<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
REGISTRATION 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ADVANCED DIGITAL INFORMATION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 3577 91-1618616
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
P.O. BOX 97057
11431 WILLOWS ROAD N.E.
REDMOND, WASHINGTON 98073-9757
(425) 881-8004
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
PETER H. VAN OPPEN
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ADVANCED DIGITAL INFORMATION CORPORATION
11431 WILLOWS ROAD N.E.
REDMOND, WASHINGTON 98073-9757
(425) 881-8004
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
LINDA A. SCHOEMAKER DANIEL J. WINNIKE
HOLLY B. KJERULFF THADDEUS G. STEPHENS
Perkins Coie LLP Howard, Rice, Nemerovski, Canady, Falk
& Rabkin,
1201 Third Avenue, 40th Floor A Professional Corporation
Seattle, Washington 98101-3099 1755 Embarcadero Road, Suite 200
(206) 583-8888 Palo Alto, California 94303-3309
(650) 842-8500
------------------------------
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value(3) 2,875,000 shares $37.16 $106,835,000 $29,701
============================================================================================================================
</TABLE>
(1) Includes 375,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any. The number of shares registered will be
automatically adjusted on August 12, 1999, the effective date of a stock
dividend declared by the registrant.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act, on the basis of the
average of the high and low prices of the registrant's common stock on
August 4, 1999, as reported on the Nasdaq National Market.
(3) Includes associated preferred stock purchase rights. Prior to the occurrence
of certain events, such rights will not be evidenced or traded separately
from the Common Stock.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION AUGUST 6, 1999
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY U.S. FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
PROSPECTUS
, 1999
[LOGO]
2,500,000 SHARES OF COMMON STOCK
---------------------------------------------------------
ADVANCED DIGITAL INFORMATION CORPORATION:
- - We provide hardware and software data storage solutions to the open systems
marketplace.
- - Advanced Digital Information Corporation
P.O. Box 97057
11431 Willows Road N.E.
Redmond, Washington 98073-9757
(425) 881-8004
- - Nasdaq National Market Symbol: ADIC
THE OFFERING:
- - ADIC is offering 2,500,000 of its shares of common stock.
- - The underwriters have an option to purchase an additional 375,000 shares from
ADIC to cover any over-allotments.
- - There is an existing trading market for these shares. The reported last sale
price on August 5, 1999 was $38.75 per share.
- - We plan to use the net proceeds from this offering for repayment of
indebtedness, working capital and general corporate purposes, as well as the
possible acquisition of or investment in complementary businesses and
technologies.
- - Closing: , 1999.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees: $ $
Proceeds to ADIC (before expenses): $ $
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
BEAR, STEARNS & CO. INC.
NEEDHAM & COMPANY, INC.
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION.
DLJDIRECT INC.
<PAGE>
[INSIDE FRONT COVER ARTWORK]
[Artwork illustrating the
growing market
for data storage solutions
and illustrating how
our products fit in
a network]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Forward-Looking Statements..................... 15
Where You Can Find More Information............ 16
Use of Proceeds................................ 18
Price Range of Common Stock.................... 18
Dividend Policy................................ 18
Capitalization................................. 19
Selected Consolidated Financial Data........... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
<CAPTION>
PAGE
<S> <C>
Business....................................... 32
Management..................................... 44
Principal Shareholders......................... 47
Underwriting................................... 49
Legal Matters.................................. 51
Experts........................................ 51
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
We will amend and complete the information in this prospectus. Although we
are permitted by U.S. federal securities law to offer these securities using
this prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION FROM THIS PROSPECTUS. TO FULLY
UNDERSTAND THIS OFFERING AND ITS CONSEQUENCES TO YOU, YOU SHOULD ALSO READ THE
MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN
THIS PROSPECTUS AND IN THE DOCUMENTS THAT WE INCORPORATE BY REFERENCE INTO THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION TO PURCHASE ADDITIONAL SHARES
OF COMMON STOCK GRANTED TO THE UNDERWRITERS. IN THIS PROSPECTUS WE WILL REFER TO
ADVANCED DIGITAL INFORMATION CORPORATION AS "ADIC," "WE," "OUR" AND "US."
ADVANCED DIGITAL INFORMATION CORPORATION
We provide hardware and software data storage solutions to the open systems
marketplace. Along with our value-added resellers, original equipment
manufacturer partners and customers, we incorporate our products, service and
support with third-party hardware and software products to deliver reliable,
flexible and scaleable storage solutions. Our solutions are designed to enable
organizations to organize, protect and retrieve complex mission-critical data.
The volume and value of this data are expected to increase dramatically. Typical
applications of our solutions include data backup, near-line storage, archiving,
storage area network, or SAN, implementations and other data-intensive
environments where the efficiency and effectiveness of the storage solution is
critical. Our sales channels include a global network of resellers developed
over the last 15 years and OEMs, including Dell Computer. In addition, we were
recently selected as a supplier to IBM, subject to completion of a definitive
agreement.
Our products include open systems hardware and software storage management
solutions. We believe we offer the industry's broadest range of automated
libraries, which provide a variety of data capacities and transfer rates. We are
a device-independent company, as our automated storage products are designed to
use a variety of third-party data recording devices, including all major tape
formats and, to a lesser extent, optical storage devices. Similarly, our
software operates in UNIX and Windows NT environments, supports multiple types
of storage devices and is compatible with a variety of automated library
products in addition to our own. Additionally, we design our products to be
integrated with a variety of emerging technologies, including Fibre Channel, SAN
and network attached storage, or NAS. We believe our open systems and
device-independent strategies provide us with a cost-effective and flexible
position from which to compete in the rapidly evolving data storage market.
Our objective is to capture an increasing portion of the open systems
storage solutions market. To achieve this objective we intend to:
- PROVIDE A BROAD ARRAY OF DEVICE-INDEPENDENT STORAGE SOLUTIONS. By
capitalizing on our device independence, we will continue to provide
effective storage solutions that incorporate the optimal combination of
our products and technology and third-party hardware and software
products.
- AGGRESSIVELY DEVELOP TECHNOLOGY. We believe that focused expenditures on
differentiated technologies are critical to our success and we are
accelerating our expenditures on technology development in order to offer
more complete storage solutions. In addition to internal investment, we
may seek to develop or acquire technology by acquisitions, minority
investments or outsourced development.
- CAPITALIZE ON WORLDWIDE BRANDED RESELLER AND OEM CHANNELS. The majority of
our sales are branded products sold through cost-effective, worldwide
reseller channels. We have also developed several key OEM relationships.
Through these arrangements, we are able to benefit from our OEMs'
extensive direct and indirect distribution networks. In addition, our
close ties with software vendors can be critical in reseller sales
situations where an effective solution requires pairing compatible
hardware and software products.
3
<PAGE>
- BUILD AND EXPAND RELATIONSHIPS WITH STRATEGIC PARTNERS. It is our strategy
to capitalize on products, technologies and channels that may be available
through partners. We believe that continued growth of the open systems
storage solutions market will create opportunities beyond those we can
meet alone.
We were incorporated in Washington in August 1984. Our principal executive
offices are located at 11431 Willows Road N.E., Redmond, Washington 98073-9757
and our telephone number is (425) 881-8004.
"ADIC-Registered Trademark-," "AML-TM-," "FastStor-TM-," "FCR-TM-,"
"Scalar-Registered Trademark-" and "VLS-TM-" are trademarks of ADIC. This
prospectus also contains product names, trade names and trademarks that belong
to other organizations.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by ADIC........... 2,500,000 shares
Common stock to be outstanding after
the offering......................... 12,597,259 shares
Use of proceeds........................ For repayment of indebtedness, working capital and
general corporate purposes, as well as the possible
acquisition of or investment in complementary
businesses and technologies.
Nasdaq National Market symbol.......... ADIC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In the table below, we provide our summary historical financial data. We
have prepared this information using our consolidated financial statements for
the five years ended October 31, 1998 and the six month periods ended April 30,
1998 and 1999. The financial statements for the five years ended October 31,
1998 have been audited. The financial statements for the six months ended
April 30, 1998 and 1999 have not been audited. The Statement of Operations data
for fiscal 1994, 1995 and 1996 reflect our results as a wholly owned subsidiary
of Interpoint Corporation. We were acquired by Interpoint on February 11, 1994.
On October 15, 1996, Interpoint spun us off into a separate company. When you
read this summary historical financial data, it is important that you read it
along with the historical financial statements and related notes in our annual
and interim financial statements included in this prospectus, as well as the
section titled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, APRIL 30,
------------------------------------------------------ ---------------------
1994(1) 1995 1996 1997 1998(2) 1998 1999(2)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales......................... $ 20,083 $ 31,716 $ 58,957 $ 93,204 $ 114,557 $ 47,672 $ 103,188
Gross profit...................... 6,588 9,609 17,070 27,648 33,168 14,425 34,433
Operating profit (loss)........... (39) 511 5,682 11,182 3,400 5,215 10,289
Net income (loss)................. (42) 292 3,430 8,497 1,530 4,295 6,597
Basic net income per share........ $ 0.94 $ 0.16 $ 0.44 $ 0.67
Diluted net income per share...... $ 0.92 $ 0.16 $ 0.43 $ 0.66
Pro forma basic net income per
share (unaudited)............... $ 0.04 $ 0.43
Pro forma diluted net income per
share (unaudited)............... $ 0.04 $ 0.42
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1999
--------------------------
ACTUAL AS ADJUSTED(3)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 14,769 $
Working capital....................................................................... 57,721
Total assets.......................................................................... 107,758
Long-term debt........................................................................ 6,370
Shareholders' equity.................................................................. 68,790
</TABLE>
5
<PAGE>
- ------------------------
(1) In February 1994, we incurred $590,000 in acquisition-related expenses
associated with our acquisition by Interpoint. Also, in June 1994, we
acquired a wholly owned European subsidiary in a transaction accounted for
as a purchase.
(2) The Statement of Operations data for periods ending after August 19, 1998
reflect the acquisition of EMASS, Inc. on that date. The Statement of
Operations data for fiscal 1998 reflect a $513,000 charge to cost of goods
sold as a result of purchase accounting adjustments and an expense of
$380,000 of acquired duplicative assets relating to that acquisition.
(3) As adjusted to reflect the sale of 2,500,000 shares of common stock at an
assumed public offering price of $ per share in this offering, after
deducting the underwriting fees and estimated offering expenses payable by
us.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE MAY
FACE. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FUTURE
FINANCIAL CONDITION AND OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND
YOU MAY LOSE ALL OR A PART OF YOUR INVESTMENT.
OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE FOR A NUMBER OF
REASONS, WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly operating results have varied in the past and are likely to
vary significantly in the future due to several factors, including:
- size and timing of significant customer orders;
- shifts in product or distribution channel mix;
- increased competition and pricing pressure;
- timing of new product announcements and releases by us or our competitors;
- new product developments by storage device manufacturers;
- recognition of losses or gains from our strategic investments;
- the rate of growth in the data storage market;
- market acceptance of new and enhanced versions of our products;
- timing and levels of our operating expenses;
- gain or loss of significant customers or distributors;
- currency fluctuations; and
- personnel changes.
Our quarterly revenue and operating results have been affected by seasonal
trends. These trends often result in lower revenue in the first quarter of each
fiscal year compared to the fourth quarter of the previous fiscal year due to
customer purchasing and budgetary practices and our sales commission and
budgetary structure.
Operating results in any period should not be considered indicative of the
results investors can expect for any future period. We cannot assure you that we
will be able to sustain our recent levels of quarterly revenue and net income,
as normalized for unusual or one-time items, or that we will maintain
profitability in any future period. Any unfavorable change in the factors
described above or any other factors could adversely affect our operating
results for a particular quarter. In addition, it is likely that in some future
quarter our operating results will be below the expectations of public market
analysts and investors. In any of these events, the price of our common stock
would likely decline.
BECAUSE WE OPERATE WITH LITTLE BACKLOG, IF WE DO NOT ACCURATELY ANTICIPATE
FUTURE SALES LEVELS, OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED
Historically, we have operated with little order backlog and, due to the
nature of our business, do not anticipate that we will have significant backlog
in the future. Consequently, a large portion of our revenue in each quarter
results from orders placed during that quarter. Because of the relatively large
dollar size of orders from our distributors and original equipment
manufacturers, commonly referred to as OEMs, delay in the placing of a small
number of orders by a small number of purchasers could negatively affect our
operating results for a particular period. In addition, our operating expense
levels are, in the short term, largely fixed and are based, in part, on
expectations regarding future revenue.
7
<PAGE>
Thus, our operating results could be disproportionately affected if we do not
receive the expected number of orders in a given quarter and our revenue falls
below expectations.
COMPETITION IN THE OPEN SYSTEMS STORAGE SOLUTIONS MARKET MAY LEAD TO REDUCED
MARKET SHARE, DECLINING PRICES FOR OUR PRODUCTS AND REDUCED PROFITS
The markets for data storage solutions in general, and automated tape
libraries and storage management software in particular, are intensely
competitive, fragmented and characterized by rapidly changing technology and
evolving standards. These conditions could render our products less competitive
or obsolete, and could harm our business, financial condition and ability to
market our products as currently contemplated. Because we offer and are
developing a range of open systems storage solutions, including automated tape
libraries, software and storage peripherals, our competitors differ depending on
the product format and performance level. Some of our competitors have
significantly more financial, technical, manufacturing, marketing and other
resources than we have. As a result, our competitors may be able to respond more
quickly than we can to new or changing opportunities, technologies, standards or
customer requirements. Competitors may develop products and technologies that
are less expensive or technologically superior to our products. In addition, our
competitors may manufacture and market their products more successfully than we
do our products.
There is significant price competition in the markets in which we compete
and we believe that pricing pressures are likely to continue. Certain
competitors may reduce prices in order to preserve or gain market share. In
order to successfully compete in this market, we must be able to manage our
components and product design costs. This pricing pressure, and our potential
inability to manage our component and product design costs, could result in
significant price erosion, reduced gross profit margins and loss of market
share, which could negatively affect our business, financial condition and
operating results.
THE STORAGE DEVICE MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL EVOLUTION, AND
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS
The market for our products is characterized by rapidly changing technology
and evolving industry standards and is highly competitive with respect to timely
innovation. At this time, the data storage market is particularly subject to
change with the emergence of Fibre Channel protocol and new storage solutions
such as storage area networks, or SANs, and network attached storage, or NAS,
devices. The introduction of new products embodying new or alternative
technology or the emergence of new industry standards could render our existing
products obsolete or unmarketable. Our future success will depend in part on our
ability to anticipate changes in technology, to gain access to such technology
for incorporation into our products and to develop new and enhanced products on
a timely and cost-effective basis. Risks inherent in the development and
introduction of new products include:
- the difficulty in forecasting customer demand accurately;
- our inability to expand production capacity fast enough to meet customer
demand;
- the possibility that new products may cannibalize current products;
- delays in our initial shipments of new products;
- competitors' responses to our introduction of new products; and
- the desire by customers to evaluate new products for longer periods of
time before making a purchase decision.
In addition, we must be able to maintain the compatibility of our products
with significant future device technologies, and we must rely on producers of
new device technologies to achieve and sustain
8
<PAGE>
market acceptance of those technologies. Development schedules for
high-technology products are subject to uncertainty, and we may not meet our
product development schedules.
If we are unable, for technological or other reasons, to develop products in
a timely manner or if the products or product enhancements that we develop do
not achieve market acceptance, our business will be harmed.
WE RELY ON TAPE TECHNOLOGY FOR A SUBSTANTIAL PORTION OF OUR REVENUE
We derive a significant majority of our revenue from products that
incorporate some form of tape technology, including digital linear tape, or DLT.
Most often these tape drive products are available from only a single
manufacturer, and we expect to continue to derive a substantial amount of
revenue from these products for the foreseeable future. As a result, our future
operating results significantly depend on the continued availability and market
acceptance of tape drive technology. If products incorporating other
technologies gain comparable or superior market acceptance, our business,
financial condition and operating results would be adversely affected unless we
successfully develop products incorporating the new technology.
WE DEPEND ON CERTAIN KEY SUPPLIERS, SOME OF WHICH ARE ALSO OUR COMPETITORS
We do not possess proprietary magnetic tape drive, optical disk,
high-density disk or other storage technologies and, consequently, we depend on
a limited number of third-party manufacturers to supply us with the devices that
we incorporate into our products. In some cases, these manufacturers are sole-
source providers of the device technology. Some also market their own tape
library products, and are thus also our competitors. Quantum is the primary
supplier of DLT drives and has, in the past, allocated quantities of drives
among its customers. It is possible that Quantum will again resort to allocation
and, as a result, we may not be able to meet our future DLT drive requirements.
In the event other device technologies supplement or supplant DLT devices in any
of our products, it is likely that any such new device technology will also make
us dependent on a small number of suppliers.
In September 1998, Quantum acquired ATL Products ATL designs, manufactures,
markets and services automated tape libraries that compete with our small and
mid-range library products. ATL may be able to manufacture and market these
competitive products more successfully than we can manufacture and market our
products, especially since ATL now has access to Quantum's financial and other
resources. Furthermore, because Quantum is now competing directly with us in
certain markets through ATL, it may be unable to meet our demand for DLT drives
and media or may provide these products at less competitive prices.
Our other suppliers have in the past been, and may in the future be, unable
to meet our supply needs, including our needs for timely delivery, adequate
quantity and high quality. We do not have long-term contracts with any of our
significant suppliers. If these suppliers were to decide to pursue the tape
library market directly, they may cease supplying us with tape drives and media,
in which case we may be unable to obtain adequate supplies of tape drives and
media at acceptable prices, if at all. The partial or complete loss of any of
our suppliers could result in significant lost revenue, added costs and
production delays or otherwise harm our business, financial condition, operating
results and customer relationships.
WE HAVE A CONCENTRATED CUSTOMER BASE, AND THEREFORE THE LOSS OF A SINGLE
CUSTOMER COULD NEGATIVELY AFFECT OUR OPERATING RESULTS
The majority of our end users purchase our products from VARs. For the small
and mid-range libraries, many of these VARs purchase our products from large
distributors such as Ingram Micro, Tech Data and others. In fiscal 1998, Ingram
Micro represented 22% and Tech Data represented 15% of our net sales. We have no
long-term orders with any of our significant customers or distributors.
9
<PAGE>
Generally we sell products pursuant to purchase orders. In addition, our
distributors carry competing product lines which they may promote over our
products. A distributor may not continue to purchase our products or market them
effectively.
Our operating results could be adversely affected if any of the following
factors occurred relating to one or more of our significant resellers:
- the reduction, delay or cancellation of orders or the return of a
significant amount of products;
- the loss of one or more of such resellers; or
- any financial difficulties of such resellers that results in their
inability to pay amounts owed.
WE EXPECT TO INCREASE OUR FOCUS ON OEM SALES AND COULD BE ADVERSELY AFFECTED IF
OUR OEM SALES EFFORTS ARE NOT SUCCESSFUL
We rely on OEMs such as Dell Computer, Exabyte, Unisys, Tandberg Data and
Plasmon for the sale of our products, and are increasing our focus on sales to
OEMs. OEM sales represented under 10% of sales in fiscal 1998, but we expect
this percentage to increase in future periods. OEMs typically conduct
substantial and lengthy evaluation programs before certifying a new product for
inclusion in their product line. We may be required to devote significant
amounts of financial and human resources to these evaluation programs with no
assurance that our products will ever be selected. In addition, even if selected
by the OEM, there generally is no requirement that the OEM purchase any
particular amount of product or that it refrain from purchasing competing
products. Further, OEM sales typically feature lower margins than we have
obtained in the past through our other distribution channels.
We recently announced that we anticipate entering into a supplier
relationship with IBM. We cannot be assured that we will ultimately enter into
this relationship or, if we do, that we will achieve any particular level of
sales or other benefits from this relationship.
Sales of our large libraries, and the revenue associated with the on-site
service of those libraries, are somewhat concentrated in specific customers,
including government agencies and Raytheon Company, the former parent company of
EMASS. If any of the resellers, OEMs or other large customers decide not to
continue to purchase our products, our business, financial condition and
operating results may be harmed.
OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED BY A SIGNIFICANT AMOUNT OF
PRODUCT RETURNS
Our customers have rights in certain instances to return products to us, and
we may otherwise allow product returns if we think that doing so is in the
interests of maximizing the effectiveness of our sales channels. We estimate and
reserve for potential returns in our reported financial results. Actual returns
could possibly exceed the level of our estimates due to new product
introductions or other changes affecting the market for our products. If returns
are made at levels that exceed our estimates, our financial results could be
adversely affected in the periods of these returns.
WE MAY MAKE ACQUISITIONS THAT ARE NOT SUCCESSFUL
We have in the past acquired businesses, and we may do so in the future.
Acquisitions present a number of risks, including:
- our ability to successful integrate the acquired entity's operations,
technologies and products with our own;
- our ability to retain key customers and employees;
- our ability to manage a larger and more diverse business, a portion of
which may be in markets where we have no or limited direct prior
experience;
10
<PAGE>
- unanticipated costs associated with the integration of the acquired entity
into our business;
- the diversion of management's attention from our core business during the
acquisition process; and
- adverse effects on existing business relationships with suppliers and
customers.
Additionally, we expect that the consideration paid for future acquisitions,
if any, could be in the form of cash, stock, assumption of indebtedness and/or
rights to purchase stock. Dilution to existing shareholders and to earnings per
share may result to the extent that shares of stock or other rights to purchase
stock are issued in connection with any such future acquisitions or that the
earnings from such acquisitions do not exceed associated interest and other
charges. We may also incur charges from the completion of acquisitions such as
the expense of in-process research and development for the EMASS acquisition or
severance or other charges arising from the integration of the business.
MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH THE
SHAREHOLDERS MAY NOT AGREE
Our management can spend the net proceeds from this offering in ways with
which the shareholders may not agree. One way we may use these proceeds is for
minority investments in complementary businesses. We have made aggregate
investments of $15.0 million in three such businesses over the past two years.
Our past and future investments may not be successful and even if the underlying
business is successful there may not be a liquid market in which to sell our
securities or other means for us to realize profit from the investments. We
carry these investments on our balance sheet on a cost, as opposed to equity,
basis, which may not reflect the investment's current market value. We cannot
assure you that our investments and use of the net proceeds of this offering
will yield favorable returns or results.
OUR VALUATION OF ACQUIRED IN-PROCESS TECHNOLOGY COULD BE CHALLENGED
In accordance with applicable accounting rules, the cost to acquire
EMASS, Inc. was allocated to the acquired assets and liabilities based on their
fair value. Our analysis of fair value included a valuation of acquired
in-process technology and other intangible assets. Valuation of such assets was
performed by an independent third-party appraisal company. While we believe that
the portion of the purchase price allocated to acquired in-process technology
was appropriate, allocations by technology companies to acquired in-process
technology in other purchase accounting applications have recently received
increased scrutiny by the SEC. If the SEC questions the valuation, we cannot be
certain that our allocation of approximately $4.5 million will remain unchanged.
A change in the valuation of acquired in-process technology may have a negative
effect on our operating results.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROWTH OR EFFECTIVELY MANAGE ANY
FUTURE GROWTH
We are experiencing rapid growth. 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 our
operating and financial systems. Our facilities, personnel and operating and
financial systems may not be sufficient to manage and sustain our current or
future growth, and additional growth may detract from our ability to respond to
new opportunities and challenges quickly. Our ability to manage any future
growth effectively will also depend on our ability to hire and retain qualified
management, sales and technical personnel. If we are unable to manage growth
effectively or hire and retain qualified personnel, our business, financial
condition and operating results could be materially and negatively affected. In
addition, to the extent expected revenue growth does not materialize, increases
in our selling and administrative costs that are based on anticipated revenue
growth could harm our operating results.
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<PAGE>
ANY INABILITY TO MEET OUR FUTURE CAPITAL REQUIREMENTS WOULD LIMIT OUR ABILITY TO
GROW
We may need, or could elect, to seek additional funding in the future. In
the event we need to raise additional funds, we may not be able to do so on
favorable terms, if at all. Further, if we issue equity securities, shareholders
may experience additional dilution or the new equity securities may have rights,
preferences or privileges senior to those of our existing securities. If we
cannot raise funds on acceptable terms, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS
Net sales to customers outside the United States accounted for approximately
33% of net sales in fiscal 1998 and 45% in the six months ended April 30, 1999.
We believe that international sales will continue to represent a significant
portion of our net sales. Our international operations and sales to customers
outside the United States subject us to a number of risks, including:
- the imposition of governmental controls;
- exposure to foreign exchange risk;
- the need to comply with a wide variety of foreign and U.S. export laws;
- political and economic instability in certain international markets;
- trade restrictions and protectionist laws and business practices that
favor local competition;
- changes in tariffs and tax laws;
- longer payment cycles typically associated with international sales and
potential difficulties in collecting accounts receivable;
- potentially lower level of protection of our intellectual property than in
the United States;
- greater difficulty of administering business overseas;
- the need to support multiple languages;
- difficulty recruiting sales and technical support personnel with the
skills to support our products;
- potential severance exposure related to our employee agreements with our
European employees; and
- dependence on local vendors.
Furthermore, although we endeavor to meet standards established by foreign
regulatory bodies, we may not be able to comply with changes in foreign
standards in the future. Our inability to design products to comply with foreign
standards could harm our business, financial condition and operating results.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN OUR DATA STORAGE PRODUCTS
Because our end users employ our storage technologies for the storage and
backup of their important data, we face potential liability for performance
problems of our products. Although we maintain general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
that is not covered by insurance or is in excess of our insurance coverage could
harm our business.
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<PAGE>
WE MAY FACE CURRENCY RISKS ASSOCIATED WITH FLUCTUATING FOREIGN CURRENCY
VALUATIONS
Currently, approximately one-half of our 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 our products less price competitive. The
remaining portion of our international sales are denominated in foreign
currencies, primarily the German deutsche mark, British pound sterling and
French franc. A decrease in the value of a relevant foreign currency in relation
to the U.S. dollar after establishing prices and before our receipt of payment
would have an adverse effect on our operating results. Furthermore, the expenses
of our international subsidiaries are denominated in their local currencies.
Because we currently engage in only limited foreign currency hedging
transactions, our operating results could be adversely affected by movement in
foreign currency exchange rates.
WE MAY NEED TO UPGRADE OUR FINANCIAL AND OTHER SOFTWARE TO ACCOUNT FOR THE
EUROPEAN ECONOMIC COMMUNITY'S ADOPTION OF THE EURO
On January 1, 1999, certain member states of the European Economic Community
fixed their respective currencies to a new currency, commonly known as the Euro.
During the three years beginning January 1, 1999, business in these countries
will be conducted both in the existing national currency, such as the French
franc or the German deutsche mark, as well as the Euro. Thereafter, all
transactions must be recorded in Euros. We will need to ensure that our
financial and other software systems are capable of processing transactions and
properly handling both the existing currencies and the Euro. We are still
assessing the impact that the introduction and use of the Euro will have on our
internal systems. We do not currently expect the introduction and use of the
Euro will materially affect our business; however, if we encounter unexpected
difficulties, our business could be harmed.
A NUMBER OF KEY PERSONNEL ARE CRITICAL TO THE SUCCESS OF OUR BUSINESS
Our future success depends in large part on our ability to retain certain
key executives and other personnel, some of whom have been instrumental in
establishing and maintaining strategic relationships with key suppliers and
customers. We do not have any employment agreements with our U.S. employees,
except for change of control agreements with our executive officers. Our future
growth and success will depend in large part on our ability to hire, motivate
and retain highly qualified management, technical, operations, sales and
marketing personnel. Competition for such personnel is intense in the
high-technology industry, particularly in Seattle and Denver. We may not be able
to retain our existing personnel or attract additional qualified personnel in
the future. In addition, companies in our industry whose employees accept
positions with competitors frequently claim that their competitors have engaged
in unfair hiring practices. We may receive such claims in the future as we seek
to hire qualified personnel, and such claims could result in litigation.
Regardless of the merits of these claims, we could incur substantial costs in
defending ourselves against these claims.
A FAILURE TO DEVELOP AND MAINTAIN PROPRIETARY TECHNOLOGY WILL NEGATIVELY AFFECT
OUR BUSINESS
Because our business depends on technology, our ability to compete
effectively depends in part on our ability to develop and maintain proprietary
aspects of our technology. We hold patents on various design elements of our
automated storage library products in the United States and international
jurisdictions and we are pursuing several additional patent applications. We
cannot be certain, however, that we will receive any future patents or that any
patents we do receive will be valid or provide meaningful protection for our
product innovations. We also rely on a combination of copyright, trademark,
trade secret and other intellectual property laws and various contract rights to
protect our proprietary rights. Such rights, however, may not preclude
competitors from developing products that are substantially equivalent or
superior to our products. In addition, many aspects of our products are not
subject to intellectual property protection and can therefore be reproduced by
our competitors.
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<PAGE>
While we are not currently engaged in any intellectual property litigation
or proceedings, we may become so involved in the future. We are now, and we may
in the future be, subject to claims or inquiries regarding our alleged
unauthorized use of a third party's intellectual property. An adverse outcome in
litigation could subject us to significant liabilities to third parties, require
us to license technology from others or require us to cease marketing or using
certain products, any of which could negatively affect our business, financial
condition and operating results. If we are required to seek licenses under
patents or proprietary rights of others, we may not be able to acquire these
licenses on acceptable terms, 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 harm our business, financial condition and operating results.
OUR INCREASED RESEARCH AND DEVELOPMENT SPENDING MAY NOT YIELD RESULTS THAT
JUSTIFY THE COSTS INCURRED
We are substantially increasing our research and development spending over
that of prior periods. Our products and markets are technologically advanced and
rapidly evolving, and we cannot be assured that these efforts will successfully
provide us with new or upgraded products that will be competitive. If these
programs are not successful, our increased investment in research and
development will not yield corresponding benefits to us.
UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUE
We may not be able to adequately control and eliminate manufacturing flaws.
Our products operate near the limits of electronic and physical performance and
are designed and manufactured with relatively small tolerances. If flaws in
design, production, assembly or testing were to occur in our products or those
of our suppliers, we could experience a rate of failure in our products that
would result in substantial repair or replacement costs and potential damage to
our reputation. Continued improvement in manufacturing capabilities and control
of material and manufacturing quality and costs are critical factors in our
future growth. We frequently revise and update manufacturing and test processes
to address engineering and component changes to our products and evaluate the
reallocation of manufacturing resources among our facilities. We cannot assure
you that our efforts to monitor, develop and implement appropriate test and
manufacturing processes for our products will be sufficient to permit us to
avoid a rate of failure in our products that results in substantial shipment
delays, significant repair or replacement costs and damage to our reputation.
Any product errors could have a material adverse effect on our business,
financial condition or operating results.
Open systems products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our new or enhanced
products. In addition, our products are combined with products from other
vendors. As a result, when problems occur, it is difficult to identify the
source of the problem. These problems may cause us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
WE FACE SUBSTANTIAL WARRANTY EXPOSURE
We generally provide product warranties for varying lengths of time. In the
past, we have incurred higher warranty expenses relating to new products than we
typically incur with established products. In anticipation of such expenses, we
establish allowances for the estimated liability associated with product
warranties. However, these warranty allowances may be inadequate, and we may
incur substantial warranty expenses in the future with respect to new or
established products.
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<PAGE>
WE HAVE ANTITAKEOVER PROVISIONS IN PLACE THAT MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US
Our 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, we have adopted a
shareholder rights plan involving the issuance of preferred stock purchase
rights designed to protect our shareholders from abusive takeover tactics by
causing substantial dilution to a person or group that attempts to acquire us on
terms not approved by our board. Certain provisions in our articles of
incorporation, bylaws and shareholder rights plan, as well as Washington law,
and the ability of our board to issue preferred stock, may have the effect of
delaying, deferring or preventing a change in control, may discourage bids for
our common stock at a premium over its market price and may adversely affect the
market price, and the voting and other rights of the holders, of common stock.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE
The market price of our common stock has experienced fluctuations since it
commenced trading in October 1996 and is likely to fluctuate significantly in
the future. Our stock price can fluctuate for a number of reasons, including:
- announcements about us or our competitors;
- quarterly variations in operating results;
- the introduction of new technology or products or changes in product
pricing policies by us or our competitors;
- comments regarding us and the data storage market made on Internet
bulletin boards; and
- changes in earnings estimates by analysts or changes in accounting
policies.
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 our common stock.
RISKS ASSOCIATED WITH YEAR 2000 NONCOMPLIANCE MAY ADVERSELY AFFECT OUR BUSINESS
We believe that the purchasing patterns of our customers and potential
customers may be affected by year 2000 compliance issues as organizations expend
significant resources to correct their current software systems in anticipation
of year 2000. These expenditures may result in reduced funding available to such
entities for other information technology purchases, such as the products and
services we offer. Furthermore, our customers and potential customers may defer
information technology purchases generally until early in the next millennium to
avoid year 2000 compliance problems. Any such deferral of purchases by our
customers or potential customers could harm our business, financial condition
and operating results. See additional year 2000 risk factors in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness Disclosure."
FORWARD-LOOKING STATEMENTS
In this prospectus, we make statements that relate to our future plans,
objectives, expectations and intentions that involve risks and uncertainties. We
have based these statements on our current expectations and projections about
future events. These statements may be identified by the use of words such as
"expects," "anticipates," "intends," "plans," "believes" and "estimates" and
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. Our actual results could differ materially from
those discussed in, or implied by, these statements. Factors that could
contribute to
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<PAGE>
such differences include, but are not limited to, those discussed in the "Risk
Factors" section and elsewhere in this prospectus. We are not obligated to
update or revise these forward-looking statements to reflect new events or
circumstances. Forward-looking statements in this prospectus include, but are
not necessarily limited to:
- our expectation that we will compete effectively in the storage management
software market;
- the anticipated growth in the open system storage solutions market;
- our ability to develop relationships with strategic partners;
- our success in developing new and enhanced products to take advantage of
market opportunities;
- our ability to achieve year 2000 compliance or the impact on us of any
third party's failure to achieve year 2000 compliance;
- our ability to successfully execute our strategies; and
- our ability to expand the scope of our international sales efforts.
WHERE YOU CAN FIND MORE INFORMATION
AVAILABLE INFORMATION
We file annual, quarterly and special reports, as well as registration and
proxy statements and other information, with the SEC. You may read and copy any
document filed with the SEC by us, including this registration statement on
Form S-3 and exhibits, at the Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the SEC's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can get further
information from the SEC's Public Reference Room by calling 1-800-SEC-0330. The
SEC also maintains a Web site at http://www.sec.gov that contains reports,
registration statements and other information regarding registrants like us that
file electronically with the SEC.
This prospectus is part of a registration statement on Form S-3 filed by us
with the SEC under the Securities Act of 1933 with respect to this offering of
common stock. As permitted by the SEC, this prospectus, which constitutes part
of the registration statement on Form S-3, does not contain all of the
information in the registration statement filed with the SEC. For a fuller
understanding of this offering, you should refer to the complete registration
statement on Form S-3 that may be obtained from the locations described above.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
the SEC, which means that we can disclose important information to you by
referring you to documents we filed with the SEC. We incorporate by reference
the documents listed below, and any additional documents filed by us with the
SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 until this offering of the securities is terminated. The information we
incorporate by reference is part of this prospectus, and any later information
that we file with the SEC will automatically update and supersede this
information.
The documents we incorporate by reference are:
(1) our Annual Report on Form 10-K for the fiscal year ended October 31,
1998;
(2) our Quarterly Reports on Form 10-Q for the quarters ended January 31,
1999 and April 30, 1999; and
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<PAGE>
(3) the description of our capital stock, including our rights plan,
contained in our registration statement on Form 10, as amended, effective
as of September 10, 1996, including any amendment or report filed for the
purpose of updating this description.
Documents incorporated by reference are available from us without charge,
excluding all exhibits except those that have been specifically incorporated by
reference in this prospectus. You may obtain documents incorporated by reference
by requesting them in writing from Advanced Digital Information Corporation,
P.O. Box 97057, 11431 Willows Road N.E., Redmond, Washington, 98073-9757,
Attention: Emily Taggart, or call (425) 881-8004. Our Internet address is
www.adic.com. Information contained on our Web site does not constitute part of
this prospectus.
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<PAGE>
USE OF PROCEEDS
We expect to receive approximately $ in net proceeds from the sale
of the 2,500,000 shares of common stock offered in this offering, assuming a
public offering price of $ per share, after deducting the estimated
underwriting fees and offering expenses payable by us.
We intend to use the net proceeds from this offering for repayment of
indebtedness, working capital and general corporate purposes, as well as the
possible acquisition of or investment in complementary businesses and
technologies. The indebtedness we intend to repay is an unsecured note payable
to Seafirst Bank due August 2003 which was incurred by us in connection with the
acquisition of EMASS. At July 31, 1999, the balance was $7.2 million. The note
bears interest at an adjusted LIBOR rate, which at July 31, 1999 was 6.53%.
While we regularly evaluate acquisitions of and investments in complementary
businesses and technologies, we currently have no commitments or agreements with
respect to any such transactions. Pending use of the net proceeds, we intend to
invest them in interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"ADIC." The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON
STOCK
----------------------
<S> <C> <C>
HIGH LOW
FISCAL YEAR ENDED OCTOBER 31, 1997
First Quarter............................................. $23 $10
Second Quarter............................................ $22 1/4 $12 1/8
Third Quarter............................................. $19 1/4 $13 3/4
Fourth Quarter............................................ $22 3/4 $14 5/8
FISCAL YEAR ENDED OCTOBER 31, 1998
First Quarter............................................. $20 1/2 $13 9/16
Second Quarter............................................ $19 15/16 $14
Third Quarter............................................. $20 1/2 $ 8 3/4
Fourth Quarter............................................ $13 7/8 $ 6 1/8
FISCAL YEAR ENDING OCTOBER 31, 1999
First Quarter............................................. $20 3/4 $13 1/8
Second Quarter............................................ $23 1/2 $13 3/16
Third Quarter............................................. $49 7/8 $20 3/4
Fourth Quarter (through August 5, 1999)................... $45 3/8 $34 1/2
</TABLE>
On August 5, 1999, the reported last sale price of our common stock on the
Nasdaq National Market was $38.75 per share. As of July 31, 1999, there were
approximately 230 shareholders of record of the common stock.
DIVIDEND POLICY
We have not declared or paid any dividends on our capital stock during any
of the periods presented above. We currently intend to retain future earnings,
if any, for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table shows our capitalization as of April 30, 1999 on an
actual basis and as adjusted to give effect to our receipt of the estimated net
proceeds from the sale of 2,500,000 shares of common stock offered by us at an
assumed public offering price of $ per share:
<TABLE>
<CAPTION>
AS OF APRIL 30, 1999
--------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt..................................................... $ 3,167 $
========= =========
Long-term debt........................................................................ $ 6,370 $
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, 9,857,535 issued and
outstanding, actual; 12,357,535 shares issued and outstanding, as adjusted(1)..... 46,976
Retained earnings................................................................... 22,606
Cumulative translation adjustment................................................... (792)
--------- ---------
Total shareholders' equity........................................................ 68,790
--------- ---------
Total capitalization............................................................ $ 75,160 $
========= =========
</TABLE>
- ------------------------
(1) Excludes 1,549,936 shares of common stock reserved for issuance under our
stock option plans, of which 1,375,215 shares were subject to outstanding
options as of April 30, 1999 at a weighted average exercise price of $11.54
per share.
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SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide our summary historical financial data. We
have prepared this information using our consolidated financial statements for
the five years ended October 31, 1998 and the six months ended April 30, 1998
and 1999. The information shown below reflects our operation as a subsidiary of
Interpoint Corporation from February 11, 1994 to October 15, 1996. On
October 15, 1996, Interpoint spun us off into a separate company. The financial
statements for the five years ended October 31, 1998 have been audited. The
financial statements for the six months ended April 30, 1998 and 1999 have not
been audited. Operating results for the six months ended April 30, 1999 are not
necessarily indicative of results that may be expected for the full fiscal year.
When you read this summary historical financial data, it is important that you
read it along with the historical financial statements and related notes in our
annual and interim financial statements included in this prospectus, as well as
the section titled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, APRIL 30,
----------------------------------------------------- --------------------
1994(1) 1995 1996 1997 1998(2) 1998 1999(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $ 20,083 $ 31,716 $ 58,957 $ 93,204 $ 114,557 $ 47,672 $ 103,188
Cost of sales...................................... 13,495 22,107 41,887 65,556 81,389 33,247 68,755
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 6,588 9,609 17,070 27,648 33,168 14,425 34,433
Operating expenses:
Selling and administrative....................... 5,000 8,001 9,846 13,556 20,793 7,965 18,093
Acquired in-process technology................... -- -- -- -- 4,492 -- --
Acquisition expenses............................. 590 -- -- -- -- -- --
Research and development......................... 1,037 1,097 1,542 2,909 4,483 1,245 6,051
--------- --------- --------- --------- --------- --------- ---------
Operating profit (loss)............................ (39) 511 5,682 11,183 3,400 5,215 10,289
Other income (expense)............................. (102) (296) (394) 1,481 1,329 1,079 431
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for income
taxes............................................ (141) 215 5,288 12,664 4,729 6,294 10,720
Provision (benefit) for income taxes............... (99) (77) 1,858 4,167 3,174 1,999 3,840
Minority interest.................................. -- -- -- -- 25 -- 283
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ (42) $ 292 $ 3,430 $ 8,497 $ 1,530 $ 4,295 $ 6,597
========= ========= ========= ========= ========= ========= =========
Basic net income per share(3)...................... $ 0.94 $ 0.16 $ 0.44 $ 0.67
========= ========= ========= =========
Diluted net income per share(3).................... $ 0.92 $ 0.16 $ 0.43 $ 0.66
========= ========= ========= =========
Pro forma basic net income per share
(unaudited)(3)................................... $ 0.04 $ 0.43
========= =========
Pro forma diluted net income per share
(unaudited)(3)................................... $ 0.04 $ 0.42
========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF APRIL
----------------------------------------------------- 30,
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 184 $ 624 $ 10,437 $ 32,807 $ 28,226 $ 14,769
Working capital........................................ 4,156 7,249 24,596 53,358 66,582 57,721
Total assets........................................... 8,710 13,943 36,710 75,194 112,407 107,758
Long-term debt and loan from Interpoint, excluding
current portion...................................... 2,358 5,434 -- -- 18,368 6,370
Shareholders' equity................................... 3,027 3,387 26,387 60,110 63,003 68,790
</TABLE>
- --------------------------
(1) In February 1994, we incurred $590,000 in acquisition-related expenses
associated with our acquisition by Interpoint. Also, in June 1994, we
acquired a wholly owned European subsidiary in a transaction accounted for
as a purchase.
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(2) The Statement of Operations data for periods ending after August 19, 1998
reflect the acquisition of EMASS, Inc. on that date. The Statement of
Operations data for fiscal 1998 reflect a $513,000 charge to cost of goods
sold as a result of purchase accounting adjustments and an expense of
$380,000 of acquired duplicative assets relating to that acquisition.
(3) Earnings per share and pro forma earnings per share data have been restated
for fiscal 1995, 1996 and 1997 to conform with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THOSE STATEMENTS INCLUDING THE
WORDS "EXPECT," "ANTICIPATE," "INTEND" AND "BELIEVES" AND SIMILAR EXPRESSIONS.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS
PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THE RISKS DISCUSSED IN THE SECTION TITLED "RISK FACTORS"
IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We provide hardware and software data storage solutions to the open systems
marketplace. Our products integrate into a wide range of rapidly evolving
network computing environments, and are designed to help our customers organize,
protect and retrieve electronic information. We design, manufacture, sell and
support specialized data storage hardware and software products and provide
related services. Currently, we derive substantially all of our revenue from the
sale of storage libraries and related service and support. As a result of our
investments in software development, we expect sales of our proprietary software
products to increase in the future. We distribute our products primarily through
value-added resellers, or VARs, and original equipment manufacturers, or OEMs,
and also directly to large end users.
Since 1997, our general trends include growth in sales of library products,
a reduction in sales of standalone DLT tape drives and growth in our OEM
business. Gross profit margins depend on a number of factors, including customer
and product mix, price competition and tape drive costs. We cannot assure you
that we can maintain our gross margin levels.
In August 1998, we acquired EMASS, Inc. for $25.0 million in cash and the
assumption of $2.0 million in indebtedness, and expensed $4.5 million of
acquired in-process research and development. EMASS established our presence in
Denver and expanded our operations in Europe. This acquisition brought with it
certain product offerings, including large-scale libraries as well as
proprietary software products designed to operate in conjunction with our
hardware products as well as the hardware products of our competitors.
Additionally, we gained a field service organization which now serves our
combined businesses. The acquisition of EMASS has resulted in increases in our
net sales, selling and administrative expenses and research and development
expenses. However, as a result of the complete integration of the EMASS business
into our existing business, we do not separately track the operating results of
the former EMASS business.
Net sales outside the United States accounted for 33% of our net sales in
fiscal 1998 and 45% of our net sales in the first six months of fiscal 1999.
This increase reflects our EMASS acquisition. Foreign currency gains or losses
arise as a result of our operation of European subsidiaries, the functional
currencies of which are the French franc and German deutsche mark. All monetary
assets are translated into the functional currencies on the financial statements
of these subsidiaries. Some U.S. dollar receivables and payables in these
subsidiaries offset to reduce our exposure to transaction gains and losses. To
the extent that these monetary assets and liabilities do not fully offset each
other and the U.S. dollar exchange rate changes with respect to these
currencies, transaction gains or losses may result. For large sales denominated
in other currencies, we attempt to implement appropriate hedging strategies.
The financial data below, prior to October 16, 1996, relates to our
operation as a wholly owned subsidiary of Interpoint Corporation.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, consolidated
statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
<CAPTION>
(AS A PERCENTAGE OF NET SALES)
<S> <C> <C> <C> <C> <C>
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 71.0 70.3 71.0 69.7 66.6
--------- --------- --------- --------- ---------
Gross profit................................................... 29.0 29.7 29.0 30.3 33.4
Operating expenses:
Selling and administrative..................................... 16.7 14.5 18.2 16.7 17.5
Acquired in-process technology................................. -- -- 3.9 -- --
Research and development....................................... 2.6 3.1 3.9 2.6 5.9
--------- --------- --------- --------- ---------
Operating profit................................................. 9.7 12.1 3.0 11.0 10.0
Other income (expense)........................................... (0.7) 1.6 1.1 2.2 0.4
--------- --------- --------- --------- ---------
Income before provision for income taxes......................... 9.0 13.7 4.1 13.2 10.4
Provision for income taxes....................................... 3.2 4.5 2.8 4.2 3.7
Minority interests............................................... -- -- -- -- 0.3
--------- --------- --------- --------- ---------
Net income....................................................... 5.8% 9.2% 1.3% 9.0% 6.4%
========= ========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
NET SALES. Net sales for the six months ended April 30, 1999 were
$103.2 million, an increase of 116% compared to the six months ended April 30,
1998. This increase in net sales reflects the inclusion of revenue associated
with the acquisition of EMASS as well as strong sales growth across our major
product lines, in both our branded products and OEM business.
GROSS PROFIT. Gross profit was $34.4 million or 33% of net sales for the
six months ended April 30, 1999 compared to $14.4 million or 30% of net sales
for the same period in fiscal 1998. Gross profit percentage for the six-month
period was higher than the same period in fiscal 1998 due to a shift in product
mix toward higher-margin tape libraries, software and service, and away from
lower-margin standalone tape drives and media, as well as the effects of overall
volume increases. Offsetting this trend were higher overhead costs associated
with our new Washington facility and increases in personnel to support the OEM
business, all of which began to be incurred late in the second quarter of fiscal
1998.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $18.1 million or 18% of net sales for the six months ended April 30, 1999
compared to $8.0 million or 17% of net sales for the same period in fiscal 1998.
The dollar and percentage increases in selling and administrative expenses in
the six months ended April 30, 1999 over the comparable period in fiscal 1998
were due to increased sales and administrative personnel both in the
headquarters office and in regional offices throughout the United States. We
expect that selling and administrative expenses as a percentage of net sales may
increase slightly throughout fiscal 1999 as we continue to invest in potential
OEM relationships.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$6.1 million or 6% of net sales for the six months ended April 30, 1999 compared
to $1.2 million or 3% of net sales for the same period in fiscal 1998. Much of
this increase relates to an emphasis on software-based
23
<PAGE>
products. We intend to maintain this higher level of research and development
spending as we continue investing heavily in software development and new
hardware products.
OTHER INCOME. Interest income for the six months ended April 30, 1999 was
$431,000 compared to $1.1 million for the same period in fiscal 1998. This
decrease is the result of lower cash balances reflecting cash utilization for
the acquisition of EMASS in August 1998 and an investment in Network
Integrity, Inc. in December 1998, as well as for paydown of our long-term debt.
Interest expense in fiscal 1999 relates primarily to interest on a bank loan,
the proceeds of which were used to partially finance the acquisition of EMASS.
The gain on sale of marketable equity securities relates to investments in
certain securities made during fiscal 1998 and sold during the first quarter of
fiscal 1999.
PROVISION FOR INCOME TAXES. Income tax expense for the six months ended
April 30, 1999 was $3.8 million compared to $2.0 million for the same period in
fiscal 1998. We believe that the 36% effective tax rate reflected in our results
for the six-month period ended April 30, 1999, which includes taxes paid in
various federal, state and international jurisdictions, is generally indicative
of our effective tax rate in future periods. There are significant deferred tax
assets associated with net operating loss carryforwards and other timing
differences associated with subsidiaries acquired in the EMASS transaction. A
valuation allowance has been established on these deferred tax assets because it
is more likely than not that these deferred assets will not be realized. In the
event that earnings of these companies allow us to deduct these expenses for tax
purposes and recognize these assets, we will reallocate the purchase price to
reduce noncurrent intangible assets related to the acquisition.
FISCAL YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
NET SALES. We generated net sales of $114.6 million, $93.2 million and
$59.0 million in fiscal 1998, 1997 and 1996, respectively. The 23% increase in
net sales in fiscal 1998 compared to fiscal 1997 relates both to an increase in
sales of small libraries and to the inclusion of EMASS sales in the fourth
quarter of fiscal 1998, offset by a significant decrease in standalone tape
drive and media sales between fiscal 1998 and 1997. The increase in small
library sales is due to market growth as well as to our OEM sales under
agreements entered into during fiscal 1998. These OEM sales consisted primarily
of the FastStor products introduced in the final quarter of fiscal 1997. The
transition during fiscal 1998 of DLT tape drives, supplied by Quantum, from a
condition of supply constraint to one of general availability was a major factor
in the reduction of sales of standalone DLT tape drives and a reduction in sales
to our distributors and resellers as they reduced their inventories of these
products. Tape drives purchased from third-party manufacturers, primarily DLT
drives, involve rapidly changing technology. To remain competitive, we sometimes
reduce prices on our library products in response to decreases in purchased tape
drive cost. In fiscal 1998, primarily due to declining tape drive prices, we
lowered prices on certain library and other products.
The 58% increase in net sales in fiscal 1997 compared to fiscal 1996 was
primarily due to strong unit sales volume of our 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. International sales were
$37.9 million, $30.6 million and $21.2 million in fiscal 1998, 1997 and 1996,
respectively, accounting for 33% of net sales in both fiscal 1998 and 1997 and
36% of net sales in fiscal 1996.
GROSS PROFIT. Gross profit was $33.1 million, $27.6 million and
$17.1 million in fiscal 1998, 1997 and 1996, respectively, representing 29%, 30%
and 29% of net sales, respectively. The decrease in gross profit margin in
fiscal 1998 was due to many factors, including higher overhead associated with
our new Washington facility, increases in personnel to support our OEM business,
and lower than anticipated product revenues, particularly in the third quarter
of fiscal 1998. Gross profit margins decreased further due to certain product
price reductions. These factors more than offset the benefit of a shift in
product mix toward higher-margin libraries and away from lower-margin standalone
products. The gross profit
24
<PAGE>
margin in the fourth quarter of fiscal 1998 benefited from the larger libraries
and software sales of EMASS, but was reduced by a $513,000 charge to cost of
goods sold as a result of purchase accounting adjustments to record EMASS
inventory at its fair market value. Gross profit margin for fiscal 1997 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, including tape drives, comprised a substantial majority of cost of
sales in fiscal 1998, 1997 and 1996.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $20.8 million, $13.6 million and $9.8 million in fiscal 1998, 1997 and
1996, respectively, representing 18%, 15% and 17% of net sales, respectively.
The increase both in absolute dollars and as a percentage of net sales in fiscal
1998 over fiscal 1997 is due to increased sales personnel in our headquarters,
regional and international sales offices, increased advertising and promotion
costs and increased costs associated with our new headquarters facility. In
addition, with the purchase of EMASS we acquired duplicate assets consisting of
computer systems to track product serial numbers and customer service
information. These assets totaled $380,000 and were expensed subsequent to the
acquisition.
Selling and administrative expenses for fiscal 1997 decreased as a
percentage of net sales as higher net sales reflected the benefits of our
significant investments in sales and marketing resources in fiscal 1996. The
dollar increase in selling and administrative expenses in fiscal 1997 over
fiscal 1996 was primarily due to additions to sales and marketing staff,
increased advertising costs and increased administrative overhead.
ACQUIRED IN-PROCESS TECHNOLOGY. In connection with the purchase of EMASS,
acquired in-process technology was identified and valued by an independent third
party at $4.5 million, approximately 18% of the total purchase price, and was
expensed immediately. The value of acquired in-process technology was determined
by estimating the stage of development of each in-process research and
development project at the date of acquisition and estimating cash flows
resulting from anticipated revenues generated from such projects, and then
discounting the projected net cash flow. Projects we are currently pursuing
include a new large library storage product and associated software, as well as
separate software products using UNIX and Windows NT platforms. Of the total
value of acquired in-process technology, 49% was associated with the in-process
library products and 51% with the in-process software products. We expect that
these products, if successfully developed, will replace existing large library
and software products. We expect that customer service and maintenance contracts
will, however, continue to provide revenue associated with the older products.
We expect to incur significant costs to develop the acquired in-process
technology into commercially viable products. The majority of the development
costs associated with the library product are expected to be incurred in fiscal
1999, with the product release anticipated for the first half of fiscal 2000.
Costs include engineering time and material, in addition to costs associated
with prototype and test systems. One of the software products was released in
fiscal 1999, and we will continue to incur development costs through the release
of the remaining software products and versions, expected in fiscal 2000.
Expenses incurred subsequent to August 1998 are included in research and
development expenses. We believe that each of these projects will be
successfully developed; however, if they are not, our sales and profitability
may be adversely affected in future periods. In addition, the failure of any
particular project could impair the value of other intangible assets acquired
and adversely affect our sales and profitability in future periods.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$4.5 million, $2.9 million and $1.5 million in fiscal 1998, 1997 and 1996,
respectively, representing 4% of net sales in fiscal 1998 and 3% in fiscal 1997
and 1996. The dollar and percentage increases in fiscal 1998 over fiscal 1997
are both related to our significant expenditures associated with hardware and
software in-process technology. Actual dollar spending during fiscal 1997 was
higher than fiscal 1996 due to
25
<PAGE>
increases in development expenses for the FastStor products released in the
final quarter of fiscal 1997 as well as the Scalar 218 series, and additions to
research and engineering staff.
OTHER INCOME (EXPENSE). Other income was $1.3 million and $1.5 million in
fiscal 1998 and 1997, respectively, compared to expenses of $395,000 in fiscal
1996. Interest income of $1.0 million for fiscal 1998 was comparable to fiscal
1997 interest income of $1.1 million. Interest expense incurred in fiscal 1998
of $311,000 represented interest from August 19, 1998 to October 31, 1998 on a
bank loan, the proceeds of which were used to partially finance the acquisition
of EMASS. The gain on sale of marketable securities relates to investments in
certain equity securities made and sold in fiscal 1998. As a result of the
proceeds from issuance of common stock in March 1997, as well as Interpoint's
forgiveness of all intercompany loans to us and contribution of cash to us in
October 1996, we 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. Between fiscal 1997 and 1996, net foreign currency translation
gains increased approximately $271,000.
PROVISION FOR INCOME TAXES. The provision for income taxes in fiscal 1998
was $3.2 million, which represented an effective tax rate of 67% of pre-tax
income. The expense associated with the write-off of acquired in-process
technology is not deductible for state or federal income tax purposes. Without
this expense, the effective tax rate would have been 34%. Income tax expense for
fiscal 1997 was $4.2 million compared to $1.9 million for fiscal 1996. The 33%
effective tax rate in fiscal 1997 reflects our investment in certain nontaxable
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.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth statement of operations data for the eight
quarters ended April 30, 1999, as well as the percentage of our net sales
represented by each item. This information has been derived from our unaudited
consolidated financial statements. The unaudited quarterly information has been
prepared on the same basis as our audited consolidated financial statements and
includes all adjustments, consisting only of normal recurring accruals, that our
management considers necessary for a fair presentation of such information when
read in conjunction with our annual consolidated audited
26
<PAGE>
financial statements and notes appearing elsewhere in this prospectus. Operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1997 1997 1998 1998 1998 1998 1999 1999
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ $ 24,463 $ 26,599 $ 22,866 $ 24,806 $ 25,314 $ 41,570 $ 49,144 $ 54,044
Cost of sales............................ 17,397 18,499 15,451 17,796 18,544 29,597 32,750 36,005
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........................... 7,066 8,100 7,415 7,010 6,770 11,973 16,394 18,039
Operating expenses:
Selling and administrative............. 3,467 3,793 3,783 4,182 4,978 7,849 9,113 8,980
Acquired in-process technology......... -- -- -- -- -- 4,492 -- --
Research and development............... 733 854 618 627 818 2,420 2,815 3,235
--------- --------- --------- --------- --------- --------- --------- ---------
Operating profit (loss).................. 2,866 3,453 3,014 2,201 974 (2,788) 4,466 5,824
Other income (expense)................... 542 344 560 518 159 91 480 (49)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes.................................. 3,408 3,797 3,574 2,719 1,133 (2,697) 4,946 5,775
Provision for income taxes............... 1,146 1,124 1,213 785 381 795 1,774 2,067
Minority interests....................... -- -- -- -- -- 25 120 163
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ 2,262 $ 2,673 $ 2,361 $ 1,934 $ 752 $ (3,517) $ 3,052 $ 3,545
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1997 1997 1998 1998 1998 1998 1999 1999
<CAPTION>
(AS A PERCENTAGE OF TOTAL NET SALES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 71.1 69.5 67.6 71.7 73.3 71.2 66.6 66.6
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........................... 28.9 30.5 32.4 28.3 26.7 28.8 33.4 33.4
Operating expenses:
Selling and administrative............. 14.2 14.3 16.5 16.9 19.7 18.9 18.5 16.6
Acquired in-process technology......... -- -- -- -- -- 10.8 -- --
Research and development............... 3.0 3.2 2.7 2.5 3.2 5.8 5.8 6.0
--------- --------- --------- --------- --------- --------- --------- ---------
Operating profit (loss).................. 11.7 13.0 13.2 8.9 3.8 (6.7) 9.1 10.8
Other income (expense)................... 2.2 1.3 2.4 2.1 0.7 0.2 1.0 (0.1)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes.................................. 13.9 14.3 15.6 11.0 4.5 (6.5) 10.1 10.7
Provision for income taxes............... 4.7 4.3 5.3 3.2 1.5 1.9 3.7 3.8
Minority interests....................... -- -- -- -- -- 0.1 0.2 0.3
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ 9.2% 10.0% 10.3% 7.8% 3.0% (8.5)% 6.2% 6.6%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Our net sales over the eight quarters ended April 30, 1999 have increased
sequentially except for the first quarter of fiscal 1998. The drop in this
quarter reflects a seasonal pattern that we have generally seen when compared to
net sales of the previous fourth quarter. In addition, revenue growth in fiscal
1998 was affected by a significant reduction in sales of standalone tape drives
and media sales when compared to fiscal 1997. This decrease was offset by
increases in sales of our library products.
Gross profit has ranged between 27% in the third quarter of fiscal 1998 to
33% in each of the first two quarters of fiscal 1999. Gross profit in the second
and third quarters of fiscal 1998 reflected certain product price reductions and
increased overhead costs. The largest component of overhead costs is related to
our move to a new headquarters facility in April 1998.
27
<PAGE>
Operating expenses, including selling, administrative, and research and
development costs, have generally increased in dollar amount over the eight
quarters. Quarterly variations prior to the fourth quarter of fiscal 1998 were
primarily due to the timing of specific expenditures. The increase in dollar
amount in the fourth quarter of fiscal 1998 reflected the inclusion of EMASS.
Increases in sales and administrative expenses reflect additional sales
personnel and increased expenditures in advertising and promotion.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $1.9 million for the first
six months of fiscal 1999 and $2.7 million for fiscal 1997, and cash flows used
in operating activities were $3.5 million for fiscal 1996. In each of these
periods, operating cash was primarily used to fund increases in accounts
receivable and inventories and was offset by net income, depreciation and other
reserves. Additionally, in fiscal 1998, net income was reduced by the expensing
of acquired in-process technology, a noncash item. Other noncash items in fiscal
1998 include an increase in the allowance for inventory obsolescence of
$1.1 million. As our installed base of library products has increased, the need
for service and warranty repair inventory, especially inventory at regional
locations to support on-site service, has also increased. We have provided an
allowance against these inventories, as well as for inventories used for
demonstration purposes, in addition to our allowance for excess and
obsolescence. Because these inventories can remain in the field for an extended
time, the amount of this allowance has increased substantially over the past two
years.
Cash flows used in investing activities were $3.5 million for the first six
months of fiscal 1999, $28.7 million for fiscal 1998, $5.8 million for fiscal
1997, and $900,000 for fiscal 1996. The first six months of fiscal 1999 includes
a $4.0 million investment in Network Integrity, Inc., ongoing investment in
property, plant and equipment and proceeds on the sales of marketable equity
securities. Our investing activities in fiscal 1998 were primarily associated
with the acquisition of EMASS in August 1998. In connection with this
acquisition, we acquired assets with a fair value of $38.9 million, and assumed
$13.9 million of liabilities. Included with EMASS's assets was $1.6 million in
cash. Additionally, we invested in property, plant and equipment, primarily
associated with our new headquarters facility and various technology additions
and upgrades, and also invested in certain marketable equity securities, some of
which were sold later in the year. In August 1997, we used $4.0 million to
acquire a minority equity position in Crossroads Systems, Inc., a provider of
Fibre Channel interconnection products. We used an additional $1.8 million to
purchase plant and equipment in fiscal 1997 compared with expenditures of
$910,000 for this purpose in fiscal 1996.
Cash flows used in financing activities were $11.4 million for the first six
months of fiscal 1999 compared to the provision of cash from financing
activities of $100,000 for the first six months of fiscal 1998, and $19.6
million for fiscal 1998, $25.5 million for fiscal 1997, and $14.2 million for
fiscal 1996. In August 1998, we received proceeds from long-term borrowings of
$20.0 million. In March 1997, we completed a public offering of stock which
provided cash of $23.7 million. In fiscal 1996, we financed our growth through
loans from Interpoint, which loans increased $4.2 million. Prior to Interpoint's
distribution of our stock, Interpoint made a contribution to our working capital
through the cancellation of all $9.6 million of our indebtedness to Interpoint.
Interpoint also contributed an additional $10.0 million in cash to our working
capital.
At April 30, 1999, our cash and cash equivalents totaled $14.8 million, down
from $28.2 million at October 31, 1998. Our working capital, the difference
between current assets and current liabilities, was $57.8 million at April 30,
1999, with a ratio of current assets to current liabilities of 2.8 to 1.
28
<PAGE>
We have a $10.0 million bank line of credit that expires in February 2001,
all of which was available as of April 30, 1999. Borrowings under this line of
credit bear interest at the bank's reference rate or an adjusted LIBOR rate. A
credit agreement covers the line of credit and long-term note payable and
requires that we maintain certain financial ratios and levels of working
capital, tangible net worth and profitability. We had no material or unusual
commitments as of April 30, 1999 other than annual rental commitments. In
June 1999, we finalized two operating lines provided by German banks totaling
approximately $8.5 million in deutsche marks and borrowed the entire amount.
These loans are due May 2003 and bear interest at the bank's rate, approximately
3.2% through November 1999. Beginning in December 1999, the interest rate
varies; we have entered into a hedging contract to fix the interest rate at
4.3%. Additionally, in July 1999, we used $7.0 million to acquire a minority
equity position in @Backup, an Internet-based backup and data access service
company.
We believe that the net proceeds of this offering, together with our
existing cash and cash equivalents, bank line of credit, and anticipated cash
flow from our operating activities, will be sufficient to fund our working
capital and capital expenditure needs for at least the next 12 months. Further,
we believe that cash provided by operations is likely to increase over the
remainder of fiscal 1999. We may utilize cash to acquire or invest in
businesses, products or technologies that we believe are strategic. We regularly
evaluate other companies and technologies for possible acquisition by us. In
addition, we have made and expect to continue to make substantial investments in
companies with whom we have identified potential synergies. However, we have no
present understanding, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
IMPACT OF EUROPEAN MONETARY CONVERSION
We are aware of the issues associated with the changes in Europe resulting
from the formation of a European economic and monetary union. One change
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the Euro, as of January 1, 1999, at
which date the Euro became a functional legal currency of these countries.
During the next three years, business in the EMU member states will be conducted
in both the existing national currency, such as the French franc or the Deutsche
mark, and the Euro. As a result, companies operating or conducting business in
EMU member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling these
currencies, including the Euro. We are still assessing the impact that the
conversion to the Euro will have on our internal systems, the sale of our
products and the European and global economies. We will take appropriate
corrective actions based on the results of such assessment. We have not yet
determined the cost related to addressing this issue.
YEAR 2000 READINESS DISCLOSURE
Many computers, software and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result, some of these
systems could fail to operate or fail to produce correct results if "00" is
interpreted to mean 1900, rather than 2000. This error could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. We are actively assessing the
impact of the upcoming change on our business, financial condition and operating
results.
PRODUCTS. Based on our assessment to date, we believe the current versions
of our hardware and software products are year 2000 compliant. All new products
are being designed to be year 2000 compliant. While most of our internally
manufactured library products have no date functionality built into them, this
is not true for certain software and large library products. Year 2000 compliant
updates are currently available for all of these products and our service
personnel are able to install these
29
<PAGE>
upgrades in conjunction with routine maintenance. In addition, we have reviewed
and continue to review hardware used in connection with certain large library
products. We have replaced certain systems that cannot be made compliant and
upgraded those that can. We estimate that the total costs to replace this
hardware will approximate $50,000. A portion of these costs is reimbursed by
customers.
We cannot assure you that all of our existing products will contain all
necessary date codes. Further, use of our products in connection with other
products that are not year 2000 compliant, including noncompliant hardware,
software and firmware, may result in the inaccurate exchange of dates and result
in performance problems or system failure. Any failure of our products to
perform could result in claims against us. The cost of defending any such claim
which may arise, as well as any liability for year 2000 related damages, could
have a material adverse effect on our business, financial condition and
operating results.
INTERNAL INFORMATION TECHNOLOGY SYSTEMS. Our business depends on numerous
systems that could potentially be impacted by year 2000 related problems. We
continue to assess the possible effects on our operations of the year 2000
readiness of our enterprise resource planning computer systems and other
internal systems. Based on assessments to date and software vendor
certification, we believe that the enterprise resource planning computer systems
at our various manufacturing sites are either year 2000 compliant currently or
can be modified to ensure compliance. In addition, we plan to complete follow-up
testing in the fourth quarter of fiscal 1999. Other internal systems have been
assessed or are currently being assessed. Based on such assessments we will
modify or replace such systems. We expect the assessments and tests of these
systems to be completed in the fourth quarter of fiscal 1999. Based on work
completed through July 31, 1999, we anticipate replacing several network servers
in Denver and Germany and various other pieces of equipment and software with an
approximate cost of $100,000.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices, may
be affected by year 2000 problems. We continue to assess the potential effect
and costs of remediating the year 2000 problem on our office equipment and
facilities. For example, we identified the need to replace a phone switch and
system in our France office, which can be completed at an immaterial cost. We
are not aware of any significant operational year 2000 issues or costs
associated with our noninformation technology systems. However, we may
experience significant unanticipated problems and costs caused by undetected
errors or defects in the technology used in these systems.
SUPPLIERS. Our reliance on key suppliers, and therefore on the proper
function of their information systems and software, means that their failure to
address year 2000 issues could have a material impact on our operations and
financial results. We have asked key suppliers to provide information regarding
their readiness for year 2000 related issues and have received responses from
substantially all of them. We are reviewing the responses and will determine
what further actions are required to mitigate vulnerability to problems with
suppliers and other third parties' systems.
YEAR 2000 COSTS. We expect to incur primarily internal staff cost and other
expenses related to infrastructure and facilities enhancements necessary to
prepare our systems for the year 2000. To date, there have been no material
direct out-of-pocket costs in these areas. Although the total cost of these year
2000 compliance activities is not yet determined, it is not anticipated to be
material to our business, financial condition and operating results.
CONTINGENCY PLANS. We are developing contingency plans to be implemented if
our efforts to identify and correct year 2000 problems affecting critical
internal systems are not effective. We expect to complete our contingency plans
by late 1999.
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WORST-CASE SCENARIO. We believe that the most likely worst-case scenario
related to the year 2000 issue that we may experience would be either an
inability to obtain inventory components from suppliers or delays in receiving
orders or payments from customers due to year 2000 problems experienced by these
third parties. If either of these events transpires, we could experience
decreased revenue due to our inability to produce and ship our products or our
inability to collect payments due to us in a timely fashion.
DISCLAIMER. The discussion of our efforts and expectations relating to year
2000 compliance include forward-looking statements. Our ability to achieve year
2000 compliance and the amount of necessary additional costs could be adversely
affected by the availability and cost of programming and testing resources,
third-party suppliers' ability to modify proprietary software and unanticipated
problems identified in our ongoing compliance review.
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BUSINESS
OVERVIEW
We provide hardware and software data storage solutions to the open systems
marketplace. We offer a broad range of products designed to enable organizations
to effectively capture, protect, manage and archive the increasing amount of
complex, mission-critical data. We incorporate our proprietary hardware,
software and interconnectivity products, as well as our service and support
expertise, with third-party hardware and software products to deliver flexible,
reliable and scalable storage solutions. Our storage solutions are
market-driven, and we do not rely on a single technology or device to deliver
them. We continue to increase our investments in developing innovative and
effective storage products. In order to broaden access to complementary
products, we make direct equity investments and initiate licensing and
co-development agreements with companies developing innovative technologies for
the data storage market. Our sales channels include a global network of
resellers developed over the last 15 years and original equipment manufacturers,
or OEMs, including Dell Computer. In addition, we were recently selected as a
supplier to IBM, subject to finalizing a definitive agreement.
INDUSTRY BACKGROUND
In an increasingly information-based economy, information and databases are
central to a company's value, and managing the increase in data is one of the
most important challenges that a company must address. The volume of
business-critical data generated, processed, stored and manipulated in the
business environment, has grown dramatically over the last decade. International
Data Corporation, an independent industry research company, estimates that the
amount of disk storage capacity sold annually grew from 10,000 terabytes, each
terabyte representing one trillion bytes of information, in 1994 to 116,000
terabytes in 1998, increasing to 1,400,000 terabytes in 2002. This represents an
expected compound annual growth rate of 86% from 1998 to 2002. We believe this
growth rate is reflective of the overall growth in electronic data in the
increasingly information-based economy. Several factors are driving the
increased volume and value of data:
- GROWTH IN BUSINESS CRITICAL DATA. Stored data is growing in size and
complexity from the proliferation of different types of stored data
including graphics, video, text and audio, as well as the implementation
of enterprise-wide databases containing both traditional and
nontraditional business management information. Organizations in all
industries, including technology, telecommunications, manufacturing,
financial services, entertainment and broadcast, are increasingly
dependent on their ability to collect, access, mine, use and transfer
these new types of stored data.
- RISE OF NETWORK SERVER COMPUTING. Within organizations, there has been a
fundamental shift from mainframe computers to networked, server-based
computing. This development has shifted critical information from the
mainframe to network servers, allowing more people to gain access to
stored data as well as create new data, which in turn needs to be stored
and backed up.
- RISE OF THE INTERNET AND E-COMMERCE BASED BUSINESSES. The growth in the
Internet as a means of commerce has created a class of companies whose
businesses depend on the access, creation and archiving of stored data. In
addition, the growth in the use of the Internet has created wide access to
vast amounts of data. As individuals and businesses increase their
reliance on the Internet for transactions and data retrieval, the need for
high-volume, high-speed access to large databases will continue to
experience rapid growth.
These and other factors, have intensified the demand placed on data centers.
As a result, organizations face heightened requirements for data storage
solutions that enable improved access to, and management of, shared data,
including solutions that offer increased connectivity capabilities, greater
capacity, higher performance, greater reliability and greater protection.
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Traditionally, storage architectures were mainly targeted at backup
applications and focused on limiting the high costs associated with lost data,
primarily stemming from human error, viruses, equipment failure, data corruption
and man-made and natural disasters. As a result, tape storage systems, which
because of their larger storage surface area offer the lowest-cost medium for
storing and protecting large quantities of data, historically had comprised a
central piece of a business's storage solution.
With the rapid escalation of the volume and value of data stored,
organizations are increasingly looking for storage system solutions that enable
them to not only back up business-critical data, but also efficiently capture,
protect, manage and archive stored information across a variety of storage
platforms. Efficiently storing, managing and protecting this data is considered
mission-critical. This data is frequently integral to the business, and in many
Web-based companies, such as Internet providers, the data is a key strategic
asset of the company. Corporate databases contain useful information about
customer records, order patterns, and other data that can be analyzed and
transformed into a competitive advantage for a corporation. The ability to turn
this data into useful information enables a company to react and adapt more
quickly to the market. As a result, companies require solutions that will
provide increased accessibility to data without sacrificing performance
requirements or introducing greater risk of data loss.
In response to the limitations of traditional storage architectures, new
open standard technology protocols have emerged that are designed to provide
high-speed connectivity for data-intensive applications across multiple
operating systems, including UNIX and Windows NT. These new methods of storage
and data management technologies include the following:
- FIBRE CHANNEL. Fibre Channel is a defined technology that allows users to
connect multiple storage devices with one gigabit per second throughput.
Fibre Channel provides the bandwidth, reliability, scalability and
transmission distances that allow companies to create storage area
networks.
- STORAGE AREA NETWORKS. A storage area network, or SAN, based architecture
applies the inherent benefits of a networked approach to data storage
applications, allowing data to move efficiently and reliably between
multiple storage devices and servers. The benefits of SAN architecture
also include increasing the scalability of existing storage solutions and
providing a higher level of connectivity than currently exists with
traditional technologies. Additionally, SANs are able to provide these
benefits across multiple operating systems.
- NETWORK ATTACHED STORAGE APPLIANCES. Network attached storage, or NAS,
appliances allow users to add plug-and-play storage capacity to networks
without having to disable or increase demands on the network server. This
allows users to maintain, or even enhance, system performance while saving
on both time and cost.
- INTERNET-BASED STORAGE BACKUP. This solution allows home users, remote
portable computer users and enterprises to outsource their storage or back
up of data on a cost-efficient basis through the services provided by
Internet-based storage backup companies. Increased availability of high-
bandwidth Internet connections is a key enabler of this approach.
- STORAGE MANAGEMENT SOFTWARE SOLUTIONS. Software innovations continue to
enhance storage management capabilities. For example, byte-level storage
management reduces the amount of total data storage by recording only
incremental changes to files and facilitates real-time, or continuous
backup, capability. Hierarchical storage management automatically moves
less frequently accessed data to less expensive tape storage, ensuring
that higher-cost disk space is available.
- MULTIPLE STORAGE FORMATS. Data centers have evolved to incorporate
multiple forms of storage media, including optical disks, hard disk
drives, higher capacity tapes and broadcast media.
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Software and hardware products have been developed that allow users to
optimize these multiple storage formats.
With the increased dependence on and use of their stored data, organizations
need efficient and reliable storage system solutions offering real-time
accessibility to shared data, higher performance and storage capabilities for
mission-critical applications and greater functionality to manage and back up
stored content. Furthermore, the limitations of existing enterprise computing
and storage solutions are compounded by the use of multiple incompatible server
operating systems, such as the proliferation of Windows NT and UNIX
environments. As a result, enterprises are being forced to dedicate substantial
financial and personnel resources to manage and maintain the distributed storage
capabilities of their networks. The heightened need for increased capacity and
number of storage devices in the enterprise has created significant
opportunities for total storage system solutions that include devices such as
tape drives, tape libraries and storage management software, as well as storage
services such as data backup, disaster recovery, near-line storage, archiving
and media management.
THE ADIC SOLUTION
We provide hardware and software data storage solutions to the open systems
marketplace. We offer a broad range of products designed to enable organizations
to effectively capture, protect, manage and archive the increasing amount of
complex, mission-critical data. Our storage solutions are market-driven, and we
do not rely on a single technology or device to deliver our storage solutions.
We, along with our value-added resellers, or VARs, OEM partners and customers,
incorporate our proprietary hardware, software and interconnectivity products,
as well as our service and support expertise, with third-party hardware and
software products to deliver reliable, flexible and scalable storage solutions.
In addition to our current products, we continue to increase investments in
research and development to produce innovative and effective storage products.
In order to access complementary products, we make direct equity investments and
initiate license or enter into co-development agreements. We believe such
research and development and third-party relationships will better position us
to continue to provide advanced storage solutions.
We offer end users technical service and support on a multilingual,
24-hour-a-day, seven-day-a-week basis. Such technical support includes warranty,
service contract, trouble shooting and integration services.
We believe that our open-systems approach, focus on new technologies,
multiple channel distribution model and customer service and support allow us to
be well positioned and sufficiently agile to provide storage solutions to a
rapidly growing and evolving data storage marketplace.
ADIC STRATEGY
Our objective is to capture an increasing portion of the open systems
storage solutions market. Key components of our strategy to achieve this
objective include:
PROVIDE A BROAD ARRAY OF DEVICE-INDEPENDENT STORAGE SOLUTIONS. We believe
that our independence from any single device technology is a key advantage. We
provide end users with effective storage solutions, comprised of competitive
data recording device technology, automation hardware, interconnectivity
products, state of the art software and technical service and support. Our
strategy employs a device-independent and open systems approach that allows us
or our OEM or value-added reseller partners to provide storage solutions
incorporating the optimal combination of our proprietary products and available
third-party hardware and software products. Depending on the specific
requirements of a particular application, such as cost, transfer rate or access
time, our products may include a variety of tape formats, optical, disk or
emerging technologies.
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AGGRESSIVELY DEVELOP TECHNOLOGY. We believe that focused expenditures on
differentiated technologies are critical to our success and are accelerating our
expenditures on technology development in order to offer more complete storage
solutions. We have built multiple generations of existing products on a
foundation of technology and know-how, including operating systems software,
programming languages and structure, file management systems, communications
protocols, electronic hardware and electro-mechanical hardware. Building on this
experience, we have made storage management software and library control
software the largest components of our growing research and development program.
In addition to internal investment, we may seek to develop or acquire technology
by acquisitions, minority investments or outsourced development. In each case,
the objective is to obtain exclusive or preferential access to proprietary
technology that complements our products.
CAPITALIZE ON WORLDWIDE BRANDED RESELLER AND OEM CHANNELS. Over the past
15 years, we believe we have established the strongest branded worldwide
distribution channels in our market. During the last two years, we have
increased our focus on OEM relationships, resulting in a significant increase in
our OEM business. Long-standing relationships with national and international
distributors, integrators and individual resellers provide an experienced
broad-based channel to cost-effectively offer our branded products to multiple
market segments. Our leading channel partners include Ingram Micro and Tech
Data, and we also have a sales relationship with Siemens. We have established
OEM relationships with Dell Computer, Unisys, Exabyte, Tandberg Data and
Plasmon. In addition, in the past year IBM selected us as a supplier subject to
finalizing a definitive agreement. Through these OEM supply arrangements we are
able to benefit from our OEMs' extensive direct and indirect distribution
networks. In addition, our close ties with software vendors can be critical in
reseller sales situations where an effective solution requires pairing
compatible hardware and software products to be effective.
BUILD AND EXPAND RELATIONSHIPS WITH STRATEGIC PARTNERS. It is our strategy
to capitalize on products, technologies and channels that may be available
through partners. We believe that continued growth of the open systems storage
solutions market will create opportunities beyond those we can meet alone. Our
relationships take the form of supplier, customer, licensor, co-developer or
equity partner. For example, we market Fibre Channel interconnection solution
products developed by Crossroads Systems under the ADIC brand name. Our
relationship with Crossroads allows us to offer products to integrate a wide
variety of storage devices with Fibre Channel connectivity in SANs. We sometimes
partner with key suppliers, including Quantum, to address developing markets. We
intend to continue to seek out related markets which leverage our strengths, and
have partnerships with VERITAS Software, Network Integrity, Computer Associates
and Legato Systems. Additionally, we recently made an investment in @Backup, an
Internet-based backup and data access service company, to develop our position
in the online, Internet-based storage market.
PRODUCTS
We believe we offer the industry's broadest range of automated storage
libraries that feature varying data storage capacities and transfer rates. In
addition, we offer storage management software that can be used with our
libraries or those of other manufacturers. Currently we receive substantially
all of our revenue from the sales and servicing of automated storage libraries.
We continuously refine our products, as well as develop new products, to be used
with a variety of emerging storage technologies, such as Fibre Channel, SANs and
NASs.
OPEN SYSTEMS STORAGE PRODUCTS
The core component of our storage solution is typically an automated storage
library. An automated tape library, directed by storage management software, can
perform sophisticated backup of a network's data without human intervention,
automatically backing up specific network data to specific tapes at specific
times. Access to multiple tape cartridges enables the library to automatically
store
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much more data than a standalone drive, eliminating the need for a system
administrator to swap tapes in order to backup all the data.
Within the library, tape cartridges or other removable media are typically
organized in magazines. In some cases, these tape magazines are removable,
easing storage and offsite transfer of the tapes. A library with multiple tape
drives can backup data with all drives simultaneously, significantly speeding up
the backup process. We design certain large libraries to allow for the
incorporation of more than one type of tape or optical media, as well as mixed
media capability.
We integrate third-party storage devices into our automated libraries. While
a large majority of our libraries currently use tape drives and media, we also
offer libraries using optical and other storage technologies. When operated in
combination with third-party storage management software and our own software,
our libraries provide a complete solution for systematically and
cost-effectively automating data storage backup and archiving in open systems
network computing environments. We design our products for a spectrum of storage
needs. Our products vary by device technology, number of drives, and number of
cartridges, with suggested retail prices typically ranging from approximately
$1,800 to over $1.5 million. The following table summarizes our open systems
storage hardware products.
<TABLE>
<CAPTION>
SUGGESTED RETAIL PRICE
PRODUCT FAMILY CAPACITY/PERFORMANCE(1) RANGE(2)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
Standalone tape drives 4-100 gigabytes $1,800-$7,300
VLS-TM- libraries 48-490 gigabytes $6,800-$17,000
FastStor-TM- libraries 280-1,540 gigabytes $5,500-$13,000
Scalar-Registered Trademark- 360-8,000 gigabytes $12,500-$63,000
libraries
Scalar-Registered Trademark- 1000 5,630-118,200 gigabytes $50,000-$150,000
libraries
AML-TM- libraries 300-6,700,000 gigabytes $150,000-$1,500,000
FCR-TM- Fibre Channel routers 1 gigabit per second $4,700-$8,300
</TABLE>
(1) Capacity and performance of our storage library products vary by type of
drives, quantity of drives and unit configuration.
(2) Prices represent typical installations.
In addition to our automated storage library and standalone drive products,
we supply our channels and end users with a range of complementary products,
including tape cartridge media, tape magazines, rackmount kits and cables.
OPEN SYSTEMS STORAGE MANAGEMENT SOFTWARE
Advanced software is a key component of a sophisticated data storage system.
The majority of our hardware products are installed in open systems computer
networks in conjunction with third-party storage management software.
OUR SOFTWARE
A key objective of the EMASS acquisition was to develop a storage software
business. Through this acquisition, we acquired proprietary software designed to
intelligently organize and manage data in open systems environments. Currently,
our software sales represent a very small percentage of our total revenue.
However, we believe that software offers a number of opportunities for us to
increase sales to existing and new customers and are devoting the greatest
portion of our increased research and development expenditures to further
software development.
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Our software products include:
AMASS. The AMASS Storage Management System is an integrated family of
products for data-intensive computing environments and is usable with removable
media products. It is presently available and installed in UNIX and Windows NT
environments worldwide. AMASS software makes data stored in libraries accessible
with the look-and-feel of a hard disk and helps optimize capacity of the
library. Under AMASS, all of the storage capacity in the library appears as a
single, large hard disk drive on the server. Users manage files from the library
the same way they currently do with hard drives. The product also includes
numerous additional features that are application-specific.
FILESERV AND DATA MANAGER. FileServ and Data Manager are hierarchical
storage management products. These products manage data migration from disk to
tape or optical storage devices by allocating high-use data to disk and low-use
data to tape, assuring efficient use of higher cost disk drive space.
Our in-house software development team is actively engaged in developing and
enhancing our proprietary software products that, when used with our hardware
products, or other vendors' hardware products, may provide an integrated storage
solution. All of our software products are certified to operate in conjunction
with our hardware products but may also be certified to operate with hardware
products provided by competitors.
THIRD-PARTY SOFTWARE
All our hardware products are designed for use on open systems computer
networks in conjunction with storage management software provided by a third
party or by us. Currently, over 50 different storage management software
packages support our products, and include partnerships with Computer
Associates, Hewlett-Packard, IBM, Legato Systems, Network Integrity and VERITAS
Software.
We work closely with storage management software companies in a number of
ways. We periodically engage in discussions with developers at these companies
regarding the marketplace, end-user needs and potential solutions to these needs
combining our products and the developer's storage management software. We
partner with storage management software companies to offer promotional product
bundles, offering customers a special price on the combination of one of our
products and a storage management software product. In addition, our field sales
force strives to maintain relationships with counterparts from each of the
storage management software companies and frequently participates in joint sales
calls and seminars. We also maintain technical relationships with developers at
these companies, in most cases providing our products for their use in
developing software for these products. Our systems engineering lab performs
ongoing compatibility testing with a variety of storage management software
products.
FIBRE CHANNEL, SAN AND OTHER EMERGING TECHNOLOGIES
In meeting the needs of data-intensive open systems computing environments,
we have combined our solutions expertise with strategic investments and key
partnerships to integrate our products with SAN and other emerging technologies.
We partner with Crossroads Systems, a developer of high-performance Fibre
Channel storage area network connectivity tools. Through this relationship, we
introduced our FibreReady-TM- line of native Fibre Channel tape libraries, the
first in the industry. We also offer standalone Fibre Channel routers, which
allow all our hardware products to be integrated into SANs.
We intend to continue building relationships with emerging technology
companies in order to further enhance the breadth and depth of our product line,
and introduce new products in areas such as Fibre Channel, storage area
networking, and network attached storage.
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STRATEGIC INVESTMENTS
In the past two years, we have invested an aggregate of $15.0 million in
three companies that are developing innovative technologies for the data storage
market. We intend to make similar investments in the future as more
opportunities arise.
In August 1997, we invested $4.0 million in, and signed an OEM distribution
agreement with, Crossroads Systems, a developer of high-performance Fibre
Channel SAN connectivity tools. Through this investment, we gained early access
to Fibre Channel technology, which allowed us to be the first in the industry to
integrate this technology into our automated libraries.
In December 1998, we invested $4.0 million in Network Integrity, a software
company which develops and markets real-time data distribution and continuous
data protection solutions for Windows NT environments. Network Integrity's
products minimize network traffic and reduce the total amount of data storage by
recording byte-level changes to files. We offer Network Integrity's Windows NT-
based data protection software products through our distribution channels.
In July 1999, we invested $7.0 million in @Backup, an Internet-based backup
and data access service company. @Backup offers secure, off-site, automatic
backup of computer data for mobile users, small enterprises and individuals.
We believe we benefit from these investments in a variety of ways,
including:
- gaining access to compelling products, which may be integrated in or
paired with our own products;
- working with technology innovators to gain valuable training and insight
into emerging markets;
- accessing additional distribution channels for our products; and
- potentially realizing future investment gains.
SALES AND MARKETING
Our sales and marketing strategy is to deploy a comprehensive sales,
marketing and support infrastructure to address our target markets both
domestically and internationally. We rely on multiple distribution channels to
reach end-user customers ranging in size from small businesses to government
agencies and large multinational corporations. Our channels include
distributors, value added resellers, commonly referred to as VARs, and original
equipment manufacturers, commonly referred to as OEMs. We support these channels
with a sales force operating out of headquarters in Washington and France in
addition to over 30 regional field sales offices in North America and Europe.
The majority of our products are sold under the ADIC brand name, but we also
sell under the names of various OEM customers. Such sales to OEM customers are
growing as a percentage of sales.
DISTRIBUTORS AND VARS
We sell our products to large regional and national distributors which in
turn resell our products to national, regional or local VARs with expertise in
integrating network solutions for end users. We support these VARs through our
authorized reseller programs. In the case of larger, more complex sales
situations, our field sales force may work in conjunction with a VAR to support
the sales process. We currently have relationships with several major U.S.
distributors, including Access Graphics, Inc., Arrow ICP, Bell Micro
Corporation, Gates/Arrow Distributing, Ingram Micro and Tech Data. For the
fiscal year ended October 31, 1998, Ingram Micro and Tech Data represented 22%
and 15%, of our net sales and, for the six months ended April 30, 1999, they
represented 12% and 10%. International sales represented 33% of net sales in
fiscal 1998 and 45% of net sales in the first six months of fiscal 1999, the
majority of which occurred in Europe.
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Similar to North America, we also have relationships with a number of large
regional and national distributors internationally. We believe international
markets represent an attractive growth opportunity and intend to expand the
scope of our international sales efforts by continuing to actively pursue
additional international distributors and resellers.
We have direct sales relationships with "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 our field sales force in certain large,
complex sales situations.
OEMS
We sell our products to several companies under private label or OEM
relationships. Private labelers and OEMs generally resell our products under
their own brand name and typically assume responsibility for product sales,
service and support. These relationships enable us to reach end users not served
by our other reseller distribution channels and to serve select geographic or
vertical markets where specific OEMs have exceptional strength. We maintain
ongoing discussions with private labelers and OEMs, including leading systems
suppliers, regarding opportunities for our products. Our existing OEM
relationships include Dell Computer, Exabyte, Unisys, Tandberg Data and Plasmon.
In addition, we were recently selected as a supplier by IBM and are currently
negotiating an agreement with them. For the first six months of fiscal 1999,
sales to Dell Computer represented 11% of our net sales.
DIRECT CORPORATE SALES
We maintain direct corporate sales relationships with a moderate number of
large national and multinational companies in various industries, including
technology, industrial, telecom, financial and service firms. We typically work
with the company's central information services organization to assess data
storage backup and archival needs and then recommend a data storage solution.
The successful culmination of this recommendation may be the creation of a
corporate standard, including a selection of our products for the company's
ongoing storage needs. In these direct selling situations, we work to avoid
conflict with existing reseller and OEM channels.
We also maintain direct sales relationships with a number of large
government and private entities where the complexity or confidentiality of
required storage solutions is such that the customer's needs are best served by
working directly with us.
MARKETING
We support our VAR, OEM and direct sales channels with a broad array of
marketing programs designed to build our 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. We advertise in key network systems publications and
participate in national and regional tradeshows both domestically and
internationally. Our Web page features a comprehensive collection of marketing
information, including product specification sheets, product user manuals and
application notes. Our field sales force conducts seminars targeting end users,
often with a sales representative from one of the storage management software
companies. We also conduct sales and technical training classes for our
resellers. We periodically engage in various promotional activities for
resellers and end users, including product-specific rebates, bundling our
products with selected storage management software, and certificates for free
tape drive cleaning cartridges.
In addition to these activities, our marketing organization's product
management team is responsible for initiating development of new products and
product line extensions. In order to create a product development plan, our
product management team combines its assessment of end-user needs,
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channel requirements, technology developments and competitive factors with input
from the engineering, sales, and manufacturing organizations.
END USERS
End users of our products represent a wide variety of industries, including
the technology, e-commerce, industrial, telecom, financial and services
industries, and range from mid-size businesses to Fortune 500 companies. The
table below lists representative end users of our products.
<TABLE>
<CAPTION>
TECHNOLOGY INDUSTRIAL TELECOM FINANCIAL SERVICES
- ----------------- ------------ ------------------- ------------------ ------------------------------
<S> <C> <C> <C> <C>
Adobe Chevron AT&T Abbey National Andersen Consulting
Cisco Disney Bell Atlantic Bank of America Arthur Andersen LLP
Dell Ford British Telecom Chase Manhattan Ernst & Young LLP
Excite@Home Rolls Royce Deutsche Telekom Deutsche Bank PricewaterhouseCoopers
Homegrocer.com Shell Oil MCI Worldcom Fidelity Survivors of the Shoah Project
Microsoft Sony Nokia HypoVereinsbank
Peoplesoft Volvo Telstra Prudential
SAP
Yahoo!
</TABLE>
CUSTOMER SERVICE AND SUPPORT
We view customer service and support as strategically important elements of
our business. Our customer service and support effort consists of five
components.
- TECHNICAL SUPPORT. Our ADIC Technical Assistance Center, or ATAC, provides
24 hour-a-day, seven-day-a-week technical support for our products. Our
multilingual staff is not only trained with respect to our products, but
is also experienced with storage management and network operating system
software. Our staff is located principally in Washington, Colorado and
France, with phone calls being routed to the location with the most timely
available expertise. Smaller library products with problems not resolved
via telephone support may be returned to us for repair or replacement
during the warranty period. We make a number of service alternatives
available for a nominal fee, including in-house repair, loaner units and
advanced exchange service.
- SALES AND SYSTEMS ENGINEERING. Sales and systems engineers provide both
pre- and post-sales technical support to resellers and end users. Systems
engineers typically become involved in more complex problem-solving
situations involving interactions among our products, third-party storage
management software, the network server hardware and the network operating
system. System engineers work with resellers and end users both over the
telephone and on-site. We view this capability as an opportunity for
growth as it allows us to provide and support storage solutions with the
highest level of complexity and value to the customer.
- ON-SITE SERVICE. Our field service team and third-party service providers
offer on-site service for our products. A wide variety of programs are
available, including an on-site service response time of four hours, seven
days a week. Most of the mid-range and larger automated libraries that we
sell include at least a one-year service warranty. As our installed base
of products has grown, post-warranty service has become an increasingly
important source of customer loyalty and revenue.
- TRAINING. We offer a comprehensive training program to resellers and end
users. Training classes are conducted at locations worldwide.
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- WARRANTY. Parts and labor for our standard products, are covered under
warranty for periods ranging from three months to three years. We pass on
to the customer the warranty provided by the manufacturer of tape drives,
other recording devices and media used in our products.
MANUFACTURING AND SUPPLIERS
We have manufacturing facilities in Washington, Colorado and Germany.
Several existing and potential OEM customers, including Dell Computer, have
audited the Washington facility. Our Washington facility is ISO 9001 certified,
and our Colorado and Germany facilities are in the process of obtaining ISO 9001
certification.
Our Washington facility is responsible for building all mid-range to
lower-capacity libraries, including the FastStor product. Our Colorado facility
is responsible for building the Scalar 1000 tape libraries, and our
highest-capacity libraries are built at our Germany facility. All these
facilities have processes that entail manufacturing electro-mechanical robotic
devices, integrating third-party recording devices, and performing tests on the
completed device. Our manufacturing strategy is to perform product assembly,
integration and testing, leaving component and piece part manufacturing to our
supplier partners.
We work closely with a group of regional, national and international
suppliers to obtain quality parts and components meeting our specifications.
Though our designs are proprietary, the various components, other than data
storage recording devices, are available off the shelf or are manufactured using
standard, readily available techniques, which limit supplier base risk and
facilitate volume increases.
We depend on third-party manufacturers to supply us with magnetic tape
drives, optical disks or other storage devices that we incorporate into our
products. We do not have long-term contracts with any of our significant
suppliers. We carefully coordinate our inventory planning and management with
our suppliers and customers to match our production to market demand. Product
orders are confirmed and, in most cases, shipped to the customer within one
week. Larger libraries often have longer lead times and include on-site
integration and acceptance. Since we fill the majority of our orders as they are
received, we do not believe that our backlog levels are indicative of future
sales.
RESEARCH AND DEVELOPMENT
Our research and development team has developed multiple product generations
of automated tape library and software products. Our 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, optical and other
recording devices, as well as communication protocols. Software products rely on
a comprehensive understanding of multiple operating system environments,
programming techniques, file management structures, communication protocols, and
user applications and needs.
Our new product development is frequently stimulated by the availability of
an enhanced tape device or other storage technology. As device manufacturers
compete in the marketplace, they continually invest in research and development
to gain performance leadership either by offering increasingly enhanced versions
of their current device products or by introducing an entirely new technology.
We continually monitor progress in development of alternative removable media
technologies which may be incorporated into our products. We also identify and
define new products based on the more traditional identification of a market
need which we believe we can successfully fill.
41
<PAGE>
Our sales, marketing, product development, and engineering organizations all
contribute to this identification process.
With these product development efforts, time and investment requirements
tend to be significant, both in terms of engineering and tooling for
manufacturing. However, we have found that we have been able to leverage our
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 our first library. Our
engineers also have been able to leverage 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,
manufacturing and after-sale service. Similarly, the AMASS NT storage management
system is entirely new software but the logic and structure are based heavily on
AMASS UNIX products which have been through multiple generations of development
over the past several years.
Our research and development expenses were $6.1 million for the six months
ended April 30, 1999 and $4.5 million, $2.9 million and $1.5 million for fiscal
1998, 1997, and 1996, respectively. We intend to maintain the higher level of
research and development spending we experienced in the first six months of
fiscal 1999 as we continue investing in software development and new hardware
products.
COMPETITION
The markets for data storage solutions in general, and automated tape
libraries and storage management software in particular, are intensely
competitive, fragmented and characterized by rapidly changing technology and
evolving standards. Competitors vary in size and in the scope and breadth of the
products they offer. As we offer a broad range of automated tape library,
software and complementary products, we tend to have a large number of
competitors that differ depending on the particular product format and
performance level. In the automated tape library market, we compete with a
number of companies, most significantly Quantum and StorageTek. Since there are
relatively low barriers to entry into the automated tape library market, we
anticipate increased competition from other sources, ranging from emerging to
established companies, including large system OEMs. Many of our 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 we do. Our competitors may develop new
technologies and products that are more effective than our products. In
addition, competitive products may be manufactured and marketed more
successfully than our products. We believe the primary competitive factors in
the market for 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.
FACILITIES
We lease facilities in Washington and Colorado of approximately 65,000
square feet and approximately 86,000 square feet, respectively. The Washington
facility houses our primary executive offices; both facilities house marketing,
sales, customer support, research and development, systems engineering, and
manufacturing organizations. We also own a manufacturing facility in Germany
where we produce our large libraries. We lease additional facilities throughout
the United States and Europe for our regional sales offices and customer service
and support personnel. An additional leased facility in Washington serves
certain warehouse needs. Finally, we lease regional sales offices in France,
Germany and the United Kingdom for the sales, marketing and customer support
organizations serving Europe, the Middle East and Africa.
42
<PAGE>
INTELLECTUAL PROPERTY
We rely predominately on our full product line, strong channel structure,
and over a decade of library and software development experience to compete in
our marketplace. However, our success also depends on our proprietary
technology. We attempt to protect our technology through a combination of
patents, copyrights, trade secret laws, trademarks, confidentiality procedures
and contractual obligations. We hold patents on various design elements of our
automated storage library products in the United States and in international
jurisdictions, and are pursuing several additional patent applications. Our
software products are copyrighted with our banners and notices. There can be no
assurance that our intellectual property protection measures will be sufficient
to prevent misappropriation of our technology, and these measures may not
preclude competitors from independently developing products or technologies that
are substantially equivalent or superior to our products and technology. Our
failure to protect our proprietary information could have a material adverse
effect on our business, financial condition and results of operations.
TEAM MEMBERS (EMPLOYEES)
As of July 31, 1999, we had 616 full-time team members, including 129 in
sales and marketing, 94 in engineering and research and development, 123 in
systems engineering, customer service and technical support, 207 in
manufacturing and operations, and 63 in finance, general administration, and
management. None of our North American team members are covered by collective
bargaining agreements. We consider our relations with our team members to be
good.
Our future success depends in large part on our ability to attract and
retain key team members. Competition for highly skilled technical, sales and
management personnel is intense. We cannot be assured that we will be successful
in retaining our existing team members, or in attracting additional qualified
team members.
LEGAL PROCEEDINGS
We are not aware of any pending or threatened litigation against us that
could have a material adverse effect on our business, financial condition,
liquidity or operating results.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of July 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Peter H. van Oppen.............................. 47 Chairman of the Board and Chief Executive Officer
Charles H. Stonecipher.......................... 38 President and Chief Operating Officer
William C. Britts............................... 40 Executive Vice President, Sales and Marketing
Michel R. Grosbost.............................. 53 President and General Manager, ADIC Europe
Leslie S. Rock.................................. 42 Secretary-Treasurer and Chief Accounting Officer
Tom A. Alberg................................... 58 Director
Christopher T. Bayley(1)........................ 61 Director
Russell F. McNeill(2)........................... 88 Director
John W. Stanton(1).............................. 44 Director
Walter F. Walker(1)(2).......................... 44 Director
</TABLE>
- ------------------------
(1) Member of the Compensation and Stock Option Committee.
(2) Member of the Audit Committee.
Our board of directors is divided into three classes. Each director serves
for a three-year term and one class is elected each year by our shareholders.
Directors hold office until their terms expire and their successors are elected
and qualified. Our executive officers are appointed by, and serve at the
direction of, our board of directors. There are no family relationships between
any of our directors or executive officers.
PETER H. VAN OPPEN. Mr. van Oppen has served as our chairman of the board
and chief executive officer since our acquisition by Interpoint in 1994. He
served as our president from 1994 to 1997. He has served as a director of ADIC
since 1986, and his current term expires at our annual meeting in 2002. Mr. van
Oppen served as Interpoint's chairman of the board from 1995 until its
acquisition by Crane Co. in 1996, as Interpoint's president and chief executive
officer from 1989 until its acquisition by Crane Co. in 1996, as Interpoint's
president and chief operating officer from 1987 to 1989, and as Interpoint's
executive vice president, finance and operations, from 1985 to 1987. Prior to
joining Interpoint, he was a consulting manager at PricewaterhouseCoopers LLP,
an accounting firm, and a consultant at Bain & Company, a consulting firm. He
has additional experience in medical electronics and venture capital. Mr. van
Oppen also serves as a director of Seattle FilmWorks, Inc., Spacelabs Medical,
Inc. and Key Technology, Inc. Mr. van Oppen holds a B.A. from Whitman College
and an M.B.A. from Harvard Business School, where he was a Baker Scholar.
CHARLES H. STONECIPHER. Mr. Stonecipher has served as our president since
1997 and our chief operating officer since 1995. From 1995 to 1997, he served as
our senior vice president, and chief operating officer. Prior to this,
Mr. Stonecipher served as Interpoint's vice president, finance and
administration and chief financial officer from 1994 to 1995. Prior to joining
Interpoint, he was a manager at Bain & Company from 1989 to 1994.
Mr. Stonecipher holds B.S. and M.S. degrees in mechanical engineering from
Stanford University and an M.B.A. from Harvard Business School.
WILLIAM C. BRITTS. Mr. Britts has served as our executive vice president,
sales and marketing since 1998. He served as our vice president, sales and
marketing from 1995 to 1997, and as our director of marketing in 1994. For seven
years prior to joining ADIC, Mr. Britts served in a number of marketing and
sales positions with Raychem Corporation and its subsidiary, Elo TouchSystems.
Mr. Britts holds
44
<PAGE>
B.S. and M.S. degrees in mechanical engineering from Virginia Polytechnic
Institute and an M.B.A. from Harvard Business School.
MICHEL R. GROSBOST. Mr. Grosbost has served as president and general
manager, ADIC Europe since 1994. From 1988 to 1994, Mr. Grosbost served in
various general management positions with Gigatape and GigaTrend Europe SARL,
predecessor to ADIC Europe. From 1985 to 1988, Mr. Grosbost served as vice
president, international with Intertechnique. He holds an advanced degree in
electrical engineering from the University of Grenoble, France.
LESLIE S. ROCK. Ms. Rock has served as our chief accounting officer and
treasurer since January 1997. Ms. Rock served as treasurer and secretary of
Interpoint from 1994 until its acquisition by Crane Co. in 1996 and was a
consultant to Crane Co. from 1996 to 1997. She served as Interpoint's vice
president, finance from 1989 to 1994, as its chief financial officer from 1987
to 1994, and as its controller from 1986 to 1994. Prior to 1986, Ms. Rock was an
audit manager at KPMG Peat Marwick. Ms. Rock holds a B.A. degree in accounting
from California State University, Fullerton and is a certified public
accountant.
TOM A. ALBERG. Mr. Alberg has served as a director of ADIC since 1998, and
his current term expires at our annual meeting in 2001. He has been a principal
of Madrona Investment Group LLC, a private venture investment firm, since 1996.
Prior to joining Madrona, Mr. Alberg was the president, chief operating officer
and a director of LIN Broadcasting Corporation, a cellular telephone company,
from 1991 to 1995. Prior to joining LIN, Mr. Alberg was an executive vice
president of AT&T Wireless Services, formerly McCaw Cellular Communications,
from 1990 to 1995. Prior to 1990, Mr. Alberg was chairman of the executive
committee and a partner in the law firm of Perkins Coie LLP. Mr. Alberg also
serves as a director of Active Voice Corporation, Amazon.com, Inc., Emeritus
Corporation and Visio Corporation.
CHRISTOPHER T. BAYLEY. Mr. Bayley has served as a director of ADIC since
1996, and his current term expires at our annual meeting in 2000. He served as a
director of Interpoint from 1987 to 1996. He has served as a principal of The
Madison Group, a public affairs consulting firm, since 1997. He has served as
chairman of Dylan Bay Companies since 1995, and of New Pacific Partners, a
Seattle-and Hong Kong-based investment bank, from 1992 to 1995. Mr. Bayley
served as president and chief executive officer of Glacier Park Company, a real
estate development firm, from 1985 to 1992. He served as senior vice president,
corporate affairs of Burlington Resources Inc., an oil and gas exploration
company, from 1989 to 1992. Mr. Bayley also serves as a director of The Commerce
Bank, as chairman of the Resource Action Council, and is a member of the board
of trustees of Scenic America and the E.B. Dunn Historic Garden Trust.
RUSSELL F. MCNEILL. Mr. McNeill has served as a director of ADIC since
1996, and his current term expires at our annual meeting in 2000. Mr. McNeill is
currently retired. Prior to its acquisition by Crane Co., he served as
Interpoint's secretary from 1977 to 1992, as a director from 1977 to 1996, and
secretary emeritus from 1992 to October 1996. He is the former president of Old
National Bank of Washington and is currently a trustee emeritus for Whitman
College.
JOHN W. STANTON. Mr. Stanton has served as a director of ADIC since 1996,
and his current term expires at our annual meeting in 2002. He served as a
director of ADIC for five years prior to its acquisition by Interpoint, and as a
director of Interpoint for eight years prior to its acquisition by Crane Co. in
1996. Mr. Stanton has served as chairman of the board and chief executive
officer of both VoiceStream Wireless and Western Wireless Corporation and its
predecessor companies since 1992. He served as a director of McCaw Cellular
Communications, Inc. from 1987 to 1994, and was its vice chairman from 1988 to
1991. Mr. Stanton also serves as a director of Columbia Sportswear and as a
trustee of Whitman College.
45
<PAGE>
WALTER F. WALKER. Mr. Walker has served as a director of ADIC since 1996
and his current term expires at our annual meeting in 2001. He served as a
director of Interpoint from 1995 to 1996. Mr. Walker has served as president of
the Seattle SuperSonics, a subsidiary of Ackerley Communications, Inc., since
1994. He served as president of Walker Capital, a money management firm, from
March 1994 to September 1994 and as a vice president of Goldman Sachs & Co., an
investment banking firm, from 1987 to 1994. Mr. Walker also serves as a director
of Drexler Technology and Redhook Ale Brewery, Incorporated, as a member of the
University of Virginia Board of Visitors and as a director of the Washington
State Special Olympics Board.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of July 31, 1999, by:
- each shareholder that we know who owns more than 5% of our common stock;
- each of our directors;
- our chief executive officer and our four most highly compensated executive
officers for the fiscal year ended October 31, 1998; and
- all of our directors and executive officers as a group.
The percentages under the "Percentage of Shares Beneficially Owned" column
are based on 10,097,259 shares outstanding on July 31, 1999 and 12,597,259
shares outstanding after this offering.
We determined beneficial ownership in accordance with rules of the SEC.
Beneficial ownership includes voting power and/or investment power with respect
to the securities held by the named individuals. Shares of common stock subject
to options currently exercisable or exercisable within 60 days of July 31, 1999,
are deemed outstanding for purposes of computing the percentage beneficially
owned by the person holding the options but are not deemed outstanding for
purposes of computing the percentage beneficially owned by any other person.
Except as otherwise noted, the persons or entities named have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each of the
shareholders below is c/o ADIC, P.O. Box 97057, 11431 Willows Road N.E.,
Redmond, Washington 98073-9757.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHARES BENEFICIALLY
OWNED(1) BENEFICIALLY OWNED
-------------------- ------------------------
<S> <C> <C> <C>
BEFORE AFTER
NAME NUMBER OFFERING OFFERING
5% SHAREHOLDERS:
Fidelity Management & Research........................................ 1,141,200 11.3% 9.1%
82 Devonshire Street
Boston, MA 02109
Kennedy Capital Management, Inc....................................... 607,400 6.0% 4.8%
10829 Olive Blvd.
St. Louis, MO 63141
Silverman Partners, L.P............................................... 508,000 5.0% 4.0%
120 Broadway
New York, NY 10271
DIRECTORS AND OFFICERS:
John W. Stanton(1).................................................... 384,664 3.8% 3.1%
Peter H. van Oppen(2)................................................. 110,242 1.1 *
Christopher T. Bayley(3).............................................. 49,000 * *
Walter F. Walker(4)................................................... 42,250 * *
Tom A. Alberg(5)...................................................... 34,550 * *
William C. Britts(6).................................................. 31,230 * *
Michel R. Grosbost(7)................................................. 22,500 * *
Charles H. Stonecipher(8)............................................. 15,051 * *
Leslie S. Rock(9)..................................................... 8,368 * *
Russell F. McNeill(10)................................................ 3,000 * *
All executive officers and directors as a group
(10 persons)(11).................................................... 700,855 6.9% 5.5%
</TABLE>
- ------------------------
* Less than 1%.
47
<PAGE>
(1) Includes 5,000 shares subject to issuance upon exercise of options that are
exercisable within 60 days of July 31, 1999.
(2) Does not include 2,800 shares that are held in trust for Mr. van Oppen's
minor children or 1,500 shares that are held in a trust, for which Mr. van
Oppen serves as trustee, for the benefit of certain minor relatives of
Mr. van Oppen, as to which he disclaims beneficial ownership. Includes 242
shares owned by Mr. van Oppen's spouse and 10,000 shares subject to issuance
upon exercise of options that are exercisable within 60 days of July 31,
1999.
(3) Includes 1,000 shares owned by Mr. Bayley's spouse and 5,000 shares subject
to issuance upon exercise of options that are exercisable within 60 days of
July 31, 1999.
(4) Includes 12,250 shares subject to issuance upon exercise of options that are
exercisable within 60 days of July 31, 1999.
(5) Includes 6,800 shares owned by Raven Trust, a charitable trust of which
Mr. Alberg and his spouse are the sole trustees, and 4,750 shares subject to
issuance upon exercise of options that are exercisable within 60 days of
July 31, 1999.
(6) Includes 27,500 shares subject to issuance upon exercise of options that are
exercisable within 60 days of July 31, 1999.
(7) Represents 22,500 shares subject to issuance upon exercise of options that
are exercisable within 60 days of July 31, 1999.
(8) Includes 11,250 shares subject to issuance upon exercise of options that are
exercisable within 60 days of July 31, 1999.
(9) Includes 1,250 shares subject to issuance upon exercise of options that are
exercisable within 60 days of July 31, 1999.
(10) Represents 3,000 shares subject to issuance upon exercise of options that
are exercisable within 60 days of July 31, 1999.
(11) Includes 102,500 shares subject to issuance upon exercise of options that
are exercisable within 60 days of July 31, 1999, 242 shares owned by
Mr. van Oppen's spouse, 1,000 shares owned by Mr. Bayley's spouse and 6,800
shares owned by Raven Trust, a charitable trust of which Mr. Alberg and his
spouse are the sole trustees. Does not include 2,800 shares that are held in
trust for Mr. van Oppen's minor children or 1,500 shares that are held in a
trust, for which Mr. van Oppen serves as trustee, for the benefit of certain
minor relatives of Mr. van Oppen, as to which he disclaims beneficial
ownership.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
Bear, Stearns & Co. Inc. and Needham & Company, Inc., have severally agreed to
purchase from ADIC the respective numbers of shares of common stock set forth
opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................
Hambrecht & Quist LLC......................................................
Bear, Stearns & Co. Inc....................................................
Needham & Company, Inc.....................................................
-----------
Total...................................................................... 2,500,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of our common stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of our common stock offered hereby, other than
those shares covered by the over-allotment option described below, if any are
purchased.
The underwriters initially propose to offer the shares of our common stock
in part directly to the public at the public offering price set forth on the
cover page of this prospectus and in part to certain dealers, including the
underwriters, at such price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the initial
offering of our common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice.
DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in this offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJDIRECT Inc. for sale to its
brokerage account holders.
The following table shows the underwriting fees we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of our common stock.
<TABLE>
<CAPTION>
PAID BY ADIC
-------------------------
FULL
NO EXERCISE EXERCISE
<S> <C> <C>
Per share.......................................................... $ $
Total.............................................................. $ $
</TABLE>
We will pay the offering expenses, estimated to be $400,000.
ADIC will grant to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an additional 375,000 shares of
our common stock at the public offering price less the underwriting fees. The
underwriters may exercise their option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise their option, each underwriter will become obligated, subject to
conditions contained in the underwriting agreement, to purchase a number of
additional shares of our common stock approximately proportionate to that
underwriter's initial purchase commitment.
49
<PAGE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
to those liabilities.
Each of ADIC, our executive officers and directors will agree, subject to
certain exceptions, not to
- offer, pledge, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock, or
- enter into any swap or other arrangement that transfers all or a portion
of the economic interest associated with the ownership of any common stock
until December 20, 1999 without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. Until the expiration of such period,
ADIC may grant stock options pursuant to its existing stock option plans and may
issues shares of common stock upon the exercise of an option or warrant or the
conversion of a security outstanding as of the date of this prospectus. In
addition, during such period, ADIC also has agreed not to file any registration
statement with respect to, and each of its executive officers, directors and
certain shareholders of ADIC have agreed not to make any demand for, or exercise
any right with respect to, the registration of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
Our shares of common stock are listed on the Nasdaq National Market under
the symbol "ADIC."
The shares of common stock offered by this prospectus may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements in connection with the offer and sale of any such
shares of common stock be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of common stock offered hereby in any jurisdiction in which such
offer or a solicitation is unlawful.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the SEC. In general, a passive market maker may not bid for or
purchase shares of common stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the common
stock during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market making
may stabilize or maintain the market price of our common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of ADIC's
common stock. Specifically, the underwriters may over-allot the offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed common stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
50
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed on for ADIC by Perkins Coie LLP,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements as of October 31, 1998 and 1997 and for each of the
three years in the period ended October 31, 1998 included in this prospectus and
the financial statements incorporated in this prospectus by reference to the
Annual Report on Form 10-K for the year ended October 31, 1998, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
51
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<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
subsidiaries at October 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
October 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Seattle, Washington
December 8, 1998
F-2
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
----------------------------- AS OF APRIL
30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 32,806,822 $ 28,225,892 $ 14,769,281
Accounts receivable, net of allowances of $324,000 in 1997,
$476,000 in 1998 and $478,000 in 1999........................ 18,078,302 31,797,375 35,207,402
Inventories, net............................................... 16,074,787 32,293,526 37,030,917
Marketable equity securities................................... -- 2,135,449 49,436
Prepaid expenses and other..................................... 714,979 1,500,145 1,613,915
Deferred income taxes.......................................... 767,688 1,339,879 1,339,879
------------- -------------- --------------
Total current assets......................................... 68,442,578 97,292,266 90,010,830
------------- -------------- --------------
Property, plant and equipment, net............................... 2,509,267 7,351,305 7,187,599
Deferred income taxes............................................ 89,414 62,681 62,681
Investment in common stock....................................... 4,000,000 4,000,000 8,000,000
Intangible and other assets...................................... 152,634 3,700,374 2,496,592
------------- -------------- --------------
Total assets................................................. $ 75,193,893 $ 112,406,626 $ 107,757,702
============= ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 11,237,131 $ 16,986,445 $ 16,969,611
Accrued liabilities............................................ 2,594,831 7,901,981 8,862,898
Income taxes payable........................................... 1,252,324 397,539 547,517
Deferred revenue............................................... -- 2,252,106 2,742,774
Current portion of long-term debt.............................. -- 3,172,328 3,167,056
------------- -------------- --------------
Total current liabilities.................................... 15,084,286 30,710,399 32,289,856
------------- -------------- --------------
Long-term debt................................................... -- 18,368,092 6,369,808
Other long-term liabilities...................................... -- 300,000 --
Minority interest................................................ -- 24,744 307,617
Commitments (Note 15)............................................ -- -- --
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized;
none issued and outstanding.................................. -- -- --
Common stock, no par value; 40,000,000 shares authorized,
9,857,535 issued and outstanding at
April 30, 1999 (9,766,161 in 1998)........................... 45,808,291 46,231,387 46,976,418
Retained earnings.............................................. 14,479,104 16,009,334 22,606,115
Cumulative translation adjustment.............................. (177,788) 762,670 (792,112)
------------- -------------- --------------
Total shareholders' equity................................... 60,109,607 63,003,391 68,790,421
------------- -------------- --------------
Total liabilities and shareholders' equity................. $ 75,193,893 $ 112,406,626 $ 107,757,702
============= ============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
-------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
(UNAUDITED)
Net sales......................... $ 58,956,993 $ 93,203,531 $ 114,556,941 $ 47,671,556 $ 103,188,547
Cost of sales..................... 41,886,619 65,555,559 81,388,832 33,246,523 68,755,371
------------- ------------- -------------- ------------- --------------
Gross profit.................... 17,070,374 27,647,972 33,168,109 14,425,033 34,433,176
------------- ------------- -------------- ------------- --------------
Operating expenses:
Selling and administrative...... 9,846,324 13,556,059 20,792,883 7,965,340 18,093,563
Acquired in-process
technology.................... -- -- 4,492,056 -- --
Research and development........ 1,541,647 2,909,460 4,483,145 1,245,078 6,050,939
------------- ------------- -------------- ------------- --------------
11,387,971 16,465,519 29,768,084 9,210,418 24,144,502
------------- ------------- -------------- ------------- --------------
Operating profit.................. 5,682,403 11,182,453 3,400,025 5,214,615 10,288,674
Other income (expense):
Interest income................. 19,459 1,095,991 1,027,934 567,280 324,264
Interest expense................ (527,951) -- (311,054) -- (546,462)
Gain on sale of marketable
equity securities............. -- -- 247,814 247,814 563,737
Foreign currency transaction
gains, net.................... 113,821 384,972 364,020 263,726 89,941
------------- ------------- -------------- ------------- --------------
(394,671) 1,480,963 1,328,714 1,078,820 431,480
------------- ------------- -------------- ------------- --------------
Income before provision for income
taxes........................... 5,287,732 12,663,416 4,728,739 6,293,435 10,720,154
Provision (benefit) for income
taxes:
Current......................... 1,981,631 4,538,494 3,719,222 1,998,231 3,840,500
Deferred........................ (124,098) (372,276) (545,457) -- --
------------- ------------- -------------- ------------- --------------
1,857,533 4,166,218 3,173,765 1,998,231 3,840,500
------------- ------------- -------------- ------------- --------------
Minority interest................. -- -- 24,744 -- 282,873
------------- ------------- -------------- ------------- --------------
Net income........................ $ 3,430,199 $ 8,497,198 $ 1,530,230 $ 4,295,204 $ 6,596,781
============= ============= ============== ============= ==============
Basic net income per share........ $ 0.94 $ 0.16 $ 0.44 $ 0.67
============= ============== ============= ==============
Diluted net income per share...... $ 0.92 $ 0.16 $ 0.43 $ 0.66
============= ============== ============= ==============
Pro forma basic net income per
share (unaudited)............... $ 0.43
=============
Pro forma diluted net income per
share (unaudited)............... $ 0.42
=============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------- RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
<S> <C> <C> <C> <C> <C>
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
Comprehensive income:
Net income................................... -- -- 3,430,199 -- --
Foreign currency translation adjustment........ -- -- -- (57,929) --
Comprehensive income......................... -- -- -- -- 3,372,270
----------- ------------ ------------ ------------ -----------
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
Comprehensive income:
Net income................................... -- -- 8,497,198 -- --
Foreign currency translation adjustment...... -- -- -- (253,178) --
Comprehensive income..................... -- -- -- -- 8,244,020
----------- ------------ ------------ ------------ -----------
Balance at October 31, 1997.................... 9,699,824 45,808,291 14,479,104 (177,788) 60,109,607
Shares repurchased............................. (29,500) (200,258) -- -- (200,258)
Purchases under Stock Purchase Plan............ 22,499 142,236 -- -- 142,236
Exercise of stock options, including tax
benefit of $317,472.......................... 73,338 481,118 -- -- 481,118
Comprehensive income:
Net income................................... -- -- 1,530,230 -- --
Foreign currency translation adjustment...... -- -- -- 940,458 --
Comprehensive income....................... -- -- -- -- 2,470,688
----------- ------------ ------------ ------------ -----------
Balance at October 31, 1998.................... 9,766,161 46,231,387 16,009,334 762,670 63,003,391
Purchases under Stock Purchase Plan
(unaudited).................................. 50,998 292,602 -- -- 292,602
Exercise of stock options, including tax
benefit of $123,000 (unaudited).............. 40,376 452,429 -- -- 452,429
Comprehensive income:
Net income (unaudited)....................... -- -- 6,596,781 -- --
Foreign currency translation adjustment
(unaudited)................................ -- -- -- (1,554,782) --
Comprehensive income (unaudited)........... -- -- -- -- 5,041,999
----------- ------------ ------------ ------------ -----------
Balance April 30, 1999 (unaudited)............. 9,857,535 $ 46,976,418 $ 22,606,115 $ (792,112) $68,790,421
=========== ============ ============ ============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
-------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 3,430,199 $ 8,497,198 $ 1,530,230 $ 4,295,204 $ 6,596,781
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 607,479 847,234 1,614,373 493,689 1,813,145
Allowance for doubtful accounts receivable... 133,608 136,678 151,909 -- 282,873
Allowance for inventory obsolescence......... 587,334 271,597 1,014,051 -- --
Acquired in-process technology............... -- -- 4,492,056 -- --
Gain on sale of marketable equity
securities................................. -- -- (247,814) (247,814) (563,737)
Deferred income taxes........................ (124,098) (372,276) 1,229 -- --
Assets retired............................... -- -- 89,177 -- 68,494
Change in assets and liabilities, net of
effects from purchase of EMASS, Inc.:
Accounts receivable.......................... (7,133,048) (5,561,698) (3,202,489) (4,331,300) (3,943,075)
Inventories.................................. (6,190,465) (5,550,102) (1,974,716) (5,637,980) (5,729,292)
Prepaid expenses and other................... (60,355) (443,687) 225,322 (95,900) (203,948)
Other assets................................. 24,221 39,424 (71,123) 28,492 287,851
Accounts payable............................. 4,544,059 2,824,342 2,710,791 (4,211,776) 367,483
Accrued liabilities.......................... 649,061 1,052,028 (1,679,326) (719,888) 1,292,893
Income taxes payable......................... 49,692 1,006,809 (489,382) (367,231) 1,082,670
Deferred revenue............................. -- -- 194,755 -- 576,391
----------- ----------- ------------ ------------ ------------
Net cash provided by (used in) operating
activities................................... (3,482,313) 2,747,547 4,359,043 (10,794,504) 1,928,529
----------- ----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment.... (910,718) (1,831,493) (3,362,582) (1,506,817) (2,136,099)
Investment in marketable equity securities... -- -- (3,003,908) (1,295,270) (49,436)
Proceeds from sale of marketable equity
securities................................. -- -- 1,116,273 1,116,273 2,699,186
Acquisition of EMASS, Inc., net of cash
acquired................................... -- -- (23,472,834) -- --
Investment in common stock................... -- (4,000,000) -- -- (4,000,000)
----------- ----------- ------------ ------------ ------------
Net cash used in investing activities.......... (910,718) (5,831,493) (28,723,051) (1,685,814) (3,486,349)
----------- ----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings........... -- -- 20,000,000 -- --
Repayment of long-term debt.................. -- -- (544,858) -- (11,801,857)
Proceeds from issuance of common stock,
net........................................ -- 23,708,784 -- -- (300,000)
Repurchase of common stock................... -- -- (200,258) -- --
Capital contribution from Interpoint, net of
loans forgiven............................. 10,000,000 266,503 -- -- --
Proceeds from issuance of common stock for
stock options and stock purchase plan,
including tax benefit...................... -- 1,503,198 305,882 107,177 745,031
Net increase in loans from Interpoint.......... 4,218,366 -- -- -- --
----------- ----------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities................................... 14,218,366 25,478,485 19,560,766 107,177 (11,356,826)
----------- ----------- ------------ ------------ ------------
Effect of exchange rate changes on cash........ (12,390) (24,500) 222,312 (106,631) (541,965)
----------- ----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................. 9,812,945 22,370,039 (4,580,930) (12,479,772) (13,456,611)
Cash and cash equivalents at beginning of
period....................................... 623,838 10,436,783 32,806,822 32,806,822 28,225,892
----------- ----------- ------------ ------------ ------------
Cash and cash equivalents at end of period..... $10,436,783 $32,806,822 $ 28,225,892 $ 20,327,050 $ 14,769,281
=========== =========== ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
-------------------------------------- --------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest................................... $ 508,492 $ -- $ 195,720
Income taxes............................... $ 404,668 $ 2,467,469 $ 3,722,491
</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 at October 16, 1996 (Note 18).
The Company purchased all of the outstanding stock of EMASS, Inc. in
August 1998 (Note 2). In conjunction with the acquisition, liabilities were
assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $38,908,639
Cash paid...................................................... 25,056,549
----------
Liabilities assumed............................................ $13,852,090
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of Advanced Digital
Information Corporation, its wholly owned subsidiaries EMASS, Inc. ("EMASS") and
ADIC Europe SARL ("ADE") and EMASS' 80% owned subsidiary ADIC/GRAU Storage
Systems GmbH & Co. KG ("Grau"). The companies are collectively hereinafter
referred to as "ADIC" or the "Company". All intercompany transactions have been
eliminated.
NATURE OF OPERATIONS
ADIC designs, manufactures, markets and services automated high performance
data storage products used to back up and archive electronic data in
client/server network computing environments. The Company's storage management
software is an integrated family of software products. The Company sells its
products on an international basis to resellers, original equipment
manufacturers and end users.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change in the
near term are the adequacy of the allowances for sales returns, inventory
obsolescence and allocation of purchase price and estimated valuation of
purchased, developed and in-process technology.
REVENUE RECOGNITION
The Company records revenue from sales of small libraries when the products
are shipped to customers, net of a provision for anticipated returns, revenue
from large library product sales is recognized upon customer acceptance. Revenue
from software sales is recognized when the criteria of Statement of Position
No. 97-2, "Software Revenue Recognition" ("SOP 97-2") have been met. These
criteria include, but are not limited to, software delivery, the Company's lack
of other significant obligations to the customer and a determination that
collectability of the amount due is probable. The Company's software products do
not require significant production, modification, or customization by the
Company or the customer. 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. Estimates of rebates and other
reductions of sales due to promotional activities are estimated at the time of
the sale and accrued for by the Company.
Certain distributors of small libraries have the right, on a quarterly
basis, to return products according to a stock rotation policy. Typically, the
value of the products returned can not exceed 15%
F-8
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the previous quarter's purchases, the returns must be accompanied by
offsetting orders of commensurate value, and the products returned must be new
and in sealed cartons. The Company accrues a provision for the estimated sales
returns, allowances and discounts in the period the products are shipped to
customers.
WARRANTY EXPENSE
For standard Company products, parts and labor are covered under warranty
for periods between three months and three years. With respect to drives and
tapes used in the Company's products but manufactured by a third party, the
Company passes on to the customer the warranty on such drives and tapes provided
by the manufacturer. A provision for costs related to warranty expense is
recorded when revenue is recognized.
ADVERTISING EXPENSE
The Company has co-operative advertising agreements with certain of its
domestic and international distributors for the promotion of ADIC product sales.
These agreements allow the distributors to be reimbursed by the Company for
approved promotional activities. The amounts available for reimbursement are
related to a percentage of the distributor's eligible purchases from the
Company. The Company accrues for co-operative advertising as the related revenue
is recognized. All other advertising costs are expensed as incurred.
RESEARCH AND DEVELOPMENT COSTS
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the short-term nature of these instruments. The carrying value
of the Company's long-term debt approximates fair value as the debt bears
interest that adjusts based upon market interest rates.
CONCENTRATION OF CREDIT RISK
The Company sells products to a wide variety of industries on a worldwide
basis. In countries or industries where the Company is exposed to material
credit risk, sufficient collateral, including cash deposits and/or letters of
credit, is required prior to the completion of a transaction. The Company does
not believe there is a material credit risk beyond that provided in the
financial statements in the ordinary course of business.
The Company sells a significant portion of its products through third-party
resellers and, as a result, experiences individually significant annual sales
volumes with major distributors. Approximately $25,566,000 (22%) and $16,945,000
(15%) of the Company's fiscal 1998 revenues were from one
F-9
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customer and a second customer, respectively. The same two customers accounted
for fiscal 1997 and 1996 revenues of $25,707,000 (28%) and $18,101,000 (19%),
and $13,315,000 (23%) and $12,610,000 (21%), respectively. These two customers
represented 20% and 58% of the accounts receivable balance at October 31, 1998
and 1997, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments and 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>
AS OF OCTOBER 31,
----------------------------
1997 1998
<S> <C> <C>
Cash........................................................... $ 8,091,286 $ 18,998,750
Commercial paper............................................... 4,457,558 7,973,553
Marketable debt securities..................................... 20,257,978 1,253,589
------------- -------------
Total...................................................... $ 32,806,822 $ 28,225,892
============= =============
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, except for property,
plant and equipment of EMASS and Grau which have been reduced for certain
negative goodwill associated with the acquisition of EMASS by ADIC. Depreciation
and amortization are computed on the straight-line method over the estimated
useful lives of the assets as follows: machinery and equipment and office
equipment, 3 to 10 years; leasehold improvements, the life of the lease.
Expenditures for maintenance and repairs are charged to income as incurred.
INTANGIBLE ASSETS
Intangible assets resulting from the acquisition of EMASS include acquired
developed technology and assembled workforce which were recorded at their fair
value less a pro rata reduction for negative goodwill as of the date of the
acquisition. These assets are amortized over the periods estimated to be
benefited, five years and three years, respectively.
INCOME TAXES
Provision for income taxes have been recorded in accordance with Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes"
("FAS 109"). Under the liability method
F-10
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of FAS 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to be recovered or settled.
Through October 15, 1996, ADIC's operations were included in consolidated
income tax returns filed by Interpoint. Income taxes in the accompanying
financial statements for the associated period have been computed assuming the
Company filed separate income tax returns worldwide.
Deferred taxes result from the difference between the tax basis and fair
value of EMASS assets, the use of accelerated depreciation for tax purposes and
from the timing of tax deductions for allowances and accrued expenses.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of ADE and Grau have been translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation." Under the provisions of this Statement, all
assets and liabilities in the balance sheets of ADE and Grau, whose functional
currency is the French franc and German deutsche mark, respectively, are
translated at year-end exchange rates, and translation gains and losses are
accumulated in a separate component of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS AND FORWARD CONTRACTS
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency, including U.S. dollars. Gains and losses on those foreign
currency transactions are included in determining net income or loss for the
period in which exchange rates change. The effect of exchange rate fluctuations
on the results of operations is minimized by the offsetting nature of ADE and
Grau foreign currency transactions. In addition, the Company may enter into
foreign currency forward contracts to hedge transactions which are not otherwise
offset. Foreign currency forward exchange contracts represent agreements to
exchange the currency of one country for the currency of another country at an
agreed-upon price, on an agreed-upon settlement date. Foreign currency forward
exchange contracts are accounted for by the fair value method, and are typically
three months or less in length. There were no outstanding contracts at
October 31, 1997 or 1998.
STOCK-BASED COMPENSATION
Stock-based compensation plans are accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25").
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("FAS 128") in the first quarter of fiscal 1998. Basic
earnings per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted
F-11
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings per share is computed based on the weighted average number of shares of
common stock outstanding during the period increased by the weighted average
number of common stock equivalents outstanding during the period, using the
treasury stock method.
Given the Company's structure as a wholly owned subsidiary of Interpoint
prior to October 16, 1996, historical earnings per share amounts are not
presented in the consolidated financial statements for the fiscal year ended
October 31, 1996 as it is not considered to be meaningful.
UNAUDITED PRO FORMA EARNINGS PER SHARE
In connection with the spin-off of ADIC by Interpoint as described in
Note 18, Interpoint shareholders received one share of ADIC common stock for
each share of Interpoint stock held. Additionally, Interpoint stock options held
by ADIC Team Members and Directors were converted in part to cash and in part to
ADIC stock options. Unaudited pro forma net income per share for the fiscal year
ended October 31, 1996 is based on the number of shares of ADIC stock
outstanding at October 31, 1996, plus the incremental shares outstanding, as
calculated under the treasury stock method at the same date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130, which is effective for all periods beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statements. The Company expects that adoption in fiscal year 1999 will
have no material impact on the Company's reported financial results.
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131, which is effective for fiscal years beginning after
December 15, 1997, establishes new disclosure requirements for operating
segments, including products, services, geographic area, and major customers.
The Company will adopt FAS 131 for its 1999 fiscal year, but does not expect the
new accounting standard to have a material effect on the Company's reported
financial results.
In June 1998, Statement of Financial Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") was issued. FAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. In July 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" ("FAS
137"). FAS 137 defers the effective date until the fiscal year ending October
31, 2001. The Company will adopt FAS 133 in its quarter ending January 31, 2001
and does not expect such adoption to have an impact on its results of
operations, financial position or cash flows.
F-12
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
2. ACQUISITION OF EMASS, INC.
In July 1998, ADIC entered into a Stock Purchase Agreement ("Agreement")
with Raytheon E-Systems, Inc. ("RES") to purchase all of the outstanding stock
of EMASS, Inc. ("EMASS") a wholly-owned subsidiary of RES (the "Acquisition").
EMASS is a provider of large-scale libraries and open systems storage software.
The Acquisition was accounted for by the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16") and, accordingly, the operating results of EMASS have
been included in the consolidated operating results since the date of
Acquisition, August 19, 1998. Pursuant to the terms of the Agreement, ADIC made
a cash payment of $24,766,000 to RES and assumed approximately $2,000,000 in
mortgage indebtedness. The Acquisition was funded through a combination of cash
and debt.
A summary of assets acquired and liabilities assumed at the date of the
Acquisition, as determined in accordance with APB 16, is presented in the table
below. The acquired in-process technology has not yet reached technological
feasibility and has no alternative future use. The fair value of the net assets
exceeded the purchase price, consequently, no goodwill has been recorded and the
excess has been allocated to reduce proportionately the initial values assigned
to noncurrent assets.
<TABLE>
<S> <C>
Cash........................................................... $ 1,583,715
Accounts receivable............................................ 10,493,341
Inventories.................................................... 14,632,283
Prepaid expenses and other..................................... 1,522,661
Property, plant and equipment.................................. 2,517,408
Acquired in-process technology................................. 4,492,056
Intangible and other assets.................................... 3,667,175
Accounts payable and other current liabilities................. (11,913,016)
Long-term debt................................................. (1,639,074)
Other long-term liabilities.................................... (300,000)
Minority interest of 80% owned subsidiary...................... --
-----------
Net assets acquired.......................................... $25,056,549
===========
</TABLE>
The value of acquired in-process technology was determined by estimating the
stage of development of each in-process research and development project at the
date of acquisition and estimating cash flows resulting from anticipated
revenues generated from such projects, and then discounting the projected net
cash flow. Projects we are currently pursuing include a new large library
storage product and associated software, as well as separate software products
using UNIX and Windows NT platforms. Of the total value of acquired in-process
technology, approximately 49% was associated with the in-process library
products and 51% with the in-process software products. Given that the valuation
of the acquired in-process technology is an estimate, actual results may change.
If the estimate of the in-process technology were to decrease, the value
assigned to property, plant and equipment and intangible and other assets
acquired would increase.
F-13
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
2. ACQUISITION OF EMASS, INC. (CONTINUED)
The following summary (unaudited), prepared on a pro forma basis, combines
the consolidated results of operations for the years ended October 31, 1997 and
1998 as if EMASS had been acquired at November 1, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1997 1998
<S> <C> <C>
Net sales............................................... $ 157,675,000 $ 167,667,000
Net loss................................................ $ (1,614,000) $ (3,055,000)
Basic net loss per share................................ $ (0.18) $ (0.31)
Diluted net loss per share.............................. $ (0.18) $ (0.31)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the Acquisition had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from consolidated operations.
3. MARKETABLE EQUITY SECURITIES
In January 1998, the Company began investing in certain equity securities.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115")
these investments are classified as available-for-sale. Under FAS 115,
unrealized holding gains and losses are reflected as a net amount in a separate
component of shareholder's equity until realized. For the purpose of computing
realized gains and losses, costs are identified on a specific identification
basis. There is no significant difference between the cost basis and fair value
of these securities at October 31, 1998 or April 30, 1999. During each of the
six-month periods ended April 30, 1998 and 1999, the Company sold certain
marketable equity securities and realized gains of $248,000 and $564,000,
respectively.
4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF APRIL
---------------------------- 30,
1997 1998 1999
<S> <C> <C> <C>
Finished goods............................... $ 8,231,656 $ 13,104,058 $14,881,473
Work-in-process.............................. 1,416,067 3,382,683 4,102,028
Raw materials................................ 7,557,748 17,951,520 20,719,674
------------- ------------- -----------
17,205,471 34,438,261 39,703,175
Less: Allowance for inventory obsolescence... (1,130,684) (2,144,735) (2,672,258)
------------- ------------- -----------
Total.................................... $ 16,074,787 $ 32,293,526 $37,030,917
============= ============= ===========
</TABLE>
F-14
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
--------------------------
1997 1998
<S> <C> <C>
Land and building................................................. $ -- $ 1,490,023
Machinery and equipment........................................... 4,366,343 6,923,443
Office equipment.................................................. 417,116 3,315,244
Leasehold improvements............................................ 415,493 618,592
------------ ------------
5,198,952 12,347,302
Less: Accumulated depreciation and amortization................... (2,689,685) (4,995,997)
------------ ------------
Total......................................................... $ 2,509,267 $ 7,351,305
============ ============
</TABLE>
Depreciation and amortization expense was $607,000, $848,000 and $1,445,000
in fiscal 1996, 1997 and 1998, respectively.
6. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31,
1998
<S> <C>
Developed technology............................................................ $ 3,016,088
Assembled workforce............................................................. 627,272
------------
3,643,360
Less: Accumulated amortization.................................................. (169,231)
------------
Total....................................................................... $ 3,474,129
============
</TABLE>
7. INVESTMENTS IN COMMON STOCK
In August 1997, the Company purchased an approximately 15% interest in
Crossroads Systems, Inc. for an aggregate purchase price of $4,000,000. This
investment is accounted for under the cost method. Crossroads Systems, Inc.
develops products that provide interconnectivity between various network
protocols and Fibre Channel networks. ADIC does not exercise influence over, or
participate in the management or board of directors of, Crossroads
Systems, Inc.
Under an OEM agreement with Crossroads, also entered into in August 1997,
the Company markets interconnectivity products developed by Crossroads under the
ADIC brand name and serves as a master distributor for Crossroads products. This
agreement has a two-year term and may be terminated, modified or renewed as
mutually agreed upon by the parties. There are no minimum purchase requirements.
F-15
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996, 1997 AND 1998 AND APRIL 30, 1998 AND 1999
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED APRIL 30, 1999 AND 1998 IS UNAUDITED)
7. INVESTMENTS IN COMMON STOCK (CONTINUED)
In December 1998, the Company purchased an approximately 8% interest in
Network Integrity, Inc. for an aggregate purchase price of $4,000,000. This
investment is accounted for under the cost method. Network Integrity, Inc. is a
developer of specialized data protection software products.
8. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
--------------------------
1997 1998
<S> <C> <C>
Accrued payroll and related liabilities........................... $ 1,646,813 $ 4,548,151
Allowance for warranty returns.................................... 375,497 762,669
Taxes, other than income.......................................... 254,564 329,303
Interest.......................................................... -- 115,334
Other............................................................. 317,957 2,146,524
------------ ------------
Total......................................................... $ 2,594,831 $ 7,901,981
============ ============
</TABLE>
9. CREDIT AGREEMENT AND LONG-TERM DEBT
CREDIT AGREEMENT
ADIC has a $10 million unsecured line of credit with a bank expiring
February 28, 2001. All of this line was available at October 31, 1998.
Borrowings against the line of credit will bear interest at the bank's prime
rate or adjusted LIBOR rate. A credit agreement covers both the line of credit
and long-term note payable and requires the Company to maintain certain
financial ratios and levels of working capital, tangible net worth and
profitability. The Company is in compliance with each of these covenants at
October 31, 1998.
LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1998:
<TABLE>
<S> <C>
Unsecured note payable to a bank in monthly installments of $235,000 through
August 2003 plus interest at the bank's prime rate or adjusted LIBOR rate,
6.758% at October 31, 1998................................................... $19,529,412
Local borrowings comprised of various notes payable by Grau and collateralized
by the Grau manufacturing facility in Germany, payable in quarterly
installments of principle and interest of $109,000 through fiscal 2005 and
with interest rates ranging from 4.05% to 6.70% at October 31, 1998.......... 2,011,008
----------
$21,540,420
==========
</TABLE>
F-16
<PAGE>
As of October 31, 1998, the maturities of long-term debt were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AMOUNT
<S> <C>
1999........................................................................... $ 3,172,328
2000........................................................................... 3,192,791
2001........................................................................... 3,206,439
2002........................................................................... 3,097,995
2003........................................................................... 8,358,239
Thereafter..................................................................... 512,628
-------------
21,540,420
Less: current maturities....................................................... (3,172,328)
-------------
$ 18,368,092
=============
</TABLE>
10. FEDERAL INCOME TAXES
Income before provision for income taxes was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Current income tax:
U.S. Federal...................................... $ 1,881,631 $ 3,692,339 $ 2,640,109
Foreign........................................... -- 832,155 1,069,113
State and local................................... 100,000 14,000 10,000
------------ ------------ ------------
Total current..................................... 1,981,631 4,538,494 3,719,222
------------ ------------ ------------
Deferred income tax:
U.S. Federal...................................... (267,260) (372,276) (545,457)
Foreign........................................... 143,162 -- --
------------ ------------ ------------
Total deferred.................................... (124,098) (372,276) (545,457)
------------ ------------ ------------
Total provision for income taxes.................. $ 1,857,533 $ 4,166,218 $ 3,173,765
============ ============ ============
</TABLE>
The provision for federal income tax differs from the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes for the following reasons:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Federal income tax at statutory rate of 34%......... $ 1,797,829 $ 4,305,561 $ 1,607,771
Change in valuation allowance....................... -- -- 68,000
Acquired in-process technology...................... -- -- 1,527,299
Tax exempt interest income.......................... -- (130,827) (123,323)
Tax credits......................................... (1,000) (127,604) (68,046)
Activity of foreign subsidiaries.................... (35,344) 126,686 61,050
State income taxes.................................. 100,000 14,000 10,000
Other............................................... (3,952) (21,598) 91,014
------------ ------------ ------------
$ 1,857,533 $ 4,166,218 $ 3,173,765
============ ============ ============
</TABLE>
F-17
<PAGE>
10. FEDERAL INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1997 and 1998 are:
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-------------------------
1997 1998
<S> <C> <C>
Deferred tax assets:
Inventories........................................................ $ 399,509 $ 3,554,271
Team member compensated absences................................... 25,845 24,763
Allowance for warranty returns..................................... 85,193 134,467
Allowances for bad debt and sales returns.......................... 202,303 654,049
Plant and equipment................................................ 89,414 1,305,481
Net operating loss carryforwards................................... -- 969,000
Other.............................................................. 54,838 238,809
--------- ------------
Deferred tax assets................................................ 857,102 6,880,840
Deferred tax liability--intangible and other assets................ -- (693,260)
Net valuation allowance............................................ -- (4,785,020)
--------- ------------
Net deferred tax assets............................................ $ 857,102 $ 1,402,560
========= ============
</TABLE>
The net valuation allowance relates to certain timing differences and net
operating loss carryforwards for EMASS and Grau and was recorded at the date of
acquisition of EMASS. Tax benefits associated with any portion of this allowance
that is subsequently relieved will be allocated to further reduce noncurrent
intangible and other assets of EMASS.
Deferred U.S. income taxes are not provided for the earnings of the
Company's foreign subsidiaries because the Company expects those earnings will
be permanently reinvested. Net pretax operating results from the foreign
subsidiaries are income of $407,000, $2,075,000 and $2,428,000 for fiscal 1996,
1997 and 1998, respectively.
Grau has net operating loss carryforwards of approximately $4 million which
have no expiration date.
11. NET INCOME PER SHARE
Effective for the fiscal year ended October 31, 1998, net income per common
share is computed using FAS 128. All prior periods have been restated to conform
to the requirements of FAS 128. The adoption of FAS 128 did not have a material
impact on the Company's net income per share.
F-18
<PAGE>
11. NET INCOME PER SHARE (CONTINUED)
The following table sets forth the computation of pro forma basic and
diluted net income per share for fiscal 1996 and basic and diluted net income
per share for fiscal 1997 and 1998:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Numerator:
Net income................................. $ 3,430,199 $ 8,497,198 $ 1,530,230 $ 4,295,204 $ 6,596,781
Denominator:
Denominator for basic net income per
share--weighted average shares........... 8,001,992 9,084,274 9,742,263 9,716,982 9,803,291
Dilutive potential common shares from Team
Member (employee) stock options.......... 179,379 200,950 122,741 189,084 240,509
------------ ------------ ------------ ------------ ------------
Denominator for diluted net income per
share--adjusted weighted average shares
and assumed conversions.................. 8,181,371 9,285,224 9,865,004 9,906,066 10,043,800
------------ ------------ ------------ ------------ ------------
Basic net income per share................. $ 0.94 $ 0.16 $ 0.44 $ 0.67
============ ============ ============ ============
Diluted net income per share............... $ 0.92 $ 0.16 $ 0.43 $ 0.66
============ ============ ============ ============
Pro forma basic net income per share
(unaudited).............................. $ 0.43
============
Pro forma diluted net income per share
(unaudited).............................. $ 0.42
============
</TABLE>
12. CAPITAL STOCK
STOCK ISSUANCE
On March 12, 1997, ADIC completed a public offering of 1,525,000 shares of
its common stock. Of the total, 1,500,000 were sold by the Company and 25,000
shares were sold by a selling shareholder. Net proceeds of $23,709,000 were
received and used for working capital and other general corporate purposes.
SHAREHOLDER RIGHTS PLAN
In July 1996, the Board of Directors adopted a shareholder rights plan
("Shareholder Rights Plan") in which preferred stock purchase rights were
distributed as a dividend at the rate of one right for each share of ADIC common
stock. The Shareholder Rights Plan is designed to deter coercive takeover
tactics and ensure that the Board of Directors can adequately protect the
interests of the shareholders in the event of a takeover attempt.
13. STOCK-BASED COMPENSATION PLANS
At October 31, 1998, the Company had three stock option plans. The 1996
Transition Plan comprises the stock options held by ADIC Team Members and
directors which were converted in connection with the spin-off from Interpoint.
There were 476,092 options issued under this plan at exercise prices ranging
from $.4397 to $5.2328. No further options may be issued under this plan. In
addition, 1,032,500 shares are reserved under the Company's 1996 and Alberg
Stock Option Plans for
F-19
<PAGE>
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Team Members, directors, officers, consultants, agents, advisors and independent
contractors of the Company. Terms of the plans require the option price to be
equal to the fair market value on the date of grant. Options may be exercisable
for all or part of the shares as determined by the option and the majority of
the options issued under these plans expire five years from the date of grant.
During fiscal year 1998, certain non-executive Team Members were given the
opportunity to cancel existing grants and receive new grants. In each case, the
new option price was equal to or greater than the fair market value on the date
of grant and the vesting and expiration schedules were the same as for any new
grant, i.e. any vesting associated with the canceled grant was forfeited.
In February 1998, the shareholders approved a Stock Purchase Plan to provide
eligible Team Members to purchase shares of Common Stock on favorable terms
through payroll deductions. In accordance with this plan, 22,499 shares of stock
were issued during fiscal 1998.
The Company accounts for the above described stock option and stock purchase
plans (the "Plans") following the guidelines of APB 25 and related
interpretations. No compensation cost has been recognized for stock options
granted and stock purchased under these Plans. Had compensation cost for the
Company's Plans been determined based on the fair value at the grant dates for
awards under those Plans consistent with the method of FAS 123, the Company's
net income, basic and diluted net income per share and pro forma basic and
diluted net income per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net income(loss):
As reported....................................... $ 3,430,199 $ 8,497,198 $ 1,530,230
Pro forma......................................... $ 3,367,350 $ 7,563,013 $ (344,763)
Basic net income and pro forma net income (loss) per
share:
As reported....................................... $ 0.43 $ 0.94 $ 0.16
Pro forma......................................... 0.42 0.83 (0.04)
Diluted net income and pro forma net income (loss)
per share:
As reported....................................... $ 0.42 $ 0.92 $ 0.16
Pro forma......................................... 0.41 0.81 (0.03)
</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>
FISCAL YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
Weighted average risk free interest rates............................... 6.01% 6.00% 4.98%
Expected dividend yield................................................. 0% 0% 0%
Expected volatility..................................................... 65% 65% 65%
Expected lives (in years)............................................... 4 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.
F-20
<PAGE>
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Options granted, exercised and canceled under the Plans are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE 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
Options granted.............................................. 758,165 12.06
Options exercised............................................ (73,338) 2.25
Options canceled............................................. (414,256) 16.58
----------
Balance at October 31, 1998.................................... 1,155,607 10.45
==========
</TABLE>
At October 31, 1998 a total of 326,754 options were exercisable, the
weighted average exercise price of these options was $9.21. The weighted average
grant date fair value of options granted in fiscal years 1996, 1997 and 1998 was
$6.38, $9.47 and $6.18 respectively.
The following table summarizes information about stock options outstanding
at October 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
<C> <C> <S> <C> <C> <C>
$ 0.8953 - $ 1.6270 19,600 41 mos $ 1.36 19,600 $ 1.36
$ 2.5504 - $ 5.2328 181,687 25 mos $ 3.76 122,189 $ 3.57
$ 8.7500 - $13.5000 769,290 49 mos $ 10.68 165,125 $ 13.22
$ 14.9375 - $19.5625 185,030 50 mos $ 17.07 19,840 $ 18.29
</TABLE>
14. PROFIT INCENTIVE AND BONUS PLANS
In fiscal 1998, the Company had a non-contributory bonus plan for certain
high-level Team Members and a non-contributory profit sharing plan for all other
domestic Team Members, other than those employed by EMASS. These plans are
generally based upon a combination of Team Member salaries and performance. No
distributions are made under the bonus plan if budgeted income is not achieved.
EMASS Team Members had a separate plan based on certain EMASS financial
performance criteria. Contributions to all plans combined totaled $740,000 and
$291,000 for fiscal 1997 and 1998, respectively.
In fiscal 1996, the Company's Team Members participated in Interpoint's
non-contributory profit incentive plan for key Team Members and a
non-contributory profit sharing plan for all regular full-time domestic Team
Members. These plans were generally based upon Team Member compensation and
pre-tax profits. Contributions to the plans were $433,000 for the year ended
October 31, 1996.
F-21
<PAGE>
15. COMMITMENTS
LEASE COMMITMENTS
The Company currently leases facilities in Redmond, Washington and
Englewood, Colorado for administrative, sales and marketing, research and
development, operations and warehouse activities. Sales and service offices are
leased at various sites in the United States and Europe.
Minimum annual rental commitments at October 31, 1998, for noncancelable
operating leases, are shown in the following table:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AMOUNT
<S> <C>
1999............................................................................ $ 2,183,000
2000............................................................................ $ 1,615,000
2001............................................................................ $ 1,313,000
2002............................................................................ $ 1,049,000
2003............................................................................ $ 1,034,000
</TABLE>
Rent expense aggregated $400,000 in fiscal 1996, $571,000 in fiscal 1997 and
$1,255,000 in fiscal 1998.
OTHER COMMITMENTS
In connection with the purchase of Grau by EMASS in 1994, EMASS entered into
an agreement with the minority shareholder of Grau whereby the minority
shareholder has the option to "put" his 20% interest in Grau to the Company for
an amount based on Grau profitability, but not to be less than $2,000,000. This
option is effective for the period January 1, 2000 to March 31, 2000.
16. RELATED PARTY TRANSACTIONS
Other accrued liabilities at October 31, 1998 include $708,000 due under an
employment separation agreement with the minority interest stockholder of Grau.
A company in which the Grau minority interest stockholder has an equity
ownership provides certain support services in Europe. Cost of these services
totaled $18,000 for the period August 19, 1998 to October 31, 1998.
17. GEOGRAPHIC SEGMENT INFORMATION
Major operations outside the United States consist of ADE, the Company's
wholly owned subsidiaries in France and Grau, a subsidiary in Germany, which has
further subsidiaries operating as branch offices in both France and the United
Kingdom. Certain information regarding operations in this geographic segment is
presented in the table below. Transfers between geographic segments are made at
arms-length prices consistent with rules and regulations of governing tax
authorities. The profits on these transfers are not recognized until sales are
made to non-affiliated customers.
Excluded from U.S. net sales are transfers from the U.S. to ADE and Grau of
$6,404,000, $14,488,000 and $14,794,000 in fiscal 1996, 1997 and 1998,
respectively. Included in U.S. sales are export sales to unaffiliated customers
of $4,666,000, $7,329,000 and $7,404,000 in fiscal 1996, 1997 and 1998,
respectively. Included in U.S. operating profit is the expense associated with
the acquired in-process technology.
F-22
<PAGE>
17. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Total international sales were $21,216,000, $30,611,000 and $37,929,000 in
fiscal 1996, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net sales:
United States...................................................... $ 42,406,762 $ 69,921,043 $ 84,032,381
Europe............................................................. 16,550,231 23,282,488 30,524,560
------------- ------------- --------------
$ 58,956,993 $ 93,203,531 $ 114,556,941
============= ============= ==============
Operating profit:
United States...................................................... $ 5,209,722 $ 9,425,633 $ 776,182
Europe............................................................. 472,681 1,756,820 2,623,843
------------- ------------- --------------
$ 5,682,403 $ 11,182,453 $ 3,400,025
============= ============= ==============
Identifiable assets:
United States...................................................... $ 31,797,515 $ 66,394,754 $ 80,320,412
Europe............................................................. 4,912,158 8,799,139 32,086,214
------------- ------------- --------------
$ 36,709,673 $ 75,193,893 $ 112,406,626
============= ============= ==============
</TABLE>
18. BASIS OF PRESENTATION FOR FISCAL 1996
On February 11, 1994, the Company was acquired by Interpoint Corporation
("Interpoint") pursuant to an Agreement and Plan of Merger dated October 29,
1993, in which the Company was merged into a wholly owned subsidiary of
Interpoint. On October 15, 1996, Interpoint distributed to its shareholders all
of the outstanding shares of ADIC (the "Distribution"). The Distribution was
made in connection with, and was a condition precedent to, the merger of
Interpoint with a wholly owned subsidiary of Crane Co., a Delaware corporation.
Prior to the Distribution, Interpoint made a contribution to the working capital
of ADIC through the cancellation of all intercompany indebtedness of ADIC and
ADE to Interpoint, transferred certain other assets to ADIC, including its
ownership of ADE, and contributed additional cash to ADIC for working capital of
$10 million. Total capital contributions were $19,628,054.
The consolidated financial statements for the period prior to October 15,
1996 reflect the results of operations, financial position, and cash flows of
ADIC as a wholly owned subsidiary of Interpoint and may not be indicative of
actual results of operations and financial position of the Company under other
ownership.
The consolidated statements of income for the fiscal year ended October 31,
1996 reflect certain expense items incurred by Interpoint which were allocated
to the Company on a basis which management believes represents a reasonable
allocation of such costs to present ADIC as a stand-alone company. These
allocations consist primarily of corporate expenses such as executive and other
compensation and interest expense on intercompany borrowings. Compensation has
been allocated based on an estimate of Interpoint personnel time dedicated to
the operations and management of ADIC. Interest expense has been allocated based
on Interpoint's borrowing rate and actual intercompany borrowings. A summary of
these allocations is as follows:
<TABLE>
<CAPTION>
CORPORATE INTEREST
YEAR ENDED: EXPENSES EXPENSE
<S> <C> <C>
October 31, 1996................................................ $ 177,292 $ 528,524
========== ===========
</TABLE>
F-23
<PAGE>
19. SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
1998 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 22,866 $ 24,806 $ 25,314 $ 41,571
Gross profit....................................................... $ 7,415 $ 7,010 $ 6,770 $ 11,973
Net income (loss).................................................. $ 2,361 $ 1,934 $ 752 $ (3,517)
Basic net income (loss) per share.................................. $ 0.24 $ 0.20 $ 0.08 $ (0.36)
Diluted net income (loss) per share................................ $ 0.24 $ 0.20 $ 0.08 $ (0.36)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
1997 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- -------------------------------------------------------------------
<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
Basic net income per share......................................... $ 0.21 $ 0.21 $ 0.23 $ 0.27
Diluted net income per share....................................... $ 0.20 $ 0.21 $ 0.23 $ 0.27
</TABLE>
F-24
<PAGE>
[INSIDE BACK COVER ARTWORK]
[Artwork illustrating types
of customers that
use our products]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO]
2,500,000 SHARES OF COMMON STOCK
----------------------
PROSPECTUS
----------------------
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
BEAR, STEARNS & CO. INC.
NEEDHAM & COMPANY, INC.
---------------
DLJDIRECT INC.
- ------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell those securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of ADIC have
not changed such the date hereof.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting fees, payable by the registrant in connection with the sale of the
common stock being registered hereby. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market additional listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 29,701
NASD filing fee................................................... 11,184
Nasdaq National Market additional listing fee..................... 17,500
Printing expenses................................................. 100,000
Legal fees and expenses........................................... 150,000
Accounting fees and expenses...................................... 50,000
Transfer agent and registrar fees................................. 5,000
Miscellaneous expenses............................................ 36,615
---------
Total........................................................... $ 400,000
=========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article 9 of the registrant's Restated Bylaws provides for
indemnification of the registrant's directors, officers, employees and agents to
the maximum extent permitted by Washington law. The directors and officers of
the registrant also may be indemnified against liability they may incur for
serving in that capacity pursuant to a liability insurance policy maintained by
the registrant for such purpose.
The Washington Business Corporation Act authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article 10 of the registrant's Restated Articles of Incorporation
contains provisions implementing, to the fullest extent permitted by Washington
law, such limitations on a director's liability to the registrant and its
shareholders.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters, for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in this
Registration Statement.
II-1
<PAGE>
ITEM 16. EXHIBITS
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<S> <C>
1.1* Form of Underwriting Agreement.
5.1 Opinion of Perkins Coie LLP as to the legality of the shares
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit 5.1 hereto)
24.1 Power of Attorney (included on page II-3)
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Redmond, State of Washington, on the 6th day of
August, 1999.
<TABLE>
<S> <C> <C>
ADVANCED DIGITAL INFORMATION CORPORATION
By: /s/ PETER H. VAN OPPEN
-----------------------------------------
Peter H. van Oppen
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD
</TABLE>
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Peter H. van Oppen and Charles H. Stonecipher, and each of them, with
full power of substitution and resubstitution and full power to act without the
other, as his or her true and lawful attorney-in-fact and agent to act in his or
her name, place and stead and to execute in the name and on behalf of each
person, individually and in each capacity stated below, any and all amendments
to this Registration Statement, including any and all post-effective amendments
and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933 and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 6th day of August, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
Chief Executive Officer
/s/ PETER H. VAN OPPEN and Chairman of the
- ------------------------------ Board (Principal
Peter H. van Oppen Executive Officer)
Chief Accounting Officer
/s/ LESLIE S. ROCK and Treasurer (Principal
- ------------------------------ Financial and Accounting
Leslie S. Rock Officer)
/s/ TOM A. ALBERG
- ------------------------------ Director
Tom A. Alberg
/s/ CHRISTOPHER T. BAYLEY
- ------------------------------ Director
Christopher T. Bayley
/s/ RUSSELL F. MCNEILL
- ------------------------------ Director
Russell F. McNeill
/s/ JOHN W. STANTON
- ------------------------------ Director
John W. Stanton
/s/ WALTER F. WALKER
- ------------------------------ Director
Walter F. Walker
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
<S> <C>
1.1* Form of Underwriting Agreement
5.1 Opinion of Perkins Coie LLP as to the legality of the shares
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit 5.1 hereto)
24.1 Power of Attorney (included on page II-3)
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
[PERKINS COIE LLP LETTERHEAD]
August 5, 1999
Advanced Digital Information Corporation
P.O. Box 97057
11431 Willows Road N.E.
Redmond, Washington 98073-9757
Ladies and Gentlemen:
We have acted as counsel to you in connection with the proceedings for the
authorization and issuance by Advanced Digital Information Corporation (the
"Company") of up to 2,500,000 shares (the "Firm Shares") of the Company's Common
Stock, no par value per share (the "Common Stock"), together with up to an
additional 375,000 shares of Common Stock if and to the extent the underwriters
exercise an over-allotment option granted by the Company (the "Option Shares"
and, together with the Firm Shares, the "Shares"), and with the preparation and
filing of a registration statement on Form S-3 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), which you
are filing with the Securities and Exchange Commission with respect to the Firm
Shares and the Option Shares.
We have examined the Registration Statement and such documents and records
of the Company and other documents as we have deemed necessary for the purpose
of this opinion. Based upon the foregoing, we are of the opinion that upon the
happening of the following events:
(a) the filing and effectiveness of the Registration Statement and any
amendments thereto,
(b) due execution by the Company and registration by its registrar of the
Firm Shares and, to the extent the underwriters exercise their
over-allotment option, the Option Shares,
<PAGE>
(c) the offering and sale of the Firm Shares and, to the extent the
underwriters exercise this over-allotment option, the Option Shares,
as contemplated by the Registration Statement, and
(d) receipt by the Company of the consideration required for the Firm
Shares, and to the extent the underwriters exercise their
over-allotment option, the Option Shares, to be sold by the Company as
contemplated by the Registration Statement,
the Firm Shares and, to the extent the underwriters exercise their
over-allotment option, the Option Shares, will be duly authorized, validly
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all
post-effective amendments and any registration statement relating to the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters". In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ Perkins Coie LLP
---------------------------------
PERKINS COIE LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated December 8, 1998 relating
to the financial statements of Advanced Digital Information Corporation, which
appears in such Prospectus. We also consent to the incorporation by reference in
such Prospectus of our report dated December 8, 1998 appearing on page 26 of
Advanced Digital Information Corporation's Annual Report on Form 10-K for the
year ended October 31, 1998. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Seattle, Washington
August 6, 1999
