<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 8-K/A
--------------------------------
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) AUGUST 19, 1998
COMMISSION FILE NUMBER 0-21103
ADVANCED DIGITAL INFORMATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------
WASHINGTON 91-1618616
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11431 WILLOWS ROAD, P.O. BOX 97057 98073-9757
REDMOND, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 881-8004
---------------
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) Financial statements of business acquired.
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
The following documents are filed as part of this report:
<S> <C>
(1) Audited Financial Statements:
Report of Independent Accountants............................. 1-2
Consolidated Balance Sheets at December 31, 1996 and 1997..... 3
Consolidated Statements of Operations for the periods
January 1, 1995 to May 2, 1995, May 3, 1995 to
December 31, 1995 and for the years ended
December 31, 1996 and 1997................................ 4
Consolidated Statements of Changes in Shareholders'
Equity for the periods January 1, 1995 to May 2, 1995,
May 3, 1995 to December 31, 1995 and for the years
ended December 31, 1996 and 1997.......................... 5
Consolidated Statements of Cash Flows for the periods
January 1, 1995 to May 1995, May 3, 1995 to December 31,
1995 and for the years ended December 31, 1996 and 1997... 6
Notes to Consolidated Financial Statements.................... 7-16
(2) Unaudited Financial Statements:
Consolidated Balance Sheet at June 30, 1998................... 17
Consolidated Statements of Operations for the six
months ended June 30, 1997
and 1998................................................. 18
Consolidated Statement of Changes in Shareholders'
equity for the six months ended June 30, 1998............ 19
Consolidated Statements of Cash Flows for the six
months ended June 30,
1997 and 1998............................................ 20
Notes to Consolidated Financial Statements.................... 21-22
(b) Pro forma financial information
The following documents are filed as part of this report:
Unaudited Pro forma Combined Condensed Balance
Sheets at July 31, 1998 ................................. 24
Unaudited Pro forma Combined Condensed Statements
of Income for the year
ended October 31, 1997................................... 25
Unaudited Pro forma Combined Condensed Statement of
Incomes for the nine
months ended July 31, 1998............................... 26
Notes to Unaudited Pro forma Condensed Combined
Financial Statements..................................... 27-29
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and
Board of Directors of
EMASS, Inc.
We have audited the accompanying consolidated statements of operations, of
shareholder's equity and of cash flows of EMASS, Inc. for the periods from
January 1, 1995 to May 2, 1995 and May 3, 1995 to December 31, 1995. 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 audit.
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.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated results of the Company's
operations and their cash flows for the periods from January 1, 1995 through May
2, 1995 and May 3, 1995 through December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the financial statements for
the period from May 3, 1995 (date of acquisition) through December 31, 1995 have
been adjusted to reflect the acquisition of EMASS, Inc. by Raytheon Company,
Inc.
PricewaterhouseCoopers LLP
Dallas, Texas
October 21, 1998
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and
Board of Directors of
EMASS, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholder's equity and of cash
flows present fairly, in all material respects, the financial position of
EMASS, Inc. and its subsidiary at December 31, 1996 and 1997 and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
October 21, 1998
2
<PAGE>
EMASS, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 718,000 $ 1,990,000
Accounts receivable, less allowance for
doubtful accounts of $1,621,000
and $1,276,000, respectively 14,032,000 9,959,000
Other receivables 2,394,000 199,000
Inventories 22,278,000 17,224,000
Prepaid expenses and other assets 1,135,000 1,053,000
------------ ------------
Total current assets 40,557,000 30,425,000
Property and equipment, net 15,364,000 10,737,000
Other assets 921,000 528,000
------------ ------------
Total assets $ 56,842,000 $ 41,690,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 4,966,000 $ 4,164,000
Due to parent company 8,472,000 11,735,000
Due to related party 85,000 88,000
Other accrued liabilities 7,053,000 4,441,000
Short-term obligations and current portion of
long-term debt 19,990,000 15,288,000
Deferred revenue 2,741,000 868,000
------------ ------------
Total current liabilities 43,307,000 36,584,000
------------ ------------
Long-term debt 2,401,000 1,806,000
------------ ------------
Minority interest - -
------------ ------------
Commitments and contingencies (Notes 3 and 12)
Shareholder's equity
Common stock, $200,000 par value, stated value $.01;
100 shares authorized; 90 shares issued and outstanding
Additional paid-in-capital 40,406,000 40,406,000
Retained deficit (29,277,000) (37,543,000)
Cumulative foreign currency translation adjustment 5,000 437,000
------------ ------------
Total shareholder's equity 11,134,000 3,300,000
------------ ------------
Total liabilities and shareholder's equity $ 56,842,000 $ 41,690,000
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
EMASS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- ---------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Revenues $ 25,662,000 $ 58,915,000 $ 73,989,000 $ 64,471,000
Cost of goods sold (11,630,000) (48,355,000) (48,079,000) (38,553,000)
------------ ------------ ------------ ------------
14,032,000 10,560,000 25,910,000 25,918,000
------------ ------------ ------------ ------------
Operating expenses:
Research and development 4,133,000 8,267,000 11,437,000 10,432,000
Selling, general and administrative 14,115,000 15,382,000 28,655,000 22,762,000
------------ ------------ ------------ ------------
Total operating expenses 18,248,000 23,649,000 40,092,000 33,194,000
------------ ------------ ------------ ------------
Other income (expense):
Foreign exchange gain 1,000 2,000 43,000 54,000
Interest expense (787,000) (748,000) (1,302,000) (976,000)
Other (expense) (131,000) (9,000)
------------ ------------ ------------ ------------
(786,000) (746,000) (1,390,000) (931,000)
------------ ------------ ------------ ------------
Loss from before income taxes (5,002,000) (13,835,000) (15,572,000) (8,207,000)
Income tax expense (53,000) (2,000) (56,000) (59,000)
------------ ------------ ------------ ------------
(5,055,000) (13,837,000) (15,628,000) (8,266,000)
Minority interest (188,000) 188,000 -- --
------------ ------------ ------------ ------------
Net loss $ (5,243,000) $(13,649,000) $(15,628,000) $ (8,266,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
EMASS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
Common Stock PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at
December 31, 1994 90 $ -- $40,355,000 $ (4,443,000) $ 218,000 $ 36,130,000
Net loss for the period
January 1, 1995 to
May 2, 1995 (5,243,000) (5,243,000)
Translation adjustment 22,000 22,000
Capital contributions 17,842,000 17,842,000
----------- ---------- ----------- ------------ ------------ ------------
Balance at
May 2, 1995 90 $ -- $58,197,000 $ (9,686,000) $ 240,000 $ 48,751,000
----------- ---------- ----------- ------------ ------------ ------------
----------- ---------- ----------- ------------ ------------ ------------
COMPANY
Balance at
May 3, 1995 90 $ -- $22,003,000 $ $ $ 22,003,000
Exercise of stock options 10,000 10,000
Net loss for the period
May 3, 1995 to
December 31, 1995 (13,649,000) (13,649,000)
Translation adjustment 658,000 658,000
Capital contributions 19,451,000 19,451,000
Effect of EMASS
acquisition and
subsequent contingent
consideration (1,058,000) (1,058,000)
----------- ---------- ----------- ------------ ------------ ------------
Balance at
December 31, 1995 90 -- 40,406,000 (13,649,000) 658,000 27,415,000
Net loss for the year
ended December 31,
1996 (15,628,000) (15,628,000)
Translation adjustment (653,000) (653,000)
----------- ---------- ----------- ------------ ------------ ------------
Balance at
December 31, 1996 90 -- 40,406,000 (29,277,000) 5,000 11,134,000
Net loss for the year
ended December 31,
1997 (8,266,000) (8,266,000)
Translation adjustment 432,000 432,000
----------- ---------- ----------- ------------ ------------ ------------
Balance at
December 31, 1997 90 $ -- $40,406,000 $(37,543,000) $ 437,000 $ 3,300,000
----------- ---------- ----------- ------------ ------------ ------------
----------- ---------- ----------- ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
EMASS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- -----------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,243,000) $(13,649,000) $(15,628,000) $(8,266,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Loss on sale of property and equipment 8,000
Depreciation and amortization 1,905,000 4,104,000 6,513,000 6,095,000
Change in operating assets and
liabilities
Accounts receivable (6,591,000) (1,999,000) 5,865,000 4,431,000
Other receivables (926,000) (2,358,000) (2,394,000) 2,195,000
Inventories (13,520,000) (7,839,000) 14,360,000 4,697,000
Prepaid expenses and other assets (285,000) (294,000) 387,000 83,000
Other assets 784,000 (89,000) (46,000) 393,000
Accounts payable 1,275,000 304,000 (7,513,000) (803,000)
Due to related party 94,000 112,000 (765,000) 3,000
Accrued liabilities 3,795,000 (2,915,000) 562,000 (2,612,000)
Deferred revenue 2,309,000 (1,874,000)
Other liabilities (1,111,000) 215,000 (437,000)
------------ ------------ ------------ -----------
Net cash provided by (used in)
operating activities (19,823,000) (24,408,000) 3,221,000 4,342,000
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (5,142,000) (4,907,000) (3,213,000) (1,493,000)
Contingent payments under purchase
agreement (803,000) (1,058,000)
Proceeds from sale of property and
equipment 1,003,000 25,000
------------ ------------ ------------ -----------
Net cash used in investing activities (5,945,000) (5,965,000) (2,210,000) (1,468,000)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent company 17,842,000 19,451,000
Proceeds from exercise of stock options 10,000
Net borrowings from parent company 6,750,000 (50,000) 8,472,000 3,263,000
Proceeds from long-term debt 648,000 11,196,000 466,000
Principal payment on long-term debt (9,138,000) (5,763,000)
------------ ------------ ------------ -----------
Net cash provided by (used in) financing
activities 25,240,000 30,607,000 (666,000) (2,034,000)
------------ ------------ ------------ -----------
Effect of foreign currency fluctuations
on cash 22,000 658,000 (653,000) 432,000
------------ ------------ ------------ -----------
Net (decrease) increase in cash and cash
equivalents (506,000) 892,000 (308,000) 1,272,000
Cash, and cash equivalents at
beginning of period 640,000 134,000 1,026,000 718,000
------------ ------------ ------------ -----------
Cash, and cash equivalents at end of period $ 134,000 $ 1,026,000 $ 718,000 $ 1,990,000
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for taxes $ -- $ 20,000 $ 58,000 $ 51,000
Cash paid during period for interest $ 511,000 $ 1,022,000 $ 1,302,000 $ 976,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
EMASS, Inc. ("EMASS" or the "Company"), including its 80% owned subsidiary
Grau Storage Systems GmbH & Co. KG (Grau), is an international developer,
producer and distributor of mass storage products, such as robotics-based
media libraries, data migration, archiving and backup software and system
integration services, for the MVS and UNIX user environments. The principal
markets are in North America and Europe.
EMASS is a wholly owned subsidiary of Raytheon E-Systems, Inc.
("E-Systems"), a wholly owned subsidiary of Raytheon Company ("Raytheon").
Raytheon acquired E-Systems effective May 3, 1995. The purchase of
E-Systems by Raytheon was accounted for by the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations". The acquisition costs were allocated among the
assets acquired and liabilities assumed based on estimated fair values.
The fair value of the net tangible assets acquired approximated the
allocated purchase price and, accordingly, no goodwill was recorded.
The fair value of the assets acquired, net of cash, was $65,686,000
and liabilities assumed were $43,683,000.
The financial statements for the period from January 1, 1995 through
May 2, 1995 represent the financial statements of EMASS prior to the
acquisition by Raytheon ("Predecessor" financial statements). The
financial statements for the period from May 3, 1995 through
December 31, 1995 have been adjusted to reflect the acquisition of
EMASS, Inc. by Raytheon. These financial statements reflect certain
sales and expense items which were allocated between the two periods
on a pro-rata basis. The financial statements of the Company and the
Predecessor are not comparable in certain respects due to the
differences between the cost bases of certain assets and liabilities.
The consolidated statement of operations reflect certain expense items
incurred by E-Systems which were allocated to the Company on a basis which
management believes represents a reasonable allocation of such costs to
present EMASS as a stand-alone company. These allocations consist primarily
of corporate expenses such as executive and other compensation.
Compensation has been allocated based on an estimate of the E-Systems
personnel time dedicated to the operations and management of EMASS. A
summary of these allocations is as follows:
7
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CORPORATE
EXPENSES
<S> <C>
PREDECESSOR
January 1, 1995 - May 2, 1995 $ 194,000
SUCCESSOR
May 3, 1995 - December 31, 1995 $ 838,000
Year ended December 31, 1996 1,371,000
Year ended December 31, 1997 1,340,000
</TABLE>
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with an original
maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to income as incurred. Additions, improvements and
major replacements are capitalized. For financial reporting purposes,
depreciation is provided using the straight-line method over the estimated
useful lives of depreciable assets. Estimated useful lives of property and
equipment range from three to ten years.
RESEARCH AND DEVELOPMENT
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products,
are expensed as incurred.
REVENUE RECOGNITION
Revenue from large library system sales is recognized upon customer
acceptance. Revenue from software and other sales is recognized upon
shipment.
Revenue from sales of services is recognized when services are performed
and billable, except for extended service agreements. Revenue under
extended service agreements is deferred and recognized ratably over the
life of the service agreement.
INCOME TAXES
Provision for income taxes has been recorded in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). Under the liability method of SFAS 109, deferred tax assets and
liabilities are determined based on differences
8
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
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.
The Company filed consolidated tax returns with its parent company during
the periods presented in these financial statements. However, income taxes
in the accompanying consolidated financial statements 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 the timing of tax deductions for allowances and accrued
expenses.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of Grau have been translated into U.S. dollars in
accordance with FASB Statement No. 52 "Foreign Currency Translation." Under
the provisions of this Statement, all assets and liabilities in the balance
sheets of Grau, whose functional currency is the German deutsche mark, are
translated at year-end exchange rates, and translation gains and losses are
accumulated in a separate component of shareholder's equity.
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
functional currency transactions are included in determining net income or
loss for the period in which exchange rates change.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents and other current assets
and liabilities such as accounts receivable, accounts payable and accrued
liabilities as presented in the consolidated financial statements
approximates fair value based on the short-term nature of these
instruments.
CONCENTRATION OF CREDIT RISK
The Company sells product 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 letter
of credit, is required prior to the completion of a transaction. The
Company does not believe there is a material credit risk beyond that
provided in the consolidated financial statements in the ordinary course of
business.
WARRANTY
For standard Company products, parts and labor are covered under warranty
which range between three months and one year. 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.
EARNINGS PER SHARE
Given the Company's historical capital structure as a wholly owned
subsidiary of E-Systems, historical earnings per share amounts are not
presented as they are not considered to be meaningful.
9
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
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
disclosure 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
<S> <C> <C>
Raw materials and supplies $ 14,842,000 $ 14,581,000
Work-in-process 4,986,000 2,848,000
Finished goods 11,213,000 8,919,000
------------ ------------
31,041,000 26,348,000
Less: Allowance for obsolete inventory (8,763,000) (9,124,000)
------------ ------------
$ 22,278,000 $ 17,224,000
------------ ------------
------------ ------------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
<S> <C> <C>
Buildings and land $ 5,391,000 $ 4,611,000
Computer equipment 7,620,000 4,784,000
Leasehold improvements 362,000 313,000
Office furniture and equipment 3,681,000 2,884,000
Machinery and equipment 14,804,000 10,293,000
Vehicles 164,000 103,000
------------ ------------
32,022,000 22,988,000
Less: Accumulated depreciation (16,658,000) (12,251,000)
------------ ------------
$ 15,364,000 $ 10,737,000
------------ ------------
------------ ------------
</TABLE>
10
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
Future minimum rental commitments under operating leases for years ending
December 31, are as follows:
<TABLE>
<S> <C>
1998 $ 932,000
1999 642,000
2000 76,000
2001 37,000
2002 -
Thereafter -
----------
$1,687,000
----------
----------
</TABLE>
Rent expense for the period January 1, 1995 to May 2, 1995, May 3, 1995 to
December 31, 1995, and for the years ended December 31, 1996 and 1997 was
$330,000, $759,000, $1,036,000 and $1,094,000, respectively.
4. MAJOR CUSTOMERS
Revenues from major customers approximate the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- --------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
E-Systems $ 4,138,000 $ 7,645,000 $ 5,894,000 $ 6,479,000
Customer A $ 4,891,000 $11,320,000 $12,909,000 $ 7,174,000
Customer B $ 4,893,000 $ 6,763,000 $ 4,889,000 $ 2,300,000
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
<S> <C> <C>
Compensation $3,962,000 $3,139,000
Taxes, other than income 43,000 143,000
Other accrued items 3,048,000 1,159,000
---------- ----------
$7,053,000 $4,441,000
---------- ----------
---------- ----------
</TABLE>
11
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
6. DEBT
Short-term obligations of $19,990,000 and $15,288,000 at December 31, 1996
and 1997, respectively, comprise local borrowings by Grau. Of the balances
outstanding, $18,847,000 and $15,008,000, respectively, represent amounts
borrowed against lines of credit. Amounts borrowed on the line of credit
become fixed term loans outstanding with specific due dates. Interest rates
on the line of credit funds ranged from 3.53% to 3.62% at December 31, 1996
and 4.22% and 4.25% at December 31, 1997. Amounts available under the lines
of credit at December 31, 1997 were $7,225,000. Amounts outstanding under
the line of credit agreements are due in January 1998.
Long-term debt, comprising local borrowings by Grau, at December 31, 1996
and 1997 is comprised of various notes payable to banks in Germany with
interest rates ranging from 6.7% to 7.75% at December 31, 1996 and 4.05% to
6.7% at December 31, 1997.
As of December 31, 1997, the maturities of long-term debt were as follows:
<TABLE>
<S> <C>
1998 $ 280,000
1999 295,000
2000 312,000
2001 326,000
2002 225,000
Thereafter 648,000
----------
2,086,000
LESS: Current maturities (280,000)
----------
$1,806,000
----------
----------
</TABLE>
12
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
7. INCOME TAXES
Loss before provision (benefit) for income taxes was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- --------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ -
State 53,000 2,000 56,000 59,000
Foreign - - - -
----------- ----------- ----------- -----------
53,000 2,000 56,000 -
----------- ----------- ----------- -----------
Deferred:
Federal - - - -
State - - - -
----------- ----------- ----------- -----------
Foreign - - - -
----------- ----------- ----------- -----------
Total $ 53,000 $ 2,000 $ 56,000 $ 59,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Net pre-tax operating results from the foreign subsidiary were $39,000,
($3,458,000), $2,333,000 and $1,025,000 for the period January 1, 1995 to
May 2, 1995, May 3, 1995 to December 31, 1995, and for the years ended
December 31, 1996 and 1997, respectively.
The provision (benefit) for income tax differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before
provision (benefit) for income taxes for the following reasons:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- --------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Income tax expense (benefit)
at statutory rates $(1,783,000) $(4,641,000) $(5,314,000) $(2,810,000)
Operating losses used by Raytheon 2,023,000 2,657,000 4,214,000 1,445,000
Net change in valuation allowance (381,000) 1,984,000 1,310,000 1,295,000
State income taxes 53,000 2,000 56,000 59,000
Other 141,000 (210,000) 70,000
----------- ----------- ----------- -----------
Total income tax expense $ 53,000 $ 2,000 $ 56,000 $ 59,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
13
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset and liabilities are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- --------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Net operating losses $ 3,571,000 $ 8,304,000 $ 2,046,000 $ 1,357,000
Allowances - 1,508,000 1,518,000 1,850,000
----------- ----------- ----------- -----------
3,571,000 9,812,000 3,564,000 3,207,000
----------- ----------- ----------- -----------
DEFERRED TAX LIABILITIES:
Property and equipment, excess
tax depreciation over book (245,000) (340,000) (1,167,000) (1,333,000)
----------- ----------- ----------- -----------
VALUATION ALLOWANCE (3,326,000) (9,472,000) (2,397,000) (1,874,000)
----------- ----------- ----------- -----------
NET DEFERRED TAX ASSET $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
8. SHAREHOLDERS EQUITY
The Company has a Stock Option Plan available to grant stock options to
employees. The plan provides for a maximum of 2,000,000 options to purchase
stock. During 1994 and 1995, the Board of Directors granted approximately
1,800,000 options at $2 per share. As a result of the Raytheon purchase of
E-Systems in May 1995, substantially all stock options became 100% vested.
In April 1998, the Company declared a 200,000 for one reverse stock split.
All share amounts included in these financial statements have been
retroactively restated to reflect the reverse stock split. As a result of
the stock split, all options outstanding resulted in options to purchase
fractional shares. As a result of the reverse stock split and a
determination by the Company's Board of Directors of the fair value of
common stock, all options outstanding were determined to have no value and
were cancelled.
9. RELATED PARTY TRANSACTIONS
Other accrued liabilities at December 31, 1996 and 1997 include $1,063,000
and $791,000, respectively, due under an employment separation agreement
with the minority interest stockholder of Grau.
Sales to E-Systems totaled $4,138,000, $7,645,000, $5,894,000 and
$6,479,000 for the period January 1, 1995 to May 2, 1995, May 3, 1995 to
December 31, 1995, and for the years ended December 31, 1996 and 1997,
respectively.
14
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
A company in which the Grau minority interest stockholder has an equity
ownership provides certain MVS support services in Europe. Cost of these
services totaled $919,000, $1,867,000, $2,586,000 and $881,000 for the
period January 1, 1995 to May 2, 1995, May 3, 1995 to December 31, 1995,
and for the years ended December 31, 1996 and 1997, respectively.
10. GEOGRAPHICAL SEGMENT INFORMATION
Major operations outside the United States are comprised of a subsidiary in
Germany, which has branch offices in both France and the United Kingdom.
Certain information regarding operations in this geographic segment is
presented in the table below. Transfers between geographic segment are made
at arm's length prices consistent with rules and regulations of governing
tax authorities. The profit on these transfers is not recognized until
sales are made to non-affiliated customers.
Included in U.S. sales are export sales to unaffiliated customers of
$2,192,000, $1,886,000, $1,578,000, $1,623,000 for the period January 1,
1995 to May 2, 1995, May 3, 1995 to December 31, 1995 and for the years
ended December 31, 1996 and 1997, respectively. Total international sales
were $20,551,000, $39,067,000, $46,680,000, $36,414,000 for the period
January 1, 1995 to May 2, 1995, May 3, 1995 to December 31, 1995 and for
the years ended December 31, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------- ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 MAY 3, 1995 YEAR ENDED YEAR ENDED
TO MAY 2, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Net sales:
United States $ 7,303,000 $ 21,734,000 $ 28,887,000 $ 29,680,000
Europe 18,359,000 37,181,000 45,102,000 34,791,000
-------------- ------------- ------------- -------------
$ 25,662,000 $ 58,915,000 $ 73,989,000 $ 64,471,000
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Operating profit (loss):
United States $ (4,255,000) $ (9,631,000) $ (12,353,000) $ (9,217,000)
Europe 39,000 (3,458,000) (1,829,000) 1,941,000
-------------- ------------- -------------- -------------
$ (4,216,000) $(13,089,000) $ (14,182,000) $ (7,276,000)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Identifiable assets:
United States $ 29,633,000 $ 23,075,000
Europe 27,209,000 18,615,000
------------- -------------
$ 56,842,000 $ 41,690,000
------------- -------------
------------- -------------
</TABLE>
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) savings plan, which provides for voluntary
annual contributions at the discretion of management. The Company has made
no contributions.
15
<PAGE>
EMASS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
In connection the purchase of Grau in 1994, the Company entered into an
agreement with the minority shareholder of Grau whereby the minority
shareholder has the option to "put" their remaining 20% interest in Grau
to the Company for $2,000,000. This option is effective for the period
January 1, 2000 to March 31, 2000.
The Company obtains insurance for workers' compensation, automobile,
product and general liability, property loss, and medical claims. However,
EMASS has elected to retain a significant portion of expected losses
through the use of deductibles. Provisions for losses expected under these
programs are recorded based upon estimates of the aggregate liability of
claims incurred. These estimates utilize the Company's prior experience and
actuarial assumptions that are provided by the Company's insurance carrier.
EMASS is involved in other disagreements, which are in the ordinary course
of the Company's business activities that are not expected to have a
material adverse effect on EMASS's financial position. Management believes
that if there is any impact on the Company's consolidated financial
statements as a result of these matters, it will not be material.
13. SUBSEQUENT EVENT
On August 19, 1998 EMASS was acquired by Advanced Digital Information
Corporation for approximately $24,766,000 in cash. This acquisition will
be accounted for under the purchase method of accounting.
16
<PAGE>
EMASS, INC.
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,250,000
Accounts receivable, less allowance for doubtful
accounts of $1,463,000 10,222,000
Other receivables 86,000
Inventories 16,064,000
Prepaid expenses and other assets 926,000
--------------
Total current assets 30,548,000
Other assets 75,000
Property and equipment, net 9,352,000
--------------
$ 39,975,000
--------------
--------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,763,000
Due to parent company 14,335,000
Due to related party 88,000
Other accrued liabilities 6,618,000
Short-term obligations and current portion
of long-term debt 11,370,000
Deferred revenue 1,551,000
--------------
Total current liabilities 36,725,000
--------------
Long-term debt 1,704,000
--------------
Minority interest 138,000
--------------
Shareholder's equity
Common stock, stated value $200,000 par value, $.01:
100 shares authorized; 90 shares issued and outstanding -
Additional paid-in capital 40,406,000
Retained deficit (39,711,000)
Cumulative foreign currency translation adjustment 713,000
--------------
Total shareholder's equity 1,408,000
--------------
$ 39,975,000
--------------
--------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
17
<PAGE>
EMASS, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1998
<S> <C> <C>
Revenues $ 28,240,000 $ 32,554,000
Cost of goods sold (18,141,000) (21,252,000)
---------------- ---------------
Gross profit 10,099,000 11,302,000
---------------- ---------------
Operating expenses:
Research and development 4,486,000 3,754,000
Selling, general and administrative 9,124,000 9,231,000
---------------- ---------------
Total operating expenses 13,610,000 12,985,000
---------------- ---------------
Interest expense (466,000) (347,000)
Other income - -
---------------- ---------------
Loss before income taxes (3,977,000) (2,030,000)
Income tax expense -
---------------- ---------------
(3,977,000) (2,030,000)
Minority interest (138,000)
---------------- ---------------
Net loss $ (3,977,000) $ (2,168,000)
---------------- ---------------
---------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
18
<PAGE>
EMASS, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 90 $ - $40,406,000 $ (37,543,000) $ 437,000 $ 3,300,000
Net loss for the period
January 1, 1998 to
June 30, 1998 (2,168,000) (2,168,000)
Translation adjustment 276,000 276,000
----------- ----------- ----------- -------------- -------------- -------------
Balance at
June 30, 1998 90 $ - $40,406,000 $ (39,711,000) $ 713,000 $ 1,408,000
----------- ----------- ----------- -------------- -------------- -------------
----------- ----------- ----------- -------------- -------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
19
<PAGE>
EMASS, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,977,000) $ (2,168,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 1,371,000 1,759,000
Gain on sale of property and equipment (147,000)
Minority interest 138,000
Changes in operating assets and liabilities:
Accounts receivable 1,771,000 1,010,000
Other receivables 1,465,000 113,000
Inventories 2,416,000 245,000
Prepaid expenses and other assets (423,000) (275,000)
Other assets 877,000 453,000
Accounts payable (2,268,000) (1,401,000)
Due to related party (85,000)
Accrued liabilities (2,098,000) 2,177,000
Deferred revenue (1,627,000) 686,000
----------------- ---------------
Net cash provided by (used in)
operating activities (2,725,000) 2,737,000
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,020,000) (204,000)
Proceeds from sale of property and
equipment 1,077,000
----------------- ---------------
Net cash provided by (used in) investing
activities 57,000 (204,000)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from parent company 4,831,000 2,471,000
Proceeds from long-term debt 530,000
Principal payment on long-term debt (2,609,000) (4,020,000)
---------------- ----------------
Net cash provided by (used in)
financing activities 2,752,000 (1,549,000)
---------------- ----------------
Effect of foreign currency fluctuations on cash 190,000 276,000
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 274,000 1,260,000
Cash and cash equivalents at beginning of period 718,000 1,990,000
---------------- ---------------
Cash and cash equivalents at end of period $ 992,000 $ 3,250,000
---------------- ---------------
---------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
20
<PAGE>
EMASS, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
The financial statements presented as of June 30, 1998 and for the six
months ended June 30, 1998 and 1997 have not been audited. In the opinion
of management, the unaudited interim balance sheet, statements of
operations, changes in shareholder's equity and of cash flows include all
normally recurring adjustments necessary to present fairly the financial
position, results of operations and cash flows as of and for the periods
presented of EMASS, Inc.
EMASS, Inc. ("EMASS" or the "Company"), including its 80% owned subsidiary
Grau Storage Systems GmbH & Co. KG (Grau), is an international developer,
producer and distributor of mass storage products, such as robotics-based
media libraries, data migration, archiving and backup software and system
integration services, for the MVS and UNIX user environments. The principal
markets are in North America and Europe.
EMASS is a wholly-owned subsidiary of Raytheon E-Systems, Inc.
("E-Systems"), a wholly-owned subsidiary of Raytheon Company ("Raytheon").
Raytheon acquired E-Systems effective May 3, 1995. The purchase of
E-Systems by Raytheon was accounted for by the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations".
The consolidated statement of operations reflect certain expense items
incurred by E-Systems which were allocated to the Company on a basis which
management believes represents a reasonable allocation of such costs to
present EMASS as a stand-alone company. These allocations consist primarily
of corporate expenses such as executive and other compensation.
Compensation has been allocated based on an estimate of the E-Systems
personnel time dedicated to the operations and management of EMASS. A
summary of these allocations is as follows:
<TABLE>
<CAPTION>
CORPORATE
EXPENSES
--------
<S> <C>
Six months ended June 30, 1997 $ 480,000
Six months ended June 30, 1998 352,000
</TABLE>
21
<PAGE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
<S> <C>
Raw materials and supplies $ 16,451,000
Work-in-progress 1,473,000
Finished goods 7,608,000
---------------
25,532,000
LESS: Allowance for obsolete inventory (9,468,000)
---------------
$ 16,064,000
---------------
---------------
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
On August 19, 1998, Advanced Digital Information Corporation ("ADIC" or the
"Company") acquired EMASS, Inc. ("EMASS"), a wholly owned subsidiary of Raytheon
E-Systems, Inc. ("E-Systems") pursuant to a Stock Purchase Agreement with
E-Systems dated July 21, 1998. Pursuant to this Stock Purchase Agreement, the
Company made a cash payment of $24,766,000 to E-Systems and assumed
approximately $2,000,000 in mortgage indebtedness in exchange for one hundred
percent of the outstanding stock of EMASS ( the "Acquisition"). The Acquisition
will be accounted for by the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations", ("APB 16").
The following unaudited pro forma condensed combined balance sheet as of
July 31, 1998 was prepared as if the Acquisition occurred on such date. The
following unaudited condensed combined statements of income give effect to the
Acquisition as of the beginning of the periods presented. The unaudited pro
forma condensed combined statements of income do not purport to represent what
the Company's results of operations actually would have been if the Acquisition
had occurred as of such date or what such results will be for any future
periods.
The unaudited pro forma condensed combined financial statements are derived
from the historical financial statements of the Company and EMASS and the
assumptions and adjustments described in the accompanying notes. The Company and
EMASS believe that all adjustments necessary to present fairly such unaudited
financial information have been made. The unaudited pro forma financial data
should be read in conjunction with the consolidated financial statements and the
accompanying notes thereto of EMASS appearing elsewhere in this 8-K and the
financial statements of the Company included in its Annual Report on Form 10-K
for the year ended October 31, 1997. The unaudited pro forma condensed
consolidated financial statements do not reflect any cost savings or other
economic efficiencies resulting from the Acquisition nor do they include any
adjustment for corporate allocations and infrastructure imposed by EMASS' parent
company.
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADIC EMASS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 22,291 $ 2,931 $ (5,050) (a) $ 20,172
Accounts receivable, net 20,262 10,584 30,846
Inventories 20,916 16,927 37,843
Prepaid expenses and other 3,477 1,551 5,028
------------- -------------- ------------- -------------
Total current assets 66,946 31,993 (5,050) 93,889
Property, plant and equipment 4,136 9,239 (6,651) (b) 6,724
Intangible assets, net 3,700 (b) 3,700
Acquired in-process research
and development 4,900 (b)
(4,900) (b)
Other long-term assets 4,284 4,284
------------- -------------- ------------- -------------
$ 75,366 $ 41,232 $ (8,001) $ 108,597
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable $ 7,230 $ 5,718 $ 12,948
Accrued and other current
liabilities 2,642 8,348 $ 1,200 (c) 12,190
Due to parent company 23,750 (23,750) (d)
------------- -------------- ------------- -------------
Total current liabilities 9,872 37,816 (22,550) 25,138
------------- -------------- ------------- -------------
Minority interest 1,100 (e) 1,100
------------- -------------
Long-term debt 1,765 20,000 (a) 21,765
-------------- ------------- -------------
Shareholders' equity
Common stock 46,237 40,406 (40,406) (f) 46,237
Retained deficit 19,526 (39,543) 39,543 (f) 14,626
(4,900)
Cumulative translation
adjustment (269) 788 (788) (f) (269)
------------- -------------- ------------- -------------
Total shareholders' equity 65,494 1,651 (6,551) 60,594
------------- -------------- ------------- -------------
$ 75,366 $ 41,232 $ (8,001) $ 108,597
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
NINE MONTHS ENDED JULY 31, 1998
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADIC EMASS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $ 72,986 $ 47,917 $ (400) (g) $ 120,503
Cost of sales 51,791 31,973 (400) (g) 83,364
------------- -------------- ------------- -------------
Gross profit 21,195 15,944 - 37,139
------------- -------------- ------------- -------------
Operating expenses
Research and development 2,063 5,621 7,684
Selling, general and
administrative 12,944 12,698 740 (h) 26,382
------------- -------------- ------------- -------------
15,007 18,319 740 34,066
------------- -------------- ------------- -------------
Operating profit (loss) 6,188 (2,375) 740 3,073
Other income (expense) 1,238 375 (975) (i) 638
------------- -------------- ------------- -------------
Income (loss) before provision
for income taxes 7,426 (2,000) (1,715) 3,711
Provision (benefit) for income
taxes 2,379 (332) (j) 2,047
Minority interest
------------- -------------- ------------- -------------
Net income (loss) $ 5,047 $ (2,000) $ (1,383) $ 1,664
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Basic earnings per share $ .52 $ .17
------------- -------------
------------- -------------
Weighted average number of
common shares outstanding 9,730,086 9,730,086
------------- -------------
------------- -------------
Diluted earnings per share $ .51 $ .17
------------- -------------
------------- -------------
Weighted average number of
common and common
equivalent shares outstanding 9,904,897 9,904,897
------------- -------------
------------- -------------
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADIC EMASS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $ 93,204 $ 64,471 $ $ 157,675
Cost of sales 65,556 38,553 104,109
------------- -------------- ------------- -------------
Gross profit 27,648 25,918 53,566
------------- -------------- ------------- -------------
Operating expenses
Research and development 2,910 10,432 13,342
Selling, general and
administrative 13,556 22,762 987 (h) 37,305
------------- -------------- ------------- -------------
16,466 33,194 987 50,647
------------- -------------- ------------- -------------
Operating profit (loss) 11,182 (7,276) (987) 2,919
Other income (expense) 1,481 (931) (1,300) (i) (750)
------------- -------------- ------------- -------------
Income (loss) before provision
for income taxes 12,663 (8,207) (2,287) 2,169
Provision (benefit) for income
taxes 4,166 59 (442) (j) 3,783
Minority interest
------------- -------------- ------------- -------------
Net income (loss) $ 8,497 $ (8,266) $ (1,845) $ (1,614)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Basic earnings per share $ .94 $ (.18)
------------- -------------
------------- -------------
Weighted average number of
common shares outstanding 9,084,274 9,084,274
------------- -------------
------------- -------------
Diluted earnings per share $ .92 $ (.18)
------------- -------------
------------- -------------
Weighted average number of
common and common
equivalent shares outstanding 9,285,226 9,084,274
------------- -------------
------------- -------------
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
1. BASIS OF PRESENTATION
The pro forma condensed combined balance sheet assumes that the Acquisition
took place on July 31, 1998 and combines the Company's unaudited July 31,
1998 condensed consolidated balance sheet and EMASS' unaudited September
30, 1998 condensed consolidated balance sheet.
The proforma condensed combined income statements assume the Acquisition
took place as of the beginning of the periods presented and combine the
Company's income statements for the year ended October 31, 1997 with EMASS'
statement of operations for the year ended December 31, 1997 and the
Company's unaudited income statements for the nine months ended July
31, 1998 with EMASS' unaudited statement of operations for the nine months
ended September 30, 1998.
All material transactions between ADIC and EMASS during the periods
presented have been eliminated as a pro forma adjustment. There are no
material differences between the accounting policies of ADIC and EMASS.
2. PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on the Company's estimates of the value
of the tangible and identifiable intangible assets acquired. An independent
third-party appraisal company has conducted a valuation of the identifiable
intangible assets acquired.
Under APB 16, the total acquisition cost will be allocated to EMASS'
assets and liabilities based on their fair value. The final allocations may
be different from the valuations reflected herein. The total market or
appraisal values of identifiable tangible and intangible assets acquired
less liabilities assumed exceeds the total purchase price. Accordingly,
this excess will be allocated proportionately to all noncurrent assets. The
Company's analysis, based on an independent appraisal, included a valuation
of acquired in-process research and development. Under generally accepted
accounting principles, any value associated with this acquired in-process
research and development will be expensed immediately. The accompanying pro
form condensed combined income statements exclude the effects of the charge
due to its nonrecurring nature.
As a result of the Acquisition, the Company expects to have certain
duplicative assets. Any duplicative assets which are owned by ADIC will be
expensed immediately. In addition, the Company expects to incur costs of
integration subsequent to the consummation of the Acquisition which costs
are not included in the proforma condensed combined income statements.
(a) Represents the cash consideration of $24.8 million and estimated
acquisition expenses of approximately $250 thousand related to the
Acquisition which was financed from existing cash of the Company and a
loan from Seafirst Bank.
27
<PAGE>
(b) Represents estimated valuation of tangible and intangible assets,
including acquired in-process research and development, resulting from
the preliminary allocation of the purchase price. Valuation of the
intangible assets acquired was conducted by an independent third-party
appraisal company and consists of purchased developed technology,
in-process research and development and assembled workforce.
The table below is a summary of the estimated amounts allocated to
intangible assets acquired (in thousands):
<TABLE>
<S> <C>
Acquired in-process research and development $4,900
Acquired developed technology $2,900
Assembled workforce $ 650
Other $ 150
</TABLE>
The intangible assets noted above will be amortized over periods
ranging from one to five years. The acquired in-process research and
development has not yet reached technological feasibility and has no
alternative future use. The value assigned to this asset will be
expensed as a non-recurring, non-tax deductible charge upon
consummation of the Acquisition. This amount has been reflected as a
reduction to shareholders' equity and has not been included in the pro
forma condensed combined income statements due to its non-recurring
nature.
The existence of acquired in-process research and development and
acquired developed technology was determined by a third-party
independent appraisal. This appraisal identified a library storage
product and associated software being developed as well as certain
separate software products. The Company expects to incur significant
costs to develop the acquired in-process research and development into
commercially viable products. The value of the acquired in-process
research and development and developed technology was determined by
estimating future revenues and costs of the products, including cost
of capital and taxes, to the estimated product life cycle then
discounting the estimated projected cash flows.
The estimated annual amortization charge to operations related to
intangible assets approximated $987 thousand. This charge is reflected
in the pro forma condensed combined income statements.
(c) Pro forma adjustment to reflect liabilities associated with
anticipated workforce and office changes.
(d) Represents the payoff by E-Systems of the short-term obligations of
EMASS" 80% owned subsidiary Grau Storage Systems GmbH & Co. KG
("Grau") and the forgiveness of the debt to parent company.
(e) Reflects the minority interest associated with Grau.
(f) Represents adjustments to reflect the elimination of common stock,
retained deficit and cumulative translation adjustments of EMASS.
(g) Adjustment to eliminate intercompany sales and cost of sales.
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(h) Adjustment to reflect the amortization expense of acquired developed
technology and assembled workforce.
(i) Adjustment to reduce interest expense for the repayment of the
short-term obligations of Grau and to reflect interest expense on the
new loan associated with the Acquisition.
(j) Pro forma adjustment for income taxes on expenses expected to be
deductible for tax purposes.
3. DEFERRED TAXES
There are significant deferred tax assets which the Company expects to
recognize based on the net tax effect of book/tax differences in the
acquired intangibles, excluding acquired in-process research and
development, and differences created as a result of reducing property,
plant and equipment. A valuation allowance is anticipated for 100% of such
deferred tax asset.
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Forms S-8 (Nos. 333-15111, 333-34103 and 333-61907) of Advanced
Digital Information Corporation of our report dated October 21, 1998,
relating to the consolidated financial statements of EMASS, Inc., which
appears in the Current Report on Form 8-K of Advanced Digital Information
Corporation dated November 2, 1998.
PricewaterhouseCoopers LLP
Dallas, Texas
November 2, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Forms S-8 (Nos. 333-15111,333-34103 and 333-61907) of Advanced
Digital Information Corporation of our report dated October 21, 1998 relating
to the consolidated financial statements of EMASS, Inc., which appears in the
Current Report on Form 8-K of Advanced Digital Information Corporation dated
November 2, 1998.
PricewaterhouseCoopers LLP
Seattle, Washington
November 2, 1998
