SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
[ ] 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 N.E.
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 9,783,662.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 AND OCTOBER 31, 1998
JANUARY 31, OCTOBER 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 23,330,691 $ 28,225,892
Accounts receivable, net of allowances of $536,000 in
1999 and $476,000 in 1998 ......................... 33,018,583 31,797,375
Inventories, net .................................... 34,569,295 32,293,526
Marketable equity securities ........................ -- 2,135,449
Prepaid expenses and other .......................... 1,425,926 1,500,145
Deferred income taxes ............................... 1,339,879 1,339,879
------------ ------------
Total current assets .............................. 93,684,374 97,292,266
Property, plant and equipment, net ..................... 7,307,598 7,351,305
Deferred income taxes .................................. 62,681 62,681
Investment in common stock ............................. 8,000,000 4,000,000
Intangible and other assets ............................ 3,541,744 3,700,374
------------ ------------
$112,596,397 $112,406,626
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 12,492,143 $ 16,986,445
Accrued liabilities ................................. 9,321,750 7,901,981
Income taxes payable ................................ 1,342,767 397,539
Deferred revenue .................................... 2,844,207 2,252,106
Current portion of long-term debt ................... 3,190,146 3,172,328
------------ ------------
Total current liabilities ....................... 29,191,013 30,710,399
Long-term debt ......................................... 17,258,424 18,368,092
Other long-term liabilities ............................ 300,000 300,000
Minority interest ...................................... 144,684 24,744
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, 9,783,662 issued and outstanding
(9,766,161 in 1998) ............................... 46,448,057 46,231,387
Retained earnings ................................... 19,061,175 16,009,334
Accumulated other comprehensive income .............. 193,044 762,670
------------ ------------
Total shareholders' equity ...................... 65,702,276 63,003,391
------------ ------------
$112,596,397 $112,406,626
------------ ------------
------------ ------------
See the accompanying notes to these consolidated financial statements.
2
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998 (UNAUDITED)
1999 1998
------------ ------------
Net sales ..................................... $ 49,144,257 $ 22,865,661
Cost of sales ................................. 32,749,895 15,450,792
------------ ------------
Gross profit ............................... 16,394,362 7,414,869
------------ ------------
Operating expenses:
Selling and administrative ................. 9,113,472 3,783,719
Research and development ................... 2,815,471 617,599
------------ ------------
11,928,943 4,401,318
------------ ------------
Operating profit .............................. 4,465,419 3,013,551
------------ ------------
Other income (expense):
Interest income ............................ 234,152 321,168
Interest expense ........................... (344,255) --
Gain on sale of marketable equity securities 563,737 --
Foreign currency transaction gains, net .... 26,718 239,988
------------ ------------
480,352 561,156
------------ ------------
Income before provision for income taxes ...... 4,945,771 3,574,707
Provision for income taxes .................... 1,773,990 1,213,418
Minority interest ............................. 119,940 --
------------ ------------
Net income .................................... $ 3,051,841 $ 2,361,289
------------ ------------
------------ ------------
Basic net income per share .................... $ 0.31 $ 0.24
------------ ------------
------------ ------------
Diluted net income per share .................. $ 0.30 $ 0.24
------------ ------------
------------ ------------
See the accompanying notes to these consolidated financial statements.
3
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998 (UNAUDITED)
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 3,051,841 $ 2,361,289
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ........................ 930,230 212,883
Gain on sale of marketable equity securities ......... (563,737) --
Minority interest .................................... 119,940 --
Assets retired ....................................... 8,665 --
Change in assets and liabilities:
Accounts receivable .................................. (1,575,644) 2,084,084
Inventories .......................................... (2,632,569) (5,921,466)
Prepaid expenses and other ........................... 16,873 (61,284)
Other assets ......................................... (50,400) 27,538
Accounts payable ..................................... (4,425,876) (353,270)
Accrued liabilities .................................. 1,575,325 (782,439)
Income taxes payable ................................. 1,339,476 975,999
Deferred revenue ..................................... 635,042 --
------------ ------------
Net cash used in operating activities ....................... (1,570,834) (1,456,666)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ................ (1,077,941) (426,835)
Proceeds from sale of marketable equity securities ....... 2,699,186 --
Investment in common stock ............................... (4,000,000) --
------------ ------------
Net cash used in investing activities ....................... (2,378,755) (426,835)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on long-term debt .............................. (1,017,632) --
Proceeds from issuance of common stock for stock options,
including tax benefit .................................. 216,670 24,822
------------ ------------
Net cash provided by (used in) financing activities ......... (800,962) 24,822
------------ ------------
Effect of exchange rate changes on cash ..................... (144,650) (132,008)
------------ ------------
Net decrease in cash and cash equivalents ................... (4,895,201) (1,990,687)
Cash and cash equivalents at beginning of period ............ 28,225,892 32,806,822
------------ ------------
Cash and cash equivalents at end of period .................. $ 23,330,691 $ 30,816,135
------------ ------------
------------ ------------
See the accompanying notes to these consolidated financial statements.
4
ADVANCED DIGITAL INFORMATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)
ACCUMULATED
COMMON STOCK OTHER
---------------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
--------- ------------ ------------- ----------- ------------
Balance at October 31, 1998........... 9,766,161 $ 46,231,387 $ 16,009,334 $ 762,670 $ 63,003,391
Exercise of stock options,
including tax benefit of
$49,100 ............................ 17,501 216,670 216,670
Comprehensive income:
Net income.......................... 3,051,841
Foreign currency translation
adjustment........................ (569,626)
Comprehensive income............ 2,482,215
--------- ------------ ------------- ----------- ------------
Balance at January 31, 1999........... 9,783,662 $ 46,448,057 $ 19,061,175 $ 193,044 $ 65,702,276
--------- ------------ ------------- ----------- ------------
--------- ------------ ------------- ----------- ------------
See the accompanying notes to these consolidated financial statements.
5
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1999
(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, 1998. 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
three-month period ended January 31, 1999, are not necessarily indicative of
results to be expected for a full year.
NOTE 2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the three months ended January 31, 1999 and 1998:
1999 1998
----------- -----------
Numerator:
Net income ..................................... $ 3,051,841 $ 2,361,289
Denominator:
Denominator for basic net income per share-
weighted average shares ....................... 9,773,624 9,702,064
Dilutive potential common shares from Team Member
(employee) stock options ...................... 233,370 200,520
----------- -----------
Denominator for diluted net income per share-
adjusted weighted average shares and assumed
conversions ................................... 10,006,994 9,902,584
----------- -----------
----------- -----------
Basic net income per share ......................... $ 0.31 $ 0.24
----------- -----------
----------- -----------
Diluted net income per share ....................... $ 0.30 $ 0.24
----------- -----------
----------- -----------
NOTE 3. INVENTORIES
Inventory is comprised as follows:
January 31, 1999 October 31, 1998
---------------- ----------------
Finished Goods ..................... $ 13,863,507 $ 13,104,058
Work-in-process .................... 2,488,866 3,382,683
Raw materials ...................... 20,610,980 17,951,520
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36,963,353 34,438,261
Allowance for inventory obsolescence (2,394,058) (2,144,735)
------------ ------------
$ 34,569,295 $ 32,293,526
------------ ------------
------------ ------------
6
NOTE 4. INVESTMENT IN NETWORK INTEGRITY, INC.
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.
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 1999 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 January 31, 1999
increased 115% to $49.1 million from $22.9 million for the same period in fiscal
1998. The increase in net sales was due to the inclusion of sales from ADIC
Denver and ADIC / GRAU, both part of the acquisition of EMASS, Inc. in August
1998 and strong sales of existing ADIC tape libraries. The Company's OEM sales,
consisting primarily of the Company's FastStor products, have also increased
significantly over the first quarter of fiscal 1998.
GROSS PROFIT. Gross profit was $16.4 million or 33% of net sales for
the three months ended January 31, 1999 compared to $7.4 million or 32% of net
sales for the same period in fiscal 1998. Gross profit percentage for the
current three-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, away from lower margin standalone tape drive and media business, as
well as the effects of overall volume increases. Offsetting this trend are
higher overhead costs associated with the Redmond facility and increases in
personnel to support the OEM business, all of which began to be incurred in the
second quarter of fiscal 1998. Also, the first quarter of fiscal 1999 reflected
adjustments associated with the reduction of sales prices for certain of the
Company's products. Gross profit margins are dependent on a number of factors,
including customer and product mix, price competition and tape drive costs. In
addition, there can be no assurance that the Company can improve upon or
maintain the current gross margin levels for a given product line, in that tape
drives purchased from third-party suppliers are a significant component of the
Company's product costs.
7
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses were $9.1 million or 19% of net sales for the three months ended
January 31, 1999 compared to $3.8 million or 17% of net sales for the same
period in fiscal 1998. The dollar increase in selling and administrative
expenses in the three months ended January 31, 1999 over the comparable period
in fiscal 1998 was primarily due to the inclusion of ADIC Denver and ADIC /
GRAU, but also to increased sales and administrative personnel both in the
headquarters office and in regional offices throughout the United States. The
Company expects that selling and administrative expenses as a percentage of net
sales may decline slightly for the fiscal year ending October 31, 1999 from the
levels experienced in the three months ended January 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $2.8 million or 6% of net sales for the three months ended January 31, 1999
compared to $618,000 or 3% of net sales for the same period in fiscal 1998. The
Company expects research and development spending to stay at this higher
percentage of net sales throughout fiscal 1999 as it continues to incur
significant expenditures in software development as well as development of new
library hardware products.
OTHER INCOME. Interest income for the three months ended January 31,
1999 was $234,000 compared to $321,000 for the same period in fiscal 1998. This
decrease is the result of cash utilization primarily for investments in ADIC
Denver and ADIC / GRAU in fiscal 1998 and in Network Integrity, Inc. in December
1998. Interest expense in fiscal 1999 relates primarily to interest on a bank
loan, the proceeds of which were used to finance the acquisition of ADIC Denver
and ADIC / GRAU. The gain on sale of marketable equity securities relates to
investments in certain securities made in fiscal 1998 and sold in the first
quarter of fiscal 1999. Net foreign currency translation gains decreased to
approximately $27,000 for the current quarter.
Foreign currency gains or losses arise as a result of the operation of the
Company's European subsidiaries, ADIC Europe and ADIC / GRAU, the functional
currencies of which are the French franc and German deutsche mark, respectively.
All monetary assets are translated into the functional currencies on the
financial statements of ADIC Europe and ADIC / GRAU. ADIC Europe buys products
from ADIC in U.S. dollars and resells a significant majority of such products in
U.S. dollars. ADIC / GRAU both buys and sells products to ADIC Denver in U.S.
dollars. ADIC / GRAU's sales are primarily in deutsche marks and the sales of
its subsidiaries in U.K. and France, which act as sales offices in those
countries, are made primarily in British pound sterling and French francs,
respectively. Certain of the U.S. dollar receivables and payables in these
entities offset. To the extent that these monetary assets and liabilities do not
fully offset each other and the U.S. dollar exchange rate changes with respect
to these currencies, transaction gains or losses may result. For large sales
denominated in other currencies, the Company attempts to implement appropriate
hedging strategies.
PROVISION FOR INCOME TAXES. Income tax expense for the three months
ended January 31, 1999 was $1.8 million compared to $1.2 million for the same
period in fiscal 1998. The Company believes that the 36% effective tax rate
reflected in its most recent results, which includes taxes paid in various
federal, state and international jurisdictions, is generally indicative
8
of the Company's effective tax rate in future periods. There are significant
deferred tax assets associated with net operating loss carryforwards and other
timing differences of ADIC Denver and ADIC / GRAU. 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 the Company to deduct these expenses for tax purposes and
recognize these assets, the Company reallocates the purchase price to reduce
noncurrent intangible assets related to the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $1.6 million of cash in the
first three months of fiscal 1999. Such cash was primarily used to fund
increases in accounts receivable and inventories and reductions in accounts
payable. Additionally, the Company used $2.4 million in investing activities
which is the net result of the $4.0 million investment in Network Integrity,
Inc., ongoing investments in property, plant and equipment and proceeds of sale
of marketable equity securities.
At January 31, 1999, the Company had cash and cash equivalents of $23.3
million. Its working capital, the difference between current assets and current
liabilities is $64.5 million, with a ratio of current assets to current
liabilities of 3.2:1. The Company also had a $10.0 million bank line of credit
that expires in February 2001. Any borrowings under this line of credit would
bear interest at the bank's prime rate or adjusted LIBOR rate. No borrowings
have been made under this line of credit. The Company had no material or unusual
commitments as of January 31, 1999 other than annual rental commitments.
The Company believes that its existing cash and cash equivalents and
bank line of credit, together with the results of operations, will be sufficient
to fund its working capital and capital expenditure needs for at least the next
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.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems and the inability of many of these products to
distinguish between twentieth-century dates and twenty-first century dates to
determine the applicable year. This error could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company is actively assessing the
impact of the upcoming change on its business, financial condition and results
of operations.
9
Based on the Company's assessment to date, the Company believes the current
versions of its software and hardware products and services are Year 2000
compliant. New products are being designed to be Year 2000 compliant. While most
of the Company's internally manufactured library products have no date
functionality built into them, this is not true for certain software and large
library products. Year 2000 compliant updates are currently available for all of
these products and the Company's service personnel are able to install these
upgrades in conjunction with its ordinary maintenance contracts. The Company is
reviewing hardware used in connection with its products for those customers with
current service maintenance contracts. Plans exist to replace certain systems
that can not be made compliant and upgrade those that can. Total cost to replace
this hardware approximates $250,000 a portion of which is reimbursed by the
customer. There can be no assurance that all existing Company products will
contain all necessary date codes. Further, use of the Company's products in
connection with other products which are not Year 2000 compliant, including
non-compliant hardware, software and firmware may result in the inaccurate
exchange of dates and result in performance problems or system failure. Any
failure of the Company's products to perform could result in claims against the
Company. The cost of defending any such claim which may arise, as well as any
liability of the Company for Year 2000 related damages could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's business depends on numerous systems that could potentially be
impacted by Year 2000 related problems. The Company is assessing the possible
effects on the Company's operations of the Year 2000 readiness of its enterprise
resource planning computer systems and other internal systems. The Company
believes that the enterprise resource planning computer systems at its various
manufacturing sites are either Year 2000 compliant currently or can be modified
to ensure compliance. Other internal systems are currently being assessed, and
based on such assessment the Company will modify or replace such systems. The
Company expects the assessments and tests of these systems to be completed in
mid-1999.
The Company's reliance on key suppliers, and therefore on the proper
function of their information systems and software, means that their failure to
address Year 2000 issues could have a material impact on the Company's
operations and financial results. The Company has asked key suppliers to provide
information regarding their readiness for Year 2000 related issues and has
received responses from substantially all of them. The Company is reviewing the
responses and will determine what further actions are required to mitigate
vulnerability to problems with suppliers and other third parties' systems.
The Company expects to incur primarily internal staff cost and other
expenses related to infrastructure and facilities enhancements necessary to
prepare the systems for Year 2000. To date there have been no material direct
out-of-pocket costs. Although the total cost of these Year 2000 compliance
activities is not yet determined, it is not anticipated to be material to the
Company's business, results of operations and financial condition. The Company
has not completed a contingency plan for handling Year 2000 problems that are
not detected and corrected prior to their occurrence, but expects to have such
plans in place for critical systems in mid to late 1999. Any failure of the
Company to address any unforeseen Year 2000 issue could adversely affect the
Company's business, financial condition and results of operations.
10
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.
At its annual meeting on February 24, 1999, duly called and
with proxies solicited, 9,242,206 shares were represented in
person or by proxy constituting 94.53 percent of the
outstanding shares. There were 9,776,662 shares of the
Company's common stock outstanding and entitled to vote at the
annual meeting.
i. The proposal to amend the Advanced Digital Information
Corporation 1996 Stock Option Plan received the following votes:
Votes Percent
--------- -------
For ...................... 5,972,126 61.09%
Against .................. 153,268 1.57%
Abstain .................. 32,286 .33%
Broker Non-Votes ......... 3,084,526 31.55%
Other Unvoted ............ 534,456 5.47%
The foregoing proposal was approved.
ii. Three directors were reelected to the Board, two to hold office
for a three-year term and one to hold office for a two-year term. Each
nominee received not less than 9,200,488 votes, which represents 99.55
percent of the shares voted.
Item 5. Other information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
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: March 15, 1999 /s/ Peter H. van Oppen
------------------------------
Peter H. van Oppen, Chairman
and Chief Executive Officer
Dated: March 15, 1999 /s/ Leslie S. Rock
------------------------------
Leslie S. Rock, Treasurer
and Chief Accounting Officer
12