPARED TO 1995
NET SALES. Net sales increased 86% to $59.0 million in fiscal 1996 from
$31.7 million in fiscal 1995. The increase resulted primarily from strong sales
volume in the Company's DLT-based products, which were introduced beginning late
in fiscal 1995, and related media. Net sales of older products, including
certain 4mm and 8mm tape libraries, decreased somewhat in fiscal 1996. Several
times during fiscal 1996 the Company reduced its end-user list prices on
selected products. Sales outside the United States were $21.2 million or 36% of
net sales in fiscal 1996 compared to $14.9 million or 47% of net sales in fiscal
1995.
GROSS PROFIT. Gross profit increased to $17.1 million in fiscal 1996 from
$9.6 million in fiscal 1995. Gross profit as a percentage of net sales decreased
to 29% in fiscal 1996 from 30% of sales in fiscal 1995 due to the shift in
product mix to DLT-based products, which have a higher per-unit tape drive cost
than products incorporating 4mm/DAT or 8mm drives. The cost of direct material
comprised a substantial majority of cost of sales in both years with the most
significant cost item being the tape drives purchased from third parties.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
totaled $9.8 million or 17% of sales in fiscal 1996 compared to $8.0 or 25% of
net sales in fiscal 1995. This increased dollar spending reflected a strategic
decision to increase the Company's investment in sales and marketing. These
investments include costs of European sales activities acquired in the purchase
of ADIC Europe and the addition of experienced sales and marketing personnel in
the United States. These expenses decreased as a
19
<PAGE>
percentage of net sales in fiscal 1996 compared to fiscal 1995 as the Company
was able to leverage its investment in these resources with larger sales volume.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
totaled $1.5 million or 3% of net sales in fiscal 1996 compared to $1.1 million
or 3% of net sales in fiscal 1995. The increase in dollar spending in fiscal
1996 was due to increases in development expenses for the Company's VLS DLT and
Scalar DLT products.
OTHER INCOME (EXPENSE). Other expense was $395,000 in fiscal 1996 compared
to $296,000 in fiscal 1995. Interest expense increased by $231,000 from fiscal
1995 to fiscal 1996 because of increased borrowings from Interpoint which were
forgiven prior to the effective date of the Distribution. Offsetting these
expenses in fiscal 1996 were gains from foreign currency transactions of
$114,000.
PROVISION FOR INCOME TAXES. The provision for income tax expense for fiscal
1996 was $1.9 million, which represented an effective tax rate of 35.1% compared
to a benefit for income taxes of $78,000 in fiscal 1995. The benefit for income
taxes in fiscal 1995 was due primarily to the recognition of certain operating
loss carryforwards at ADIC Europe. In addition, certain federal tax credits
reduced the effective tax rate in both years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $2.7 million of cash in fiscal
1997 compared to net usage of cash from operating activities of $3.5 million and
$1.9 million in fiscal 1996 and 1995, respectively. In each of the three years,
cash was used primarily to fund increases in accounts receivable and inventories
and was offset by net income and increases in accounts payable and other accrued
liabilities. In fiscal 1996 and 1995, the Company financed its growth through
loans from Interpoint, and the net increases in the amount of such loans was
$4.2 million and $3.1 million, respectively. Prior to the Distribution,
Interpoint made a contribution to the working capital of the Company through the
cancellation of all $9.6 million of Company indebtedness to Interpoint.
Interpoint also contributed an additional $10.0 million in cash to the working
capital of the Company at the time of the Distribution. During fiscal 1997, the
Company realized $1.5 million due to the exercise of stock options by Team
Members, including tax benefits of $1.1 million.
In fiscal 1997, the Company used $4.0 million to acquire a minority equity
position in Crossroads Holding Corp. the parent company of Crossroads Systems,
Inc. a provider of Fibre Channel interconnection products. In addition, the
Company used cash in the amounts of $1.8 million, $911,000 and $757,000 to
acquire property, plant and equipment in fiscal years 1997, 1996 and 1995,
respectively.
At October 31, 1997, the Company had cash and cash equivalents of $32.8
million. As of that date, ADIC also had a $10.0 million bank line of credit that
expires at the end of fiscal 1998, all of which was available. Any borrowings
under this line of credit would bear interest at the bank's prime rate or
adjusted LIBOR rate. The Company had no material or unusual commitments as of
October 31, 1997 other than annual rental commitments under noncancellable
operating leases for the Company's facilities.
The Company believes that its existing cash and cash equivalents and bank
line of credit, together with the results of operations, will be sufficient to
fund its working capital and capital expenditure needs for at least the next 12
months. The Company's significant computer systems recognize the year 2000,
therefore, the Company does not expect to have a material cost or disruption of
business due to this change. The Company may utilize cash to acquire or invest
in businesses, products or technologies that it believes are strategic. From
time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies. However,
the Company has no present understanding, commitments or agreements with respect
to any material acquisition of other businesses, products or technologies.
20
<PAGE>
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 22
Consolidated Balance Sheets at October 31, 1997 and October 31, 1996....................................... 23
Consolidated Statements of Income for each of the three years in the period ended October 31, 1997......... 24
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended
October 31, 1997......................................................................................... 25
Consolidated Statements of Cash Flows for each of the three years in the period ended October 31, 1997..... 26
Notes to Consolidated Financial Statements................................................................. 27
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Advanced Digital Information Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) present fairly, in all material respects,
the financial position of Advanced Digital Information Corporation and its
subsidiary at October 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended October 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1, Advanced Digital Information Corporation was a
wholly owned subsidiary of Interpoint Corporation prior to October 15, 1996.
Price Waterhouse LLP
Seattle, Washington
November 26, 1997
22
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 32,806,822 $ 10,436,783
Accounts receivable, net of allowances of $324,000 in 1997 and $187,000 in
1996........................................................................... 18,078,302 12,789,415
Inventories, net................................................................. 16,074,787 10,935,520
Prepaid expenses and other....................................................... 714,979 282,183
Deferred income taxes............................................................ 767,688 474,456
------------- -------------
Total current assets........................................................... 68,442,578 34,918,357
------------- -------------
Property, plant and equipment, at cost:
Machinery and equipment.......................................................... 4,366,343 2,713,682
Office equipment................................................................. 417,116 350,700
Leasehold improvements........................................................... 415,493 357,282
------------- -------------
5,198,952 3,421,664
Less: accumulated depreciation and amortization.................................. (2,689,685) (1,855,457)
------------- -------------
Net property, plant and equipment.............................................. 2,509,267 1,566,207
------------- -------------
Deferred income taxes.............................................................. 89,414 10,370
------------- -------------
Investment in Crossroads Holding Corp. and other assets............................ 4,152,634 214,739
------------- -------------
$ 75,193,893 $ 36,709,673
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 11,237,131 $ 8,460,723
Accrued liabilities.............................................................. 2,594,831 1,608,132
Income taxes payable............................................................. 1,252,324 253,716
------------- -------------
Total current liabilities...................................................... 15,084,286 10,322,571
------------- -------------
Commitments (Note 11).............................................................. -- --
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized; none issued and
outstanding.................................................................... -- --
Common stock, no par value; 40,000,000 shares authorized, 9,699,824 issued and
outstanding at October 31, 1997 (8,001,992 in 1996)............................ 45,808,291 20,329,806
Retained earnings................................................................ 14,479,104 5,981,906
Cumulative translation adjustment................................................ (177,788) 75,390
------------- -------------
Total shareholders' equity..................................................... 60,109,607 26,387,102
------------- -------------
$ 75,193,893 $ 36,709,673
------------- -------------
------------- -------------
</TABLE>
See the accompanying notes to these consolidated financial statements.
23
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- -------------
Net sales........................................................... $ 93,203,531 $ 58,956,993 $ 31,716,372
Cost of sales....................................................... 65,555,559 41,886,619 22,107,341
------------- ------------- -------------
Gross profit...................................................... 27,647,972 17,070,374 9,609,031
------------- ------------- -------------
Operating expenses:
Selling and administrative........................................ 13,556,059 9,846,324 8,001,290
Research and development.......................................... 2,909,460 1,541,647 1,097,090
------------- ------------- -------------
16,465,519 11,387,971 9,098,380
------------- ------------- -------------
Operating profit.................................................... 11,182,453 5,682,403 510,651
------------- ------------- -------------
Other income (expense):
Interest income (expense), net.................................... 1,095,991 (508,492) (277,451)
Foreign currency transaction gains (losses)....................... 384,972 113,821 (18,476)
------------- ------------- -------------
1,480,963 (394,671) (295,927)
------------- ------------- -------------
Income before provision for income taxes............................ 12,663,416 5,287,732 214,724
------------- ------------- -------------
Provision (benefit) for income taxes:
Current........................................................... 4,538,494 1,981,631 176,422
Deferred.......................................................... (372,276) (124,098) (254,104)
------------- ------------- -------------
4,166,218 1,857,533 (77,682)
------------- ------------- -------------
Net income.......................................................... $ 8,497,198 $ 3,430,199 $ 292,406
------------- ------------- -------------
------------- ------------- -------------
Average number of common and common equivalent shares outstanding... 9,389,000
-------------
-------------
Net income per share................................................ $ .91
-------------
-------------
Pro forma average number of common and common equivalent shares
outstanding (unaudited)........................................... 8,274,000 8,010,000
------------- -------------
------------- -------------
Pro forma net income per share (unaudited).......................... $ .41 $ .04
------------- -------------
------------- -------------
</TABLE>
See the accompanying notes to these consolidated financial statements.
24
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1994............... 1,000 $ 701,752 $ 2,259,301 $ 66,391 $ 3,027,444
Net income................................ 292,406 292,406
Foreign currency translation adjustment... 66,928 66,928
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1995............... 1,000 701,752 2,551,707 133,319 3,386,778
Stock dividend to Interpoint.............. 8,000,992
Contribution of capital from Interpoint... 19,628,054 19,628,054
Net income................................ 3,430,199 3,430,199
Foreign currency translation adjustment... (57,929) (57,929)
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1996............... 8,001,992 20,329,806 5,981,906 75,390 26,387,102
Shares issued, net of costs............... 1,500,000 23,708,784 23,708,784
Contribution of capital................... 266,503 266,503
Exercise of stock options, including tax
benefit of $1,064,197................... 197,832 1,503,198 1,503,198
Net income................................ 8,497,198 8,497,198
Foreign currency translation adjustment... (253,178) (253,178)
---------- ------------- ------------- ----------- -------------
Balance at October 31, 1997............... 9,699,824 $ 45,808,291 $ 14,479,104 $ (177,788) $ 60,109,607
---------- ------------- ------------- ----------- -------------
---------- ------------- ------------- ----------- -------------
</TABLE>
See the accompanying notes to these consolidated financial statements.
25
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 8,497,198 $ 3,430,199 $ 292,406
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................... 847,234 607,479 483,739
Deferred taxes.................................................. (372,276) (124,098) (254,104)
Assets retired.................................................. -- -- 2,156
Change in assets and liabilities:
Accounts receivable............................................. (5,425,020) (6,999,440) (1,662,846)
Inventories..................................................... (5,278,505) (5,603,131) (2,563,452)
Prepaid expenses and other...................................... (443,687) (60,355) (39,788)
Income taxes receivable......................................... -- -- 161,344
Other assets.................................................... 39,424 24,221 (59,474)
Accounts payable................................................ 2,824,342 4,544,059 1,418,558
Accrued liabilities............................................. 1,052,028 649,061 122,416
Income taxes payable............................................ 1,006,809 49,692 204,024
------------- ------------- -------------
Net cash provided by (used in) operating activities................. 2,747,547 (3,482,313) (1,895,021)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................... (1,831,493) (910,718) (756,935)
Investment in Crossroads Holding Corp............................. (4,000,000) -- --
------------- ------------- -------------
Net cash used in investing activities............................... (5,831,493) (910,718) (756,935)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net....................... 23,708,784
Capital contribution from Interpoint, net of loans forgiven....... 266,503 10,000,000 --
Proceeds from issuance of common stock for stock option........... 1,503,198 -- --
Net increase in loans from Interpoint............................. -- 4,218,366 3,076,418
------------- ------------- -------------
Net cash provided by financing activities........................... 25,478,485 14,218,366 3,076,418
------------- ------------- -------------
Effect of exchange rate changes on cash............................. (24,500) (12,390) 15,391
------------- ------------- -------------
Net increase in cash and cash equivalents........................... 22,370,039 9,812,945 439,853
Cash and cash equivalents at beginning of period.................... 10,436,783 623,838 183,985
------------- ------------- -------------
Cash and cash equivalents at end of period.......................... $ 32,806,822 $ 10,436,783 $ 623,838
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for:
Interest.......................................................... $ -- $ 508,492 $ 277,451
Income taxes...................................................... $ 2,467,469 $ 404,668 $ (147,746)
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans from Interpoint Corporation, in the amount of $9,628,054, were
forgiven just prior to the Distribution (Note 1).
See the accompanying notes to these consolidated financial statements.
26
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Advanced Digital Information Corporation ("ADIC" or the "Company"),
including its wholly owned subsidiary ADIC Europe SARL ("ADE"), designs,
manufactures and markets automated high performance data storage products used
to file or archive electronic data in conjunction with integrated computer
systems, including local area networks, workstations and other microcomputer
systems. The Company sells its products on an international basis to resellers,
original equipment manufacturers ("OEMs") and end users.
On February 11, 1994, the Company was acquired by Interpoint Corporation
("Interpoint") pursuant to an Agreement and Plan of Merger dated October 29,
1993, in which the Company was merged into a wholly owned subsidiary of
Interpoint. According to the terms of the merger agreement, each outstanding
share of common stock of ADIC was converted into .55 shares of Interpoint common
stock. A total of 1,340,255 shares of Interpoint common stock were issued to
ADIC shareholders. The acquisition was accounted for as a pooling-of-interest in
accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations."
On October 15, 1996, Interpoint distributed to its shareholders all of the
outstanding shares of ADIC (the "Distribution"). The Distribution was made in
connection with, and was a condition precedent to, the merger of Interpoint with
a wholly owned subsidiary of Crane Co., a Delaware corporation. Prior to the
Distribution, Interpoint made a contribution to the working capital of ADIC
through the cancellation of all intercompany indebtedness of ADIC and ADE to
Interpoint, transferred certain other assets to ADIC, including its ownership of
ADE, and contributed additional cash to ADIC for working capital of $10 million.
Total capital contributions were $19,628,054.
The consolidated financial statements for all periods prior to October 15,
1996 reflect the results of operations, financial position, and cash flows of
ADIC as a wholly owned subsidiary of Interpoint and may not be indicative of
actual results of operations and financial position of the Company under other
ownership.
The consolidated statements of income for the fiscal years ended October 31,
1996 and 1995 reflect certain expense items incurred by Interpoint which were
allocated to the Company on a basis which management believes represents a
reasonable allocation of such costs to present ADIC as a stand-alone company.
These allocations consist primarily of corporate expenses such as executive and
other compensation and interest expense on intercompany borrowings. Compensation
has been allocated based on an estimate of Interpoint personnel time dedicated
to the operations and management of ADIC. Interest expense has been allocated
based on Interpoint's borrowing rate and actual intercompany borrowings. A
summary of these allocations is as follows:
<TABLE>
<CAPTION>
CORPORATE INTEREST
YEAR ENDED: EXPENSES EXPENSE
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
October 31, 1996...................................................... $ 177,292 $ 528,524
---------- ----------
---------- ----------
October 31, 1995...................................................... $ 175,400 $ 279,279
---------- ----------
---------- ----------
</TABLE>
27
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of ADIC and its wholly
owned subsidiary ADIC Europe SARL. All intercompany transactions have been
eliminated.
EARNINGS PER SHARE
Given the Company's historical capital structure as a wholly owned
subsidiary of Interpoint, historical earnings per share amounts are not
presented in the consolidated financial statements for the fiscal years ended
October 31, 1996 and 1995 as they are not considered to be meaningful. For the
fiscal year ended October 31, 1997, primary earnings per share is computed by
dividing net income available to common shareholders by the weighted average
number of shares outstanding plus the common stock equivalents attributable to
dilutive stock options during the period. Fully diluted earnings per share does
not differ materially from primary earnings per share.
UNAUDITED PRO FORMA EARNINGS PER SHARE
In connection with the spin-off of ADIC by Interpoint as previously
described, Interpoint shareholders received one share of ADIC common stock for
each share of Interpoint stock held. Additionally, Interpoint stock options held
by ADIC Team Members and Directors were converted in part to cash and in part to
ADIC stock options.
Unaudited pro forma net income per share for the fiscal year ended October
31, 1996 is based on the number of shares of ADIC stock outstanding at October
31, 1996, plus the incremental shares outstanding, as calculated under the
treasury stock method at the same date. For the fiscal year ended October 31,
1995 it is calculated based on the number of shares of Interpoint stock
outstanding at June 30, 1996, plus the incremental shares outstanding, as
calculated under the treasury stock method, of the ADIC stock options
outstanding as a result of the spin-off.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments in commercial paper and marketable
debt securities which are readily convertible to cash without penalty and
subject to insignificant risk of changes in value. The Company's cash and cash
equivalents balance consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Cash........................................................... $ 8,091,286 $ 10,436,783
Commercial paper............................................... 4,457,558 --
Marketable debt securities..................................... 20,257,978 --
------------- -------------
$ 32,806,822 $ 10,436,783
------------- -------------
------------- -------------
</TABLE>
The marketable debt securities are variable rate instruments which are
readily convertible to cash. However, the remaining contractual maturities of
these instruments range from 3 to 27 years.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
28
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation and
amortization are computed on the straight-line method over the estimated useful
lives of the assets as follows: machinery and equipment and office equipment, 3
to 10 years; leasehold improvements, the life of the lease. Amortization of
leasehold improvements with a net book value of $165,000 has been accelerated
due to the planned move of Company headquarters during fiscal year 1998 (Note
11).
INCOME TAXES
Provision for income taxes has been recorded in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS
109"). Under the liability method of FAS 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to be recovered or
settled.
Commencing February 12, 1994 through October 15, 1996, the Company's
operations have been included in consolidated income tax returns filed by
Interpoint. Income taxes in the accompanying financial statements for the
associated periods have been computed assuming the Company filed separate income
tax returns worldwide. Deferred taxes result primarily from the use of
accelerated depreciation for tax purposes and from the timing of tax deductions
for allowances and accrued expenses.
FOREIGN CURRENCY TRANSLATION
The financial statements of ADE have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation." Under the provisions of this Statement, all assets and
liabilities in the balance sheets of ADE, whose functional currency is the
French franc, are translated at year-end exchange rates, and translation gains
and losses are accumulated in a separate component of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS AND FORWARD CONTRACTS
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency, including U.S. dollars. Gains and losses on those foreign
currency transactions are included in determining net income or loss for the
period in which exchange rates change. The effect of exchange rate fluctuations
on the results of operations is minimized by the offsetting nature of ADE
foreign currency transactions. In addition, the Company may enter into foreign
currency forward contracts to hedge transactions which are not otherwise offset.
Foreign currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method, and are typically three
months or less in length. There were no outstanding contracts at October 31,
1997 or 1996.
CONCENTRATION OF CREDIT RISK
The Company sells products to a wide variety of industries on a worldwide
basis. In countries or industries where the Company is exposed to material
credit risk, sufficient collateral, including cash deposits and/or letters of
credit, is required prior to the completion of a transaction. The Company does
29
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not believe there is a material credit risk beyond that provided in the
financial statements in the ordinary course of business.
The Company sells a significant portion of its products through third-party
resellers and, as a result, experiences individually significant annual sales
volumes with major distributors. Approximately $25,707,000 (28%) and $18,101,000
(19%) of the Company's fiscal 1997 revenues were from one customer and a second
customer, respectively. The same two customers accounted for fiscal 1996 and
1995 revenues of $13,315,000 (23%) and $12,610,000 (21%), and $4,329,000 (14%)
and $5,151,000 (16%), respectively. These two customers represented 58% and 48%
of the accounts receivable balance at October 31, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the short-term nature of these instruments.
REVENUE RECOGNITION
Revenue from product sales is recorded by the Company when products are
shipped to customers. Certain distributors have the right, on a quarterly basis,
to return products according to a stock rotation policy. Typically, the value of
the products returned can not exceed 15% of the previous quarter's purchases,
the returns must be accompanied by offsetting orders of commensurate value, and
the products returned must be new and in sealed cartons. The Company accrues a
provision for the estimated sales returns, allowances and discounts in the
period the products are shipped to customers.
WARRANTY EXPENSE
For standard Company products, parts and labor are covered under warranty
for two years. With respect to drives and tapes used in the Company's products
but manufactured by a third party, the Company passes on to the customer the
warranty on such drives and tapes provided by the manufacturer.
ADVERTISING EXPENSE
The Company accrues for co-operative advertising as the related revenue is
earned, and other advertising expense is recorded as incurred. Advertising
expense for the years ended October 31, 1997, 1996 and 1995 was $1,421,000
$959,000 and $506,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which was effective for the Company beginning in
fiscal 1997. Under the provisions of FAS 123, employee stock-based compensation
expense is measured using either the intrinsic-value method as prescribed by
Accounting Principles Board
30
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") or the
fair value method described in FAS 123. Companies choosing the intrinsic-value
method are required to disclose the pro forma impact of the fair value method on
net income and net income per share. The Company has elected to continue
accounting for its team member stock-based compensation under the provisions of
APB 25. The Company is required to implement FAS 123 for stock-based awards to
other than team members and directors; however, the impact on the Company's
financial position at October 31, 1997 and results of operations for the year
then ended is immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), was issued. This pronouncement modifies the
calculation and disclosure of earnings per share and will be adopted by the
Company in its financial statements for the year ending October 31, 1998.
Adoption of FAS 128 is not expected to have a material impact on the Company's
earnings per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change in the
near term are the adequacy of the allowances for sales returns, inventory
obsolescence and warranty costs.
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Finished goods................................................. $ 8,231,656 $ 4,688,604
Work-in-process................................................ 1,416,067 1,503,691
Raw materials.................................................. 7,557,748 5,602,312
------------- -------------
17,205,471 11,794,607
Allowance for inventory obsolescence........................... (1,130,684) (859,087)
------------- -------------
$ 16,074,787 $ 10,935,520
------------- -------------
------------- -------------
</TABLE>
31
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Accrued payroll and related liabilities........................... $ 1,646,813 $ 1,057,472
Allowance for warranty returns.................................... 375,497 354,557
Taxes, other than income.......................................... 254,564 41,001
Other............................................................. 317,957 155,102
------------ ------------
$ 2,594,831 $ 1,608,132
------------ ------------
------------ ------------
</TABLE>
5. INVESTMENT IN CROSSROADS HOLDING CORP.
In August 1997, the Company purchased an approximately 15% interest in
Crossroads Holding Corp. for an aggregate purchase price of $4,000,000. This
investment is accounted for under the cost method. Crossroads Systems, Inc.
("Crossroads"), a wholly owned subsidiary of Crossroads Holding Corp., develops
products that provide interconnectivity between various network protocols and
Fibre Channel networks. Under an OEM agreement with Crossroads also entered into
in August, the Company will market interconnectivity products developed by
Crossroads under the ADIC brand name and serve as a master distributor for
Crossroads products.
6. CREDIT AGREEMENT
ADIC has a $10 million unsecured line of credit with a bank expiring October
31, 1998. All of this line was available at October 31, 1997. Borrowings against
the line of credit will bear interest at the bank's prime rate or adjusted LIBOR
rate.
7. CAPITAL STOCK
STOCK ISSUANCE
On March 12, 1997, ADIC completed a public offering of 1,525,000 shares of
its common stock. Of the total, 1,500,000 were sold by the Company and 25,000
shares were sold by a selling shareholder. Net proceeds of $23,709,000 were
received and will be used for working capital and other general corporate
purposes.
SHAREHOLDER RIGHTS PLAN
In July 1996, the Board of Directors adopted a shareholder rights plan
("Shareholder Rights Plan") in which preferred stock purchase rights were
distributed as a dividend at the rate of one right for each share of ADIC common
stock. The Shareholder Rights Plan is designed to deter coercive takeover
tactics and ensure that the Board of Directors can adequately protect the
interests of the shareholders in the event of a takeover attempt.
8. STOCK-BASED COMPENSATION PLANS
At October 31, 1997, the Company had two stock option plans. The 1996
Transition Plan comprises the stock options held by ADIC team members and
directors which were converted in connection with the
32
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
spin-off. There were 476,092 options issued under this plan at exercise prices
ranging from $.4397 to $5.2328. Some of these options were granted by ADIC prior
to its acquisition in February 1994 and were converted to options to purchase
shares of Interpoint common stock at that time. No further options may be issued
under this plan.
In addition, 625,000 shares are reserved under the Company's 1996 Stock
Option Plan for team members, directors, officers, consultants, agents, advisors
and independent contractors of the Company. Terms of both plans require the
option price to be equal to the fair market value on the date of grant. Options
may be exerciseable for all or part of the shares as determined by the option
and the majority of the options issued under these plans expire five years from
the date of grant.
The Company accounts for the above described stock option plans (the
"Plans") following the guidelines of APB 25 and related interpretations. No
compensation cost has been recognized for stock options granted under these
Plans. Had compensation cost for the Company's Plans been determined based on
the fair value at the grant dates for awards under those Plans consistent with
the method of FAS 123, the Company's net income, net income per share and pro
forma net income per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net income:
As reported..................................................... $ 8,497,198 $ 3,430,199
Pro forma....................................................... $ 7,563,013 $ 3,367,350
Net income and pro forma net income per share:
As reported..................................................... $ .91 $ .41
Pro forma....................................................... $ .81 $ .41
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Weighted average risk free interest rates....................................... 6.00% 6.01%
Expected dividend yield......................................................... 0% 0%
Expected volatility............................................................. 65% 65%
Expected lives (in years)....................................................... 4 4
</TABLE>
The Black-Scholes option pricing model requires the input of highly
subjective assumptions and does not necessarily provide a reliable measure of
fair value.
33
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Options granted, exercised and canceled under the Plans are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- -----------
<S> <C> <C>
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
----------
----------
</TABLE>
At October 31, 1997, a total of 247,990 options were exercisable, the
weighted average exercise price of these options was $6.40. The weighted average
grant date fair value of options granted in fiscal 1997 and fiscal 1996 was
$9.47 and $6.38 respectively.
The following table summarizes information about stock options outstanding
at October 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISEABLE PRICE
- --------------------------- ----------- -------------- ----------- ----------- -----------
$0.7995 - $1.8029 78,700 23 mos $ 1.43 76,500 $ 1.42
$2.4625 - $5.2328 195,110 37 mos $ 3.76 80,550 $ 3.44
$10.7500 - $13.5000 369,375 48 mos $ 13.22 90,940 $ 13.23
$14.9375 - $20.3750 241,851 57 mos $ 17.53 -- --
</TABLE>
9. FEDERAL INCOME TAXES
Income before provision (benefit) for income taxes was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Current income tax:
U.S. Federal....................................... $ 3,692,339 $ 1,881,631 $ 166,422
Foreign............................................ 832,155 -- --
State and local.................................... 14,000 100,000 10,000
------------ ------------ -----------
Total current...................................... 4,538,494 1,981,631 176,422
------------ ------------ -----------
Deferred income tax:
U.S. Federal....................................... (372,276) (267,260) (97,456)
Foreign............................................ -- 143,162 (156,648)
------------ ------------ -----------
Total deferred..................................... (372,276) (124,098) (254,104)
------------ ------------ -----------
Total provision (benefit) for income taxes........... $ 4,166,218 $ 1,857,533 $ (77,682)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
34
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FEDERAL INCOME TAXES (CONTINUED)
The provision (benefit) for federal income tax differs from the amount
computed by applying the statutory federal income tax rate to income before
provision for income taxes for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Federal income tax at statutory rate of 34%.......... $ 4,305,561 $ 1,797,829 $ 73,006
Change in valuation allowance........................ -- -- (139,326)
Tax exempt interest income........................... (130,827) -- --
Tax credits.......................................... (127,604) (1,000) (44,874)
Activity of foreign subsidiaries..................... 126,686 (35,344) 17,848
State income taxes................................... 14,000 100,000 10,000
Other................................................ (21,598) (3,952) 5,664
------------ ------------ -----------
$ 4,166,218 $ 1,857,533 $ (77,682)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1997 and 1996 are:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories....................................................... $ 399,509 $ 297,951
Team member compensated absences.................................. 25,845 25,081
Allowance for warranty returns.................................... 85,193 67,671
Allowances for bad debt and sales returns......................... 202,303 83,753
Plant and equipment............................................... 89,414 10,370
Other............................................................. 54,838 --
----------- -----------
Gross deferred tax assets....................................... $ 857,102 $ 484,826
----------- -----------
----------- -----------
</TABLE>
Deferred U.S. income taxes are not provided for the earnings of the
Company's foreign subsidiary because the Company expects those earnings will be
permanently reinvested. Net pretax operating results from the foreign subsidiary
are income of $2,075,000 and $407,000 for fiscal 1997 and 1996, respectively,
and loss of $51,000 for fiscal 1995.
10. PROFIT INCENTIVE AND BONUS PLANS
The Company currently has a non-contributory bonus plan for certain
high-level team members and a non-contributory profit sharing plan for all other
domestic team members. These plans are generally based upon a combination of
team member salaries and performance. No distributions are made under the bonus
plan if budgeted income is not achieved. Contributions to both plans combined
totaled $740,000 for fiscal 1997.
In fiscal 1995 and 1996, the Company's team members participated in
Interpoint's non-contributory profit incentive plan for key team members and a
non-contributory profit sharing plan for all regular full-time domestic team
members. These plans were generally based upon team member compensation and
pre-tax profits. The profit incentive plan allowed the Board of Directors to
provide between 5 and 35 percent of participating team members' salaries, after
a set minimum profitability was achieved, for
35
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PROFIT INCENTIVE AND BONUS PLANS (CONTINUED)
distribution to the plan's participants. The profit sharing plan provided that
15 percent of pretax profits would be contributed to the plan up to a maximum of
one month's pay. Contributions to the plans were $433,000 and $123,000 for the
years ended October 31, 1996 and 1995.
11. COMMITMENTS
The Company currently leases facilities in Redmond, Washington for
administrative, sales and marketing, research and development, operations and
warehouse activities. Sales offices are leased at various sites in the United
States and Europe. In addition, in October 1997 the Company committed to lease
additional facilities in Redmond, Washington with an expected lease commencement
date of April 1, 1998. The Company is negotiating with the owner of the facility
it currently occupies regarding possible early lease termination. In addition,
the Company is reviewing the possibility of sub-leasing the facility to a third
party. Because the lease for the existing facility is at below-market rental
rates, the Company believes that it will be successful in one of these efforts.
Minimum annual rental commitments at October 31, 1997, for noncancelable
operating leases, are shown in the following table. This table excludes
commitments on the current facility after March 1998. Total commitments under
this lease from April 1998 through August 2005, the lease termination date, are
$3,406,000.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AMOUNT
- ---------------------------------------------------------------------- ------------
<S> <C>
1998.................................................................. $ 974,640
1999.................................................................. $ 1,084,083
2000.................................................................. $ 1,072,775
2001.................................................................. $ 998,259
2002.................................................................. $ 1,033,884
</TABLE>
Rent expense aggregated $571,000 in fiscal 1997, $400,000 in fiscal 1996 and
$253,000 in fiscal 1995.
12. RELATED PARTY TRANSACTIONS
The Company leases its current headquarters facility from K-M Properties, a
general partnership of which Walter P. Kistler, a director, is a partner. The
lease began in September 1995. Rent payments for fiscal 1997, 1996 and 1995 were
$348,000, $301,000 and $50,000, respectively.
13. GEOGRAPHIC SEGMENT INFORMATION
Major operations outside the United States consist of ADE, the Company's
wholly owned subsidiary in France. Certain information regarding operations in
this geographic segment is presented in the table below. Transfers between
geographic segments are made at arms-length prices consistent with rules and
regulations of governing tax authorities. The profits on these transfers are not
recognized until sales are made to non-affiliated customers.
Excluded from U.S. net sales are transfers from the U.S. to ADE of
$14,488,000, $6,404,000 and $2,925,000 in 1997, 1996 and 1995, respectively.
Included in U.S. sales are export sales to unaffiliated customers of $7,329,000,
$4,666,000 and $2,495,000 in 1997, 1996 and 1995, respectively.
36
<PAGE>
13. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Total international sales were $30,611,000, $21,216,000 and $14,930,000 in
fiscal 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales:
United States................................. $ 69,921,043 $ 42,406,762 $ 19,281,763
Europe........................................ 23,282,488 16,550,231 12,434,609
------------- ------------- -------------
$ 93,203,531 $ 58,956,993 $ 31,716,372
------------- ------------- -------------
------------- ------------- -------------
Operating profit:
United States................................. $ 9,425,633 $ 5,209,722 $ 432,601
Europe........................................ 1,756,820 472,681 78,050
------------- ------------- -------------
$ 11,182,453 $ 5,682,403 $ 510,651
------------- ------------- -------------
------------- ------------- -------------
Identifiable assets:
United States................................. $ 66,394,754 $ 31,797,515 $ 8,930,769
Europe........................................ 8,799,139 4,912,158 5,012,261
------------- ------------- -------------
$ 75,193,893 $ 36,709,673 $ 13,943,030
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
14. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales................................................... $ 20,069 $ 22,073 $ 24,463 $ 26,599
Gross profit................................................ $ 5,971 $ 6,511 $ 7,066 $ 8,100
Net income.................................................. $ 1,661 $ 1,901 $ 2,262 $ 2,673
Net income per share........................................ $ 0.20 $ 0.21 $ 0.23 $ 0.27
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales................................................... $ 10,606 $ 13,779 $ 15,186 $ 19,386
Gross profit................................................ $ 2,994 $ 3,735 $ 4,253 $ 6,088
Net income.................................................. $ 292 $ 716 $ 933 $ 1,489
Pro forma net income per share.............................. $ 0.04 $ 0.09 $ 0.11 $ 0.17
</TABLE>
The fiscal year through October 15, 1996 reflects the Company's results of
operations as a wholly owned subsidiary of Interpoint.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III (Item 10, 11, 12 and 13) will be
included in the Registrant's Proxy Statement and is incorporated herein by
reference. Such Proxy Statement will be filed within 120 days of the
Registrant's last fiscal year end, October 31, 1997.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE
- ---------------------------------------------------------------------------------------------------------------------- -----
<S> <C> <C> <C>
a. The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Accountants............................................................... 22
Consolidated Balance Sheets at October 31, 1997 and 1996........................................ 23
Consolidated Statements of Income for each of the three years in the period ended October 31,
1997.......................................................................................... 24
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the
period ended October 31, 1997................................................................. 25
Consolidated Statements of Cash Flows for each of the three years in the period ended October
31, 1997...................................................................................... 26
Notes to Consolidated Financial Statements...................................................... 27
(2) Supplemental Financial Statement Schedule for each of the three years in the period ended
October 31, 1997:
VIII--Valuation and Qualifying Accounts......................................................... 39
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
b. REPORTS ON FORM 8-K. None.
c. EXHIBITS. See page 40 for index to exhibits.
38
<PAGE>
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR INCOME DEDUCTIONS* END OF YEAR
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE:
1997...................................................... $ 187,063 $ 166,666 $ 29,988 $ 323,741
1996...................................................... 53,455 212,205 78,597 187,063
1995...................................................... 54,008 26,450 27,003 53,455
ALLOWANCE FOR INVENTORY OBSOLESCENCE:
1997...................................................... 859,087 651,125 379,528 1,130,684
1996...................................................... 271,753 1,214,937 627,603 859,087
1995...................................................... 141,584 199,000 68,831 271,753
</TABLE>
- ------------
* Deductions represent amounts written off against the allowance, net of
recoveries.
39
<PAGE>
INDEX TO EXHIBITS
(ITEM 14C)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
3.1 Restated Articles of Incorporation of ADIC (Exhibit 3.1)......................................... (A)
3.2 Restated Bylaws of ADIC (Exhibit 3.2)............................................................ (A)
4.1 Rights Agreement, dated as of August 12, 1996, between ADIC and ChaseMellon Shareholders
Services, L.L.C., as Rights Agent (Exhibit 4.2)................................................ (A)
10.1 Lease Agreement and Work Letter Agreement between The Quadrant Corporation and ADIC, dated as of
November 5, 1997...............................................................................
10.2* ADIC Bonus Plan..................................................................................
10.3 Lease Agreement between K-M Properties and ADIC, dated as of May 11, 1995........................ (B)
10.4 Tax Allocation Agreement between ADIC and Interpoint Corporation (Exhibit 10.2).................. (A)
10.5* ADIC 1996 Stock Option Plan (Exhibit 10.3)....................................................... (A)
10.6* ADIC 1996 Transition Plan (Exhibit 10.4)......................................................... (A)
10.7 Form of Indemnification Agreement, together with schedule of agreements.......................... (C)
21.1 Subsidiaries of the Registrant...................................................................
23.1 Consent of Independent Accountants...............................................................
27.1 Financial Data Schedule..........................................................................
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement.
(A) Incorporated herein by reference to designated exhibit to Form 10
Information Statement filed September 10, 1996.
(B) Incorporated by reference to Exhibit 10.3 of the Interpoint Corporation
Annual Report on Form 10-K for the fiscal year ended October 31, 1995.
(C) Incorporated herein by reference to Exhibit 10.5 of the Advanced Digital
Information Corporation Annual Report on Form 10-K for the fiscal year ended
October 31, 1996.
40
<PAGE>
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)
<TABLE>
<S> <C> <C>
By:/s/ PETER H. VAN OPPEN
----------------------------------------
Peter H. van Oppen
Chairman and
Chief Executive Officer
</TABLE>
Dated: January 8, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
By /s/ LESLIE S. Treasurer and Chief January 8, 1998
ROCK Accounting Officer
- ------------------------------
Leslie S.
Rock
By /s/ CHRISTOPHER T. Director January 8, 1998
BAYLEY
- ------------------------------
Christopher T.
Bayley
By /s/ WALTER P. Director January 8, 1998
KISTLER
- ------------------------------
Walter P.
Kistler
By /s/ RUSSELL F. Director January 8, 1998
MCNEILL
- ------------------------------
Russell F.
McNeill
By /s/ JOHN W. Director January 8, 1998
STANTON
- ------------------------------
John W.
Stanton
By /s/ PETER H. VAN Chairman of the Board and January 8, 1998
OPPEN Chief Executive Officer
- ------------------------------
Peter H. van
Oppen
By /s/ WALTER F. Director January 8, 1998
WALKER
- ------------------------------
Walter F.
Walker
41
<PAGE>
LEASE
LEASE, dated November 5, 1997, between THE QUADRANT CORPORATION, a
Washington corporation ("Landlord"), and ADVANCED DIGITAL INFORMATION
CORPORATION, a Washington corporation, ("Tenant").
1. BASIC LEASE TERMS. This Section sets forth certain basic terms of
this Lease for reference purposes. This Section is to be read in
conjunction with the other provisions of this Lease; provided, however, to
the extent of any inconsistency between this Section and the other
provisions of this Lease, this Section shall control.
LEASED PREMISES (See Section 2)
Business Park Quadrant Willows
Corporate Center
Building Name Building A
Address 11431 Willows Road
Redmond WA 98073
Rentable Sq. Ft. ("RSF") Approx. 64,780 RSF
RENT; PREPAID RENT; SECURITY DEPOSIT
(See Sections 5 and 6)
Base Monthly Rent
Mo. 1 - 36: $79,032/Mo.
($14.64/RSF/year)
Mo. 37 - 72: $86,157/Mo.
($15.96/RSF/year) Mo. 73 - 120:
$93,877/Mo.
($17.39/RSF/year)
Security Deposit $79,032
Prepaid Rent $ -0 -
TERM (See Section 3)
Commencement Date 4/1/98
Rent Commencement Date 4/1/98
Expiration Date 3/31/2008
Length of Term 120 months
Extension Options See Section 1A.2
PERMITTED USE (See Section 7)
Office, laboratory, light manufacturing, and repair and maintenance of
electronic products, sales activities directly related thereto and such
other lawful uses permitted by and in compliance with applicable
governmental regulations
OPERATING EXPENSES (See Section 8)
Tenant's Share 100%
Additional Rent Estimated to be
$30,500/Month
($5.65/RSF/year) until first
annual adjustment
PARKING (See Section 24) 195 stalls
CC&R'S (See Sections 8 and 22)
Declaration of Covenants, Conditions, Easements & Restrictions Applicable to
Quadrant Willows Corporate Center
BROKERS (See Section 36)
For Tenant CB Commercial
For Landlord CB Commercial
ADDRESSES FOR NOTICES (See Section 29)
Landlord:
The Quadrant Corporation
Quadrant Plaza, Suite 500
NE 8th Street at 112th Ave. NE
Bellevue, WA 98004
Tel: 425-455-2900
Fax: 425-646-8300
Attn: Wally Costello
Tenant:
Advanced Digital Information Corporation
P.O. Box 97057
Redmond, WA 98073-9757
Attn: Leslie S. Rock
Tel: 425-881-8004
Fax: 425-881-2296
1
<PAGE>
1A. SPECIAL LEASE TERMS. The following additional Lease terms shall
apply. To the extent of any inconsistency between this Section 1A and the other
provisions of this Lease, this Section 1A shall control.
1A.1 CONSTRUCTION OF PREMISES. The Premises are to be constructed
pursuant to the terms and conditions of the Work Letter of even date
herewith attached as EXHIBIT B hereto (the "Work Letter"), together with
such additional written understandings and agreements as may be mutually
entered into concerning the construction of the Premises. (The Work Letter
and all such additional understandings and agreements regarding the
construction of the Premises shall be collectively referred to as the "Work
Documents").
1A.1.1 MEASUREMENT. The [RSF] contained in the Premises has been
determined under this Lease to be 64,780 S. F. [RSF] based upon a
measurement equal to the "Construction Area" (for a single-tenant
building), as defined in the Building Owners and Managers Association
International (BOMA) American National Standard Method for Measuring
Floor Area in Office Buildings, as approved June 7, 1996, by reference
to the Building Shell Construction Documents as defined in the Work
Letter, which measurement Landlord and Tenant accept, approve and
agree. Landlord and Tenant further acknowledge and agree that the
calculation of Base Monthly Rent on a per [RSF] basis is for
convenience of calculation purposes only in order to determine the
Base Monthly Rent. Any actual measurement of the square footage or
rentable square footage of the Premises and Building shall not be
relevant to or control the calculation of Base Monthly Rent.
1A.1.2 DELIVERY OF POSSESSION. Except as provided in the Work Letter,
if Landlord, for any reason whatsoever, cannot deliver possession of
the Premises to the Tenant at the Scheduled Commencement Date, this
Lease shall not be void or voidable, nor shall Landlord be liable to
Tenant for any loss or damage resulting therefrom, except as provided
in the Work Letter. Delays which may occur in achieving Substantial
Completion of construction of the Building and Premises shall be
addressed as set forth in the Work Letter; and Landlord and Tenant
understand and agree that such delays may result in extension of the
Scheduled Commencement Date as set forth in the Work Letter.
1A.2 OPTIONS TO EXTEND TERM.
1A.2.1 Tenant shall have two successive options to extend the
Term of this Lease for an additional three years. Each such option
may be exercised by Tenant only by written notice of exercise to
Landlord no earlier than 18 months and no later than 12 months prior
to the expiration of the then-effective Term.
1A.2.2 Upon such exercise, the parties shall be obligated under
all the terms and conditions of this Lease through the extended Term,
except that Monthly Base Rent during the extension of the Term shall
be equal to the higher of (i) the Monthly Base Rent in the final month
of the then-effective Term or (ii) 95% of the fair market rent for the
Premises as of 90 days after Tenant's notice of exercise.
2
<PAGE>
1A.2.3 Within 20 days of Tenant's notice of exercise, Landlord
shall propose a Base Monthly Rent for the extended Term. The parties
shall negotiate in good faith, but if they are unable to agree upon
such Base Monthly Rent by 30 days after the delivery of Landlord's
proposal, then either party may elect to cause such Base Monthly Rent
to be determined by reference to the appraised fair market rent. Such
election shall be made by such party by notice to the other party,
including in such notice the designation of an appraiser. The other
party may accept such appraiser or designate another appraiser within
10 days of such notice. If it does not designate another appraiser in
such period, it shall be deemed to have accepted the first appraiser.
If a second appraiser is designated, the two appraisers shall promptly
appoint a third appraiser.
1A.2.4 Each appraiser shall determine the fair market rent for
the Premises for the extended Term by reference to all factors deemed
appropriate in his or her professional opinion, and notify the parties
within 30 days of the date of appointment of the last appraiser of
such fair market rent. The Base Monthly Rent for the extended Term
shall be calculated as provided in Section 1.A.2.1 by reference to the
fair market monthly rent determined by the single appraiser or, if
there are three appraisers, the mean average of the two closest fair
market monthly rents.
1A.2.5 All appraisers under this appraisal provision shall be
independent certified professional appraisers with at least five
years' experience appraising office properties/business park complexes
in the Cities of Redmond and Bellevue. If there are three appraisers,
each party shall pay for the cost of its designated appraiser and 50%
of the cost of the third appraiser. If there is only one appraiser,
each party shall pay 50% of the cost of such appraiser.
1A.2.6 Tenant may not exercise its option to renew the Term at
any time in which it is in Default under this Lease. If Tenant
becomes in Default under this Lease after exercise of its option to
extend the Term but before the commencement of the extended Term,
Landlord may, in addition to its other remedies under this Lease,
elect to terminate such extension by notice in writing to Tenant,
whereupon the Term shall expire without any such extension.
1A.3 SUBLEASE; ASSIGNMENT. Tenant will be given the right to
sublease or assign any or all of the leased premises so long as Tenant
remains liable for the lease. Landlord's consent to any proposed sublease
or assignment of all or any part of the Premises shall not be unreasonably
withheld; provided, however, that Landlord's rejection of any proposed
subtenant or assignee based upon Landlord's determination, in the exercise
of its sole discretion, that use of the Premises by such proposed subtenant
or assignee is inconsistent or incompatible with the uses then allowed in
the Business Park shall not be deemed to be an unreasonable withholding of
Landlord's consent.
1A.4 SIGNAGE. Exterior signage shall be provided by Landlord
identifying Tenant at the main entrance on the west side of the Building;
and Business Park directory signage shall be provided by Landlord (or by
the Owner' Association under the CC&R's) identifying Tenant at the entrance
to the Business Park; provided, however, maintenance of such signage shall
constitute an Operating Expense. At Tenant's expense, Tenant shall have
the right to install an identifying signage (with no greater than 30 inch
high letters) on the east elevation of the Building visible to Willows
Road; and exterior identification signage on the west side of the Building.
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1.A.5 PARKING. The covered parking spaces contained within the
Building shall be exclusively available to Tenant and shall not be
available for use in common with other tenants, owners or occupants of the
Business Park.
1.A.6 UTILITIES. At Tenant's request, Tenant may be billed directly
by utility providers for some or all of utility services provided to the
Building and Premises. In such event those utility expenses will not be
considered as Operating Expenses or Additional Rent, however, if Tenant
fails to timely pay for such utility services, Landlord shall have the
right to pay such utility expenses on behalf of Tenant and Tenant shall
reimburse Landlord as Additional Rent for such payment within five (5) days
of Landlord's demand. In addition, if Tenant fails to timely pay any
utility expenses, Tenant shall forfeit at Landlord's option the right to
pay utility expenses through direct billing and utility expenses shall then
be included as Operating Expenses.
1.A.7 RETURN OF SECURITY DEPOSIT. If Tenant is not in Default on the
first day of Month 61 of the Term, then the Security Deposit shall either
by returned to Tenant within five business days of notice of its election,
or shall be applied to the Rent due for Month 62 of the Term, at Tenant's
option.
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2. PREMISES. Landlord agrees to lease to Tenant and Tenant agrees to
lease from Landlord the Premises described on EXHIBIT A-1 and consisting of
approximately the RSF designated in Section 1. The Premises constitute the
entirety of the Building, located on the real property described on EXHIBIT A-2
( "Property"). The Premises, Building, and Property are part of a business park
described on EXHIBIT A-3 ("Business Park").
3. TERM.
3.1 The term of this Lease ("Term") shall commence on the
Commencement Date set forth in Section 1, subject to Section 4.
3.2 The Term shall expire on the Expiration Date set forth in
Section 1, unless sooner terminated or extended as provided in this Lease.
4. CONSTRUCTION OF PREMISES; EARLY POSSESSION; DELAYED DELIVERY OF
POSSESSION.
4.1 Any improvements to or construction on the Premises shall be
carried out in accordance with the Work Documents.
4.2 If Landlord permits Tenant to occupy the Premises prior to the
Commencement Date set forth in Section 1, the Commencement Date shall be
such date of occupancy. Tenant's occupancy prior to the originally
scheduled Commencement Date shall be subject to all the provisions of this
Lease and shall not advance the Expiration Date.
4.3 If Landlord for any reason cannot deliver possession of the
Premises to Tenant at the Commencement Date, (i) the Commencement Date
shall be the date on which possession of the Premises is delivered to
Tenant, (ii) this Lease shall not be void or voidable, nor shall Landlord
be liable to Tenant for any loss or damage resulting therefrom, (iii) the
Rent Commencement Date shall be delayed to the same extent as the delay in
the Commencement Date, except as provided in Section 4.4, (iv) the
Expiration Date shall be adjusted so that the length of the Lease Term
remains as provided in Section 1, and (v) Landlord and Tenant shall execute
an amendment to this Lease setting forth the adjusted Commencement Date and
Expiration Date.
4.4 If Tenant causes any delay in Landlord's completion of the
Premises, thereby delaying Tenant's occupancy of the Premises beyond the
Commencement Date set forth in Section 1, then Landlord may at its option
require Tenant to commence payment of Rent on the Rent Commencement Date
set forth in Section 1 notwithstanding such delay in delivery of
possession.
5. RENT.
5.1 Tenant shall pay to Landlord the Base Monthly Rent specified in
Section 1 and the Additional Rent as set forth in Section 8 and elsewhere
in this Lease (the Base Monthly Rent and the Additional Rent are
collectively referred to as "Rent"). Rent shall be paid in advance, on or
before the first day of each calendar month of the Lease Term.
5.2 Rent shall be paid without prior notice, demand, set off,
counterclaim, deduction or defense and, except as otherwise expressly
provided in this Lease, without abatement or suspension.
5.3 Payment of Rent shall begin on the Rent Commencement Date set
forth in Section 1, subject to Section 4. Rent for any period during the
Lease term that is for less than one month shall be prorated for the actual
number of days in such period.
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5.4 All Rent shall be paid to Landlord at the address for notices
set forth in Section 1, in lawful money of the United States of America, or
to such other person or at such other place as Landlord may from time to
time designate in writing.
6. PREPAID RENT AND SECURITY DEPOSIT.
6.1 Upon execution of this Lease, Tenant shall pay to Landlord the
Prepaid Rent and Security Deposit set forth in Section 1 (the Prepaid Rent
and the Security Deposit being collectively referred to as the "Deposit").
6.2 Landlord shall have the right to all or any part of the Deposit
to cure any Default by Tenant under this Lease or to compensate Landlord
for any damage sustained by it resulting from such Default. In the event
of any such application of the Deposit, Tenant shall, on demand,
immediately pay to Landlord the amount necessary to replenish the Deposit
to the amount set forth in Section 1.
6.3 If Tenant is not in Default at the expiration or termination of
this Lease, Landlord shall return the remaining Security Deposit to Tenant,
less any amounts necessary to return the Premises to their original
condition, reasonable wear and tear excepted.
6.4 In the event this Lease is terminated before the end of the
Term for any reason, any Rent paid for any period after the date of such
termination shall be treated as an addition to the Security Deposit.
6.5 Landlord's obligations with respect to the Security Deposit are
those of a debtor and not a trustee. Landlord may maintain the security
deposit separate from Landlord's general funds or may commingle the
Security Deposit with other funds of Landlord. No interest shall accrue
for Tenant on the Deposit.
7. USE OF PREMISES.
7.1 Tenant shall use the Premises only for the purpose set forth in
Section 1. Tenant acknowledges that it has determined to its satisfaction
that the Premises can be used for those purposes. Tenant waives any right
to terminate this Lease in the event the Premises cannot be used for such
purposes during the Term. The Premises may not be used for any other
purpose without Landlord's written consent.
7.2 Tenant shall not do or permit anything to be done in or about
the Premises or bring or keep anything therein which will in any way
increase the cost of or affect any fire or other insurance upon the
Building or any part thereof or any of its contents, or cause cancellation
of any insurance policy covering the Building or any part thereof or any of
its contents.
7.3 Tenant shall not do or permit anything to be done in or about
the Premises that will obstruct or interfere with the rights of other
tenants or occupants of the Building or Business Park or injure them or
their property, or use or allow the Premises to be used for any unlawful
purpose or in any way constituting a nuisance.
8. ADDITIONAL RENT FOR OPERATING EXPENSES.
8.1 TENANT PAYMENT. Tenant shall pay, as Additional Rent, all
Operating Expenses. Operating Expenses shall be payable on or before the
first day of the first full calendar month of the Term or upon the
Commencement Date, whichever first occurs, and
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on the first day of each successive calendar month thereafter during the
Term in the same manner as Base Monthly Rent.
8.2 ACCOUNTING PERIOD. An accounting period is a calendar year;
except the first accounting period shall commence on the Commencement Date
and end on December 31 of the same calendar year. The last accounting
period shall end on the Expiration Date of the Lease Term. Annualized
Operating Expenses shall be prorated on a per diem basis for any accounting
period that is less than a full calendar year.
8.3 ADJUSTMENT. Landlord can adjust the Operating Expenses at the
commencement of each new accounting period throughout the Lease term,
whereupon Tenant's Additional Rent shall be adjusted accordingly. Prior to
each January 1 of the Term, Landlord shall furnish Tenant a written
statement of the estimated monthly Operating Expenses for the coming
calendar year. The estimated monthly Operating Expenses for the period
before the first January 1 after the Commencement Date will be provided by
Landlord to Tenant no later than 90 days prior to the Commencement Date.
Landlord may, by written notice to Tenant, revise its estimate of Operating
Expenses from time to time.
8.4 RECONCILIATION. Within 90 days after each January 1 during the
Term, or as soon thereafter as practicable, Landlord shall deliver to
Tenant a written statement setting forth the actual Operating Expenses
during the preceding calendar year (or portion of such calendar year after
the Commencement Date). To the extent actual Operating Expenses exceeded
the estimated Operating Expenses paid by Tenant, Tenant shall pay
Additional Rent to Landlord within 30 days after receipt of such statement
by Tenant. To the extent actual Operating Expenses were less than the
estimated Operating Expenses paid by Tenant, Tenant shall receive a credit
against its next payable Rent or such amount shall otherwise be refunded to
Tenant as Landlord determines in its sole discretion.
8.5 DEFINITIONS. "Operating Expenses" means all expenses and
charges incurred by Landlord in the operation of the Building, Property and
Common Areas (as defined in the CC&R's), as a first-class facility,
including without limitation the following costs by way of illustration:
(i) all real property taxes, assessments and other general or special
charges levied during the Term by any public, governmental or
quasi-governmental authority against the real or personal property included
in the Building or the Property, including without limitation Landlord's
personal property used in the maintenance, repair or operation of the
Building or the Property, or any other tax on the leasing of the Building
or on the rents from the Building (other than any federal, state or local
income or franchise tax); (ii) any and all assessments, fees, charges and
impositions Landlord must pay for the Building, Property or Common Areas
pursuant to the CC&R's, transportation or any other improvement monitoring
or management plans, or any other covenant, condition or reciprocal
easement agreements; (iii) electricity, gas and similar energy sources,
refuse collection, water, sewer and other utilities' services for the
Building and the Property; (iv) all licenses, permits and inspection fees,
property management fees paid to independent or affiliated contractors or
to Landlord, and legal, accounting and other professional expenses; (v) all
costs and expenses relating to the Premises Maintenance Obligations (as
defined in Section 9.1), including reasonable reserves; (vi) all costs and
expenses relating to the Premises Services Obligations (as defined in
Section 9.2), including reasonable reserves; (vii) all costs of
improvements or alterations to the Building and Property required by Laws,
or to save labor, or to reduce Operating Expenses; (viii) all premiums and
deductibles for liability, property damage, casualty, automobile, rental
loss, compensation or other insurance maintained by Landlord for the
Building or Property; (ix) the cost (amortized over such reasonable period
of time as Landlord shall determine together with market rate interest as
reasonably determined by Landlord on the unamortized balance ) of any
capital improvements made to the Property or Building by Landlord for the
replacement of any
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Building' equipment needed to operate the Building at the same quality
levels as prior to the replacement;(x) costs incurred in the management of
the Building and Property (including supplies, wages and salaries of
employees used in the management, operation and maintenance thereof and
payroll taxes and similar governmental charges with respect thereto, and
Building management office rental, if any; (xi) any other expense or charge
whether or not described above that in accordance with generally accepted
accounting and management practices is properly an expense of maintaining,
operating or repairing the Building or Property. Operating Expenses shall
not include depreciation on the Building or equipment therein, Landlord's
executive salaries, real estate brokers' commissions, and costs or expenses
for which Landlord is reimbursed or indemnified, by an insurer or
condemnor. Landlord shall not collect more than 100% of Operating Expenses
and shall not recover any item of cost more than once.
8.6 TENANT OBLIGATION. Landlord shall have the same rights with
respect to Tenant's nonpayment of Operating Expenses as required under this
Lease as it has with respect to any other nonpayment of Rent under this
Lease.
9. PREMISES MAINTENANCE AND SERVICES OBLIGATIONS.
9.1 PREMISES MAINTENANCE OBLIGATIONS. Landlord shall cause to be
performed all repairs, maintenance, replacements, resurfacing and
monitoring to the entirety of the Premises, Building and Property, and
every part thereof, including, without limitation, the elevator equipment
and system, the signs, windows, doors, skylights, landscaping, irrigation
system, parking lot, patios, decks, service areas, exterior and interior
finishes and painting, roof (so long as such roof repair and maintenance is
not a Structural Repair as defined in Section 10.1), heating, ventilating
and air conditioning systems, cleaning and refuse removal systems, and
similar items, including reasonable reserves, (but excluding the telephone,
data, cable television, satellite transmission, computer and security
systems of the Premises), and any other reasonable and necessary
maintenance, repair and replacement (but excluding Tenant's trade fixtures)
required to keep the Premises, Building and Property in first class order,
condition and repair and in compliance with all service and maintenance
requirements imposed by any warranty, service or maintenance contract in
effect for any portion of the Premises, Building or Property (collectively,
"Premises Maintenance Obligations").
9.2 PREMISES SERVICES OBLIGATIONS. Landlord shall arrange for and
cause to be provided, all services to the Premises, Building and Property
of a continuing nature, including without limitation, janitorial, landscape
and irrigation system maintenance, parking lot sweeping and maintenance,
window washing, rubbish removal, maintenance of the heating, ventilating,
and air conditioning systems, property management services and other
similar desired and necessary services (but excluding telephone, cable
television, data transmission, satellite transmission, and security system
services or computer cabling or wiring) (collectively "Premises Services
Obligations").
9.3 OPERATING EXPENSE. In the manner and to the extent provided in
Section 8, any and all costs arising from the performance of the Premises
Maintenance and Services Obligations shall be paid in full by Tenant as
Additional Rent and Operating Expenses under this Lease.
9.4 LANDLORD DEFAULT. Landlord shall perform the Premises
Maintenance and Service Obligations diligently and promptly as
circumstances warrant, but so long as Landlord acts with such diligence,
Landlord shall not be liable for any failure to perform the Premises
Maintenance and Services Obligations unless such failure shall persist for
the period beyond that cure period stated in Section 18.2 after written
notice of the failure to
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perform such Premises Maintenance and Services Obligations is given to
Landlord by Tenant.
9.5 SURRENDER. Tenant shall surrender the Premises to Landlord
upon the expiration or sooner termination of this Lease, in the same
condition as when received, excluding ordinary wear and tear. Upon
expiration or termination of this Lease, any and all damage done to the
Premises as a result of Tenant's removal of any personal property, fixtures
or furnishings shall be repaired and the Premises restored, at Tenant's
expense.
9.6 NO OBLIGATION TO ALTER. Except as specifically provided
elsewhere in this Lease, Landlord shall have no obligation whatsoever to
alter, remodel, improve, repair, decorate, or paint the Premises or any
part thereof. Tenant affirms that Landlord has made no representations to
Tenant about the condition of the Premises or the Building, except as
specifically herein set forth.
9.7 TENANT WAIVER. Tenant waives the right to make repairs at
Landlord's expense under any law, statute, or ordinance now or hereafter in
effect.
10. STRUCTURAL AND UTILITY MAINTENANCE AND REPAIR RESPONSIBILITY.
10.1 STRUCTURAL REPAIRS. Subject to the provisions of Section 15,
Landlord shall, at Landlord's expense, maintain, repair and replace the
roof structure, all exterior and bearing walls, the floor slab and the
foundation of the Building ("Structural Repairs"). Landlord shall give
reasonable advance notice to Tenant of such repairs to the extent practical
and feasible.
10.2 UTILITIES REPAIRS. Subject to the provisions of Section 15,
Landlord shall, at Landlord's expense, if required, or cause the utility
purveyor to maintain, repair and replace the underground electrical, water,
sewer and plumbing utility systems serving the Buildings insofar as such
utility systems are located outside the Building between the public right
of way and the Building , and the conduits and pipes or wiring located
therein and forming a part thereof, ("Utility Systems Repairs").
10.3 TENANT'S RESPONSIBILITY. To the extent that such Structural
Repairs or Utility Systems Repairs are necessitated in part or in whole by
the act, neglect, fault, or omission of any duty by the Tenant, its agents,
servants, employees, or invitees, Tenant shall pay to Landlord the
reasonable costs of such Structural Repairs or Utility Systems Repairs,
within thirty (30) days after Landlord's submission of a reasonably
detailed invoice for the same, but only to the extent such costs were
necessitated by the act, neglect, fault or omission of any duty by the
Tenant. Landlord shall not be liable for any failure to make any such
Structural Repairs or Utility Systems Repairs, unless such failure shall
persist after Landlord's receipt of written notice from Tenant and beyond
the cure periods set forth in Section 18.2.
11. UTILITIES AND SERVICES.
11.1 LANDLORD RESPONSIBILITY. Landlord shall arrange for and cause
to be provided, at Tenant's expense, heat, light, water, electricity, gas
and any and all other utility services, excluding, however,
telecommunicaions and data communications services, telephone service,
cable television service, satellite transmission service, if any, or
computer cabling or wiring.
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11.2 TENANT RESPONSIBILITY. Tenant shall pay, as Additional Rent,
prior to delinquency, for heat, light, water, electricity, gas and any and
all other utility services supplied to the Premises and will pay any
required deposits therefor.
11.3 FAILURE OF SERVICES. In the event of any failure or
interruption of such utilities and services, Landlord shall diligently
attempt to resume service promptly. Tenant shall not be entitled to any
abatement or reduction of Rent by reason of any failure or interruption of
utilities or services, no eviction of Tenant shall result from any such
failure or interruption, and Tenant shall not be relieved from the
performance of any obligation in this Lease because of such failure or
interruption.
12. LIMITS ON LANDLORD'S LIABILITY. Landlord's liability in respect of
its obligations under Sections 9, 10 and 11 to repair and maintain portions of
the Premises and Building and to provide utilities and services (collectively,
"Repair and Service Obligations") is subject to the following limitations:
12.1 CIRCUMSTANCES BEYOND LANDLORD'S CONTROL. Landlord shall not be
liable for any failure of Repair and Service Obligations when such failure
is caused by (i) strikes, lockouts or other labor disturbance or labor
dispute of any character, (ii) governmental regulation, moratorium or other
governmental action, (iii) inability despite the exercise of reasonable
diligence to obtain electricity, water or fuel from the providers thereof,
(iv) acts of God or (v) any other cause beyond Landlord's reasonable
control.
12.2 LANDLORD LIABILITY. Subject to Section 12.1, Landlord shall
not be liable for any failure of Repair and Service Obligations, unless
such failure shall persist for an unreasonable time after written notice of
the need of such repairs or maintenance or of the interruption of services
is given to Landlord by Tenant. Landlord shall not be liable for any injury
to or interference with Tenant's business arising from the making of any
repairs, alterations, or improvements in or to any portion of the Building,
the Premises, or the Property, or to fixtures, appurtenances, and equipment
therein, or the failure of Repair and Service Obligations. Without
limiting the generality of this Section 12, in no event shall Landlord have
any liability for consequential damages resulting from any act or omission
of Landlord in respect of its Repair and Service Obligations, even if
Landlord has been advised of the possibility of such consequential damages.
12.3 RENT ABATEMENT. Except as specifically provided in Sections 15
and 16, there shall be no abatement of Rent in any circumstance under this
Lease.
13. ALTERATIONS AND ADDITIONS BY TENANT. With the prior written consent
of Landlord, Tenant may make at its expense additional improvements or
alterations to the Premises. Any repairs or new construction by Tenant shall be
done in conformity with plans and specifications approved by Landlord, by
contractors approved by Landlord (including a requirement for union labor), and
subject to Landlord's reasonable rules and regulations regarding such
construction. All work performed shall be done lien-free in a workmanlike
manner and shall become the property of Landlord. Landlord may require that
Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in
an amount equal to 150% of the estimated cost of any improvements, additions, or
alterations in the Premises. Landlord shall not unreasonably withhold its
consent to Tenant's proposed alterations or improvements if the conditions of
this Section 13 are satisfied. Landlord may require Tenant to remove any
improvements or alterations at the expiration or termination of the Term, such
removal to occur at Tenant's expense; and Tenant shall repair all damage to the
Premises or Building occurring as a result of such removal. In the event Tenant
fails to remove any improvements or alterations as required by Landlord or
repair any damage occurring during such removal, Landlord shall be entitled to
remove any improvements or alterations or make such repairs, at Tenant's
expense, and shall further be entitled to draw upon the Deposit.
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14. INSURANCE; INDEMNITY.
14.1 TENANT WAIVER. Landlord shall not be liable to Tenant, and
Tenant hereby waives all claims against Landlord, for injury or damage to
any person or property in or about the Premises, Building, Property or
Common Areas by or from any cause whatsoever, including without limitation
any acts or omissions of any other tenants, licensees or invitees of the
Building.
14.2 TENANT INDEMNITY. Tenant shall indemnify and defend (using
legal counsel acceptable to Landlord) Landlord and hold Landlord harmless,
from and against any and all loss, cost, damage, liability and expense
(including reasonable attorneys' fees) whatsoever that may arise out of or
in connection with Tenant's occupation, use or improvement of the Premises,
or that of its employees, agents or contractors, or Tenant's breach of its
obligations under this Lease. To the extent necessary to fully indemnify
Landlord from claims made by Tenant or its employees, this indemnity
constitutes a waiver of Tenant's immunity under the Washington Industrial
Insurance Act, RCW Title 51. This indemnity shall survive the expiration
or termination of the Term.
14.3 LANDLORD RESPONSIBILITY. The exculpation, release and
indemnity provisions of Sections 14.1 and 14.2 shall not apply to the
extent the subject claims thereunder were caused by Landlord's gross
negligence or willful misconduct. However, in no event shall Landlord be
liable to Tenant for consequential damages.
14.4 TENANT INSURANCE. Tenant shall procure and maintain throughout
the Term at Tenant's expense, the following insurance:
14.4.1 Comprehensive general public liability insurance,
insuring Tenant against liability arising out of the Lease and the
use, occupancy, or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be in the amount of not
less than $5,000,000 combined single limit for injury to or death of
one or more persons in an occurrence, and for damage to tangible
property (including loss of use) in an occurrence (or in such amount
as Landlord determines in its reasonable discretion). Such policy
shall insure the operations of independent contractors and contractual
liability (covering the indemnity in Section 14.2) and shall: (i) name
Landlord as an additional insured, (ii) provide a waiver of
subrogation endorsements with respect to Landlord, and (iii) provide
that it is primary and noncontributing with any insurance in force or
on behalf of Landlord.
14.4.2 Standard form property insurance insuring against the
perils of fire, extended coverage, vandalism, malicious mischief,
special extended coverage ("All-Risk") and sprinkler leakage. This
insurance policy shall be upon all personal property for which Tenant
is legally liable or that was installed at Tenant's expense, and that
is located in the Building or Premises, including without limitation
all Tenant's furnishings, fixtures, furniture, fittings, and equipment
and all improvements to the Premises installed by Tenant, in an amount
not less than 90% of the full replacement cost thereof. In the event
of a dispute as to the amount of full replacement cost, the decision
of Landlord or any mortgagees of Landlord shall be conclusive. Such
policy shall also include business interruption coverage, covering
direct indirect loss of Tenant's earnings attributable to Tenant's
inability to use fully or obtain access to the Premises or Building,
in an amount as will properly reimburse Tenant. Such policy shall
name Landlord and any mortgagees of Landlord as insured parties, as
their respective interests may appear.
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14.4.3 Workman's Compensation and Employer's Liability
Insurance (as required by state law).
14.4.4 Any other form or forms of insurance as Tenant or
Landlord or any mortgagees of Landlord may reasonably require from
time to time in form, in amounts and for insurance risks against which
a prudent tenant would protect itself.
14.5 POLICIES. All policies of insurance to be obtained by Tenant
hereunder shall be in a form satisfactory to Landlord and shall be issued
by insurance companies holding a General Policyholder Rating of "A" and a
Financial Rating of "X" or better in the most current issue of Best's
Insurance Guide. Tenant shall provide Landlord with certificates of such
insurance. No such policy shall be cancelable or reducible in coverage
except after 30 days' prior written notice to Landlord. Tenant shall,
within ten days prior to the expiration of such policies, furnish Landlord
with renewals or "binders" thereof, or Landlord may order such insurance
and charge the cost thereof to Tenant as Additional Rent.
14.6 LANDLORD'S INSURANCE. Landlord shall maintain liability and
casualty insurance for the Building and Property adequate in Landlord's
judgment to cover (with deductibles deemed appropriate by Landlord) the
risks customarily insured against by owners of properties similar to the
Building.
14.7 PROCEEDS. The proceeds of any insurance policies maintained by
or for the benefit of Landlord shall belong to and be paid over to
Landlord. Any interest or right of Tenant in any such proceeds shall be
subject to Landlord's interest and right in such proceeds.
14.8 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Tenant and Landlord each waives its entire right of
recovery, claims, actions, or causes of action against the other for loss
or damage to the Premises, Building, or Property or any personal property
of such party therein that is caused by or incident to the perils covered
by normal extended coverage clauses of standard fire insurance policies
carried by the waiving party and in force at the time of damage or loss.
Tenant and Landlord each waives any right of subrogation it may have
against the other party to the extent of recovery under any such insurance,
and shall cause each insurance policy obtained by it to provide that the
insurance company waives all right to recovery by way of subrogation
against the other party in connection with any such loss or damage. If
either Landlord or Tenant is unable to obtain its insurer's permission to
waive any claim against the other party, such party shall promptly notify
the other party of such inability.
14.9 NOTICE OF ACCIDENTS. Tenant shall promptly notify Landlord of
any casualty or accident occurring in or about the Premises.
15. DESTRUCTION.
15.1 If the Premises or the Building is destroyed by fire,
earthquake, or other casualty to the extent that they are untenantable in
whole or in part as reasonably determined by Landlord, then Landlord shall
have the right but not the obligation to proceed with reasonable diligence
to rebuild and restore the Premises or the Building or such part thereof.
15.2 Landlord shall within 30 days after such destruction or injury
notify Tenant whether Landlord intends to rebuild. If Landlord fails to
notify Tenant within such period, then this Lease shall terminate as of the
end of such period.
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15.3 During the period from destruction or damage until restoration
(or termination of this Lease), Rent shall be abated in the same ratio as
that portion of the Premises which Landlord determines is unfit for
occupancy shall bear to the whole Premises. If damage is due to the fault
or neglect of Tenant or its agents, employees, invitees, or licensees,
there shall be no abatement of Rent.
15.4 Landlord shall not be required to repair any injury or damage
by fire or other cause, or to make any repairs or replacements of any
panels, decoration, office fixtures, paintings, floor covering, or any
other improvements to the Premises installed by Tenant. Instead, if
Landlord repairs or rebuilds the Premises under this Section 15, Tenant
shall repair or rebuild such Tenant-installed improvements and other items
of property
15.5 Tenant shall not be entitled to any compensation or damages
from Landlord for loss of the use of the whole or any part of the Premises,
the property of Tenant, or any inconvenience or annoyance occasioned by
such damage, repair, reconstruction, or restoration.
16. CONDEMNATION.
16.1 If all or part of the Premises are taken under power of eminent
domain, or sold under the threat of the exercise of said power, this Lease
shall terminate as to the part so taken as of the date the condemning
authority takes possession.
16.2 If more than 25% of the floor area of Premises is taken by
condemnation, Landlord or Tenant may, by written notice to the other within
ten days after notice of such taking, terminate this Lease as to the
remainder of the Premises as of the date the condemning authority takes
possession.
16.3 If Landlord or Tenant does not so terminate, this Lease shall
remain in effect as to such remainder, except that the Rent shall be
reduced in the proportion that the rentable floor area taken bears to the
original rentable total floor area. However, if circumstances make
abatement based on floor area unreasonable, the Rent shall abate by a
reasonable amount to be determined by Landlord. In the event that neither
Landlord nor Tenant elects to terminate this Lease, Landlord's
responsibility to restore the remainder of the Premises shall be limited to
the amount of any condemnation award allocable to the Premises, as
determined by Landlord.
16.4 Any award for the taking of all or part of the Premises under
the power of eminent domain, including payment made under threat of the
exercise of such power, shall be the property of Landlord, whether made as
compensation for diminution in value of the leasehold or for the taking of
the fee or as severance damages. Tenant shall only be entitled to such
compensation as may be separately awarded or recoverable by Tenant in
Tenant's own right for the loss of or damage to improvements to the
Premises installed by Tenant, Tenant's trade fixtures and removable
personal property. Landlord shall not be liable to Tenant for the loss of
the use of all or any part of the Premises taken by condemnation.
16.5 Landlord shall have the exclusive authority to grant possession
and use to the condemning authority and to negotiate and settle all issues
of just compensation or, in the alternative, to conduct litigation
concerning such issues; provided, however, that Landlord shall not enter
into any settlement of any separate award that may be made to Tenant as
described in Section 16.4 without Tenant's prior approval of such
settlement, which approval shall not be unreasonably withheld.
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17. ASSIGNMENT AND SUBLETTING.
17.1 Tenant shall not assign this Lease, or sublet the Premises or
any part thereof, either by operation of law or otherwise, or permit any
other party to occupy all or any part of the Premises, without first
obtaining the written consent of Landlord. Tenant shall propose such
assignment or sublease by written notice to Landlord, and such notice shall
specify the use of the Premises or such part thereof as contemplated by
such proposed assignee or sublessee and an effective date which shall be
the first day of a calendar month and shall be not less than 60 days after
the date of such notice. This Lease shall not be assignable by operation
of law. Tenant shall further provide to Landlord other information and
creditworthiness materials concerning any proposed assignee or sublessee as
is requested by Landlord.
17.2 If Tenant is a corporation, any transfer of this Lease from
Tenant by merger, consolidation, or liquidation, or any change in the
ownership of or power to vote 50% or more of the outstanding voting stock
of Tenant shall constitute an assignment under this Lease. If Tenant is a
partnership or limited liability company, any change in the identity or
majority ownership of partners or members in Tenant serving as general
partner or manager or owning 50% or more of the outstanding economic
interests in such entity shall constitute an assignment under this Lease.
17.3 In the alternative to consenting to a proposed assignment or
sublease, Landlord shall have the right to recapture the Premises, or
applicable portion thereof. Landlord may exercise such right by notice to
Tenant within 20 days after receipt of Tenant's notice. Such recapture
shall terminate this Lease as to the applicable portion of the Premises
effective on the effective date proposed in Tenant's notice.
17.4 If Landlord elects not to recapture and thereafter elects to
gives its consent to the proposed assignment or sublease, (i) Landlord may
charge Tenant a reasonable sum to reimburse Landlord for legal and
administrative costs incurred in connection with such consent; (ii) in the
event of an assignment or a sublease, Tenant shall remain liable to
Landlord for the performance of all of Tenant's obligations under this
Lease.
17.5 If this Lease is assigned pursuant to the provisions of the
Revised Bankruptcy Act, 11 U.S.C. Section 101 et seq., any and all
consideration paid or payable in connection with such assignment shall be
Landlord's exclusive property and paid or delivered to Landlord, and shall
not constitute the property of tenant or tenant's estate in bankruptcy.
Any person or entity to whom the Lease is assigned pursuant to the Revised
Bankruptcy Act shall be deemed automatically to have assumed all of
Tenant's obligations under this Lease.
17.6 In the event of any sale of the Building or Property, or any
assignment of this Lease by Landlord, Landlord shall be relieved of all
liability under this Lease arising out of any act, occurrence, or omission
occurring after sale or assignment; and the purchaser or assignee at such
sale or assignment or any subsequent sale or assignment of Lease, the
Property, or Building, shall be deemed without any further agreement to
have assumed all of the obligations of the Landlord under this Lease
accruing after the date of such sale or assignment.
17.7 Subject to the provisions of this Section 17, this Lease shall
be binding upon and inure to the benefit of the parties, their heirs,
successors and assigns.
18. DEFAULT.
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18.1 The occurrence of any one or more of the following events shall
constitute a material default and breach of the Lease by Tenant
("Default"):
18.1.1 vacation or abandonment of all or any portion of the
Premises;
18.1.2 failure by Tenant to make any payment required as and
when due, where such failure shall continue after three days' written
notice from Landlord;
18.1.3 failure by Tenant to observe or perform any of the
covenants, conditions, or provisions of this Lease, other than the
making of any payment, where such failure shall continue after 30
days' written notice from Landlord;
18.1.4 the making by Tenant of any general assignment or
general arrangement for the benefit of creditors; (ii) the filing by
or against Tenant of a petition in bankruptcy, including
reorganization or arrangement, unless, in the case of a petition filed
against Tenant, the same is dismissed within 30 days; (iii) the
appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease; (iv) the seizure by any department of
any government or any officer thereof of the business or property of
Tenant; and (v) adjudication that Tenant is bankrupt.
18.2 Tenant shall notify Landlord promptly of any Default by Tenant
(or event or occurrence which, with the passage of time, the giving of
notice, or both, would become a Default) that by its nature is not
necessarily known to Landlord.
18.3 Landlord shall be in default if it fails to observe or perform
any of the covenants, conditions, or provisions of this Lease, where such
failure shall continue after 30 days' written notice from Tenant; provided,
however, that if the nature of Landlord's obligation is such that more than
30 days are required for performance, Landlord shall not be in default if
Landlord commences performance within 30 days after Tenant's notice and
thereafter completes such performance diligently and within a reasonable
time. Tenant shall copy Landlord's lender with any such notice of default,
if Tenant has been provided with the name and address of any such lender.
18.4 In no event shall a default by Landlord under this Lease give
rise to any right of Tenant to terminate this Lease or withhold or offset
the payment of Base Monthly Rent or Additional Rent. The obligations of
Tenant to pay Base Monthly Rent and Additional Rent shall continue
unaffected in all events unless suspended or terminated pursuant to an
express provision of this Lease.
19. REMEDIES IN DEFAULT.
19.1 In the event of any Default by Tenant, Landlord may, at any
time without waiving or limiting any other right or remedy, do any one or
more of the following: (i) re-enter and take possession of the Premises,
(ii) pursue any remedy allowed by law or equity, and/or (iii) terminate
this Lease.
19.2 Whether Landlord has elected to terminate this Lease or not,
Tenant agrees to pay Landlord the cost of recovering possession of the
Premises, the expenses of reletting, and any other costs or damages arising
out of Tenant's Default, including without limitation the costs of removing
persons and property from the Premises, the costs of preparing or altering
the Premises for reletting, broker's commissions, and attorneys' fees.
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19.3 No re-entry or taking possession of the Premises by Landlord
pursuant to this Section 19, or acceptance of Tenant's keys to or surrender
of the Premises shall be construed as an election to terminate this Lease
unless a written notice of such intention is given to Tenant.
19.4 Notwithstanding any reentry or termination, the liability of
Tenant for the Rent shall continue for the balance of the Term, and Tenant
shall make good to Landlord any deficiency arising from reletting the
Premises at a lesser rent than the Rent provided for in this Lease. Tenant
shall pay such deficiency each month as the amount thereof is ascertained
by Landlord.
20. ACCESS. Tenant shall permit Landlord to enter the Premises at all
reasonable times for the purpose of inspecting, altering, and repairing the
Premises and the Building and ascertaining compliance with the provisions of
this Lease by Tenant. The existence or exercise of such right of access shall
not be construed as imposing any obligation on Landlord to inspect, discover or
correct or repair any condition in the Premises or the Building. Landlord may
also show the Premises to prospective purchasers or tenants at reasonable times,
provided that Landlord shall not materially interfere with Tenant's business
operation.
21. HOLD-OVER TENANCY. If without execution of a new Lease or written
extension Tenant shall hold over after the expiration or termination of the
Term, with Landlord's written consent, Tenant shall be deemed to be occupying
the Premises as a Tenant from month to month, which tenancy may be terminated as
provided by law, unless the parties agree otherwise at the time of Landlord's
consent. If Tenant shall hold over after expiration or termination of the Term
without Landlord's written consent, the Base Monthly Rent payable shall be 200%
of the Base Monthly Rent payable in the last month prior to expiration or
termination of the Term, and Tenant shall continue to pay Additional Rent.
During any such tenancy, Tenant shall continue to be bound by all of the terms,
covenants, and conditions of this Lease, insofar as applicable.
22. COMPLIANCE WITH LAWS. Tenant shall not use the Premises or permit
anything to be done in or about the Premises which will in any way conflict with
any applicable law, statute, ordinance, or governmental rule or regulation and
the CC&R's and any other restrictive covenants and obligations created by
private contracts which affect the use and operation of the Premises, Building,
Common Areas or Business Park, now or hereafter in force ("Laws"). Tenant shall
at its sole cost and expense promptly comply with all Laws, including without
limitation the Americans with Disabilities Act, and with the requirements of any
board of fire insurance underwriters, Insurance Service Office, or other similar
bodies now or hereafter constituted, relating to, or affecting the use or
occupancy of the Premises. The judgment of any court of competent jurisdiction,
or the admission of Tenant in any action, whether Landlord be a party thereto or
not, that Tenant has violated any Laws, shall be conclusive of the fact as
between Landlord and Tenant.
23. RULES AND REGULATIONS. Tenant shall faithfully observe and comply
with the rules and regulations that Landlord shall from time to time promulgate.
Landlord reserves the right from time to time to make all reasonable
modifications to such rules and regulations. Additions and modifications to
rules and regulations shall be binding on Tenant upon delivery of a copy of them
to Tenant. Landlord shall not be responsible to Tenant for the nonperformance
of any rules or regulations by any other tenants or occupants of the Building.
24. PARKING. Tenant shall have the right to use, on a first-come, first
served basis, in common with other tenants and occupants of the Building and
Business Park, in compliance with all Laws, up to the number of parking stalls
specified in Section 1, as designated by Landlord and available for use by all
tenants of the Business Park, their guests and invitees, located within the
Building or the Business Park (which designated parking facilities Landlord may
change at any time
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and from time to time in its sole discretion), subject to the rules and
regulations and any charges that may be established or altered for such parking
facilities from time to time.
25. ESTOPPEL CERTIFICATES. Tenant shall execute, within ten business days
following Landlord's request, a certificate in such reasonable form as may be
required by Landlord or a prospective purchaser, mortgagee or trust deed
beneficiary, or Landlord's successor after a sale or foreclosure, certifying:
(i) the Commencement Date of this Lease, (ii) that the Lease is unmodified and
in full force and effect, (or if there have been modifications hereto, that this
Lease is in full force and effect, and stating the date and nature of such
modifications); (iii) that there have been no current defaults under this Lease
by either Landlord or Tenant except as specified in Tenant's statement, (iv) the
dates to which the Base Monthly Rent, Additional Rent and other charges have
been paid, and (v) any other information reasonably requested by the requesting
party. Such certificate may be relied upon by Landlord and/or such other
requesting party. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant that this Lease is in full force and effect,
without modification except to the extent represented by Landlord, that there
are no uncured defaults in Landlord's performance under this Lease, and that not
more than one month's Rent has been paid in advance. Tenant's failure to
deliver said statement within ten business days of request, shall constitute
Tenant's Default.
26. SUBORDINATION. Tenant agrees that this Lease shall be subordinate to
the lien of any mortgage, deeds of trust, or ground leases now or hereafter
placed against the Property or Building, and to all renewals and modifications,
supplements, consolidations, and extensions thereof. Notwithstanding the
foregoing, Landlord reserves the right, however, to subordinate or cause to be
subordinated any such mortgage, deed of trust or ground lease to this Lease.
Upon a foreclosure or conveyance in lieu of foreclosure under such mortgage or
deed of trust, or a termination of such ground lease, and a demand by Landlord's
successor, Tenant shall attorn to and recognize such successor as Landlord under
this Lease. Tenant shall execute and deliver on request and in the form
requested by Landlord, any instruments reasonably necessary or appropriate to
evidence, effect or confirm such subordination. Should Tenant fail to sign and
return any such documents within ten business days of request, Tenant shall be
in Default. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of
Tenant to execute, deliver and record any such document in the name and on
behalf of Tenant.
27. REMOVAL OF PROPERTY. On expiration or other termination of this
Lease, Tenant shall remove (i) all personal property of Tenant on the Premises,
including without limitation all Tenant's furnishings, fixtures, furniture,
fittings, cabling, wiring and equipment; (ii) all improvements to the Premises
installed by or at the expense of Tenant other than such improvements as have
become the property of Landlord under Section 13; and (iii) at Landlord's
request, all non-standard or specialty improvements made to the Premises by
Landlord or Tenant. Tenant shall repair or reimburse Landlord for the cost of
repairing any damage to the Premises resulting from the installation or removal
of such property of Tenant. All property of Tenant remaining on the Premises
after reentry or termination of this Lease shall conclusively be deemed
abandoned and may be removed by Landlord. Landlord may store such property of
Tenant in any place selected by Landlord, including but not limited to a public
warehouse, at the expense and risk of the owner thereof, with the right to sell
such stored property of Tenant without notice to Tenant. The proceeds of such
sale shall be applied first to the cost of such sale, second to the payment of
the cost of removal and storage, if any, and third to the payment of any other
amounts that may then be due from Tenant to Landlord under this Lease, and any
balance shall be paid to Tenant.
28. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all
personal property taxes payable with respect to all property of Tenant located
on the Premises or the Building and promptly upon request of Landlord shall
provide satisfactory evidence of such
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payment. "Personal property taxes" under this Section 28 shall include all
property taxes assessed against the property of Tenant, whether assessed as real
or personal property.
29. NOTICES. All notices under this Lease shall be in writing. Notices
shall be effective (i) when mailed by certified mail, return receipt requested
(ii) when personally delivered, or (iii) when sent by fax, in each case to the
address or fax number of the receiving party set forth in Section 1. Either
party may change its address and fax number for notices by notice to the other
from time to time.
30. CONDITION OF PREMISES. Except as otherwise provided in Landlord's
warranties set forth in the Work Letter, by taking possession of the Premises,
Tenant accepts the Premises as being in good, sanitary order, condition and
repair, and further accepts all aspects of the Premises, Building, Property and
Business Park in their present condition, AS IS, including latent defects,
without any representations or warranties, express or implied, from Landlord.
31. HAZARDOUS SUBSTANCES.
31.1 Tenant shall not, without first obtaining Landlord's prior
written approval, generate, release, store, deposit, transport, or dispose
of (collectively "Release") any hazardous substances, sewage, petroleum
products, hazardous materials, toxic substances or any pollutants or
substances, defined as hazardous or toxic in applicable federal, state and
local laws and regulations ("Hazardous Substances") in, on or about the
Premises. In the event, and only in the event, Landlord approves such
Release of Hazardous Substances on the Premises, such Release shall occur
safely and in compliance with all applicable federal, state, and local laws
and regulations.
31.2 Tenant shall indemnify and defend (with counsel approved by
Landlord) Landlord, and hold Landlord harmless, from and against any and
all claims, liabilities, losses, damages, cleanup costs, and expenses
(including reasonable attorneys' fees) arising out of or in any way
relating to the Release by Tenant or any of its agents, representatives,
employees or invitees, or the presence of any Hazardous Substances in, on
or about the Premises occurring as a result of or in connection with
Tenant's use or occupancy of the Premises at any time after the
Commencement Date.
31.3 Landlord shall have the right from time to time to enter the
Premises, Building and Property and inspect the same for the presence of
Hazardous Substances and compliance with the provisions of this Section 31
and inspect the Premises, Building and Property. Landlord may cause tests
to be performed for Hazardous Substances on the Premises from time to time.
Tenant shall bear the cost of the first such test in any calendar year and
any other such test that occurs upon a reasonable suspicion by Landlord
that there may be Hazardous Substances in the Premises in violation of
Tenant's obligations under this Lease.
31.4 The provisions of this Section 31 shall survive the expiration
or termination of this Lease with respect to any occurrences during the
Term.
32. SIGNS. Tenant shall not place upon or install in windows or other
openings or exterior sides of doors or walls of the Premises any symbols,
drapes, or other materials without the written consent of Landlord. Tenant
shall observe and comply with the requirements of all Laws.
33. GENERAL PROVISIONS.
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33.1 ATTORNEYS' FEES. In the event Landlord reasonably requires the
services of any attorney in connection with any Default or violation by
Tenant of the terms of this Lease or the exercise by Landlord of its
remedies for any Default by Tenant under this lease, or a request by Tenant
for Landlord's waiver of any terms of this Lease or extension of time to
perform or pay any obligation of Tenant under this Lease, Tenant shall
promptly on demand reimburse Landlord for its reasonable attorneys' fees
incurred in such instance. In the event of any litigation, arbitration or
other proceeding (including proceedings in bankruptcy and probate and on
appeal) brought to enforce or interpret or other wise arising under this
Lease, the substantially prevailing party therein shall be entitled to the
award of its reasonable attorneys' fees, witness fees, and court costs
incurred therein and in preparation therefor.
33.2 GOVERNING LAW. This Lease shall be governed by and construed
in accordance with the laws of the State of Washington.
33.3 CUMULATIVE REMEDIES. No remedy or election under this Lease
shall be deemed exclusive but shall, wherever possible, be cumulative with
all other remedies at law or in equity.
33.4 EXHIBITS; ADDENDA. Exhibits and Addenda, if any, affixed to
this Lease are a part of and incorporated into this Lease.
33.5 INTERPRETATION. This Lease has been submitted to the scrutiny
of all parties hereto and their counsel, if desired, and shall be given a
fair and reasonable interpretation in accordance with the words hereof,
without consideration or weight being given to its having been drafted by
any party hereto or its counsel.
33.6 JOINT OBLIGATION. If there is more than one Tenant under this
Lease, the obligations hereunder imposed upon Tenants shall be joint and
several.
33.7 KEYS. Upon expiration or termination of this Lease, Tenant
shall surrender all keys to the Premises to Landlord at the place then
fixed for payment of Rent and shall inform Landlord of all combination
locks, safes, and vaults, if any, in the Premises.
33.8 LATE CHARGES; INTEREST. Late payment by Tenant to Landlord of
Rent or other sums due under this Lease will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which would be
difficult and impractical to ascertain. Such costs include without
limitation processing and accounting charges and late charges which may be
imposed on Landlord by the terms of any mortgage or trust deed covering the
Premises. Accordingly, Tenant shall pay to Landlord as Additional Rent a
late charge equal to five percent of such installment as liquidated damages
for such late payment, other than for time value damages. Payment of the
Rent via Tenant's delivery of a check returned for "Insufficient Funds"
shall constitute the delinquent payment of Rent and shall be subject to the
late charge and interest provisions of this Section. In addition, any
Rent or other sums due under this Lease to Landlord that is not paid when
due shall bear interest at the rate per annum of two percent over the prime
rate in effect at Seattle-First National Bank, Main Office, on the day such
Rent or other sum was due. The existence or payment of charges and
interest under this Section shall not cure or limit Landlord's remedies for
any Default under this Lease.
33.9 LIGHT, AIR, AND VIEW. Landlord does not guarantee the
continued present status of light, air, or view in, to or from the
Premises.
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33.10 MEASUREMENTS. All measurements of the Premises stated in
this Lease, even if approximations, shall govern and control over any
actual measurement of the Premises. The Rent provided in this Lease and
Tenant's Share shall not be modified or changed by reason of any
measurement or re-measurement of the Premises or the Building that may
occur after the date of this Lease, and is agreed by Landlord and Tenant to
constitute the negotiated rent for the Premises. The foregoing shall not
be deemed to modify any obligation of Landlord to construct the Premises in
accordance with the Work Letter.
33.11 NAME. Tenant shall not use the name of the Building or
Business Park for any purpose other than as an address of the business
conducted by the Tenant in the Premises.
33.12 PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all of
the agreements of the parties with respect to any matter covered or
mentioned in this Lease, and no prior agreements of understandings
pertaining to any such matters shall be effective for any purpose. No
provision of this Lease may be amended or added to except by an agreement
in writing signed by the parties or their respective successors in
interest. This Lease shall not be effective or binding on any party until
fully executed by both parties hereto.
33.13 RECORDATION. Tenant shall not record this Lease or a short
form memorandum of this Lease without the prior written consent of
Landlord.
33.14 LIABILITY. If Landlord is a partnership, any claim by
Tenant against Landlord shall be limited to the assets of such partnership,
and Tenant expressly waives any right to proceed against the partners or
the officers, directors, or shareholders of any partner in Landlord, except
to the extent necessary to subject the assets of such partnership to such
claim.
33.15 SEVERABILITY. That any provision of this Lease is invalid,
void, or illegal shall in no way affect, impair, or invalidate any other
provision of this Lease and such other provision shall remain in full force
and effect.
33.16 TIME. Time is of the essence of this Lease and each of its
provisions.
33.17 WAIVER. No provision of this Lease shall be deemed to have
been waived by Landlord unless such waiver is in writing signed by
Landlord's duly authorized representatives. The waiver by either party of
any provision of this Lease shall not be deemed to be a waiver of such
provision or any other provision, in any subsequent instance. The
acceptance of Rent by Landlord shall not be deemed to be a waiver of any
preceding Default or breach by Tenant under this Lease, whether known or
unknown to Landlord, other than the failure of the Tenant to pay the
particular Rent so accepted.
33.18 NO WASTE. Tenant shall not commit or suffer to be committed
any waste, damage or nuisance in or upon the Premises.
33.19 QUIET ENJOYMENT. Provided Tenant observes its obligations
under this Lease, its quiet enjoyment of the Premises throughout the Term
shall not be disturbed.
34. AUTHORITY OF TENANT.
34.1 If Tenant is a corporation, each individual executing this
Lease on behalf of Tenant represents and warrants that (s)he is duly
authorized by all necessary action of
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the directors of Tenant to execute and deliver this Lease on behalf of
Tenant, and that this Lease is binding upon Tenant in accordance with its
terms.
34.2 If Tenant is a partnership or limited liability company, each
individual executing this Lease on behalf of Tenant represents and warrants
that (s)he is duly authorized in accordance with Tenant's partnership
agreement or limited liability company agreement by all necessary action of
the partners or members or managers of Tenant to execute and deliver this
Lease on behalf of Tenant, and, and that this Lease is binding upon Tenant
in accordance with its terms.
35. FINANCIAL STATEMENTS. Tenant shall furnish to Landlord from time to
time, within 30 days of request, Tenant's most recent financial statements,
including at a minimum a balance sheet, income statement and statement of
changes in financial condition, or the equivalent, dated as of and for a period
ending not more than one quarter prior to the date of delivery. Such statements
shall be in the form furnished to Tenant's principal lender and/or to Tenant's
shareholders or other owners, but at a minimum shall be reviewed or compiled by
an independent certified public accountant. Landlord shall not request financial
statements under this Section more than once each calendar year.
36. COMMISSIONS. Any commissions payable as a result of the execution of
this Lease shall be paid pursuant to a separate commission contract. Each party
represents and warrants to the other that it has not had dealings with any real
estate broker, agent or salesperson, other than the Broker identified in Section
1 of this Lease, if any, with respect to this Lease that would cause the other
party to have any liability for any commissions or other compensation to such
broker, agent or salesperson, and that no such broker, agent or salesperson has
asserted any claim or right to any such commission or other compensation. Such
representing party shall defend and indemnify the other party and hold the other
party harmless from and against any and all loss, cost, liability, damage and
expense (including reasonable attorneys' fees) whatsoever that may arise out of
the breach of such representation and warranty.
EXECUTED the day and year above written.
LANDLORD:
THE QUADRANT CORPORATION
By______________________________________
__________________, its ______________
TENANT:
ADVANCED DIGITAL INFORMATION CORPORATION
By______________________________________
__________________, its ______________
STATE OF WASHINGTON )
)ss.
COUNTY OF ________ )
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On this ____ day of ______________, 19____, before me, the undersigned, a
Notary Public in and for the State of Washington, personally appeared
______________ ___________________, to me known to be the ____________________
of THE QUADRANT CORPORATION, the corporation that executed the foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation, for the uses and purposes therein mentioned,
and on oath stated that he/she was authorized to execute the said instrument on
behalf of said corporation.
WITNESS MY HAND AND OFFICIAL SEAL hereto affixed the day and year first
above written.
________________________________________
Name ___________________________________
NOTARY PUBLIC in and for the State of
Washington,
residing at ___________________________.
My commission expires _________________.
STATE OF __________________ )
)ss.
COUNTY OF ________ )
On this ____ day of ______________, 19___, before me, the undersigned, a
Notary Public in and for the State of __________, personally appeared
______________ ___________________, to me known to be the ____________________
of ADVANCED DIGITAL INFORMATION CORPORATION, the corporation that executed the
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he/she was authorized to execute the said
instrument on behalf of said corporation.
WITNESS MY HAND AND OFFICIAL SEAL hereto affixed the day and year first
above written.
________________________________________
Name ___________________________________
NOTARY PUBLIC in and for the State of
Washington,
residing at ___________________________.
My commission expires _________________.
22
<PAGE>
EXHIBIT A-1
THE BUILDING
The entirety of Floors 1 and 2 of the Building located on the Property, bearing
a street address of 11431 Willows Road, Redmond, Washington.
23
<PAGE>
EXHIBIT A-2
PROPERTY DESCRIPTION
Lot 1, Quadrant Willows Corporate Center as delineated on according to the
Binding Site Plan, filed in Volume 181 of Plats, Pages 5 through 11, inclusive,
and recorded July 9, 1997 under Recording No. 9707091343, records of King
County, Washington.
24
<PAGE>
EXHIBIT A-3
BUSINESS PARK DESCRIPTION
Lots 1, 2, 3, 4, 5, 6 and 7, Quadrant Willows Corporate Center as delineated on
according to the Binding Site Plan, filed in Volume 181 of Plats, Pages 5
through 11, inclusive, and recorded July 9, 1997 under Recording No. 9707091343,
records of King County, Washington, excepting therefrom that portion conveyed to
the City of Redmond by Deed recorded July 9, 1997, under Recording No.
9707091385, records of King County Washington.
25
<PAGE>
WORK LETTER AGREEMENT
Work Letter Agreement ("Agreement"), dated as of the 5 day of November,
1997, by and between THE QUADRANT CORPORATION, a Washington corporation
("Landlord"), and ADVANCED DIGITAL INFORMATION CORPORATION, a Washington
corporation ("Tenant").
RECITALS
Concurrently with the execution of this Agreement, Landlord and Tenant have
entered into a lease ("Lease") covering certain premises ("Premises") more
particularly described in EXHIBIT A-1 attached to the Lease.
In order to induce Tenant to enter into the Lease and in consideration of
the mutual covenants hereinafter contained, Landlord and Tenant hereby agree as
follows. Capitalized terms used herein shall have the meanings ascribed to them
in the Lease.
1. COMPLETION SCHEDULE
1.1. Attached is a schedule ("Work Schedule") setting forth a timetable for
the planning and completion of the installation of the Tenant
Improvements to be constructed in the Premises prior to the
Commencement Date of the Lease. The Work Schedule sets forth each of
the various items of work to be done by or approval to be given by
Landlord and Tenant in connection with the completion of the Tenant
Improvements. The Work Schedule shall be the basis for completing the
Tenant Improvement work. Landlord and Tenant shall each exert their
good faith, reasonable and diligent efforts to achieve completion or
approval of the matters described in the Work Schedule on or before
the dates set forth therein; and Landlord and Tenant each agree to
promptly and diligently respond to all questions and concerns raised
by architects, engineers and other consultants in connection
therewith. If Landlord or Tenant, as the case may be, do not complete
the stated approval or item by the applicable date shown in the Work
Schedule, the provisions of Section 8 shall apply.
2. CONSTRUCTION OF BUILDING SHELL
2.1. Landlord shall cause the Building Shell to be substantially completed
sufficient for the issuance of a temporary certificate of occupancy
for the Premises on or before the Commencement Date of the Lease in
substantial accordance with those certain drawings and specifications
issued by Lance Mueller & Associates: Building A design drawings
marked "Construction Set for Building 'A'", dated 30-May-97;
Construction Specification for Quadrant Willows Corporate Center,
dated Mar-1996; Building A supplemental drawings marked "Building 'A'
Core Bid Set", dated 18-Aug-997; "Building 'A' Lobby Finish
Supplement", dated 18-Aug-97 ("Building Shell Plans").
2.2. The Building Shell shall include the following improvements
constructed in substantial accordance with the Building Shell Plans,
which shall not
1
<PAGE>
constitute any part of the Tenant Improvements and shall not be
included within the Tenant Improvement Allowance described in
Section 7:
2.2.1. Heating, ventilating and air conditioning system ("HVAC")
properly sized for Tenant with the main distribution of the
HVAC to each floor of the Building;
2.2.2. Finished lobby serving the Building;
2.2.3. Installation of the elevator serving the Building;
2.2.4. Restrooms on each floor of the Building large enough to
accommodate each entire floor;
2.2.5. Showers on one floor with one stall for men and one stall for
women.
2.2.6 Main electrical service brought to the electrical room.
3. TENANT IMPROVEMENTS; TENANT IMPROVEMENT PLANS
3.1. In this Agreement "Tenant Improvements" shall include all work to be
done in the Premises pursuant to the Tenant Improvements Plans
described in and developed in accordance with this Section 3, as
modified by Tenant pursuant to Section 4. Landlord and Tenant shall
prepare Schematic Space Plan for the Tenant Improvements in
accordance with the Work Schedule, upon which Schematic Space Plan,
Landlord and Tenant shall then prepare the Tenant Improvements
construction documents, (i.e., final working drawings and
specifications for the Tenant Improvements) for the approval of
Landlord and Tenant in accordance with the Work Schedule, which
Tenant Improvements construction documents shall then constitute the
"Tenant Improvements Plans".
3.2. After determination of the Tenant Improvements Plans, the same shall
be submitted to the appropriate governmental body for plan checking
and issuance of necessary permits and approvals. Landlord, with
Tenant's cooperation, shall cause to be made any changes in the
Tenant Improvements Plans necessary to obtain such permits and
approvals.
4. TENANT REQUESTED CHANGES TO TENANT IMPROVEMENTS PLANS
4.1. After determination of the Tenant Improvements Plans, Tenant may, at
Tenant's election, request revisions, modifications, changes and
amendments to the Tenant Improvements Plans; and, subject to
Landlord's consent and approval, in the exercise of Landlord's
reasonable discretion, the Tenant Improvements Plans shall be so
revised, provided, however, that all costs relating to re-design of
the Tenant Improvements for such change, costs for changes to the
Tenant Improvements Plans, additional permitting or fees which may
be required in connection with such change, and any increased Tenant
Improvements construction costs shall be paid first from any Tenant
Improvement Allowance savings and second by Tenant.
2
<PAGE>
Additionally, delays resulting from any such changes together with
the time period for the preparation of estimates and review and
approval by Landlord and Tenant shall constitute a Tenant Delay in
accordance with the provisions of Section 8 herein. If approved by
Landlord, changes to the Tenant Improvements Plans shall be
evidenced by written change order signed by Landlord, Tenant and the
construction contractor. Landlord shall have the right to decline
Tenant's request for a change to the Tenant Improvements Plans if
such changes are inconsistent with the other provisions of this
Agreement or if the change would, in Landlord's opinion, delay
completion of the Tenant Improvements beyond the Commencement Date.
5. DETERMINATION OF FINAL PRICING
5.1. After the determination of the Tenant Improvements Plans, Landlord
shall prepare a final pricing for tenant's approval in accordance
with the Work Schedule, taking into account any modifications which
may be required to reflect changes in the Tenant Improvements Plans
required by such governmental body in connection with the issuance
of permits and approvals. In Landlord's preparation of such final
pricing, Landlord and Tenant shall have the opportunity to obtain
competitive subcontractor bids for the construction of the Tenant
Improvements.
6. CONSTRUCTION OF TENANT IMPROVEMENTS
6.1. Landlord shall cause the Tenant Improvements to be substantially
completed sufficient for the issuance of a temporary certificate of
occupancy for the Premises on or before the Commencement Date of the
Lease in accordance with the provisions set forth in this Work
Letter. Landlord shall supervise the completion of such work and
shall use diligent efforts to secure substantial completion of the
work in accordance with the Work Schedule. The cost of such work
shall be paid as provided in Section 7.
6.2. In connection with the construction of the Tenant Improvements,
Landlord and Tenant shall arrange for Tenant to have access to the
Premises commencing approximately 10 days prior to the estimated
date for substantial completion shown on the Work Schedule, in order
to allow Tenant to install telephone lines and telephone systems,
fiber optics, computer cabling, and related similar matters, and, on
a "space ready" basis only, to commence installation of Tenant's
trade fixtures. Tenant shall schedule installation of such items
with Landlord and Landlord's contractor so as not to unreasonably
impede, interfere with or delay the progress of construction of the
Tenant Improvements; and Tenant shall perform such installation in
accordance with guidelines promulgated by Landlord's contractor.
Delay, interference or damage arising out of Tenant's installation
of such items shall constitute a Tenant Delay under Section 8. Any
and all costs of installation of such items shall be at Tenant's
sole cost and expense.
6.3. During the period of construction of the Tenant Improvements,
Landlord shall consult with Tenant from time to time as necessary to
achieve approval of certain matters and installations related to the
Tenant Improvements.
3
<PAGE>
Such approvals shall be forthcoming from Tenant within a reasonable
time period as requested by Landlord, which time period shall enable
Landlord to maintain the schedule for substantial completion of the
Tenant Improvements stated in the Work Schedule. Failure of Tenant
to respond within such requested time period shall constitute a
Tenant Delay.
6.4. During the period of construction of the Tenant Improvements,
Landlord and Tenant shall meet at regular meetings occurring at
least once monthly regarding the status of the construction and
occurring at least once weekly during the final month of
construction. If timely, matters requiring Tenant's approval may be
determined at such meetings and decisions shall be reflected in the
minutes of such meetings.
7. PAYMENT OF COST OF THE TENANT IMPROVEMENTS
7.1. Tenant is entitled to a "Tenant Improvement Allowance" of $22 per
rentable square foot ("RSF" as defined in the Lease), plus $165,000.
Such Tenant Allowance shall be used only for:
7.1.1. Payment of the cost of preparing the space plan and final
working drawings and specifications, including mechanical,
electrical, plumbing and structural drawings and of all
other aspects of the Tenant Improvement Plans; provided,
however that Landlord shall provide $0.15/RSF allowance to
Tenant for the cost of preliminary space plans with respect
to the Tenant Improvements.
7.1.2. The payment of plan check, permit and license fees relating
to construction of the Tenant Improvements.
7.1.3. Construction of the Tenant Improvements, including without
limitation the following:
7.1.3.1. Installation within the Premises of all
partitioning, doors, floor coverings, ceilings,
wall coverings and painting, millwork and similar
items.
7.1.3.2. All electrical wiring, lighting fixtures, outlets
and switches and other electrical work to be
installed within the Premises.
7.1.3.3. The furnishing and installation of all duct work,
terminal boxes, diffusers and accessories required
for the completion of the heating, ventilation and
air conditioning systems within the Premises,
including the cost of meter and key control for
after-hour heating, ventilation and air
conditioning.
7.1.3.4. Any additional Tenant requirements including but
not limited to odor control, special heating,
ventilation and air conditioning, noise or
vibration control or other special systems.
4
<PAGE>
7.1.3.5. All fire and life safety control systems such as
fire walls, sprinklers, halon, fire alarms,
including piping, wiring and accessories installed
within the Premises.
7.1.3.6. All plumbing, fixtures, pipes and accessories to
be installed within the Premises.
7.1.3.7. All exterior dock improvements in substantial
accordance with those specifications for exterior
dock improvements ("Dock Plans").
7.1.3.8. Installation within the parking garage of a two
stop elevator or product lift in substantial
accordance with those specifications for parking
garage lift ("Lift Plans").
7.1.3.9. Testing and inspection costs.
7.1.3.10. Contractor's fees, including but not limited to
any fees based on general conditions.
7.1.3.11. All applicable Washington State sales taxes.
7.2. Retail sales taxes otherwise applicable to portions of construction
of the Building Shell and Tenant Improvements may be eligible for
deferral pursuant to RCW 82.63 and WAC 458-20-24003 as a result of
the uses intended by Tenant of the Premises. Landlord agrees that
in the event Tenant elects to seek such tax deferral, Landlord will
cooperate with Tenant's application for the same and shall agree as
a part of such application to state that the economic benefit of any
such deferral shall be passed to Tenant, provided, however, that:
7.2.1. Under no circumstances shall such application delay
commencement of construction of the Building Shell or any
other activity contemplated hereunder;
7.2.2. In the event retail sales tax for Building Shell or Tenant
Improvements is deferred, and if, for any reason, any part
of the retail sales tax so deferred is subsequently required
to be paid, Tenant shall promptly pay the same, together
with any interest, penalties or other charges that are or
become due in connection therewith; and
7.2.3. Tenant shall indemnity and hold Landlord harmless from any
and all costs, expenses and claims arising out of or related
to any retail sales tax deferral for the Building Shell and
Tenant Improvements. The provisions of this Section 7.2
shall survive termination of this Agreement and shall
specifically benefit The Quadrant Corporation whether or not
The Quadrant Corporation is Landlord under the Lease.
5
<PAGE>
7.3. The cost of each item shall be charged against the Tenant
Improvement Allowance. In the event that the cost of installing the
Tenant Improvements, as established by the final pricing schedule to
be determined by Landlord and Tenant, exceeds the Tenant Improvement
Allowance, or if any of the Tenant Improvements are not to be paid
out of the Tenant Improvement Allowance, then the excess shall be
paid by Tenant to Landlord not later than ten (10) days after
invoice from Landlord to Tenant for the same.
7.4. If, after the Tenant Improvement Plans have been established and the
final pricing has occurred, Tenant shall require changes or
substitutions to the Tenant Improvement Plans, any additional costs
thereof shall be paid first from any Tenant Improvement Allowance
savings and second by Tenant to Landlord not later than ten days
after invoice from Landlord to Tenant for the same. Landlord shall
have the right to decline Tenant's request for a change to the
Tenant Improvement Plans if such changes are inconsistent with the
other provisions of this Agreement or if the change would, in
Landlord's opinion, delay completion of the Tenant Improvements
beyond the Commencement Date.
7.5. In the event that the cost of the Tenant Improvements increases as
set forth in Landlord's final pricing due to the requirements of any
governmental agency and such increases exceed any available
remaining amount of the Tenant Improvement Allowance, Tenant shall
pay Landlord the amount of such increase within ten days after
receipt of Landlord's invoice for the same.
7.6. Any unused portion of the Tenant Improvement Allowance upon
completion of the Tenant Improvements shall be paid by Landlord to
Tenant or available to Tenant as a credit against any obligations of
Tenant under the Lease, as elected by Tenant.
8. DELAY IN DELIVERY OF POSSESSION
8.1. To the extent there occurs a delay in completing the Tenant
Improvements and delivering possession of the Premises at the
Commencement Date, which delay is caused by reason other than: (i)
Tenant's failure to meet its obligations under the Lease or this
Work Letter Agreement, (ii) Tenant initiated changes to the Tenant
Improvements Plans (iii) Tenant's failure to complete its approval
of actions in accordance with the Work Schedule, or (iv)
interference or damage arising out of Tenant's installation of
telephone lines and telephone systems, fiber optics, computer
cabling, and related similar matters pursuant to Section 6.3
(collectively subsections (ii) through (v) being referred to as
"Tenant Delay"), then Landlord and Tenant agree that as Tenant' s
sole remedy for such delay, the Rent Commencement Date shall be
postponed one (1) day for each day that the Commencement Date is
later than April 1, 1998.
8.2. To the extent that the delay in delivering possession of the
Premises at the Commencement Date is caused by Tenant Delays, then
Rent Commencement Date pursuant to the Lease shall be the earlier of
the Commencement Date and April 1, 1998. Upon the occasion of a
Tenant
6
<PAGE>
Delay, other than Tenant's failure to meet the requirements of the
Work Schedule, Landlord shall notify Tenant of the commencement of
such period of Tenant Delay and, if it can be reasonably determined
or is known to Landlord, the extent of the Tenant Delay.
9. SUBSTANTIAL COMPLETION
9.1. The Tenant Improvements shall be deemed substantially complete
notwithstanding the fact that minor details of construction,
mechanical adjustments or decorations which do not materially
interfere with Tenant's use and enjoyment of the Premises remain to
be performed (items normally referred to as "punch list" items).
10. TENANT REPRESENTATIVE
10.1. Tenant appoints Leslie S. Rock as Tenant's Representative to act for
Tenant in all mattes under this Agreement. All inquiries, requests,
instructions, authorizations, and other communications under this
Agreement may be made by Landlord to Tenant's Representative.
Tenant may change the identity of Tenant Representative by notice in
writing to Landlord.
11. LIABILITY FOR PROFESSIONALS
11.1. Neither Landlord nor Tenant is an architect, contractor, engineer or
other licensed professional and, except as otherwise provided in
this Agreement or the Lease, neither Landlord nor Tenant shall be
responsible or liable to the other for the work performed on their
behalf by their respective architects, contractors, engineers, or
other licensed professionals.
12. SIGNAGE DURING CONSTRUCTION
12.1. During the construction period, to the extent permitted by the City
of Redmond and if requested by Tenant, Landlord shall provide at
Landlord's expense, signage as large as permitted, stating "Future
Home of Advanced Digital Information Corporation".
13. WARRANTIES
13.1. Landlord's delivery of occupancy to Tenant shall constitute
Landlord's warranty that the Building Shell and Tenant Improvements
shall be free of material defects in construction (whether latent or
patent) and constructed pursuant to the terms of this Work Letter,
and Landlord shall be responsible for the cost of repair or
reconstruction of the Building Shell and Tenant Improvements to the
extent Landlord is notified in writing by Tenant on or before the
expiration of twelve (12) months from the Commencement Date of the
particular defects believed to be covered by the warranty made in
this sentence. In no event shall Landlord be liable for
consequential damages or lost profits in connection with such
warranty, even though Landlord may be aware of the possibility that
such damages may be suffered. Tenant waives
7
<PAGE>
any claim for any such consequential damages or lost profits as a
material part of the inducement to Landlord to make such warranty.
13.2. Landlord shall obtain from all contractors and subcontractors
providing material and labor in the construction of the Building and
Tenant Improvements all commercially reasonable warranties
(including manufacturers' warranties) for their respective materials
or labor which are available from such contractors or
subcontractors. All such warranties shall be in writing and shall
run to Landlord. To the extent there exists any defect in the
Building Shell or Tenant Improvements, which is covered by the
warranties obtained under this Section, Landlord shall seek to
enforce such warranties in accordance with their terms.
14. GENERAL
14.1. The provisions of the Lease and of the Exhibits hereto are made a
part of this Agreement. The parties shall execute such further
documents and instruments and take such other further actions as may
be reasonably necessary to carry out the intent and provisions of
this Agreement.
EXECUTED as of the date first above written.
LANDLORD:
THE QUADRANT CORPORATION
By: ___________________________________
__________________________, its
____________________
TENANT:
ADVANCED DIGITAL INFORMATION
CORPORATION
By: ___________________________________
______________, its ____________________
8
<PAGE>
WORK SCHEDULE
10/24/97 Selection of Space Planner
10/28/97 Determination of Schematic Space Plan
10/31/97 Architect Completion of Draft Tenant Improvement
Plans "Check Set" and Submission to Tenant
11/7/97 Landlord and Tenant Approve Tenant Improvements Plans
11/19/97 Approved Tenant Improvements Plans
Submitted for Tenant Improvements Construction Permit
12/5/97 Determination of Final Pricing
12/17/97 Landlord and Tenant approve pricing and any changes to
Tenant Improvement plans.
1/15/98 Tenant Improvements Construction Permit Issued
3/18/98 Premises available for Tenant to begin installation of
Tenant owned improvements such as furniture, fixtures,
telephone and cable. (Tenant and Landlord agreed to work
together on the schedule to allow Tenant access for
telephone and cable earlier than 3/18/98.)
4/1/98 Substantial Completion and Issuance of Temporary Certificate
of Occupancy
April 1, 1998 Lease Commencement Date
[REMAINING DATES TO BE INSERTED AS MUTUALLY AGREED PRIOR TO LEASE
EXECUTION]
1
<PAGE>
ADIC POLICY
Section: Benefits
Subject: ADIC Bonus Plan (ABP)
Effective Date: November 1, 1996
Page 1 of 3
- --------------------------------------------------------------------------------
1.0 Purpose
This is a discretionary bonus plan designed to reward Team Members for the
financial success of the Company. The plan described herein was adopted on
September 27, 1996. The ADIC Board of Directors reserves the right to
amend or terminate the plan without notice.
2.0 Policy
Based upon recommendation of the Chief Executive Officer, the ADIC Board of
Directors will approve the allocation and distribution of funds to be paid
out under the ADIC Bonus Plan. A targeted payout will be determined based
upon grade level and a pre-determined percent of base salary. These
targets will be reviewed annually.
3.0 Applicability
The bonus policy applies to all eligible Team Members as defined in
Section 5.
4.0 Responsibilities
Human Resources Department is responsible for maintaining a database which
tracks Team Member salary, participation and actual bonus.
5.0 Definitions
a. Eligibility: All regular, non-commissioned Team Members, with the
exception of ADIC Europe Team Members, working more than twenty-five
hours per week are eligible. Part-time employment (hours worked
between twenty-five hours and full-time) will result in prorated
participation. Eligibility for bonus distribution is contingent upon
employment on the date of the actual bonus payout. A person whose
employment is terminated for any reason prior to the bonus payout
forfeits all rights to receive a bonus for that fiscal year.
b. Non-commissioned: Team Members whose compensation package does not
include a sales commission plan are considered non-commissioned.
<PAGE>
c. Commissioned: Team Members whose compensation package includes a
sales commission plan. ADIC reserves the right to include certain,
specifically identified commissioned Team Members, for participation
in the ADIC Bonus Plan.
6.0 Procedure:
a. Team Member participation in the plan will be based on length of
service. Participation on a partial share basis will begin after
completing two months of service. Full participation is achieved at
the end of 12 months of service.
b. The participation factor equals the total number of months employed at
ADIC, minus the two-month waiting period, divided by 10. The total
number of months employed is rounded to the nearest one-half month.
Length of service is then adjusted to reflect any leaves of absence.
c. Distribution will be in proportion to each Team Member's annual base
salary percentage target multiplied by that Team Member's
participation factor.
d. Time taken by a Team Member as a leave of absence shall not be
included in the determination of a Team Member's total length of
service. Time missed due to the leave of absence will reduce the
distribution on a prorated basis for that year.
e. Profit bonus will be paid in cash and will be taxable as ordinary
income. It will also be deferred into ADIC's 401(k) Plan for current
401(k) participants.
f. Bonus plan distribution will occur annually, within the first three
weeks of December, following the release of the Company's fiscal year
earnings to the general public.
g. Targeted payouts for Team Members at Grades 0 through 25 are based
upon the Company achieving 125% of budgeted earnings before profit
sharing and taxes. Target is 80% of nominal payout at 100% of budget.
Funding begins with the first dollar earned and continues on a linear
basis.
h. Targeted payouts for Team Members at Grade 26 and above are based on a
combination of budgeted earnings as per above, and individual
performance. No payments shall be made if the Company does not achieve
at least 75% of budgeted earnings before profit sharing and taxes.
<PAGE>
Targeted Payouts for 1996-1997
Grades 0 - 12, 8% of annual base salary
Grades 17 - 19, 9% of annual base salary
Grades 20-22, 10% of annual base salary
Grades 23 - 25, 12% of annual base salary
Grades 26 - 29, 20% of annual base salary
Grades 30 - 32, 30% of annual base salary
Grades 33 - 36, 40% of annual base salary
Grades 37, 50% of annual base salary
PROFIT BONUS EXAMPLE
Peter Penguin, Grade 17, earns $22,000 per year.
ADIC payout = 9% of annual base salary
1. After three months
Participation factor = 1/10 = 10%
$22,000 X 9% X 10% = $198.00
2. After seven months
Participation factor = 5/10 = 50%
$22,000 X 9% X 50% = $990.00
3. After 11 months
Participation factor = 9/10 = 90%
$22,000 X 9% X 90% = $1,782.00
4. After 12 months
Participation factor = 10/10 = 100%
$22,000 X 9% X 100% = $1,980.00
<PAGE>
SUBSIDIARIES OF ADVANCED DIGITAL INFORMATION CORPORATION
ADIC Europe SARL, a French corporation
ADIC Trade Corp., a Barbados corporation
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-15111 and No. 333-34103) of Advanced Digital
Information Corporation of our report dated November 26, 1997 appearing in this
Annual Report on Form 10-K.
Price Waterhouse LLP
Seattle, Washington
January 23, 1998
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 32,807
<SECURITIES> 0
<RECEIVABLES> 18,402
<ALLOWANCES> 324
<INVENTORY> 16,075
<CURRENT-ASSETS> 68,443
<PP&E> 5,199
<DEPRECIATION> 2,690
<TOTAL-ASSETS> 75,194
<CURRENT-LIABILITIES> 15,084
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 60,110
<TOTAL-LIABILITY-AND-EQUITY> 75,194
<SALES> 93,204
<TOTAL-REVENUES> 93,204
<CGS> 65,556
<TOTAL-COSTS> 65,556
<OTHER-EXPENSES> 2,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,663
<INCOME-TAX> 4,166
<INCOME-CONTINUING> 8,497
<DISCONTINUED> 0
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