SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q --------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 0-21103 ADVANCED DIGITAL INFORMATION CORPORATION Incorporated under the laws I.R.S. Identification of the State of Washington No. 91-1618616 11431 Willows Road P.O. Box 97057 Redmond, Washington 98073-9757 (425) 881-8004 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The total shares of common stock without par value outstanding at the end of the quarter reported is 9,761,812. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED BALANCE SHEETS JULY 31, 1998 AND OCTOBER 31, 1997 JULY 31, OCTOBER 31, 1998 1997 ------------ ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents ............................... $ 22,290,922 $ 32,806,822 Marketable securities ................................... 2,135,449 -- Accounts receivable, net of allowances of $482,000 in 1998 and $324,000 in 1997 ............................. 20,261,718 18,078,302 Inventories, net ........................................ 20,915,766 16,074,787 Prepaid expenses and other .............................. 574,328 714,979 Deferred income taxes ................................... 767,688 767,688 ------------ ------------ Total current assets .................................. 66,945,871 68,442,578 ------------ ------------ Property, plant and equipment, at cost: Machinery and equipment ................................. 5,966,579 4,366,343 Office equipment ........................................ 882,643 417,116 Leasehold improvements .................................. 570,719 415,493 ------------ ------------ 7,419,941 5,198,952 Less: accumulated depreciation and amortization ......... (3,283,184) (2,689,685) ------------ ------------ Net property, plant and equipment ..................... 4,136,757 2,509,267 ------------ ------------ Deferred income taxes ...................................... 89,414 89,414 ------------ ------------ Investment in Crossroads Holding Corp. and other assets ................................................. 4,194,288 4,152,634 ------------ ------------ $ 75,366,330 $ 75,193,893 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................ $ 7,229,770 $ 11,237,131 Accrued liabilities ..................................... 2,003,077 2,594,831 Income taxes payable .................................... 638,828 1,252,324 ------------ ------------ Total current liabilities ........................... 9,871,675 15,084,286 ------------ ------------ Commitments ................................................ -- -- 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, 9,761,812 issued and outstanding (9,699,824 in 1997) .............................................. 46,236,776 45,808,291 Retained earnings ....................................... 19,526,469 14,479,104 Cumulative translation adjustment ....................... (268,590) (177,788) ------------ ------------ Total shareholders' equity .......................... 65,494,655 60,109,607 ------------ ------------ $ 75,366,330 $ 75,193,893 ------------ ------------ ------------ ------------ See the accompanying notes to these consolidated financial statements. 2 ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1998 AND 1997 (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED JULY 31, JULY 31, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales ...................................... $ 25,314,025 $ 24,463,001 $ 72,985,581 $ 66,604,997 Cost of sales .................................. 18,544,302 17,397,206 51,790,825 47,057,154 ------------ ------------ ------------ ------------ Gross profit ................................ 6,769,723 7,065,795 21,194,756 19,547,843 ------------ ------------ ------------ ------------ Operating expenses: Selling and administrative .................. 4,978,269 3,467,050 12,943,609 9,762,777 Research and development .................... 817,687 732,596 2,062,765 2,055,560 ------------ ------------ ------------ ------------ 5,795,956 4,199,646 15,006,374 11,818,337 ------------ ------------ ------------ ------------ Operating profit ............................... 973,767 2,866,149 6,188,382 7,729,506 ------------ ------------ ------------ ------------ Other income: Interest income ............................. 222,679 382,753 789,959 758,975 Gain on sale of marketable securities ....... -- -- 247,814 -- Foreign currency transaction gains (losses), net ....................................... (63,317) 159,255 200,409 376,846 ------------ ------------ ------------ ------------ 159,362 542,008 1,238,182 1,135,821 ------------ ------------ ------------ ------------ Income before provision for income taxes ....... 1,133,129 3,408,157 7,426,564 8,865,327 Provision for income taxes ..................... 380,967 1,145,866 2,379,199 3,041,963 ------------ ------------ ------------ ------------ Net income ..................................... $ 752,162 $ 2,262,291 $ 5,047,365 $ 5,823,364 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic net income per share ..................... $ 0.08 $ 0.23 $ 0.52 $ 0.66 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted net income per share ................... $ 0.08 $ 0.23 $ 0.51 $ 0.64 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ See the accompanying notes to these consolidated financial statements. 3 ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED JULY 31, 1998 AND 1997 (UNAUDITED) 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 5,047,365 $ 5,823,364 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ......................... 874,807 435,914 Gain on sale of marketable securities ............... (247,814) -- Change in assets and liabilities: Accounts receivable ................................... (2,167,387) (3,976,694) Inventories ........................................... (4,916,788) (2,980,485) Prepaid expenses and other ............................ 138,836 52,430 Other assets .......................................... (46,267) 44,571 Accounts payable ...................................... (3,986,130) (486,964) Accrued liabilities ................................... (565,452) 523,381 Income taxes payable .................................. (296,074) 896,475 ------------ ------------ Net cash provided by (used in) operating activities .......... (6,164,904) 331,992 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ............... (2,511,984) (1,050,968) Investment in marketable securities ...................... (3,003,908) -- Proceeds from sale of marketable securities .............. 1,116,273 -- ------------ ------------ Net cash used in investing activities ........................ (4,399,619) (1,050,968) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock for stock options, including tax benefit ...................... 140,420 1,300,053 Proceeds from issuance of common stock, net .............. -- 23,708,784 ------------ ------------ Net cash provided by financing activities .................... 140,420 25,008,837 ------------ ------------ Effect of exchange rate changes on cash ...................... (91,797) (128,917) ------------ ------------ Net (decrease) increase in cash and cash equivalents ......... (10,515,900) 24,160,944 Cash and cash equivalents at beginning of period ............. 32,806,822 10,436,783 ------------ ------------ Cash and cash equivalents at end of period ................... $ 22,290,922 $ 34,597,727 ------------ ------------ ------------ ------------ See the accompanying notes to these consolidated financial statements. 4 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS July 31, 1998 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying condensed financial statements are unaudited and should be read in conjunction with the Advanced Digital Information Corporation financial statements included in the Company's Annual Report on Form 10-K for the year ended October 31, 1997. In the opinion of management, all normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the nine-month period ended July 31, 1998, are not necessarily indicative of results to be expected for a full year. NOTE 2. EARNINGS PER SHARE In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS128") which changed the Company's presentation and calculation of earnings per share. Basic net income per share represents net income divided by the weighted average number of shares outstanding during the period. Diluted net income per share represents net income divided by the weighted average number of shares outstanding including the potentially dilutive impact of stock options. Common stock options are converted using the treasury stock method. Earnings per share for 1997 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 earnings per share. The following table sets forth the computation of basic and diluted net income per share for the three months and nine months ended July 31, 1998 and 1997: THREE MONTHS ENDED NINE MONTHS ENDED JULY 31, JULY 31, 1998 1997 1998 1997 Numerator: Net income ............................... $ 752,162 $2,262,291 $5,047,365 $5,823,364 Denominator: Denominator for basic net income per share - weighted average shares .............. 9,755,866 9,676,021 9,730,086 8,881,196 Dilutive potential common shares from Team Member (employee) stock options ................................ 149,196 208,141 174,811 203,147 ---------- ---------- ---------- ---------- Denominator for diluted net income per share - adjusted weighted average shares and assumed conversions ................ 9,905,062 9,884,162 9,904,897 9,084,343 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic net income per share .................. $ 0.08 $ 0.23 $ 0.52 $ 0.66 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted net income per share ................ $ 0.08 $ 0.23 $ 0.51 $ 0.64 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 5 NOTE 3. INVENTORIES Inventory is comprised as follows: July 31, 1998 October 31, 1997 ------------- ---------------- Finished Goods $ 11,110,289 $ 8,231,656 Work-in-process 2,310,562 1,416,067 Raw materials 9,095,044 7,557,748 ------------ ------------ 22,515,895 17,205,471 Allowance for inventory obsolescence (1,600,129) (1,130,684) ------------ ------------ $ 20,915,766 $ 16,074,787 ------------ ------------ ------------ ------------ NOTE 4. INVESTMENT IN MARKETABLE 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 shareholders' 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 July 31, 1998. During April 1998, the Company sold certain of these securities and realized a gain of $248,000. NOTE 5. STOCK PURCHASE AGREEMENT In July 1998, the Company entered into a Stock Purchase Agreement ("Agreement") with Raytheon E-Systems, Inc. ("Raytheon") to purchase all of the outstanding stock of EMASS, Inc. ("EMASS") a wholly-owned subsidiary of Raytheon. EMASS is a provider of large-scale libraries and open systems storage software. The acquisition of EMASS was finalized August 19, 1998 and will be accounted for by the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations". Accordingly, the operating results of EMASS will be included in the consolidated operating results from the date of acquisition. Pursuant to the terms of the Agreement, ADIC made a cash payment of $24,766,000 to Raytheon and assumed approximately $2,000,000 in mortgage indebtedness. The acquisition was funded through a combination of cash and debt. ADIC expects to incur certain restructuring costs associated with the transaction as well as a significant one-time expense for the write-off of in-process research and development. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion and analysis may contain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The Company's actual results could differ materially from those discussed here. Such risks are detailed in the Company's Annual Report on Form 10-K filed with the SEC in January 1998 and are incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. NET SALES. Net sales for the three months ended July 31, 1998 increased 3% to $25.3 million from $24.5 million for the same period in fiscal 1997. Net sales for the nine months ended July 31, 1998 were $73.0 million, an increase of 10% versus the nine months ended July 31, 1997. The increase in net sales for the quarter and nine months was due to strong unit sales volume of the Company's automated tape libraries, including the Scalar and FastStor products. The FastStor products were introduced in the final quarter of fiscal 1997, and an agreement to provide an OEM version of the FastStor tape library for resale by Dell Computer Corporation was announced in April 1998. The growth in sales related to library products was offset by lower sales of standalone tape drives and media products from the comparable periods of 1997 and price reductions for selected parts. In addition, over the nine-month period, certain large distributors, which are significant customers of the Company, have been reducing the amount of inventory that they are holding. This inventory contraction also contributed to net sales being lower than the Company's expectations. There can be no assurance that the Company can improve upon the level of net sales achieved due to the risk of increasing competition, the reliance on certain customers and suppliers and other factors. GROSS PROFIT. Gross profit was $6.8 million or 27% of net sales for the three months ended July 31, 1998 compared to $7.1 million or 29% of net sales for the same period in fiscal 1997. Gross profit as a percentage of net sales was 29% for both of the nine-month periods ended July 31, 1998 and 1997. While the shift in product mix toward higher-margin libraries and the reduction in sales of the lower-margin standalone products benefited gross margin, this benefit was offset for both the quarter and nine-month periods by certain product price reductions and increased overhead costs. Most significant during the quarter was the effect of manufacturing overhead costs associated with the move to larger facilities in April 1998. Gross profit margins are dependent on a number of factors, including customer and product mix, price competition and tape drive costs. There can be no assurance that the Company can improve upon or maintain the current gross margin levels for any of its product lines. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were $5.0 million or 20% of net sales for the three months ended July 31, 1998 compared to $3.5 million or 14% of net sales for the same period in fiscal 1997. The dollar increase in selling and administrative expenses in the three months ended July 31, 1998 over the comparable period in fiscal 1997 was due to increased sales personnel both in the headquarters office and in regional offices throughout the United States and to increased expenditures for advertising and promotion. 7 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were $818,000 or 3% of net sales for the three months ended July 31, 1998 compared to $733,000 or 3% of net sales for the same period in fiscal 1997. Research and development expenses are associated primarily with modifications and enhancements to the existing product lines. OTHER INCOME. Interest income for the three months ended July 31, 1998 was $223,000 compared to $383,000 for the same period in fiscal 1997. This decrease is the result of investing in equity securities which reduced the interest bearing balance of cash and cash equivalents as well as increases in working capital requirements which also reduced the amount of cash available for interest bearing investments. Net foreign currency transaction gains decreased approximately $223,000 between the comparison periods. Foreign currency gains or losses arise as a result of the operation of ADIC Europe, the functional currency of which is French francs. ADIC Europe buys products from ADIC in U.S. dollars and resells a significant majority of such products in U.S. dollars. However, because francs are used as the functional accounting currency, all monetary assets and liabilities are translated into francs on ADIC Europe's financial statements. To the extent that these monetary assets and liabilities do not fully offset each other and the franc-to-U.S.-dollar exchange rate changes, transaction gains or losses may result. For large sales denominated in other currencies, the Company attempts to implement appropriate hedging strategies. PROVISION FOR INCOME TAXES. Income tax expense for the three months ended July 31, 1998 was $381,000 compared to $1,146,000 for the same period in fiscal 1997. The tax rate fluctuates in part based upon the taxable or non-taxable nature of the Company's investments. YEAR 2000 ISSUE. The Company, like most owners of computer software, will be required to modify portions of its software so that it will function properly in the year 2000. Any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This 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. Based on its analysis to date, the Company believes that the impact of year 2000 issues will not be material to the Company's business. The Company is actively assessing the impact of the upcoming change and does not, as of yet, have determinable estimates of the costs to be incurred. The Company expects to incur primarily internal staff cost and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. ADIC believes that its critical internal software is year 2000 compliant and that its complete line of products are year 2000 compliant. The Company expects its year 2000 readiness project to be completed on a timely basis. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities used $6.2 million of cash in the first nine months of fiscal 1998. Such cash was used to fund increases both in inventories and receivables as well as decreases in accounts payable and other accrued liabilities. These changes are partially due to timing of receipt or payment of certain large checks both to our large suppliers and from a specific few large customers. The Company does not believe that the timing of these payments or receipts is indicative of any change in credit or collection risks. Additionally, the Company used funds of $2.5 million to purchase property, plant and equipment, much of which was associated with the move to a new headquarters and manufacturing facility. 8 At July 31, 1998, the Company had cash and cash equivalents of $22.3 million. In addition, the Company has a $10.0 million bank line of credit that expires February 28, 2001. Any borrowings under this line of credit would bear interest at the bank's Reference Rate or adjusted LIBOR rate. No borrowings have been made under this line of credit. In August 1998, the Company finalized a Credit Agreement with Seafirst Bank and a Term Note for $20 million that was used to fund the acquisition of EMASS, Inc. from Raytheon E-Systems, Inc. The note is payable in equal monthly principal payments plus interest, based on a seven year amortization schedule, with a final payment due August 1, 2003. The Company believes that its existing cash and cash equivalents and bank line of credit, together with the results of operations, will be sufficient to fund its working capital and capital expenditure needs for at least the next twelve months. The Company may utilize cash to acquire or invest in businesses, products or technologies that it believes are strategic. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. However, the Company has no present understanding, commitments or agreements with respect to any material acquisition of other businesses, products or technologies. 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other information. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description -------------- ----------- 2.1 Stock Purchase Agreement by and between Raytheon E-Systems, Inc. and Advanced Digital Information Corporation, dated July 21, 1998* 2.2 Amendment No. 1 to Stock Purchase Agreement by and between Raytheon E-Systems, Inc. and Advanced Digital Information Corporation, dated July 21, 1998** 2.3 Letter agreement between Raytheon E-Systems, Inc. and the Company, dated August 19, 1998** 10.1 Credit Agreement between Advanced Digital Information Corporation and Seafirst Bank dated August 17, 1998 * Incorporated by reference to the Company's Current Report on Form 8-K dated July 21, 1998 ** Incorporated by reference to the Company's Current Report on Form 8-K dated August 19, 1998 10 (b) Reports on Form 8-K On August 3, 1998, the Company filed a report under Item 5 of Form 8-K relating to the Stock Purchase Agreement between Raytheon E-Systems, Inc. and the Company under which the Company would acquire the stock of EMASS, Inc. This report was dated July 21, 1998. On September 3, 1998, the Company filed a report under Item 2 of Form 8-K announcing the acquisition of EMASS, Inc. from Raytheon E-Systems, Inc. This report was dated August 19, 1998. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCED DIGITAL INFORMATION CORPORATION Dated: September 14, 1998 /s/ Peter H. van Oppen ------------------------------------ Peter H. van Oppen, Chairman and Chief Executive Officer Dated: September 14, 1998 /s/ Leslie S. Rock ------------------------------------ Leslie S. Rock, Treasurer and Chief Accounting Officer 12