-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ltbqj/epHJ04OwmD5utSzpFHjKMdvKpilpw4Bo2Zol9wfjpRlTI/JQI4Z85Um803 wyKw2Xo65jx1rguNeXQfgQ== 0000891020-97-000214.txt : 19970222 0000891020-97-000214.hdr.sgml : 19970222 ACCESSION NUMBER: 0000891020-97-000214 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970218 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED DIGITAL INFORMATION CORP CENTRAL INDEX KEY: 0000770403 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 911618616 STATE OF INCORPORATION: WA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-21915 FILM NUMBER: 97536794 BUSINESS ADDRESS: STREET 1: 1201 WILLOWS ROAD STREET 2: P O BOX 97057 CITY: REDMOND STATE: WA ZIP: 98073-9757 BUSINESS PHONE: 2068818004 MAIL ADDRESS: STREET 1: 10201 WILLOWS ROAD STREET 2: P O BOX 97057 CITY: REDMOND STATE: WA ZIP: 98073-9757 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1997 REGISTRATION NO. 333- ================================================================================ 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) WASHINGTON 91-1618616 (State or other jurisdiction of incorporation (I.R.S. Employer Identification Number) or organization)
10201 WILLOWS ROAD REDMOND, WASHINGTON 98052 (206) 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, PRESIDENT AND CHIEF EXECUTIVE OFFICER ADVANCED DIGITAL INFORMATION CORPORATION 10201 WILLOWS ROAD REDMOND, WASHINGTON 98052 (206) 881-8004 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------ COPIES TO: LINDA A. SCHOEMAKER LAIRD H. SIMONS III RICHARD C. SOHN ROBERT A. FREEDMAN PERKINS COIE FENWICK & WEST LLP 1201 THIRD AVENUE, 40TH FLOOR TWO PALO ALTO SQUARE SEATTLE, WASHINGTON 98101-3099 PALO ALTO, CALIFORNIA 94306 (206) 583-8888 (415) 494-0600
------------------------------------ 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 of 1933, 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 of 1933, 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
================================================================================================================= PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------- Common Stock, no par value(3) 1,983,750 $19.9375 $39,551,016 $11,986 =================================================================================================================
(1) Includes 258,750 shares issuable upon exercise of the Underwriters' over-allotment option. (2) Computed in accordance with Rule 457(c) under the Securities Act of 1933, as amended, on the basis of the average of the high and low sale prices of the Common Stock on February 12, 1997. (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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1997 PROSPECTUS - ---------- 1,725,000 SHARES [ADIC LOGO] COMMON STOCK Of the 1,725,000 shares of Common Stock offered hereby, 1,700,000 shares are being sold by Advanced Digital Information Corporation (the "Company") and 25,000 shares are being sold by the Selling Shareholder. The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholder. See "Principal and Selling Shareholders." The Company's Common Stock is quoted on the Nasdaq National Market under the symbol ADIC. On February 14, 1997, the last reported sale price of the Common Stock was $21.00 per share. See "Price Range of Common Stock." ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================ PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDER - ------------------------------------------------------------------------------------------------ Per Share.............. $ $ $ $ - ------------------------------------------------------------------------------------------------ Total(3)............... $ $ $ $ ================================================================================================
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $300,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 258,750 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1997, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST DAIN BOSWORTH INCORPORATED , 1997 3 INSIDE FRONT COVER GRAPHIC ENTITLED "CLIENT/SERVER BACKUP FOR WINDOWS NT, NETWARE, AND UNIX NETWORKS," DEPICTING IN DIAGRAMS USE OF THE COMPANY'S TAPE LIBRARY PRODUCTS IN A DISTRIBUTED BACKUP AND CENTRALIZED BACKUP CLIENT/SERVER ENVIRONMENT. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ ADIC(TM), VLS(TM) and Scalar(R) are trademarks of the Company. DLT(TM) is a trademark of Quantum Corporation. This Prospectus also contains other trademarks and trade names, which are the property of their respective holders. 2 4 Two-page Gatefold entitled "Protecting Data Worldwide" including narrative descriptions of a cross-section of Company clients in seven industry segments and their use of the Company's products. 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Advanced Digital Information Corporation ("ADIC" or the "Company") is a leading provider of automated tape libraries and standalone tape drives used to back up and archive electronic data in client/server network computing environments. The Company integrates proprietary electro-mechanical robotics, electronics hardware and firmware with technologically advanced tape drives manufactured by third parties to provide highly automated data storage protection. When used with third-party storage management software, the Company's products can perform sophisticated backup and archiving of electronic data residing across a network of PCs, workstations and servers with minimal human intervention. The Company's product family operates in both PC-based (Windows NT and Novell NetWare) and UNIX environments and provides data storage capacity ranging from four gigabytes to over three terabytes. As organizations shift their core business processes to network computing environments and as data-intensive software applications continue to proliferate, the data stored on client/server networks is growing in both volume and value. These trends have driven the rapidly growing market for data backup and archiving solutions for protection of an organization's critical data. To address this market, ADIC offers what it believes is the industry's broadest range of automated tape library and standalone tape drive products for the client/server network marketplace with end-user list prices ranging from approximately $2,000 to over $75,000. The Company's broad product family provides both end users and channel partners with "one-stop shopping" for products, service and support. The Company's strategy is to work closely with leading tape drive and storage management software developers and rapidly develop products incorporating state-of-the-art technologies. The Company currently offers automated tape libraries based on DLT, 4mm/DAT and 8mm magnetic tape drive technologies. The Company also maintains product compatibility with over 50 storage management software applications. The Company deploys an extensive sales, marketing and technical support infrastructure to address the market for client/server network storage peripherals. The Company's end users range in size from large multinational companies to small businesses and are geographically dispersed with 36.0% of net sales in fiscal 1996 derived from outside the United States. The Company leverages multiple distribution channels, including domestic and international distributors, value-added resellers ("VARs") and original equipment manufacturers ("OEMs"). In particular, the Company believes that its distribution relationships and brand name recognition position it well to take advantage of the growth of PC-based client/server computing environments, including those based on Windows NT. The Company was incorporated under the laws of the state of Washington in August 1984 and was acquired by Interpoint Corporation ("Interpoint") in February 1994. In October 1996, Interpoint distributed all the shares of the Company's Common Stock to Interpoint shareholders and ADIC became an independent publicly traded company (the "Distribution"). Interpoint was subsequently acquired by Crane Co. See Note 1 of Notes to Consolidated Financial Statements. The Company's executive offices are located at 10201 Willows Road, Redmond, Washington 98052, and its telephone number is (206) 881-8004. 3 6 THE OFFERING Common Stock offered by the Company................. 1,700,000 shares Common Stock offered by the Selling Shareholder..... 25,000 shares Common Stock to be outstanding after the offering... 9,859,176 shares(1) Use of proceeds..................................... Working capital and other general corporate purposes Nasdaq National Market symbol....................... ADIC
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEARS ENDED OCTOBER 31, ENDED JANUARY 31, ----------------------------------- --------------------- 1994(2) 1995(2) 1996(2) 1996(2) 1997 ------- ------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales............................................. $20,083 $31,716 $58,957 $10,606 $20,069 Gross profit.......................................... 6,588 9,609 17,070 2,994 5,971 Operating profit (loss)............................... (39) 511 5,682 544 2,292 Net income (loss)..................................... $ (42) $ 292 $ 3,430 $ 292 $ 1,661 Pro forma average number of common and common equivalent shares outstanding(3).................... 8,010 8,274 Pro forma net income per share(3)..................... $ 0.04 $ 0.41 Average number of common and common equivalent shares outstanding......................................... 8,350 Net income per share.................................. $ 0.20
QUARTER ENDED ------------------------------------------------------------------ FISCAL 1996(2) FISCAL 1997 --------------------------------------------------- ----------- JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, 1996 1996 1996 1996 1997 ----------- --------- -------- ----------- ----------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales............................................. $10,606 $13,779 $15,186 $19,386 $20,069 Gross profit.......................................... 2,994 3,735 4,253 6,088 5,971 Operating profit...................................... 544 1,203 1,554 2,381 2,292 Net income............................................ $ 292 $ 716 $ 933 $ 1,489 $ 1,661
JANUARY 31, 1997 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................................................. $ 6,796 $ 40,143 Working capital........................................................................... 27,185 60,532 Total assets.............................................................................. 37,492 70,839 Long-term debt............................................................................ -- -- Total shareholders' equity................................................................ 29,105 62,452
- --------------- (1) Based on the number of shares outstanding as of January 31, 1997. Excludes (i) 691,408 shares of Common Stock issuable as of January 31, 1997 upon the exercise of outstanding options at a weighted average exercise price of $8.52 per share and (ii) 252,500 shares of Common Stock reserved for future issuance as of January 31, 1997 under the Company's 1996 Stock Option Plan (the "1996 Plan"). See "Capitalization" and Note 6 of Notes to Consolidated Financial Statements. (2) Reflects the Company's results of operations as a wholly owned subsidiary of Interpoint, except for the period subsequent to October 15, 1996. The Company was acquired by Interpoint in February 1994 in a transaction accounted for as a pooling of interests. Results of operations for periods prior to October 15, 1996 include allocations of corporate expenses and interest expense on intercompany borrowings. (3) Unaudited pro forma net income per share for the fiscal year ended October 31, 1995 is calculated based on the number of shares of Interpoint common stock outstanding at June 30, 1996, plus the incremental shares outstanding, as calculated under the treasury stock method, based on the number of ADIC stock options outstanding as a result of the Distribution. Unaudited pro forma net income per share for the fiscal year ended October 31, 1996 is calculated based on the number of shares of ADIC Common Stock outstanding at October 31, 1996, plus the incremental shares outstanding, as calculated under the treasury stock method, at the same date. (4) Adjusted to reflect the sale of the 1,700,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $21.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 4 7 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. The following risk factors should be considered carefully in addition to the other information in this Prospectus before purchasing the shares of Common Stock offered hereby. Potential Fluctuations in Quarterly Results; Seasonality. The Company's quarterly operating results have varied in the past, and may vary significantly in the future, depending on factors such as increased competition and pricing pressure, timing of new product announcements and releases by the Company and its competitors, shifts in product or channel mix, the rate of growth in the data storage market, market acceptance of new and enhanced versions of the Company's products, timing and levels of operating expenses, size and timing of significant customer orders, gain or loss of significant customers or distributors, currency fluctuations, personnel changes and economic conditions in general. Any unfavorable change in these or other factors could have a material adverse effect on the Company's results of operations for a particular quarter. In particular, quarterly revenue and operating results depend on the volume and timing of orders received during the quarter. A significant majority of the Company's revenue in each quarter results from orders during that quarter. The Company historically has operated with little order backlog and, due to the nature of its business, does not anticipate that it will have significant backlog in the future. The Company's operating expense levels are, in the short term, largely fixed and are based, in part, on expectations regarding future revenue. Thus, if the Company's revenue falls below its expectations, the Company's results of operations could be disproportionately affected. Because of the relatively large dollar size of orders from the Company's distributors, delay in the placing of a small number of orders could have a significant impact on the Company's results of operations for a particular period. See "-- Customer Concentration." The Company's quarterly revenue and results of operations have been and may continue to be affected by seasonal trends, which often result in lower revenue in the first quarter of each fiscal year compared to the fourth quarter of the previous year, due to customer purchasing and budgetary practices and the Company's sales commission and budgetary structure. There can be no assurance that seasonal trends in customer purchasing will not materially adversely affect the Company's results of operations in future quarters. Consequently, operating results in any period should not be considered indicative of the results to be expected for any future period. There can be no assurance that the Company's revenue will increase, that its recent levels of quarterly revenue and net income will be sustained, or that the Company will achieve profitability in any future period. In addition, it is likely that in some future quarter the Company's results of operations will be below the expectations of public market analysts and investors. In such event, the price of the Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Selected Quarterly Information." Increasing Competition and Potentially Declining Prices. The market for network data storage peripherals in general, and automated tape libraries in particular, is intensely competitive, fragmented and characterized by rapidly changing technology and evolving standards. Competitors vary in size and in the scope and breadth of the products they offer. As the Company offers a broad range of automated tape library and complementary products, it tends to have a large number of competitors which differ depending on the particular product format and performance level. With respect to 4mm/DAT products, the Company believes it competes with Hewlett-Packard Company ("Hewlett-Packard"), Seagate, Sony Electronics Inc. ("Sony") and Spectra Logic. With respect to DLT products, the Company believes ATL Products, Inc., Breece Hill, Overland Data, Qualstar, Quantum Corporation ("Quantum") and StorageTek comprise its competition. With respect to 8mm products, the Company believes its competition is represented by Exabyte, Qualstar, Spectra Logic and StorageTek. Since there are relatively low barriers to entry into the automated tape library market, the Company 5 8 anticipates increased competition from other sources, ranging from emerging to established companies, including large system OEMs. Many of the Company's competitors have substantially greater financial and other resources, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products than the Company. The Company's competitors may develop new technologies and products that are more effective than the Company's products. In addition, competitive products may be manufactured and marketed more successfully than the Company's products. Such developments could render the Company's products less competitive or obsolete, and could have a material adverse effect on the Company's business, financial condition and ability to market the Company's products as currently contemplated. The Company believes the primary competitive factors in the market for network data storage products are performance, reliability, breadth of product line, distribution strength, product availability and price, as well as customer issues, including technical and sales support. The markets for the Company's products are characterized by significant price competition, and the Company anticipates that its products will face increasing price pressure. This pressure could result in significant price erosion, reduced gross profit margins and loss of market share, which could have a material adverse effect on the Company's business, financial condition and results of operations. Product Concentration. The Company derived a significant majority of its revenue in fiscal 1996 and the three months ended January 31, 1997 from the sale of its DLT-related products, including associated media, and the Company expects to continue to derive a substantial portion of its revenue from these products for the foreseeable future. As a result, the Company's future operating results are significantly dependent upon continued market acceptance of such products. There can be no assurance that the Company will successfully develop new products utilizing DLT technology or that such products will find market acceptance or meet customer expectations or that other technologies will not replace, in whole or in part, DLT technology. The Company's DLT products may be rendered obsolete by future technical advances by the Company's competitors or by certain of its suppliers, distributors or resellers. The failure of the Company to maintain and enhance the capabilities of its current DLT products or to introduce new products successfully into the market could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Technological Changes and Dependence on New Product Development" and "Business -- Products." Dependence on Certain Suppliers. The Company does not possess proprietary data storage drive technology and, consequently, depends on a limited number of third-party manufacturers for the drives that are incorporated into its products. These suppliers include Quantum, Sony and Hewlett-Packard. In some cases, these manufacturers are sole source providers of the drive technology and competitors of the Company in that they market their own tape library products. In particular, Quantum is the sole supplier of DLT drives and the primary supplier of DLT media, both of which have been subject to allocation by Quantum. As a result, the Company's requirement for DLT drives and media may not be met. The Company's other suppliers have, in the past, and may, in the future, be unable to ensure that the Company's supply needs will be adequately met. The Company does not have any long-term contracts with any of its significant suppliers, and if these suppliers were to decide to pursue the tape library market aggressively, they could cease supplying tape drives and media directly to the Company. Thus, there can be no assurance that the Company will be able to obtain adequate supplies of tape drives and media at acceptable prices, if at all. The partial or complete loss of certain of these sources could result in significant lost revenue, added costs and production delays or otherwise have a material adverse effect on the Company's business, financial condition, results of operations and customer relationships. See "Business -- Manufacturing." Technological Changes and Dependence on New Product Development. The market for the Company's products is characterized by rapidly changing technology and evolving industry standards and is highly competitive with respect to timely innovation. The introduction of new products embodying new or alternative technology, including optical disk, RAID or DVD storage systems, or the emergence of new industry standards could render existing products obsolete or unmarketable. The Company's 6 9 future success will depend on its ability to anticipate changes in technology, to gain access to such technology for incorporation into the Company's products and to develop new and enhanced products on a timely and cost-effective basis. In particular, the Company must be able to maintain compatibility of its products with significant future drive technologies and relies on producers of such drive technologies to achieve and sustain market acceptance of such technologies. Development schedules for high-technology products are subject to uncertainty, and there can be no assurance that the Company will be able to meet its product development schedules. If the Company is unable for technological or other reasons to develop products in a timely manner or if the products or product enhancements that it develops do not achieve market acceptance, the Company's business will be materially adversely affected. Additionally, there can be no assurance that the Company will be able to develop new products in response to product introductions by competitors, including both automated tape libraries and other sequential or random access mass storage devices that may be developed in the future, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Research and Development." Dependence on Growth in the Network Data Storage Market; Computer Market Generally. Substantially all of the Company's business is in the network data storage market, which is still a rapidly evolving market. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting network data storage solutions for their client/server computing environments. There can be no assurance that the market for network data storage will continue to grow. If the network data storage market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, financial condition and results of operations would be materially adversely affected. During recent years, segments of the computer industry have experienced significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns and layoffs. The Company's operations may in the future experience substantial fluctuations from period to period as a consequence of such industry patterns. There can be no assurance that such factors will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Industry." Customer Concentration. The majority of the Company's end users purchase the Company's products from VARs that, in turn, purchase the Company's products from large distributors such as Access Graphics Inc. ("Access Graphics"), Gates/FA Distributing Inc., GBC Distributing Inc., Ingram Micro Incorporated ("Ingram Micro"), Tech Data Corporation ("Tech Data") and Tenex Data Corp. ("Tenex"). Ingram Micro and Tech Data represented 22.6% and 21.4%, respectively, of the Company's net sales for the fiscal year ended October 31, 1996, and 23.0% and 15.6%, respectively, of the Company's net sales for the three months ended January 31, 1997. The Company has no long-term contracts with any of its significant customers or distributors, and sales are generally made pursuant to purchase orders. The Company's distributors carry competing product lines. There can be no assurance that distributors will continue to purchase the Company's products or be able to market them effectively. The Company allows distributors to return unsold products, generally within certain limitations. The reduction, delay or cancellation of orders or the return of a significant amount of products by one or more of its major distributors or customers, the loss of one or more of such distributors or customers, or any financial difficulties of such distributors or customers resulting in their inability to pay amounts owing to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing." Management of Growth. The Company is currently undergoing a period of rapid growth, and there can be no assurance that such growth, if sustained, can be managed successfully. This growth has resulted in, and may possibly create in the future, additional capacity requirements, new and increased responsibilities for management personnel, and added pressures on the Company's operating and financial systems. There can be no assurance that the Company's facilities, personnel and operating and financial systems will be sufficient to manage and sustain its current or future growth. The 7 10 Company's ability to manage any future growth effectively and accomplish its overall goals will depend on its ability to hire and retain qualified management, sales and technical personnel. See "-- Dependence on Key Employees (Team Members)" and "Business -- Employees (Team Members)" and "-- Facilities." International Operations. Net sales to customers outside the United States accounted for approximately 36.0% of net sales in fiscal 1996 and 37.2% of net sales in the three months ended January 31, 1997. The Company expects that international sales will continue to represent a significant portion of the Company's net sales. Sales to customers outside the United States are subject to a number of risks, including the imposition of governmental controls, the need to comply with a wide variety of foreign and U.S. export laws, political and economic instability, trade restrictions, changes in tariffs and taxes, longer payment cycles typically associated with international sales, and the greater difficulty of administering business overseas. Furthermore, although the Company endeavors to meet standards established by foreign regulatory bodies, there can be no assurance that the Company will be able to comply with changes in foreign standards in the future. The inability of the Company to design products to comply with foreign standards could have a material adverse effect on the Company's business, financial condition and results of operations. Most of the Company's international sales are denominated in U.S. dollars and fluctuations in the value of foreign currencies relative to the U.S. dollar could therefore make the Company's products less price competitive. A portion of the Company's international sales are denominated in foreign currencies. Consequently, a decrease in the value of a relevant foreign currency in relation to the U.S. dollar after establishing prices and before receipt of payment by the Company would have an adverse effect on the Company's results of operations. Further, the expenses of ADIC Europe SARL, the Company's wholly owned subsidiary ("ADIC Europe"), are denominated in French francs. The Company currently engages in only limited foreign currency hedging transactions, and is therefore exposed to some level of currency risk. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as do the laws of the United States. See "Business -- Sales and Marketing." Dependence on Key Employees (Team Members). The Company's future success depends in large part on its ability to retain certain key executives and other personnel, some of whom have been instrumental in establishing and maintaining strategic relationships with certain of the Company's suppliers and customers. The Company does not have any employment agreements with its domestic Team Members and maintains no key person insurance. The Company's growth and future success will depend in large part on its continuing ability to hire, motivate and retain highly qualified management, technical, sales and marketing Team Members. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its existing personnel or attract additional qualified personnel in the future. See "Business -- Employees (Team Members)" and "Management." Proprietary Technology. The Company's ability to compete effectively depends in part on its ability to develop and maintain proprietary aspects of its technology. The Company currently holds two U.S. patents and has applications for additional patents pending. There can be no assurance, however, that any future patents will be granted or that any patents will be valid or provide meaningful protection for the Company's product innovations. The Company also relies on a combination of copyright, trademark, trade secret and other intellectual property laws to protect its proprietary rights. Such rights, however, may not preclude competitors from developing products that are substantially equivalent or superior to the Company's products. In addition, many aspects of the Company's products are not subject to intellectual property protection. While the Company is not currently engaged in any intellectual property litigation or proceedings, there can be no assurance that it will not become so involved in the future. An adverse outcome in litigation or similar proceedings could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from others or require the Company to cease marketing or using certain products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. If the Company is required to seek licenses under patents or proprietary rights of others, there can be no assurance that any required licenses would be made 8 11 available on terms acceptable to the Company, if at all. In addition, the cost of responding to an intellectual property litigation claim, in terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Proprietary Rights." Warranty Exposure. The Company generally provides a two-year warranty on its products, with the exception of the tapes and the tape drives used in its products but manufactured by a third party. The Company passes on to the customer the manufacturer's warranty with respect to these tapes and tape drives. In the past, the Company has incurred higher warranty expenses relating to new products than it typically incurs with established products. The Company establishes allowances for the estimated liability associated with product warranties, but there can be no assurance that such allowances will be adequate or that the Company will not incur substantial warranty expenses in the future with respect to new or established products. See "Business -- Customer Service and Support." Risk of Product Defects; Product Liability. Complex products similar to those sold by the Company may contain defects or experience failures, especially when first introduced or when enhancements are added. The Company has in the past discovered defects in its products and may experience delays or lost revenue to correct any defects that may be discovered in the future. There can be no assurance that errors will not be found in new products after commencement of commercial shipments, and that such errors will not result in lost market share or reduced customer acceptance of new Company products. Any such occurrence could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's products are typically used to store data critical to organizations and, as a result, the sale of products by the Company may entail the risk of product liability claims. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. Broad Management Discretion Over Use of Proceeds. The primary purpose of this offering is to increase the Company's equity capital. The anticipated net proceeds to the Company from this offering have not been designated for specific uses and management of the Company will have broad discretion with respect to the use of such funds. Accordingly, there can be no assurance that such funds will be invested in a manner satisfactory to shareholders or in a manner that results in a significant return on investment. If appropriate opportunities present themselves, the Company may acquire businesses, products or technology that it believes are strategic, although it currently has no understandings, commitments or agreements with respect to any material acquisition. There can be no assurance that the Company will be able to identify, negotiate or finance such acquisitions successfully, or to integrate such acquisitions with its current business. The process of integrating an acquired business, product or technology into the Company may result in unforeseen operating difficulties and expenditures, and may absorb significant management attention that would otherwise be available for ongoing development of the Company's business. Moreover, there can be no assurance that the anticipated benefits of any acquisition will be realized. Acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, financial condition and results of operations. See "Use of Proceeds." Certain Antitakeover Considerations. The Company's Board of Directors (the "Board of Directors") has the authority, without any action by the shareholders, to issue up to 2,000,000 shares of Preferred Stock and to fix the rights and preferences of such shares. In addition, the Company has adopted a shareholder rights plan (the "Shareholder Rights Plan") involving the issuance of preferred stock purchase rights designed to protect the Company's shareholders from abusive takeover tactics by causing substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors. Certain provisions in the Company's Restated Articles of Incorporation, Restated Bylaws and the Shareholder Rights Plan, as well as Washington law, and the ability of the Board of Directors to issue Preferred Stock, may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a 9 12 premium over the market price of the Common Stock and may adversely affect the market price, and the voting and other rights of the holders, of Common Stock. Limited Trading History; Possible Volatility of Stock Price. The market price of the Common Stock has experienced fluctuations since it commenced trading in October 1996. There can be no assurance that the market price of the Common Stock will not fluctuate significantly. Announcements concerning the Company or its competitors, quarterly variations in operating results, the introduction of new technology or products or changes in product pricing policies by the Company or its competitors, changes in earnings estimates by analysts or changes in accounting policies, among other factors, could cause the market price of the Common Stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. See "Price Range of Common Stock." 10 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,700,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $21.00 per share are estimated to be approximately $33,347,000 (approximately $38,469,000 if the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholder. See "Principal and Selling Shareholders." The Company expects to use the net proceeds for working capital and other general corporate purposes. The Company may, when and if the opportunity arises, use an unspecified portion of the net proceeds to acquire 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 currently has no understandings, commitments or agreements with respect to any material acquisition, and there can be no assurance that any acquisition will be made. Pending such uses, the net proceeds will be invested principally in money market funds or other short-term, interest-bearing, investment grade securities. PRICE RANGE OF COMMON STOCK The Common Stock of the Company commenced trading publicly on the Nasdaq National Market on October 17, 1996 and is traded under the symbol ADIC. The following table sets forth, for the periods indicated, the high and low daily closing prices for the Common Stock:
HIGH LOW ------ ------ FISCAL YEAR ENDED OCTOBER 31, 1996 Fourth Quarter (beginning October 17, 1996).................... $14.25 $10.13 FISCAL YEAR ENDING OCTOBER 31, 1997 First Quarter.................................................. 22.00 10.25 Second Quarter (through February 14, 1997)..................... 21.94 19.50
On February 14, 1997, the last reported sale price for the Common Stock on the Nasdaq National Market was $21.00 per share. As of January 31, 1997, there were approximately 300 holders of record of the Common Stock. DIVIDEND POLICY The Company has not paid any cash dividends on the Common Stock and does not expect to pay any cash dividends on the Common Stock in the foreseeable future. The Company currently intends to reinvest earnings, if any, on the continued development and operation of its business. Any payment of cash dividends would depend on the Company's pattern of growth, profitability, financial condition and such other factors as the Board of Directors may deem relevant. 11 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of January 31, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the sale of the 1,700,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $21.00 per share and the receipt of the estimated net proceeds therefrom. This table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
JANUARY 31, 1997 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) 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; 8,159,176 shares issued and outstanding actual; 9,859,176 shares issued and outstanding as adjusted(1).................................. 21,555 54,902 Retained earnings.................................................. 7,642 7,642 Cumulative translation adjustment.................................. (92) (92) ------- ------- Total shareholders' equity.................................... 29,105 62,452 ------- ------- Total capitalization....................................... $29,105 $62,452 ======= =======
- --------------- (1) Excludes (i) 691,408 shares of Common Stock issuable upon the exercise of outstanding options to purchase Common Stock at a weighted average exercise price of $8.52 per share and (ii) 252,500 shares of Common Stock reserved for future issuance under the 1996 Plan. See Note 6 of Notes to Consolidated Financial Statements. 12 15 SELECTED FINANCIAL DATA The following selected financial data of the Company are derived from the Company's historical financial statements and notes thereto. For the approximately three-year period from November 1, 1993 to October 15, 1996, the selected consolidated financial data relate to the operations of the Company as part of Interpoint. For the two years ended September 30, 1993 and the period subsequent to October 15, 1996, the selected financial data relate to the operation of the Company as an independent company. Consolidated balance sheets at October 31, 1995 and 1996 and the related consolidated statements of operations and of cash flows for the three years ended October 31, 1996 and notes thereto appear elsewhere in this Prospectus. The selected financial data for the three months ended January 31, 1996 and 1997 have been derived from unaudited consolidated financial statements appearing elsewhere in this Prospectus which, in the opinion of the Company's management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for the interim periods presented. The results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year.
THREE MONTHS YEARS ENDED ENDED JANUARY 31, SEPTEMBER 30, YEARS ENDED OCTOBER 31, ----------------- ------------------------------ ----------------- 1992 1993(1) 1994(1)(2) 1995 1996 1996 1997 ------- ------- ---------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.......................................... $12,837 $17,108 $ 20,083 $31,716 $58,957 $10,606 $20,069 Cost of sales...................................... 8,831 10,775 13,495 22,107 41,887 7,612 14,098 ------- ------- ------- ------- ------- ------- ------- Gross profit..................................... 4,006 6,333 6,588 9,609 17,070 2,994 5,971 Operating expenses: Selling and administrative....................... 2,219 3,796 5,000 8,001 9,846 2,149 3,047 Research and development......................... 631 879 1,037 1,097 1,542 301 632 Acquisition expense.............................. -- -- 590 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Operating profit (loss)............................ 1,156 1,658 (39) 511 5,682 544 2,292 Other income (expense)............................. (170) (65) (102) (296) (394) (111) 254 ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes............................................ 986 1,593 (141) 215 5,288 433 2,546 Provision (benefit) for income taxes............. 22 308 (99) (77) 1,858 141 885 ------- ------- ------- ------- ------- ------- ------- Net income (loss).................................. $ 964 $1,285 $ (42) $ 292 $ 3,430 $ 292 $ 1,661 ======= ======= ======= ======= ======= ======= ======= Pro forma average number of common and common equivalent shares outstanding (unaudited)(3)..... 8,010 8,274 ======= ======= Pro forma net income per share (unaudited)(3)...... $ 0.04 $ 0.41 ======= ======= Average number of common and common equivalent shares outstanding............................... 8,350 ======= Net income per share............................... $ 0.20 =======
SEPTEMBER 30, OCTOBER 31, ------------------ -------------------------------- JANUARY 31, 1992 1993 1994(1)(2) 1995 1996 1997 ------- ------- ---------- ------- ------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital.................................... $ 2,080 $ 3,004 $ 4,156 $ 7,249 $24,596 $ 27,185 Total assets....................................... 3,958 5,895 8,710 13,943 36,710 37,492 Long-term and intercompany debt, excluding current portion.......................................... 916 672 2,358 5,434 -- -- Total shareholders' equity......................... 1,524 2,808 3,027 3,387 26,387 29,105
- --------------- (1) In order to conform the Company's fiscal year to Interpoint's fiscal year upon the merger of the Company into Interpoint in February 1994, in a transaction accounted for as a pooling of interests, the Company's financial statements for the month of October 1993 are not included in either the fiscal year ended September 30, 1993 or the fiscal year ended October 31, 1994. (2) In February 1994, the Company incurred $590,000 in acquisition-related expenses associated with its acquisition by Interpoint. Also, in June 1994, the Company acquired its wholly owned subsidiary, ADIC Europe, in a transaction accounted for as a purchase. (3) Unaudited pro forma net income per share for the fiscal year ended October 31, 1995 is calculated based on the number of shares of Interpoint common stock outstanding at June 30, 1996, plus the incremental shares outstanding, as calculated under the treasury stock method, based on the number of ADIC stock options outstanding as a result of the Distribution. Unaudited pro forma net income per share for the fiscal year ended October 31, 1996 is calculated based on the number of shares of ADIC Common Stock outstanding at October 31, 1996, plus the incremental shares outstanding, as calculated under the treasury stock method, at the same date. 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The Company's actual results could differ materially from those discussed here. The cautionary statements made in this Prospectus should be read as being applicable to all forward-looking statements wherever they appear in this Prospectus. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW The Company was incorporated in 1984 to develop data backup and storage subsystems for computer systems, and introduced its first product that same year. The Company's initial products used a variety of data storage technologies and media supplied by third parties, including large-capacity hard disks. In 1988, with the objective of increasing the proprietary features of its product line, the Company introduced a random access automatic tape changer, the LANbacker. Building on the proprietary electro-mechanical robotics and firmware incorporated into the LANbacker, in November 1991 the Company introduced a data backup tape changer product utilizing 4mm/DAT technology, the first product in its automated tape library family. Subsequently, the Company has pursued a strategy of offering the market a full range of automated tape library products through development of new library platforms that incorporate DLT, 4mm/DAT and 8mm magnetic tape drive technologies. In addition to automated tape libraries, the Company also markets tape products such as standalone tape drives and tape media in order to offer its customers a complete line of tape products for their backup and archiving needs. RESULTS OF OPERATIONS The following table sets forth certain statements of operations data as a percentage of net sales for the periods indicated.
PERCENTAGE OF NET SALES --------------------------------------------- THREE MONTHS ENDED YEARS ENDED OCTOBER 31, JANUARY 31, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................................... 67.2 69.7 71.0 71.8 70.2 ------ ------ ------ ------ ------ Gross profit................................... 32.8 30.3 29.0 28.2 29.8 Operating expenses: Selling and administrative..................... 24.9 25.2 16.7 20.3 15.3 Research and development....................... 5.2 3.5 2.6 2.8 3.1 Acquisition expense............................ 2.9 -- -- -- -- ------ ------ ------ ------ ------ Operating profit (loss).......................... (0.2) 1.6 9.7 5.1 11.4 Other income (expense)........................... (0.5) (0.9) (0.7) (1.0) 1.3 ------ ------ ------ ------ ------ Income (loss) before provision (benefit) for income taxes................................... (0.7) 0.7 9.0 4.1 12.7 Provision (benefit) for income taxes........... (0.5) (0.2) 3.2 1.3 4.4 ------ ------ ------ ------ ------ Net income (loss)................................ (0.2)% 0.9% 5.8% 2.8% 8.3% ====== ====== ====== ====== ======
14 17 THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 Net Sales. Net sales for the three months ended January 31, 1997 increased 89.2% to $20.1 million from $10.6 million for the same period in fiscal 1996. The increase in net sales was primarily due to strong unit sales volume of the Company's new DLT-based products, particularly the VLS DLT and Scalar automated tape libraries, the DS9000 series standalone tape drives and DLT media. The Company does not expect that its net sales will continue to grow at the year-to-year rate experienced in recent quarters. Sales outside the United States were $7.5 million or 37.2% of net sales for the three months ended January 31, 1997 compared to $4.9 million or 46.1% of net sales for the same period in fiscal 1996. Such sales are typically made in U.S. dollars but may also be made in foreign currencies. The Company takes appropriate actions to minimize exposure to fluctuations in foreign currency exchange rates. Gross Profit. Gross profit was $6.0 million or 29.8% of net sales for the three months ended January 31, 1997 compared to $3.0 million or 28.2% of net sales for the same period in fiscal 1996. Gross profit margin for the current three-month period was higher than the same period in fiscal 1996 due to a shift in product mix toward higher-margin Scalar libraries and product cost reduction efforts, offset in part by a general shift in product mix toward DLT products, which have a higher per-unit tape drive cost than products incorporating 4mm/DAT and 8mm drives, and related media. Gross profit margins are dependent on a number of factors, including customer and product mix, price competition and tape drive costs. There can be no assurance that the Company can improve upon or maintain the current gross margin levels, given that tape drives purchased from third-party suppliers are a significant component of the Company's product costs. Selling and Administrative Expenses. Selling and administrative expenses were $3.0 million or 15.3% of net sales for the three months ended January 31, 1997 compared to $2.1 million or 20.3% of net sales for the same period in fiscal 1996. Selling and administrative expenses for the three months ended January 31, 1997 decreased significantly as a percentage of net sales as increased net sales reflected the benefits of the Company's significant investments in sales and marketing resources in prior fiscal periods. Net sales volume in the three-month period increased 89.2%, compared to a corresponding 41.8% increase in selling and administrative expenses. The dollar increase in selling and administrative expenses in the three months ended January 31, 1997 over the comparable period in fiscal 1996 was primarily due to increased sales commissions, additions to sales and marketing staff, and increased administrative overhead. The Company does not expect selling and administrative expenses as a percentage of net sales to decline significantly from the levels experienced in the three months ended January 31, 1997. Research and Development Expenses. Research and development expenses were $632,000 or 3.1% of net sales for the three months ended January 31, 1997 compared to $301,000 or 2.8% of net sales for the same period in fiscal 1996. Actual dollar spending during the current three-month period was higher than the same period in fiscal 1996 due to increases in development expenses for the new Scalar 218 series and other product development expenses, and additions to research and engineering staff. Other Income (Expense). Other income for the three months ended January 31, 1997 was $254,000 compared to an expense of $111,000 for the same period in fiscal 1996. As a result of Interpoint's forgiving all intercompany loans to ADIC and contributing cash to ADIC in October 1996, the Company realized $115,000 of interest income in the three months ended January 31, 1997, rather than $129,000 of interest expense incurred in the same period in fiscal 1996. Net foreign currency translation gains increased approximately $120,000 between the comparison periods. Foreign currency translation 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 15 18 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 (Benefit) for Income Taxes. Income tax expense for the three months ended January 31, 1997 was $885,000 compared to $141,000 for the same period in fiscal 1996. The Company believes that the 34.8% effective tax rate reflected in its most recent results, which includes taxes paid in various federal, state and international jurisdictions, is generally indicative of the Company's effective tax rate in future periods. Inflation. The Company believes inflation has not had a material effect on its operations for these periods. FISCAL YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 Net Sales. Net sales increased 85.9% to $59.0 million in fiscal 1996 from $31.7 million in fiscal 1995. The increase resulted primarily from strong sales volume in the Company's DLT-based products, which were introduced beginning late in fiscal 1995, and related media. Net sales of older products, including certain 4mm/DAT and 8mm tape libraries, decreased somewhat in fiscal 1996. Several times during fiscal 1996 the Company reduced its end-user list prices on selected products. Net sales increased by 57.9% to $31.7 million in fiscal 1995 from $20.1 million in fiscal 1994. The increase in net sales was primarily due to strong worldwide market acceptance of the Company's automated tape libraries and standalone tape drive products. In addition, a portion of the growth from fiscal 1994 to fiscal 1995 reflects a full year of operations of ADIC Europe, which was acquired in June 1994. Sales outside the United States were $21.2 million or 36.0% of net sales in fiscal 1996 compared to $14.9 million or 47.1% of net sales in fiscal 1995 and $5.5 million or 27.4% of net sales in fiscal 1994. Gross Profit. Gross profit increased to $17.1 million in fiscal 1996 from $9.6 million in fiscal 1995. Gross profit as a percentage of net sales decreased to 29.0% in fiscal 1996 from 30.3% in fiscal 1995 due to the shift in product mix to DLT-based products, which have a higher per-unit tape drive cost than products incorporating 4mm/DAT or 8mm drives. The cost of direct material comprised a substantial majority of cost of sales in both fiscal 1995 and fiscal 1996, with the most significant cost item being the cost of tape drives purchased from third parties. Gross profit margin decreased from 32.8% in fiscal 1994 to 30.3% in fiscal 1995 due to the introduction of DLT-based products and an increase in the percentage of net sales derived from lower-margin, non-library products by ADIC Europe. Selling and Administrative Expenses. Selling and administrative expenses totaled $9.8 million or 16.7% of net sales in fiscal 1996 compared to $8.0 million or 25.2% of net sales in fiscal 1995, and $5.0 million or 24.9% of net sales in fiscal 1994. This increased dollar spending reflected a strategic decision to increase the Company's investments in sales and marketing subsequent to Interpoint's acquisition of the Company in February 1994. These investments include costs of European sales activities acquired in the purchase of ADIC Europe and the addition of experienced sales and marketing personnel in the United States. These expenses decreased as a percentage of net sales in fiscal 1996 compared to fiscal 1995 as the Company was able to leverage its investment in these resources with larger sales volume. While these expenses were relatively constant as a percentage of net sales in fiscal 1994 and fiscal 1995, actual dollar spending increased in fiscal 1995 due to additional costs incurred in connection with increased sales and marketing staff and the full-year impact of the ADIC Europe acquisition. Research and Development Expenses. Research and development expenses totaled $1.5 million or 2.6% of net sales in fiscal 1996 compared to $1.1 million or 3.5% of net sales in fiscal 1995, and $1.0 million, or 5.2% of net sales in fiscal 1994. The increase in dollar spending in fiscal 1996 was due to increases in development expenses for the Company's VLS DLT and Scalar DLT products, and to additions to research and engineering staff. 16 19 Acquisition Expense. The Company incurred a $590,000 acquisition-related expense during fiscal 1994 as a result of Interpoint's acquisition of the Company, which was accounted for as a pooling of interests. Other Expense. Other expense was $394,000 in fiscal 1996 compared to $296,000 in fiscal 1995 and $102,000 in fiscal 1994. Interest expense increased by $231,000 from fiscal 1995 to fiscal 1996 because of increased borrowings from Interpoint, which were forgiven prior to the effective date of the Distribution. Offsetting these expenses in fiscal 1996 were gains from foreign currency transactions of $114,000. Expense increases from fiscal 1994 to fiscal 1995 were due to increased interest expense arising from intercompany borrowings to support additional working capital requirements resulting from higher net sales. Provision (Benefit) for Income Taxes. The provision for income taxes for fiscal 1996 was $1.9 million, which represented an effective tax rate of 35.1% of pre-tax income in fiscal 1996, compared to a benefit for income taxes of $77,000 in fiscal 1995 and $99,000 in fiscal 1994. The benefits for income taxes in fiscal 1994 and fiscal 1995 were the result of the recognition of a net operating loss carryforward at ADIC Europe. The net operating loss carryforward existed when ADIC Europe was acquired in June 1994; however, a valuation allowance was provided for this item due to the uncertainty regarding the Company's ability to utilize this carryforward. Consequently, income taxes on earnings in fiscal 1994 and 1995 of ADIC Europe were offset by a reduction of this valuation allowance. At October 31, 1995, the valuation allowance associated with the remaining unused carryforward also was eliminated. In addition, certain federal tax credits reduced the effective tax rate in both years. SELECTED QUARTERLY INFORMATION The following table presents selected financial information for the quarters indicated. This information was derived from unaudited consolidated financial statements that were prepared on a basis consistent with the Company's audited consolidated financial statements included elsewhere in this Prospectus and, in the opinion of management, reflects all normal recurring adjustments necessary to present the information fairly. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------------------ FISCAL FISCAL 1995 FISCAL 1996 1997 ----------------------------------------- ----------------------------------------- -------- JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, 1995 1995 1995 1995 1996 1996 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Net sales...................... $ 5,823 $ 6,676 $ 8,470 $10,747 $10,606 $13,779 $15,186 $19,386 $20,069 Cost of sales.................. 3,726 4,460 6,043 7,878 7,612 10,044 10,933 13,298 14,098 ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross profit................. 2,097 2,216 2,427 2,869 2,994 3,735 4,253 6,088 5,971 Operating expenses: Selling and administrative.... 1,822 1,966 1,907 2,306 2,149 2,173 2,311 3,213 3,047 Research and development...... 264 184 271 378 301 359 388 494 632 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating profit............... 11 66 249 185 544 1,203 1,554 2,381 2,292 Other income (expense)......... (61) (51) (58) (126) (111) (130) (128) (25) 254 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes... (50) 15 191 59 433 1,073 1,426 2,356 2,546 Provision (benefit) for income taxes............... (28) 18 (4) (63) 141 357 493 867 885 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).............. $ (22) $ (3) $ 195 $ 122 $ 292 $ 716 $ 933 $ 1,489 $ 1,661 ======= ======= ======= ======= ======= ======= ======= ======= =======
17 20 The following table sets forth certain statements of operations data as a percentage of net sales for the quarters indicated.
PERCENTAGE OF NET SALES ------------------------------------------------------------------------------------------------ FISCAL FISCAL 1995 FISCAL 1996 1997 ----------------------------------------- ----------------------------------------- -------- JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, 1995 1995 1995 1995 1996 1996 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................. 64.0 66.8 71.3 73.3 71.8 72.9 72.0 68.6 70.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Gross profit................. 36.0 33.2 28.7 26.7 28.2 27.1 28.0 31.4 29.8 Operating expenses: Selling and administrative... 31.3 29.4 22.5 21.5 20.3 15.8 15.2 16.6 15.3 Research and development..... 4.5 2.8 3.2 3.5 2.8 2.6 2.6 2.5 3.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Operating profit............... 0.2 1.0 3.0 1.7 5.1 8.7 10.2 12.3 11.4 Other income (expense)......... (1.1) (0.8) (0.7) (1.2) (1.0) (0.9) (0.8) (0.1) 1.3 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision (benefit) for income taxes... (0.9) 0.2 2.3 0.5 4.1 7.8 9.4 12.2 12.7 Provision (benefit) for income taxes............... (0.5) 0.3 0.0 (0.6) 1.3 2.6 3.3 4.5 4.4 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss).............. (0.4)% (0.1)% 2.3% 1.1% 2.8% 5.2% 6.1% 7.7% 8.3% ===== ===== ===== ===== ===== ===== ===== ===== =====
The Company's operating results over the nine quarters ended January 31, 1997 reflect generally increasing net sales, excluding the first quarters of fiscal 1995 and 1996. The sequential drop in net sales in those quarters and the diminished sequential growth of net sales in the first quarter of fiscal 1997, when compared to their respective previous fourth quarters, reflect a traditional seasonal pattern in the Company's operating results. The Company's quarterly operating results have varied in the past, and may vary significantly in the future, depending on factors such as increased competition and pricing pressure, timing of new product announcements and releases by the Company and its competitors, shifts in product or channel mix, the rate of growth in the data storage market, market acceptance of new and enhanced versions of the Company's products, timing and levels of operating expenses, size and timing of significant customer orders, gain or loss of significant customers or distributors, currency fluctuations, personnel changes and economic conditions in general. Any unfavorable change in these or other factors could have a material adverse effect on the Company's results of operations for a particular quarter. See "Risk Factors -- Potential Fluctuations in Quarterly Results; Seasonality." LIQUIDITY AND CAPITAL RESOURCES From February 1994 when the Company was acquired by Interpoint until the Distribution, the Company financed its growth through loans from Interpoint. The net increases in the amounts of such loans in fiscal 1994, 1995 and 1996 were $2.4 million, $3.1 million and $4.2 million, respectively. Prior to the Distribution, Interpoint made a contribution to the working capital of the Company through the cancellation of all $9.6 million of Company indebtedness to Interpoint. Interpoint also contributed an additional $10.0 million in cash to the working capital of the Company at the time of the Distribution, which cash has funded the Company's growth since October 1996. In the first three months of fiscal 1997, the Company realized $1.2 million due to the exercise of stock options by Team Members, including tax benefits of $891,000. The Company's operating activities used cash of $1.7 million in fiscal 1994, $1.9 million in fiscal 1995, $3.5 million in fiscal 1996 and $4.5 million in the first three months of fiscal 1997. In fiscal 1994, such cash was primarily used to fund a $1.7 million increase in accounts receivable. In fiscal 1995, such cash was primarily used to fund a $2.6 million increase in inventories and a $1.7 million increase in accounts receivables, offset in part by a $1.4 million increase in accounts payable. In fiscal 1996, such cash was primarily used to fund a $7.0 million increase in accounts receivable and a $5.6 million 18 21 increase in inventories, offset in part by a $4.5 million increase in accounts payable and net income of $3.4 million. In the first three months of fiscal 1997, such cash was primarily used to fund a $2.4 million increase in accounts receivable, a $2.2 million increase in inventories and a $1.8 million decrease in accounts payable, offset in part by net income of $1.7 million. The Company also used cash in the amount of $494,000 to acquire the Company's European sales subsidiary in 1994 and cash in the amounts of $451,000, $757,000, $911,000 and $324,000 to acquire property, plant and equipment in fiscal 1994, 1995 and 1996 and the first three months of fiscal 1997, respectively. At January 31, 1997, the Company had cash and cash equivalents of $6.8 million. As of that date, the Company also had a $10.0 million bank line of credit that expires at the end of fiscal 1998, all of which was available. Any borrowings under this line of credit would bear interest at the bank's prime rate or adjusted LIBOR rate. The Company has no material commitments other than annual rental commitments of $411,000 to $465,000 over each of the next five fiscal years under noncancellable operating leases for the Company's facilities. In addition, while the Company does not expect revenue to continue to grow indefinitely at rates comparable to those of the last several years as the market for its products matures, if revenue were to continue to grow at such rates the Company would require substantial cash to finance its working capital (especially accounts receivable and inventories). The Company believes that its existing cash and cash equivalents and bank line of credit, together with the net proceeds from this offering, will be sufficient to fund its working capital and capital expenditure needs for at least the next 12 months. Thereafter, if the cash generated from operations is insufficient to meet the Company's requirements, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's shareholders. There can be no assurance that such additional financing, if required, would be obtained on acceptable terms, if at all. The Company may also 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 understandings, commitments or agreements with respect to any material acquisition of other businesses, products or technologies. 19 22 BUSINESS GENERAL The Company is a leading provider of automated tape libraries and standalone tape drives used to back up and archive electronic data in client/server network computing environments. The Company integrates proprietary electro-mechanical robotics, electronics hardware and firmware with technologically advanced tape drives manufactured by third parties to provide highly automated data storage protection. When used with third-party storage management software, the Company's products can perform sophisticated backup and archiving of electronic data residing across a network of PCs, workstations and servers with minimal human intervention. The Company's product family operates in both PC-based (Windows NT and Novell NetWare) and UNIX environments and provides data storage capacity ranging from four gigabytes to over three terabytes. The Company's customers are located worldwide and range in size from large multinational companies to small businesses. The Company markets its products in North America, Europe and the Asia Pacific region through multiple distribution channels, including distributors, VARs and OEMs. For fiscal 1996 and the three months ended January 31, 1997, 36.0% and 37.2%, respectively of the Company's net sales were derived from outside the United States. The Company supports these channels and its end users with a combination of regional field sales, systems engineering and technical support personnel, as well as third-party on-site service organizations. INDUSTRY CLIENT/SERVER NETWORK DATA BACKUP MARKET The Company believes that multiple trends continue to foster growth of the data storage segment of the client/server network computing environment. Personal computer and workstation microprocessors continue to achieve substantial increases in performance, both absolute and relative to their cost. Enabled by this increased processing power and the increasing sophistication of both network operating systems and relational databases, organizations are migrating core business processes (such as financial transaction processing, materials requirements planning, document imaging and management, engineering drawings and customer databases) from manual processes or mainframes to lower-cost client/server computer networks. In addition, the advent of the Internet, electronic mail and groupware continue to foster further client/server network computing growth. The combination of these trends is driving a proliferation of client/server network computing. Each of the trends outlined above is driving an increase not only in the installed base of networks, but also in the data storage requirements of these networks. The data stored on client/server networks is growing both in volume and in value. As an organization migrates its core processes to client/server computer networks, the electronic data stored on these networks, such as a customer or patient database, a set of engineering drawings or a record of financial transactions, becomes an increasingly vital asset. The opportunity cost of data loss has become extraordinarily high, with potentially large and long-term negative impacts on an organization. Data loss can result from a wide variety of causes, including human error, equipment failure, database corruption, computer viruses and man-made or natural disasters. Systematic and cost-effective backup and archiving of data stored on client/server networks is essential to protecting one of an organization's most important assets. The combination of these trends, coupled with increasingly data-intensive software applications, is driving an increase in demand for data storage and a growing need for data backup and archiving in client/server network computing environments. AUTOMATED TAPE LIBRARIES The Company believes automated tape libraries, which operate in conjunction with storage management software and incorporate magnetic tape drive technology, provide the best systematic and cost-effective backup solution for client/server networks. These products provide client/server 20 23 networks with software-controlled access to multiple magnetic tape cartridges for storage and retrieval of digitally stored data. The backups occur automatically and minimize human intervention. Automated tape libraries, housing these tapes and one or more tape drives, utilize an electro-mechanical robotic mechanism to manipulate the tape cartridges, loading and unloading specific tape cartridges into and out of the tape drive or drives as directed by the storage management software. Automated tape libraries efficiently systematize the network backup process through a number of features. An automated tape library, directed by storage management software, can perform sophisticated backups of a network's data without human intervention, automatically backing up specific network data to specific tapes at specific times. This process operates in a "lights out" mode, backing up the network at any time, thereby eliminating the need for system administrator staffing when the network is backed up, generally at night. Access to multiple tape cartridges enables the library to automatically store much more data than a standalone drive, eliminating the need for a system administrator to swap tapes in order to back up all the data. Unlike a typical hard disk drive, magnetic tape drives utilize removable cartridges containing a robust medium. Therefore, data backed up by an automatic tape library can be reliably stored offsite as an element of a disaster recovery scheme. Within the library, tape cartridges are typically organized in magazines. In some cases, these tape magazines are removable, easing storage and offsite transfer of the tapes. A library with multiple tape drives can back up data with all drives simultaneously, significantly speeding up the backup process. Some larger libraries feature a barcode system which, in conjunction with the storage management software, can catalog each tape, further enhancing the management of the data. Libraries often feature key lock access to the tapes, providing security protection for the data by preventing undesired human access. Some libraries feature a software and password-controlled access feature which allows for controlled addition or removal of selected cartridges without providing open access to all tapes housed within the library or taking the library off-line. Backup and archival storage needs differ somewhat from the demands of other storage applications, such as online data storage, with overall capacity and data transfer rate being more important than the speed of data access and retrieval. As a result of relatively high transfer rates, high capacity and low cost per gigabyte, tape drive technologies are used for backup or archival purposes in a large proportion of client/server networks in commercial and government organizations. The Company believes that, assuming continued investment by tape drive manufacturers, magnetic tape drives will continue to be a cost-effective solution for data backup and archival purposes in terms of cost per unit of data storage. Automated tape libraries leverage the cost-effectiveness of magnetic tape drives by automating the access to multiple data cartridges by each tape drive, decreasing further the dollar-per-gigabyte of storage cost relative to other technologies. According to a December 1995 independent study by Dataquest Incorporated, the market for automated tape libraries for client/server network computing environments (DLT, 4mm/DAT and 8mm) was approximately $300 million in 1995, and is projected to grow at an annual compound growth rate of approximately 32% to over $900 million in 1999. ADIC STRATEGY The Company's goal is to continue expanding its position as a market leader in providing automated tape libraries and complementary products to the client/server network marketplace. Key components of the Company's strategy include: Offer a Full Range of Library Products. The Company believes it currently offers the most complete range of automated tape library and standalone drive products available for the client/server network marketplace. Available storage capacities range from four gigabytes to over three terabytes. Although different types and sizes of client/server networks require different levels of tape library capacity and performance, the Company's broad product family provides both end users and channel partners with "one-stop-shopping" for products, service and support. By offering standalone drive products in addition to libraries, the Company is able to further enhance the breadth of its product 21 24 line, familiarizing customers with entry-level backup and archiving data storage needs with its brand name and products and providing them with migration and upgrade paths to the Company's other products. In addition, the Company's broad product line allows it to purchase tape drives in large volumes, which may enhance its ability to negotiate with key magnetic tape drive suppliers. Offer Products in Multiple Drive Technologies. The Company offers automated tape libraries based on each of the magnetic tape drive technologies, including DLT, 4mm/DAT and 8mm, and maintains compatibility with a wide variety of storage management software platforms. The Company's strategy is to work closely with leading tape drive manufacturers in order to rapidly develop products incorporating state-of-the-art technologies. The Company's strategy of developing products based on multiple drive technologies allows the Company to reduce its dependence on any single tape drive technology, as well as offer products which target the specific technology needs of different market segments. In addition, the Company's products are compatible with over 50 storage management software applications. Leverage Technology Across Products. The Company is able to leverage nearly a decade of automated tape library research and development across a number of products. The Company has launched six generations of products and is currently developing products featuring the seventh generation of its technology. Successive products and product line extensions build on an existing foundation of technology and knowledge, including operating systems software, electronic hardware and electro-mechanical hardware. Leveraging its existing technology to build a broad product line enables the Company to decrease both the time-to-market and development costs of new products. In addition, this strategy enhances manufacturing leverage and flexibility, as the Company is able to share common parts, manufacturing resources and suppliers across a wide range of products. Further Develop Brand Name and Strong Worldwide Distribution Channels. The Company has established and continues to develop strong distribution channels in the North American, European and Pacific Rim markets. The Company has numerous long-standing relationships with national distributors and resellers that have experience in offering the Company's line of products. These distribution channels enable the Company to cost-effectively offer its broad range of branded products to multiple market segments and provide an immediate outlet for new products as they are developed. In addition, the Company believes that as a result of its investment in advertising, promotion and brand development, it will develop brand recognition and customer loyalty, increasing the level of recurring business from its customers. In particular, the Company believes that its distribution relationships and brand name recognition position it well to take advantage of the growth of PC-based client/server networks, including those based on Windows NT. As appropriate, the Company intends to pursue additional channel partnerships to address untapped or underpenetrated market segments. Offer Broad Technical Support. The Company views customer service and support as strategically important elements of its business. During the sales process, the Company's sales force and systems engineers provide technical recommendations to its channel partners and end users. After the sale, the Company provides 24-hour-a-day technical support. The Company's technical support staff, which is knowledgeable about storage management software and systems, is able to address customer inquiries beyond the automated tape library hardware level. In situations where problems are beyond the scope of the Company's technical support staff, systems engineers can be made available for telephone or on-site consultation. The Company also offers customers various levels of on-site service programs through third-party providers. Finally, the Company offers a comprehensive training program to resellers and end users. Develop or Acquire Related Specialized Storage Products. The Company believes that growth of the client/server network data storage market will create opportunities for it to expand its product offerings. The Company intends to continue to seek out related market niches which leverage its strengths. The Company has over a decade of research and development experience in client/server network data storage and believes this experience may be applied beyond automated tape libraries to other specialized storage products. In addition, the Company believes its distribution channels can be 22 25 used to distribute related data storage products to end users. New, related storage products could originate from internal research and development or through acquisitions. PRODUCTS The Company's principal products, automated tape libraries, combine proprietary electro-mechanical robotics, electronic hardware and firmware with industry standard, technologically advanced tape drives manufactured by third parties. The automated tape libraries are housed in a desktop, rackmount or floor-standing enclosure. When operated in conjunction with third-party storage management software, the Company's libraries provide a complete solution for systematically and cost-effectively automating data storage backup and archiving in client/server network computing environments. The Company offers a family of automated tape libraries and standalone tape drive products with different data storage capacity and data transfer rate characteristics. In addition to automated tape library and standalone tape drive products, the Company supplies its channels and end users with a range of supplemental products, including tape cartridge media, tape magazines, rackmount kits and cables. See "Risk Factors -- Product Concentration." The Company's products vary by tape technology, number of tape drives and number of tape cartridges. New library product development is driven by two sources, the identification of new market opportunities and the availability of new tape drive technologies. The identification of new market opportunities results from ongoing work by the Company's sales, marketing and product management organizations to identify new products to fulfill customer and marketplace needs. In addition, the Company maintains close relationships with tape drive manufacturers in order to stay abreast of technology developments. The table below summarizes the configurations and performance of the Company's current automated tape library product line. CURRENT ADIC PRODUCTS
DATA STORAGE DATA TRANSFER PRODUCT TAPE NUMBER OF NUMBER OF TAPE CAPACITY RATE OR PRODUCT LINE TECHNOLOGY TAPE DRIVES CARTRIDGES (GB)(1) (MB/MIN)(1) - --------------- ---------- ----------- -------------- ------------ ------------- DATa 8000 4mm/DAT 1 1 8 44-90 SDX 300 SDX 1 1 50 360 DS9000 DLT 1 1 20-70 150-600 800E 4mm/DAT 1 8 64 90 1200 4mm/DAT 1 12 96 44-90 VLS-4 4mm/DAT 1-2 15 120 44-180 VLS-8 8mm 1-2 11 154 60-120 VLS DLT DLT 1 7 210-490 150-600 Scalar 218 DLT 2 18 540-1260 300-1200 Scalar 224 DLT 2 24 720-1680 300-1200 Scalar 448 DLT 2-4 48 1440-3360 300-2400 Scalar 458 DLT 2-4 58(2) 1440-3360 300-2400
- --------------- (1) Both capacity and transfer rate values assume 2:1 data compression. Attainment of these capacities and rates depends on system software and hardware performance in addition to library performance. Data storage capacity and data transfer rate ranges for a specific library model are a function of different drive models. (2) Ten of the 58 tape cartridges in the Scalar 458 are provided by the import/export feature and are not counted in calculating capacity. 23 26 The Company's products range in end-user list price from under $2,000 for a DATa 8000 to over $75,000 for a Scalar 458 with four of the most advanced DLT drives (the DLT 7000). In certain configurations, both the VLS and Scalar series products can be purchased in lower-cost configurations and upgraded in the future as the customer's performance needs grow. DATa 8000 Series. The DATa 8000 series is the Company's line of standalone 4mm/DAT drives for use in the smallest backup applications. The DATa 8000 series includes the DATa 8000E, which offers a transfer speed of 90 megabytes per minute, compressed. SDX 300 Series. The SDX 300 series is the Company's new standalone 8mm tape drive product that features recently introduced SDX technology from Sony. DS9000 Series. The DS9000 series is the Company's line of standalone DLT drives for more demanding backup applications. Several of the DS9000 series models feature a differentiating user-friendly display which displays information regarding drive status and performance. 800E. The 800E is the Company's recently introduced entry-level library, an autoloader featuring one 4mm/DAT tape drive and up to eight tape cartridges. 1200 Series. The 1200 series features one 4mm/DAT tape drive and up to 12 tape cartridges. The 1200 series is available with either a Hewlett-Packard tape drive or one of two performance levels of Sony tape drives. Introduced in 1992, the 1200 series is the Company's longest established library. VLS Series. The VLS series is available in DLT, 4mm/DAT and 8mm drive versions. The VLS series features a display and an advanced keypad for ease of user operation. The 4mm/DAT and 8mm products are available in versions with two drives or with one drive upgradeable to two. As with the 1200 series, the VLS 4mm/DAT product is available with a Hewlett-Packard tape drive or one of two performance levels of Sony tape drives. Also, the VLS DLT product is available with three performance levels of DLT drives (the 2000xt, 4000 and 7000). Scalar Series. The Scalar 224, 448 and 458, the Company's fifth generation of automated libraries, represent the high end of the Scalar product line. These Scalar units utilize DLT drive technology, and are available in three different levels of drive performance (the 2000xt, 4000 and 7000), with up to four drives and a 58 tape cartridge capacity. Fully configured, the Scalar 458 can store over three terabytes of data. Available features include a bar code system, a tape import/export mechanism and rack-mount or free-standing configurations. Critical subassemblies are field replaceable to minimize downtime and enhance serviceability. Additionally, the Scalar 224, 448 and 458 feature upgradability from the lowest-cost base model to the fully featured model. The Scalar 218 is the Company's sixth generation and most recently launched library. The Company believes that it is the highest capacity desktop library available, with a maximum capacity of 1.26 terabytes, using two DLT drives and 18 tape cartridges. The Scalar 218 received a Windows NT Magazine UNIX/Windows NT Technology award in October 1996. 24 27 The Company's broad product offerings enable it to address a wide range of backup storage needs within the client/server network environment. The chart below arrays a subset of the Company's library products, excluding Scalar libraries configured with the highest performing DLT tape drives (the DLT 7000), on the critical performance dimensions of data storage capacity and data transfer rate. The full performance range of the Company's Scalar libraries is listed in the table above entitled "Current ADIC Products." [GRAPHICS INDICATING CERTAIN CRITICAL PERFORMANCE DIMENSION OF THE COMPANY'S PRODUCTS]
Rated Capacity Transfer Rate Product (GB) (MB/Min) - ------- -------------- ------------- 1200 96 44 VLS-4 120 88 VLS-8 154 120 VLS DLT300 210 150 VLS DLT400 280 180 VLS DLT700 490 600 Scalar 218 (2000xt) 540 300 Scalar 224 (2000xt) 720 300 Scalar 218 (4000) 720 360 Scalar 224 (4000) 960 360 Scalar 448/458 (2000xt) 1440 600 Scalar 448/458 (4000) 1920 720
STORAGE MANAGEMENT SOFTWARE The majority of the Company's products are installed on client/server computer networks in conjunction with storage management software. Currently, over 50 different storage management software packages support one or more of the Company's products. On Microsoft Windows NT and Novell NetWare platforms, these packages include products from Cheyenne Software, Legato Systems, Network Integrity, Seagate Software (Arcada and Palindrome) and STAC. On UNIX platforms, these packages include products from Cheyenne Software, IBM ADSM, Legato Systems, OpenVision Technologies, Spectra Logic (Alexandria) and VERITAS Software. The Company works closely with storage management software companies in a number of ways. It periodically engages in discussions with developers at these companies regarding the marketplace, end-user needs and potential solutions to these needs combining the Company's products and the company's storage management software. The Company partners with storage management software companies to offer promotional product bundles, offering customers a special price on the combination of a Company product and a storage management software product. In addition, the Company's field sales force strives to maintain relationships with its counterparts from each of the storage management software companies and frequently participates in joint sales calls and seminars. The Company also maintains technical relationships with developers at these companies, in most cases providing Company products for their use in developing software for these products. The Company's systems engineering lab has many storage management software products running in-house in order to perform ongoing compatibility testing. 25 28 SALES AND MARKETING The Company's strategy is to deploy a comprehensive sales, marketing and support infrastructure to address the market for client/server network storage peripherals both domestically and internationally. The Company relies on multiple distribution channels to reach end users ranging in size from small businesses to large multinational corporations. The Company's channels include distributors, VARs and OEMs. The Company supports these channels with a field sales force operating out of regional offices in the following locations: Atlanta, Chicago, Dallas, London, Los Angeles, Munich, New York, Paris, San Francisco, Toronto and Redmond, Washington. RESELLERS North American Distributors. The Company sells its products to large regional and national distributors that in turn resell the Company's products to national, regional or local VARs with expertise in integrating network solutions for end users. The Company provides support for these VARs through its authorized reseller programs. In the case of larger, more complex sales situations, the Company's field sales force may work in conjunction with a VAR to support the sale. The Company currently has relationships with six major North American distributors -- Access Graphics, Gates/FA, GBC Distributing Inc., Ingram Micro, Tech Data and Tenex. Ingram Micro and Tech Data represented 22.6% and 21.4%, respectively, of the Company's net sales for the fiscal year ended October 31, 1996, and 23.0% and 15.6%, respectively, of the Company's net sales for the three months ended January 31, 1997. See "Risk Factors -- Customer Concentration." International Distributors. Similar to North America, the Company also has relationships with a number of large regional and national distributors internationally. International sales represented 36.0% of net sales in fiscal 1996 and 37.2% of net sales in the three months ended January 31, 1997, the majority of which, in each period, occurred in Europe. The Company believes that international markets represent an attractive growth opportunity and intends to expand the scope of its international sales efforts in part by continuing to actively pursue additional international distributors and resellers. See "Risk Factors -- International Operations." Premier VAR Program. The Company has direct sales relationships with approximately 25 "Premier VARs" throughout North America and Europe. These Premier VARs are typically larger VARs specializing in data storage and network solutions for client/server networks. Premier VARs assume increased levels of responsibility for sales and support, although they are still occasionally assisted by the Company's field sales force in certain large, complex sales situations. OEMS The Company sells its products to several companies under a private label or OEM relationship. These companies resell the products under their own brand name, sometimes after enhancing the products technically to target a specific market, performance or application niche. Private labelers and OEMs assume responsibility for product sales, service and support. These relationships enable the Company to reach end-user market niches not served by its other reseller distribution channels. Although not a key component to its strategy, the Company maintains ongoing discussions with private labelers and OEMs, including leading systems suppliers, regarding opportunities with the Company's products. Sales of the Company's products through OEM channels were not material in fiscal 1996 or the three months ended January 31, 1997. CORPORATE SALES The Company maintains corporate sales relationships with a number of large national and multinational companies, including financial institutions, telecommunications companies, large industrial corporations and professional service firms. In these sales situations, the Company typically works with the company's central information services organization to assess data storage backup needs, and then recommends a solution incorporating the Company's products. The successful culmination of this 26 29 recommendation may be the establishment of a corporate standard, including a selection of the Company's products. Once this standard is established, organizations throughout the company can purchase the Company's products to meet their needs. CORPORATE MARKETING The Company supports its channel sales and field sales force efforts with a broad array of marketing programs designed to build the Company's brand name, attract additional resellers and generate end-user demand. Resellers are provided with a full range of marketing materials, including product specification literature and application notes. The Company advertises in key network systems publications and participates in national and regional tradeshows both domestically and internationally. The Company's World Wide Web page features a comprehensive collection of marketing information, including product specification sheets, product user manuals and application notes. The Company's field sales force conducts seminars targeting end users, often with a sales representative from one of the storage management software companies. The Company also conducts sales and technical training classes for its resellers. The Company periodically engages in various promotional activities for resellers and end users, including product-specific rebates, bundling its products with selected storage management software and certificates for free tape drive cleaning cartridges. In addition to the activities outlined above, the Company's marketing organization, specifically its product management team, is responsible for initiating development of new products and product line extensions. In order to create the Company's product development plan, the product management team combines its assessment of end-user needs, channel requirements, technology developments and competitive factors with input from the Company's engineering, sales and manufacturing organizations. CUSTOMER SERVICE AND SUPPORT The Company views customer service and support as strategically important elements of its business. The Company's customer service and support effort consists of five components. Technical Support. The Company maintains an internal technical support organization. Technical support personnel are available to all customers at no charge via telephone, facsimile and Internet electronic mail to answer questions and solve problems relating to the Company's products. Technical support personnel are not only trained with respect to the Company's products, but also experienced with storage management and network operating system software. Products with problems not resolved via telephone support may be returned to the Company for repair or replacement during the warranty period. For a nominal fee, customers may choose to receive a "hot swap" exchange unit that will be shipped via express mail within 24 hours. Systems Engineering. The Company also maintains a staff of systems engineers who provide both pre- and post-sales support to resellers and end users. Systems engineers typically become involved in more complex problem-solving situations involving interactions between the Company's products, the storage management software, the network server hardware and the network operating system. Systems engineers work with resellers and end users both over the telephone and on-site. On-Site Service. The Company contracts with third-party service providers to offer on-site service for its products. A wide variety of programs is available, up to and including 24-hour-a-day, seven-day-a-week on-site service. Training. The Company offers a comprehensive training program to resellers and end users. Training classes are conducted at the Company's headquarters and on-site at reseller and end-user locations worldwide. Warranty. For Company products, parts and labor are generally covered by a two-year warranty. With respect to tape drives and related media used in the Company's products but manufactured by a 27 30 third party, the Company passes on to the customer the manufacturer's warranty on such tape drives and related media provided by the manufacturer. See "Risk Factors -- Warranty Exposure." RESEARCH AND DEVELOPMENT The Company's research and development team has developed six product generations of automated tape library products. The Company's research and development efforts rely on the integration of multiple engineering disciplines to generate products that competitively meet market needs in a timely fashion. Successful development of automated tape libraries requires the melding of firmware design, electro-mechanical design, electronic design and engineering packaging into a single, integrated product. Product success also relies on the engineering team's thorough knowledge of each of the different tape drive technologies and SCSI protocol. See "Risk Factors -- Technological Changes and Dependence on New Product Development." The Company's new product development is frequently stimulated by the availability of an enhanced or new tape drive technology. As they compete in the marketplace, tape drive manufacturers continually invest in research and development to gain performance leadership either by offering increasingly enhanced versions of their current drive products or by introducing an entirely new drive technology. The Company benefits from these industry developments by utilizing these new tape drive technologies in its products. If a new drive is an enhanced version of one already incorporated in one or more of the Company's products, the Company's time and dollar investment to incorporate the new drive can be quite small, with the focus being on verification testing. With new tape drive technology introductions, the level of effort required to develop a corresponding product depends somewhat on the form factors of the drive and media. In cases where the form factors match a drive technology currently supported, the time and investment required can again be quite low. When the form factors differ, the time and investment requirements can grow substantially, and may require development of a new product altogether. Given the importance of relationships with tape drive manufacturers to the Company's success, the Company strives to, and believes it does, maintain close relationships on both a management and a technical level with several tape drive manufacturers. These relationships at times provide early warning of new tape drive technologies and assist the Company in reducing the time-to-market for new product development. The Company also identifies and defines new products based on the more traditional identification of a market need which the Company believes it can successfully fill. The Company's sales, marketing, product development and engineering organizations all contribute to this identification process. With these product development efforts, time and investment requirements tend to be significant, in terms of both engineering and tooling for manufacturing. However, the Company has found that it has been able to leverage its previous engineering investments into new products. For example, the firmware, or operating system, of the fifth-generation Scalar library product is based on successive generations of the operating system developed for the Company's first library. Similarly, the Company's engineers have been able to leverage its electro-mechanical and electronic hardware designs from previous products into next-generation designs. In some cases, entire subassemblies are transferable, leveraging not only engineering time but also tooling investments, materials purchasing, inventory stocking and manufacturing. The Company's research and development expenses were $1.0 million, $1.1 million and $1.5 million in fiscal 1994, 1995 and 1996, respectively, and $632,000 for the three months ended January 31, 1997. The Company anticipates making comparable or increased investments in research and development efforts in the future. MANUFACTURING The Company's manufacturing processes, which are ISO 9001 certified, entail manufacturing electro-mechanical robotic devices, integrating into them third-party tape drives, and performing testing on the completed device. The Company's manufacturing strategy is to perform product 28 31 assembly, integration and testing, leaving component and piece part manufacturing to its supplier partners. The Company works closely with a group of regional, national and international suppliers to obtain quality parts and components meeting its specifications. Though the Company's designs are proprietary, the various components are available off the shelf or are manufactured using standard, readily available techniques, limiting supplier base risk and easing volume increases. Inventory planning and management is coordinated closely with suppliers and customers to match the Company's production to market demand. Product orders are confirmed and, in most cases, shipped to the customer within one week. The Company fills orders as they are received and therefore believes that its backlog levels are not indicative of future sales. COMPETITION The market for network data storage peripherals in general, and automated tape libraries in particular, is intensely competitive, fragmented and characterized by rapidly changing technology and evolving standards. Competitors vary in size and in the scope and breadth of the products they offer. As the Company offers a broad range of automated tape library and complementary products, it tends to have a large number of competitors which differ depending on the particular product format and performance level. With respect to 4mm/DAT products, the Company believes it competes with Hewlett-Packard, Seagate, Sony and Spectra Logic. With respect to DLT products, the Company believes ATL Products, Inc., Breece Hill, Overland Data, Qualstar, Quantum and StorageTek comprise its competition. With respect to 8mm products, the Company believes its competition is represented by Exabyte, Qualstar, Spectra Logic and StorageTek. Since there are relatively low barriers to entry into the automated tape library market, the Company anticipates increased competition from other sources, ranging from emerging to established companies, including large system OEMs. Many of the Company's competitors have substantially greater financial and other resources, larger research and development staffs and more experience and capabilities in manufacturing, marketing and distributing products than the Company. The Company's competitors may develop new technologies and products that are more effective than the Company's products. In addition, competitive products may be manufactured and marketed more successfully than the Company's products. Such developments could render the Company's products less competitive or obsolete, and could have a material adverse effect on the Company's business, financial condition and ability to market the Company's products as currently contemplated. The Company believes the primary competitive factors in the market for network data storage products are performance, reliability, breadth of product line, distribution strength, product availability and price, as well as customer issues, including technical and sales support. The Company believes that it is currently well positioned in its markets along these multiple dimensions and is focused on maintaining its competitive strengths. See "Risk Factors -- Increasing Competition and Potentially Declining Prices." PROPRIETARY RIGHTS Although the Company relies predominantly on its full product line, strong channel structure and nearly a decade of library development experience to compete in its marketplace, it has or is pursuing patents on various design elements of its automated tape library products. There can be no assurance, however, that pending patent applications will ultimately issue as patents or, if patents do issue, that the claims allowed will be sufficiently broad to protect the Company's proprietary rights. In addition, there can be no assurance that issued patents or pending applications will not be challenged or circumvented by competitors, or that the rights granted thereunder will provide competitive advantages to the Company. The Company relies on a combination of patent and trademark laws, trade secrecy, confidentiality procedures and contractual provisions to protect its intellectual property rights. There can be no assurance that these procedures will be successful, that the Company would have adequate remedies for any breach or that the Company's trade secrets and know-how will not otherwise become known to or independently developed by competitors. See "Risk Factors -- Proprietary Technology." 29 32 LEGAL PROCEEDINGS The Company has no legal proceedings of a material nature underway. EMPLOYEES (TEAM MEMBERS) As of January 31, 1997, the Company had 153 full-time Team Members, including 43 in sales and marketing, 22 in research and development, systems engineering and technical support, 71 in manufacturing and operations, and 17 in finance, general administration and management. None of the Company's Team Members is covered by collective bargaining agreements, and management believes its relationship with Team Members is good. The Company's success depends in large part on its ability to attract and retain key Team Members. Competition among network data storage peripheral companies for highly skilled technical and management personnel is intense. There can be no assurance that the Company will be successful in retaining its existing Team Members, or in attracting additional qualified Team Members. See "Risk Factors -- Dependence on Key Employees (Team Members)." FACILITIES The Company currently leases a 41,000-square-foot facility in Redmond, Washington, under a lease which expires in 2005. This facility currently houses the executive offices of the Company, as well as its marketing, sales, customer support, research and development, systems engineering and manufacturing organizations. The Company currently leases office space in the United States and Canada for its eight regional sales offices and in London, England and Paris, France for the sales, marketing and customer support organizations serving Europe, the Middle East and Africa. The Company believes its existing facilities are adequate to support its business needs for at least the next 12 months. 30 33 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages are set forth in the following table.
NAME AGE POSITION - ------------------------- ---- ------------------------------------------------------------- Peter H. van Oppen....... 44 Chairman of the Board, President and Chief Executive Officer Charles H. Stonecipher... 35 Senior Vice President and Chief Operating Officer Michel R. Grosbost....... 50 President and General Manager, ADIC Europe William C. Britts........ 37 Vice President, Sales and Marketing Barry W. Brugman......... 51 Vice President, Operations and Finance Leslie S. Rock........... 39 Treasurer and Chief Accounting Officer Nathan H. Searle......... 49 Vice President, Engineering Christopher T. Bayley(1).............. 58 Director Walter P. Kistler(2)..... 77 Director Russell F. McNeill(2).... 85 Director John W. Stanton(1)....... 41 Director Walter F. Walker(1)(2)... 42 Director
- --------------- (1) Member of the Compensation and Stock Option Committee. (2) Member of the Audit Committee. The Board of Directors is divided into three classes. Each director serves for a three-year term and one class is elected each year by the Company's shareholders. Directors hold office until their terms expire and their successors are elected and qualified. Executive officers of the Company are appointed by, and serve at the direction of, the Board of Directors. There are no family relationships between any of the directors or executive officers of the Company. Peter H. van Oppen. Mr. van Oppen has served as Chairman of the Board, President and Chief Executive Officer of ADIC since its acquisition by Interpoint in 1994. In 1996, he was elected to serve as a Director of ADIC for a term expiring at ADIC's annual meeting of shareholders (the "Annual Meeting") in 1999. He has served as a Director of ADIC since 1986. He served as Chairman of the Board of Directors of Interpoint from 1995 until its acquisition by Crane Co. in October 1996. He also served as President and Chief Executive Officer of Interpoint from 1989 until its acquisition by Crane Co. in October 1996, as President and Chief Operating Officer of Interpoint from 1987 to 1989, and as Executive Vice President for Finance and Operations of Interpoint from 1985 to 1987. Prior to 1985, Mr. van Oppen worked as a Consulting Manager at Price Waterhouse LLP and at Bain & Company in Boston and London. He has additional experience in medical electronics and venture capital. Mr. van Oppen also serves as a Director of Seattle FilmWorks, Inc. He 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 Senior Vice President and Chief Operating Officer of ADIC since 1995. Prior to this, he served as Vice President, Finance and Administration and Chief Financial Officer of Interpoint from 1994 to 1995. Prior to joining Interpoint, Mr. Stonecipher worked as a Manager at Bain & Company in San Francisco from 1989 to 1994. Previously, he worked as an engineer at The Boeing Company. He holds B.S. and M.S. degrees in Mechanical Engineering from Stanford University, where he was graduated Phi Beta Kappa, 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 31 34 served as Vice President, International, with Intertechnique. He holds an advanced degree in electrical engineering from the University of Grenoble, France. William C. Britts. Mr. Britts has served as Vice President, Sales and Marketing of ADIC since 1995. He has also served as its Director of Marketing since 1995. 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. He holds B.S. and M.S. degrees in Mechanical Engineering from Virginia Polytechnic Institute and an M.B.A. from Harvard Business School. Barry W. Brugman. Mr. Brugman has served as Vice President, Operations and Finance of ADIC since 1994. He previously served as Vice President and General Manager of the Custom Hybrids Division of Interpoint from 1993 to 1994, Vice President of Operations of Interpoint from 1992 to 1993, and Vice President of Marketing of the Custom Hybrids Division of Interpoint from 1989 to 1992. He holds a B.S. in Electrical Engineering from U.C.L.A. and an M.B.A. from the University of Washington, where he was valedictorian. Leslie S. Rock. Ms. Rock has served as Treasurer and Chief Accounting Officer of ADIC since January 1997. Ms. Rock served as Treasurer and Secretary of Interpoint from 1994 until its acquisition by Crane Co. in October 1996 and was a consultant to Crane Co. from October 1996 until January 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, she was an audit manager at KPMG Peat Marwick. She holds a B.A. in Accounting from California State University, Fullerton, and is a certified public accountant. Nathan H. Searle. Mr. Searle has served as Vice President, Engineering of ADIC since 1988. From 1986 to 1988, Mr. Searle served as Vice President of IQ Technologies Inc. Mr. Searle co-founded Output Technology Corporation and served as its Vice President, Engineering, from 1984 to 1985. He holds a B.S. in Electrical Engineering from California Polytechnic University. Christopher T. Bayley. Mr. Bayley was elected in 1996 to serve as a Director of ADIC for a term expiring at the Annual Meeting in 1997. He served as a Director of Interpoint from 1987 until its acquisition by Crane Co. in October 1996. He has served as Chairman of Dylan Bay Companies since 1995 and of New Pacific Partners (a Seattle and Hong Kong-based investment bank) since 1992. He served as President and Chief Executive Officer of Glacier Park Company (real estate development), and as Senior Vice President, Corporate Affairs of Burlington Resources Inc. (oil and gas exploration and production company) from 1985 to 1992 and 1989 to 1992, respectively. He is also a Director of The Commerce Bank, Lawyer Selection Advisors and a member of the Board of Trustees of Scenic America, the International Music Festival of Seattle and the E. B. Dunn Historic Garden Trust. He holds an A.B. in History from Harvard University and a J.D. from Harvard Law School. Walter P. Kistler. Mr. Kistler was elected in 1996 to serve as a Director of ADIC for a term expiring at the Annual Meeting in 1998. He served as a Director of ADIC for 11 years prior to its acquisition by Interpoint in 1994 and as a Director of Interpoint from 1972 until its acquisition by Crane Co. in October 1996. Mr. Kistler has served as Chairman of the Board of Kistler Aerospace Corporation since 1993. Mr. Kistler served as Chairman Emeritus of the Interpoint Board of Directors since 1987, and served as its Chairman from 1974 to 1987. Mr. Kistler also served as Chairman of Kistler-Morse Corporation (electronic equipment manufacturer) from 1972 to 1995. He studied at the University of Geneva and holds an M.S. in Physics from the Federal Institute of Technology in Zurich, Switzerland. Russell F. McNeill. Mr. McNeill was elected in 1996 to serve as a Director of ADIC for a term expiring at the Annual Meeting in 1997. He served as a Director of Interpoint from 1977 until its acquisition by Crane Co. in October 1996. Mr. McNeill served as Secretary Emeritus of Interpoint from 1992 until its acquisition by Crane Co. in October 1996 and as its Secretary from 1977 to 1992. He is the former President of Old National Bank of Washington, and serves as Trustee Emeritus for Whitman College. He holds a B.A. in Mathematics and Physics from Whitman College. 32 35 John W. Stanton. Mr. Stanton was elected in 1996 to serve as a Director of ADIC for a term expiring at the Annual Meeting in 1999. He also served as a Director of ADIC for five years prior to its acquisition by Interpoint in 1994, and as a Director of Interpoint from 1988 until its acquisition by Crane Co. in October 1996. Mr. Stanton has served as Chairman of the Board and Chief Executive Officer of Western Wireless Corporation and its predecessor companies since 1992. Prior to this, he served as a Director of McCaw Cellular Communications, Inc. from 1987 to 1994, serving as Vice Chairman from 1988 to 1991. Mr. Stanton also serves as a Director of SmarTone Inc., a Hong Kong wireless communications company, and as a Trustee of Whitman College. He holds a B.A. in Political Science from Whitman College and an M.B.A. from Harvard Business School. Walter F. Walker. Mr. Walker was elected in 1996 to serve as a Director of ADIC for a term expiring at the Annual Meeting in 1998. He served as a Director of Interpoint from 1995 until its acquisition by Crane Co. in October 1996. Mr. Walker has served as President of the Seattle Supersonics National Basketball Association basketball team (a subsidiary of Ackerley Communications, Inc.) since 1994. Prior to this, he served as President, Walker Capital (a money management firm) from March 1994 to September 1994 and as Vice President, Goldman Sachs & Co. (an investment banking firm) from 1987 to 1994. Mr. Walker also serves as a Director of Redhook Ale Brewery, Incorporated and Gargoyles Inc. (eyeware manufacturer). He holds a B.A. in Psychology from the University of Virginia and an M.B.A. from Stanford University. 33 36 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of January 31, 1997 by (i) each person known by the Company to beneficially own more than 5% of the Common Stock, (ii) each director of the Company, (iii) each of the Company's Chief Executive Officer and the five other most highly compensated executive officers of the Company for the fiscal year ended October 31, 1996, (iv) all directors and executive officers of the Company as a group, and (v) the Selling Shareholder.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OWNED OFFERING(1) NUMBER OF AFTER OFFERING(1)(2) --------------------- SHARES --------------------- NAME AND ADDRESS NUMBER PERCENT BEING OFFERED NUMBER PERCENT - -------------------------------------------- --------- ------- ------------- --------- ------- John W. Stanton(3).......................... 481,464 5.9 % -- 481,464 4.9 % 10201 Willows Road Redmond, WA 98052 Walter P. Kistler(3)(4)..................... 328,900 4.0 25,000 303,900 3.1 Peter H. van Oppen(5)....................... 124,974 1.5 -- 124,974 1.3 Nathan H. Searle(6)......................... 54,300 * -- 54,300 * Christopher T. Bayley(3)(7)................. 49,000 * -- 49,000 * Barry W. Brugman(8)......................... 39,050 * -- 39,050 * Michel R. Grosbost(9)....................... 25,000 * -- 25,000 * Walter F. Walker(10)........................ 18,750 * -- 18,750 * Charles H. Stonecipher(11).................. 9,000 * -- 9,000 * Russell F. McNeill(12)...................... 8,800 * -- 8,800 * William C. Britts(13)....................... 2,000 * -- 2,000 * All directors and executive officers as a group (12 persons)(14).................... 1,149,238 13.8 25,000 1,124,238 11.2
- --------------- * Represents holdings of less than 1%. (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of January 31, 1997 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Assuming that the Underwriters' over-allotment option to purchase up to 258,750 shares from the Company is not exercised. (3) Includes 13,000 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. (4) Includes 250,000 shares owned by Foundation for the Future, of which Mr. Kistler is a trustee. (5) Does not include 10,300 shares that are held in trust for Mr. van Oppen's minor children or 6,000 shares that are held in a trust (of which Mr. van Oppen is a trustee) for the benefit of certain minor relatives of Mr. van Oppen, as to which he disclaims beneficial ownership. Includes 20,000 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 120,000 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. (6) Includes 28,300 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 30,200 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. (7) Includes 4,000 shares owned by Mr. Bayley's spouse. (8) Includes 26,900 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 20,700 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. (9) Includes 6,000 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 60,500 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. (10) Includes 3,750 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 8,250 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. 34 37 (11) Includes 7,000 shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 118,000 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. (12) Represents shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. (13) Represents shares subject to issuance upon exercise of options that are currently exercisable or exercisable within 60 days of January 31, 1997. Does not include 75,000 shares subject to issuance upon exercise of options that are not exercisable until more than 60 days after January 31, 1997. (14) Includes 141,750 shares subject to issuance upon exercise of options and 250,000 shares owned by Foundation for the Future, of which Mr. Kistler is a trustee. Does not include 10,300 shares that are held in trust for Mr. van Oppen's minor children or 6,000 shares that are held in a trust (as to which Mr. van Oppen is a trustee) for the benefit of certain minor relatives of Mr. van Oppen, as to which he disclaims beneficial ownership. 35 38 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their representatives, Hambrecht & Quist LLC and Dain Bosworth Incorporated (collectively, the "Representatives"), have severally agreed to purchase from the Company and the Selling Shareholder the following respective numbers of shares of Common Stock:
NUMBER OF NAME SHARES -------------------------------------------------------- --------- Hambrecht & Quist LLC................................... Dain Bosworth Incorporated.............................. --------- Total................................................... 1,725,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent accountants. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering of the shares, the offering price and other selling terms may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 258,750 additional shares of Common Stock at the public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of this offering without notice. The Underwriters reserve the right to reject any order for the purchase of shares in whole or in part. The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), and to contribute to payments the Underwriters may be required to make in respect thereof. The Company and certain shareholders of the Company, including the Company's executive officers and directors, who will own in the aggregate 1,124,238 shares of Common Stock after this offering (including shares of Common Stock issuable upon the exercise of certain outstanding options), have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock or options to acquire shares of Common Stock owned by them during the 90-day period following the date of this Prospectus. 36 39 In general, the rules of the Securities and Exchange Commission (the "Commission") will prohibit the Underwriters from making a market in the Company's Common Stock during the "cooling-off" period immediately preceding the commencement of sales in this offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. These rules permit an Underwriter to continue to make a market subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with this offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters, selling group members (if any) or their respective affiliates intend to engage in passive market making in the Common Stock during the "cooling-off" period. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Perkins Coie, Seattle, Washington. Certain legal matters relating to this offering will be passed upon for the Underwriters by Fenwick & West LLP, Palo Alto, California. EXPERTS The consolidated financial statements of the Company as of October 31, 1995 and 1996, and for each of the three years in the period ended October 31, 1996 included in this Prospectus have been so included in reliance upon the report of Price Waterhouse LLP, independent accountants, given on authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements and other information with the Commission. Such reports, proxy and information statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission located at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained upon written request from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site (http:/www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants such as the Company which file electronically with the Commission. The Company's Common Stock is traded on the Nasdaq National Market. The Company has filed with the Commission a registration statement on Form S-3 (together with all amendments and exhibits, the "Registration Statement") under the Securities Act. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. 37 40 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission (File No. 0-21103) pursuant to the Exchange Act are incorporated herein by reference: 1. The Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996; and 2. The description of the Common Stock and the Company's preferred stock purchase rights contained in the Company's Registration Statement on Form 10, as amended, effective as of September 10, 1996, including any amendment or report filed for the purpose of updating such description. All other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing such documents. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents which are incorporated herein by reference, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to the Company, 10201 Willows Road, Redmond, Washington 98052, Attention: Secretary, telephone: (206) 881-8004. Any statement contained in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified shall not be deemed to constitute a part of this Prospectus except as so modified, and any statement so superseded shall not be deemed to constitute part of this Prospectus. 38 41 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants..................................................... F-2 Consolidated Balance Sheets as of October 31, 1995, October 31, 1996 and January 31, 1997 (unaudited).................................................................... F-3 Consolidated Statements of Operations for each of the three years ended October 31, 1996 and for the three-months ended January 31, 1996 and 1997 (unaudited)........... F-4 Consolidated Statements of Changes in Shareholders' Equity for each of the three years ended October 31, 1996 and for the three-months ended January 31, 1997 (unaudited)......................................................................... F-5 Consolidated Statements of Cash Flows for each of the three years ended October 31, 1996 and for the three-months ended January 31, 1996 and 1997 (unaudited)........... F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 42 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 to consolidated financial statements on page F-1 present fairly, in all material respects, the financial position of Advanced Digital Information Corporation and its subsidiary at October 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Footnote 1, Advanced Digital Information Corporation was a wholly owned subsidiary of Interpoint Corporation prior to October 15, 1996. Price Waterhouse LLP Seattle, Washington November 27, 1996 F-2 43 ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED BALANCE SHEETS
OCTOBER 31, --------------------------- JANUARY 31, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................... $ 623,838 $10,436,783 $ 6,795,914 Accounts receivable, net of allowances of $53,000, $187,000 and $210,000, respectively............ 5,816,171 12,789,415 15,084,623 Inventories, net.................................. 5,383,931 10,935,520 12,982,015 Prepaid expenses and other........................ 227,449 282,183 234,274 Deferred income taxes............................. 319,657 474,456 474,456 ----------- ----------- ----------- Total current assets........................... 12,371,046 34,918,357 35,571,282 ----------- ----------- ----------- Property, plant and equipment, at cost: Machinery and equipment........................... 1,933,090 2,713,682 2,886,131 Office equipment.................................. 329,686 350,700 355,983 Leasehold improvements............................ 148,193 357,282 353,959 ----------- ----------- ----------- 2,410,969 3,421,664 3,596,073 Less: accumulated depreciation and amortization... (1,234,245) (1,855,457) (1,905,148) ----------- ----------- ----------- Net property, plant and equipment.............. 1,176,724 1,566,207 1,690,925 ----------- ----------- ----------- Deferred income taxes............................... 46,009 10,370 10,370 ----------- ----------- ----------- Other assets........................................ 349,251 214,739 219,102 ----------- ----------- ----------- $13,943,030 $36,709,673 $37,491,679 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 3,937,194 $ 8,460,723 $ 6,576,105 Accrued liabilities............................... 980,725 1,608,132 1,484,133 Income taxes payable.............................. 204,024 253,716 326,375 ----------- ----------- ----------- Total current liabilities...................... 5,121,943 10,322,571 8,386,613 ----------- ----------- ----------- Loan from Interpoint................................ 5,434,309 -- -- ----------- ----------- ----------- Commitments (Note 9)................................ -- -- -- 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, 8,001,992 and 8,159,176 shares issued and outstanding at October 31, 1996 and January 31, 1997, respectively................. 701,752 20,329,806 21,555,340 Retained earnings................................. 2,551,707 5,981,906 7,642,444 Cumulative translation adjustment................. 133,319 75,390 (92,718) ----------- ----------- ----------- Total shareholders' equity..................... 3,386,778 26,387,102 29,105,066 ----------- ----------- ----------- $13,943,030 $36,709,673 $37,491,679 =========== =========== ===========
See the accompanying notes to these consolidated financial statements. F-3 44 ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY YEARS ENDED OCTOBER 31, 31, ------------------------------------------- ----------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales...................... $20,083,275 $31,716,372 $58,956,993 $10,606,380 $20,068,602 Cost of sales.................. 13,495,286 22,107,341 41,886,619 7,611,970 14,097,140 ----------- ----------- ----------- ----------- ----------- Gross profit................. 6,587,989 9,609,031 17,070,374 2,994,410 5,971,462 ----------- ----------- ----------- ----------- ----------- Operating expenses: Selling and administrative... 5,000,139 8,001,290 9,846,324 2,149,530 3,047,461 Research and development..... 1,037,255 1,097,090 1,541,647 300,926 632,015 Acquisition expense.......... 590,000 -- -- -- -- ----------- ----------- ----------- ----------- ----------- 6,627,394 9,098,380 11,387,971 2,450,456 3,679,476 ----------- ----------- ----------- ----------- ----------- Operating profit (loss)........ (39,405) 510,651 5,682,403 543,954 2,291,986 ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest income (expense).... (133,787) (277,451) (508,492) (128,789) 115,483 Foreign currency transaction gains (losses)............ 31,568 (18,476) 113,821 18,032 138,231 ----------- ----------- ----------- ----------- ----------- (102,219) (295,927) (394,671) (110,757) 253,714 ----------- ----------- ----------- ----------- ----------- Income (loss) before provision (benefit) for income taxes... (141,624) 214,724 5,287,732 433,197 2,545,700 ----------- ----------- ----------- ----------- ----------- Provision (benefit) for income taxes: Current...................... (183,832) 176,422 1,981,631 141,381 885,162 Deferred..................... 84,491 (254,104) (124,098) -- -- ----------- ----------- ----------- ----------- ----------- (99,341) (77,682) 1,857,533 141,381 885,162 ----------- ----------- ----------- ----------- ----------- Net income (loss).............. $ (42,283) $ 292,406 $ 3,430,199 $ 291,816 $ 1,660,538 =========== =========== =========== =========== =========== Pro forma average number of common and common equivalent shares outstanding (unaudited).................. 8,010,000 8,274,000 =========== =========== Pro forma net income per share (unaudited).................. $ .04 $ .41 =========== =========== Average number of common and common equivalent shares outstanding (unaudited)...... 8,350,000 =========== Net income per share (unaudited).................. $ .20 ===========
See the accompanying notes to these consolidated financial statements. F-4 45 ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND THREE MONTHS ENDED JANUARY 31, 1997
COMMON STOCK CUMULATIVE ------------------------ RETAINED TRANSLATION SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL ---------- ----------- ---------- ---------- ----------- Balance at September 30, 1993....... 2,436,900 $ 613,752 $2,194,399 $ 2,808,151 Net income October 31, 1993....... 107,185 107,185 Shares canceled in business combination.................... (2,436,900) Shares issued in business combination.................... 1,000 Contribution of capital from Interpoint..................... 88,000 88,000 Net loss.......................... (42,283) (42,283) Foreign currency translation adjustment..................... $ 66,391 66,391 ---------- ----------- ---------- -------- ----------- Balance at October 31, 1994......... 1,000 701,752 2,259,301 66,391 3,027,444 Net income........................ 292,406 292,406 Foreign currency translation adjustment..................... 66,928 66,928 ---------- ----------- ---------- -------- ----------- Balance at October 31, 1995......... 1,000 701,752 2,551,707 133,319 3,386,778 Stock dividend to Interpoint...... 8,000,992 Contribution of capital from Interpoint..................... 19,628,054 19,628,054 Net income........................ 3,430,199 3,430,199 Foreign currency translation adjustment..................... (57,929) (57,929) ---------- ----------- ---------- -------- ----------- Balance at October 31, 1996......... 8,001,992 20,329,806 5,981,906 75,390 26,387,102 Exercise of stock options, including tax benefit of $891,000 (unaudited)........... 157,184 1,225,534 1,225,534 Net income (unaudited)............ 1,660,538 1,660,538 Foreign currency translation adjustment (unaudited)......... (168,108) (168,108) ---------- ----------- ---------- -------- ----------- Balance at January 31, 1997 (unaudited)....................... 8,159,176 $21,555,340 $7,642,444 $(92,718) $29,105,066 ========== =========== ========== ======== ===========
See the accompanying notes to these consolidated financial statements. F-5 46 ADVANCED DIGITAL INFORMATION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED OCTOBER 31, JANUARY 31, --------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................... $ (42,283) $ 292,406 $ 3,430,199 $ 291,816 $ 1,660,538 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization......... 331,153 483,739 607,479 126,655 172,330 Deferred taxes........................ 84,491 (254,104) (124,098) -- -- Assets retired........................ (1,591) 2,156 -- -- -- Change in assets and liabilities: Accounts receivable................... (1,731,167) (1,662,846) (6,999,440) 45,169 (2,370,560) Inventories........................... (151,951) (2,563,452) (5,603,131) (1,300,583) (2,155,499) Prepaid expenses and other............ 68,461 (39,788) (60,355) (48,587) 42,178 Income taxes receivable............... (161,344) 161,344 -- -- -- Other assets.......................... (15,958) (59,474) 24,221 (80,564) (20,132) Accounts payable...................... 472,649 1,418,558 4,544,059 (233,682) (1,838,213) Accrued liabilities................... (111,775) 122,416 649,061 69,299 (79,145) Income taxes payable.................. (441,703) 204,024 49,692 154,732 78,411 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities..... (1,701,018) (1,895,021) (3,482,313) (975,745) (4,510,092) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment............................. (450,702) (756,935) (910,718) (269,302) (324,338) Acquisition of ADIC Europe, net of cash acquired.............................. (493,553) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities..... (944,255) (756,935) (910,718) (269,302) (324,338) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contribution from Interpoint, net of loans forgiven................. -- -- 10,000,000 -- -- Repayments of long-term debt............ (778,999) -- -- -- -- Net increase in loans from Interpoint... 2,357,891 3,076,418 4,218,366 938,072 -- Proceeds from issuance of common stock for stock options, including tax benefit............................... -- -- -- -- 1,225,534 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities.............................. 1,578,892 3,076,418 14,218,366 938,072 1,225,534 ----------- ----------- ----------- ----------- ----------- Effect of exchange rate changes on cash... 4,607 15,391 (12,390) (17,213) (31,973) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash........... (1,061,774) 439,853 9,812,945 (324,188) (3,640,869) Cash and cash equivalents at beginning of period.................................. 1,080,708 183,985 623,838 623,838 10,436,783 Adjustment to conform fiscal year of ADIC (see Note 1)............................ 165,051 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period.................................. $ 183,985 $ 623,838 $10,436,783 $ 299,650 $ 6,795,914 =========== =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid (received) during the period for: Interest................................ $ 142,027 $ 277,451 $ 508,492 $ 128,789 $ (115,483) Income taxes............................ $ 419,215 $ (147,746) $ 404,668 $ -- $ 177,440
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Loans from Interpoint Corporation, in the amount of $9,628,054, were forgiven in October 1996, just prior to the spin-off. See the accompanying notes to these consolidated financial statements. F-6 47 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Advanced Digital Information Corporation ("ADIC" or the "Company"), including its wholly owned subsidiary ADIC Europe SARL ("ADE"), designs, manufactures and markets automated high performance data storage products used to file or archive electronic data in conjunction with integrated computer systems, including local area networks, workstations and other microcomputer systems. The Company sells its products on an international basis to original equipment manufacturers ("OEMs"), resellers and end users. On February 11, 1994, the Company was acquired by Interpoint Corporation ("Interpoint") pursuant to an Agreement and Plan of Merger dated October 29, 1993, in which the Company was merged into a wholly owned subsidiary of Interpoint. According to the terms of the merger agreement, each outstanding share of common stock of ADIC was converted into .55 shares of Interpoint common stock. A total of 1,340,255 shares of Interpoint common stock were issued to ADIC shareholders. The acquisition was accounted for as a pooling-of-interests in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." In order to conform ADIC's previous year end of September 30 to Interpoint's year end, ADIC's operations for the month of October 1993 were not included in either fiscal year 1993 or fiscal year 1994. ADIC's net income from October 1993 has increased retained earnings. Results of this month were as follows: Net sales........................................................ $1,826,744 Gross profit..................................................... 673,861 Income before provision for income taxes......................... 162,402 Net income....................................................... 107,185
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 (the "Merger") of Interpoint with a wholly owned subsidiary of Crane Co., a Delaware corporation. Prior to the Merger, Interpoint made a contribution to the working capital of ADIC through the cancellation of all intercompany indebtedness of ADIC and ADE to Interpoint, transferred certain other assets to ADIC, including its ownership of ADE, and contributed additional cash to ADIC for working capital of $10 million. Total capital contributions were $19,628,054. The consolidated financial statements for all periods prior to October 15, 1996 reflect the results of operations, financial position, and cash flows of ADIC as a wholly-owned subsidiary of Interpoint and may not be indicative of actual results of operations and financial position of the Company under other ownership. As further described in Note 12, on June 17, 1994, the Company completed the purchase of the assets and liabilities of ADE, a manufacturer and integrator of tape storage products for the computer network and workstation markets. The consolidated statements of operations 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 F-7 48 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interpoint's borrowing rate and actual intercompany borrowings. A summary of these allocations is as follows:
CORPORATE INTEREST YEAR ENDED: EXPENSES EXPENSE ------------------------------------------------------- --------- -------- October 31, 1994....................................... $ 109,233 $ 77,915 ======== ======== October 31, 1995....................................... $ 175,400 $279,279 ======== ======== October 31, 1996....................................... $ 177,292 $528,524 ======== ========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The financial statements consolidate the accounts of ADIC and its wholly owned subsidiary ADE. All intercompany transactions have been eliminated. Earnings per share Given the Company's historical capital structure as a wholly owned subsidiary of Interpoint, historical earnings per share amounts are not presented in the consolidated financial statements for fiscal 1994, 1995 and 1996 and the three months ended January 31, 1996, as they are not considered to be meaningful. For the three months ended January 31, 1997, primary earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding plus the common stock equivalents attributable to dilutive stock options during the period. Fully diluted earnings per share do not differ materially from primary earnings per share. Unaudited pro forma earnings per share In connection with the spin-off of ADIC by Interpoint as previously described, Interpoint shareholders received one share of ADIC common stock for each share of Interpoint stock held. Additionally, Interpoint stock options held by ADIC Team Members and Directors were converted in part to cash and in part to ADIC stock options. Unaudited pro forma net income per share for the 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. At October 31, 1995, it is calculated based on the number of shares of Interpoint stock outstanding at June 30, 1996, plus the incremental shares outstanding, as calculated under the treasury stock method, of the ADIC stock options outstanding as a result of the spin-off. Cash and cash equivalents The Company considers short-term investments with maturities from the date of purchase of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. F-8 49 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property, plant and equipment Property, plant and equipment is recorded at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets as follows: machinery and equipment and office equipment, 3 to 10 years; leasehold improvements, the life of the lease. Income taxes Provision for income taxes has been recorded in accordance with Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes." Under the liability method of FAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. Commencing February 12, 1994 through October 15, 1996, the Company's operations have been included in consolidated income tax returns filed by Interpoint. Income taxes in the accompanying consolidated financial statements have been computed assuming the Company filed separate income tax returns worldwide. Deferred taxes result primarily from the use of accelerated depreciation for tax purposes and from the timing of tax deductions for allowances and accrued expenses. Foreign currency translations The financial statements of ADE have been translated into U.S. dollars in accordance with FASB Statement No. 52 "Foreign Currency Translation." Under the provisions of this Statement, all assets and liabilities in the balance sheets of ADE, whose functional currency is the French franc, are translated at year-end exchange rates, and translation gains and losses are accumulated in a separate component of shareholders' equity. Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. Gains and losses on those foreign currency transactions are included in determining net income or loss for the period in which exchange rates change. The effect of exchange rate fluctuations on the results of operations is minimized by the offsetting nature of ADE foreign currency transactions. 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 consolidated 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. F-9 50 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues from major customers approximate the following:
THREE MONTHS ENDED JANUARY YEARS ENDED OCTOBER 31, 31, ----------------------------------------- --------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES Customer A.................. $3,791,000 $5,151,000 $12,610,000 $ 1,682,000 $ 3,139,000 Customer B.................. 2,563,000 4,329,000 13,315,000 1,923,000 4,608,000 % OF REVENUES Customer A.................. 19% 17% 21% 16% 16% Customer B.................. 13% 14% 23% 18% 23%
Revenue recognition Revenue from product sales is recorded by the Company when products are shipped to customers. Certain distributors have the right, on a quarterly basis, to return products according to a stock rotation policy. Typically, the value of the products returned cannot exceed 15% of the previous quarter's purchases, the returns must be accompanied by offsetting orders of commensurate value, and the products returned must be new and in sealed cartons. The Company accrues a provision for the estimated sales returns, allowances and discounts in the period the products are shipped to customers. Warranty For standard Company products parts and labor are covered under warranty for two years. With respect to drives and tapes used in the Company's products but manufactured by a third party, the Company passes on to the customer the warranty on such drives and tapes provided by the manufacturer. Research and development costs Research and development costs are expensed as incurred. Stock-based compensation In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. Under the provisions of this Statement, stock-based compensation expense is measured using either the intrinsic-value method as prescribed by Accounting Principles Board Opinion No. 25 or the fair value method described in Statement No. 123. Companies choosing the intrinsic-value method will be required to disclose the pro forma impact of the fair value method on net income and earnings per share. The Company plans to implement the Statement in fiscal 1997 using the intrinsic-value method; accordingly, there will be no effect of adopting the Statement on the Company's financial position and results of operations. Interim results In the opinion of management, the interim consolidated financial statements and related data included herein present fairly the consolidated balance sheet, consolidated statements of operations, changes in shareholders' equity, and of cash flows as of and for the periods presented, and reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the results for the interim periods. The interim results of operations are not necessarily indicative of results to be expected for a full year. The consolidated balance sheet at January 31, 1997 is F-10 51 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unaudited as are the consolidated statements of operations and of cash flows for the three-month periods ended January 31, 1996 and 1997 and the consolidated statement of changes in shareholders' equity for the three months ended January 31, 1997. 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 and warranty costs. 3. INVENTORIES Inventories are comprised of the following:
OCTOBER 31, OCTOBER 31, JANUARY 31, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) Finished goods............................... $ 2,887,267 $ 4,688,604 $ 5,637,898 Work-in-process.............................. 885,397 1,503,691 2,321,514 Raw materials................................ 1,883,020 5,602,312 6,071,681 ---------- ----------- ---------- 5,655,684 11,794,607 14,031,093 Allowance for inventory obsolescence......... (271,753) (859,087) (1,049,078) ---------- ----------- ---------- $ 5,383,931 $10,935,520 $12,982,015 ========== =========== ==========
4. ACCRUED LIABILITIES Accrued liabilities are comprised of the following:
OCTOBER 31, OCTOBER 31, JANUARY 31, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) Accrued payroll and related liabilities...... $ 631,420 $ 1,057,472 $ 817,802 Allowance for warranty returns............... 74,454 354,557 339,324 Other........................................ 274,851 196,103 327,007 ---------- -------- ---------- $ 980,725 $ 1,608,132 $ 1,484,133 ========== ======== ==========
5. CREDIT AGREEMENT ADIC has a $10 million unsecured line of credit with a bank expiring October 31, 1998. All of this line was available at October 31, 1996 and January 31, 1997. Borrowings against the line of credit will bear interest at the bank's prime rate or adjusted LIBOR rate. 6. CAPITAL STOCK AND STOCK OPTIONS At October 31, 1996, the Company had two stock option plans. The 1996 Transition Plan comprises the stock options held by ADIC Team Members and Directors which were converted in connection with the spin-off. There are 476,092 options issued under this plan at exercise prices ranging from $.4397 to $5.2328. Some of these options were granted by ADIC prior to its acquisition in February F-11 52 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1994 and were converted to options to purchase shares of Interpoint common stock at that time. No further options may be issued under this plan. In addition, 625,000 shares are reserved under the Company's Stock Option Plan for Team Members, directors, officers, consultants, agents, advisors and independent contractors of the Company. Terms of both plans require the option price to be equal to the fair market value on the date of grant. Options may be 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.
OUTSTANDING OPTIONS PRICE ----------- -------------- Balance at October 31, 1995............................. -- $ -- Options converted in spin-off from Interpoint......... 476,092 .4397-5.2328 Options granted....................................... 368,500 10.75-13.25 ------- ------------ Balance at October 31, 1996............................. 844,592 .4397-13.25 Options exercised (unaudited)......................... (157,184) 1.1011-3.8696 Options granted (unaudited)........................... 4,000 11.00-13.50 ------- ------------ Balance at January 31, 1997 (unaudited)................. 691,408 $ .4397-13.50 =======
In July 1996, the Board of Directors adopted a Shareholder Rights Plan (the "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 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. 7. FEDERAL INCOME TAXES Income (loss) before provision (benefit) for income taxes was taxed under the following jurisdictions:
YEARS ENDED OCTOBER 31, ------------------------------------- 1994 1995 1996 --------- --------- ----------- Current income tax: U.S. Federal................................. $(188,832) $ 166,422 $ 1,881,631 State and local.............................. 5,000 10,000 100,000 -------- ---------- ------------ Total current................................ (183,832) 176,422 1,981,631 -------- ---------- ------------ Deferred income tax: U.S. Federal................................. 16,908 (97,456) (267,260) Foreign...................................... 67,583 (156,648) 143,162 -------- ---------- ------------ Total deferred............................... 84,491 (254,104) (124,098) -------- ---------- ------------ Total provision (benefit) for income taxes..... $ (99,341) $ (77,682) $ 1,857,533 ======== ========== ============
F-12 53 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income tax differs from the amount computed by applying the statutory federal income tax rate to income (loss) before provision (benefit) for income taxes for the following reasons:
YEARS ENDED OCTOBER 31, ------------------------------------ 1994 1995 1996 -------- --------- ----------- Federal income tax at statutory rate of 34%..... $(48,152) $ 73,006 $ 1,797,829 Utilization of net operating loss carryforward/removal of valuation allowance... (61,373) (139,326) -- Tax credits..................................... (21,255) (44,874) (1,000) Nondeductible acquisition expenses.............. 20,740 -- -- Activity of foreign subsidiaries................ -- 17,848 (35,344) State income taxes.............................. 5,000 10,000 100,000 Other........................................... 5,699 5,664 (3,952) -------- ---------- ------------ $(99,341) $ (77,682) $ 1,857,533 ======== ========== ============
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at October 31, 1995 and 1996 are:
OCTOBER 31, OCTOBER 31, 1995 1996 ----------- ----------- Deferred tax assets: Inventory reserves......................................... $ 188,326 $ 297,951 Team Member benefits, primarily compensated absences....... 34,217 25,081 Warranty reserves.......................................... 20,400 67,671 Net operating loss carryforwards........................... 97,114 -- Plant and equipment, excess of book depreciation over tax depreciation............................................ -- 10,370 Other...................................................... 30,586 83,753 -------- -------- Gross deferred tax assets.......................... 370,643 484,826 -------- -------- Deferred tax liabilities: Plant and equipment, excess of tax depreciation over book depreciation............................................ 4,977 -- -------- -------- Gross deferred tax liabilities..................... 4,977 -- -------- -------- Net deferred tax asset............................. $ 365,666 $ 484,826 ======== ========
Deferred U.S. income taxes are not provided for the earnings of the Company's foreign subsidiary because the Company expects those earnings will be permanently reinvested. Net pretax operating results from the foreign subsidiary are income of $379,000 and $407,000 for fiscal 1994 and 1996, respectively, and losses of $51,000 for 1995. 8. PROFIT INCENTIVE AND BONUS PLANS In fiscal 1995 and 1996, the Company's Team Members participated in Interpoint's noncontributory profit incentive plan for key Team Members and a noncontributory profit-sharing plan for all regular full-time domestic Team Members. These plans are generally based upon pretax profits. The profit incentive plan allows the Board of Directors to provide between 5% and 35% of participating Team Members' salaries, after a set minimum profitability is achieved, for distribution to F-13 54 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the plan's participants. The profit sharing plan provides that 15% of pretax profits will be contributed to the plan, up to a maximum of one month's pay. Prior to 1995, ADIC Team Members had a separate plan based on certain ADIC financial performance criteria. Profit incentive and profit sharing expenses related to ADIC team members have been reflected in these consolidated financial statements. Contributions to the plans were $123,000 and $433,000 for the years ended October 31, 1995 and 1996. There were no contributions during the year ended October 31, 1994. Contributions for three months ended January 1996 and 1997 (unaudited) were $103,000 and $190,000, respectively. 9. COMMITMENTS The Company leases production and operating facilities in Redmond, Washington. Sales offices are leased at various sites in the United States and Europe. Minimum annual rental commitments at October 31, 1996, for noncancelable operating leases are as follows:
YEAR ENDING OCTOBER 31, AMOUNT ------------------------------------------------------------------ -------- 1997........................................................ $460,000 1998........................................................ $464,000 1999........................................................ $411,000 2000........................................................ $432,000 2001........................................................ $465,000
Rent expense aggregated $258,000 in fiscal 1994, $253,000 in fiscal 1995 and $400,000 in fiscal 1996. Rent expense for the three months ended January 31, 1996 and 1997 (unaudited) aggregated $76,000 and $116,000, respectively. 10. RELATED PARTY TRANSACTIONS The Company leases its facility located in Redmond, Washington from K-M Properties, a general partnership of which Walter P. Kistler, a director, is a partner. The lease began in September 1995. Rent payments for fiscal 1995 and 1996 were $49,647 and $300,862, respectively, and for the three months ended January 31, 1996 and 1997 were $69,840 and $88,791 (unaudited), respectively. 11. GEOGRAPHIC SEGMENT INFORMATION Major operations outside the United States are comprised of a subsidiary in France. Certain information regarding operations in this geographic segment is presented in the table below. Transfers between geographic segments are made at arm's-length prices consistent with rules and regulations of governing tax authorities. The profit on these transfers is not recognized until sales are made to non-affiliated customers. Excluded from U.S. net sales are transfers from the U.S. to ADE of $376,000, $2,925,000 and $6,404,000 in 1994, 1995 and 1996, respectively. Included in U.S. sales are export sales to unaffiliated customers of $2,006,000, $2,495,000 and $4,666,000 in 1994, 1995 and 1996, respectively. F-14 55 ADVANCED DIGITAL INFORMATION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total international sales were $5,508,000, $14,930,000 and $21,216,000 in fiscal 1994, 1995 and 1996, respectively.
OCTOBER 31, OCTOBER 31, OCTOBER 31, 1994 1995 1996 ----------- ----------- ----------- Net sales: United States................................. $16,581,272 $19,281,763 $42,406,762 Europe........................................ 3,502,003 12,434,609 16,550,231 ----------- ----------- ----------- $20,083,275 $31,716,372 $58,956,993 =========== =========== =========== Operating profit (loss): United States................................. $ (428,280) $ 432,601 $ 5,209,722 Europe........................................ 388,875 78,050 472,681 ----------- ----------- ----------- $ (39,405) $ 510,651 $ 5,682,403 =========== =========== =========== Identifiable assets: United States................................. $ 5,726,646 $ 8,930,769 $31,797,515 Europe........................................ 2,983,200 5,012,261 4,912,158 ----------- ----------- ----------- $ 8,709,846 $13,943,030 $36,709,673 =========== =========== ===========
12. ACQUISITION OF ADIC EUROPE SARL On June 17, 1994, the Company completed the acquisition of substantially all of the assets and the liabilities of ADE, formerly known as GigaTrend Europe SARL, a manufacturer and integrator of tape storage products for the computer network and workstation markets. The acquisition was accounted for by the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations" and, accordingly, the operating results from ADE product sales have been included in the Company's consolidated operating results since the date of acquisition. The purchase price of the acquisition was $628,000 and was comprised of cash and the Company's product totaling $540,000, plus stock of $88,000. The purchase price was funded through a capital contribution and intercompany debt from Interpoint. The fair value of the net assets acquired approximated the purchase price and, accordingly, no goodwill was recorded. The fair value of assets acquired, net of cash, was $1,826,000, and liabilities assumed were $1,244,000. Net sales and operating income relating to ADE products for the period from June 17, 1994 through October 31, 1994 (post-acquisition) amounted to $3,502,003 and $311,700, respectively. The following summary (unaudited), prepared on a pro forma basis, combines the consolidated results of operations for the year ended October 31, 1994 as if ADE had been acquired at November 1, 1993, after including the impact of certain adjustments. Net sales..................................................... $22,833,000 Net loss...................................................... $ (435,000)
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire period 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. F-15 56 Inside Back Cover Graphic entitled "A Broad Range of Backup Solutions" displaying in bar graph format the data storage capacity of three categories of the Company's products. 57 ============================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 Use of Proceeds....................... 11 Price Range of Common Stock........... 11 Dividend Policy....................... 11 Capitalization........................ 12 Selected Financial Data............... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 14 Business.............................. 20 Management............................ 31 Principal and Selling Shareholders.... 34 Underwriting.......................... 36 Legal Matters......................... 37 Experts............................... 37 Available Information................. 37 Incorporation of Certain Documents by Reference........................... 38 Index to Consolidated Financial Statements.......................... F-1
============================================================ ============================================================ 1,725,000 SHARES LOGO COMMON STOCK ----------------------- PROSPECTUS ----------------------- HAMBRECHT & QUIST DAIN BOSWORTH INCORPORATED , 1997 ============================================================ 58 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 underwriting discounts, payable by the registrant in connection with the issuance and distribution 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. Securities and Exchange Commission registration fee..... $ 11,986 NASD filing fee......................................... 4,455 Nasdaq National Market additional listing fee........... 17,500 Blue Sky fees and expenses.............................. 5,000 Printing and engraving expenses......................... 70,000 Legal fees and expenses................................. 80,000 Accounting fees and expenses............................ 80,000 Transfer Agent and Registrar fees....................... 5,000 Miscellaneous expenses.................................. 26,059 -------- Total................................................... $300,000 ========
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"). Section 10 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. Section 23B.08.320 of 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 11 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 registrant has entered into an indemnification agreement with each of its directors in which the registrant agrees to hold harmless and indemnify the director to the fullest extent permitted by Washington law. The registrant agrees to indemnify the director against any and all losses, claims, damages, liabilities or expenses incurred in connection with any actual, pending or threatened action, suit, claim or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which the director is, was or becomes involved by reason of the fact that the director is or was a director, officer, employee, trustee or agent of the registrant or any related company, partnership, joint venture, trust or enterprise, including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action (or inaction) by the director in an official capacity or in any other capacity while serving as a director, officer, employee, trustee or agent, other than an action, suit, claim or proceeding instituted by or at the direction of the officer or director unless such action, suit, claim or proceeding is or was authorized by the registrant's Board of Directors. No indemnity pursuant to the indemnification agreements shall be provided by the registrant on account of any suit in which a final, unappealable judgment is rendered against the officer or director II-1 59 for an accounting of profits made from the purchase or sale by the officer or director of securities of the registrant in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and amendments thereto, or for damages that have been paid directly to the officer or director by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the registrant. ITEM 16. EXHIBITS 1.1 Form of Underwriting Agreement 4.1 Rights Agreement, dated as of August 12, 1996, between ADIC and ChaseMellon Shareholders Services, L.L.C., as Rights Agent (Exhibit 4.2)* 5.1 Opinion of Perkins Coie regarding legality of the Common Stock being registered 23.1 Consent of Price Waterhouse LLP, independent accountants (contained on page II-5) 23.2 Consent of Perkins Coie (contained in opinion filed as Exhibit 5.1) 24.1 Power of attorney (contained on signature page) 27.1 Financial Data Schedule
- --------------- * Incorporated herein by reference to the Company's Registration Statement on Form 10, as amended, effective as of September 10, 1996, filed with the Securities and Exchange Commission. ITEM 17. UNDERTAKINGS A. 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 15, 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. B. 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. C. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 60 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, thereunder duly authorized, in the City of Redmond, State of Washington, on the 17th day of February, 1997. ADVANCED DIGITAL INFORMATION CORPORATION By /S/ PETER H. VAN OPPEN ------------------------------------ Peter H. van Oppen President and Chief Executive Officer 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 true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Registration Statement, including any and all post-effective amendments and amendments thereto 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, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their and his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated below on the 17th day of February, 1997.
SIGNATURE TITLE - ------------------------------------- ------------------------------------------------------ /s/ PETER H. VAN OPPEN Chairman of the Board, President and - ------------------------------------- Chief Executive Officer Peter H. van Oppen /s/ LESLIE S. ROCK Treasurer and Chief Accounting Officer - ------------------------------------- (Principal Financial and Accounting Officer) Leslie S. Rock /s/ CHRISTOPHER T. BAYLEY Director - ------------------------------------- Christopher T. Bayley
II-3 61
SIGNATURE TITLE - ------------------------------------- ------------------------------------------------------ /s/ WALTER P. KISTLER Director - ------------------------------------- Walter P. Kistler /s/ RUSSELL F. MCNEILL Director - ------------------------------------- Russell F. McNeill /s/ JOHN W. STANTON Director - ------------------------------------- John W. Stanton /s/ WALTER F. WALKER Director - ------------------------------------- Walter F. Walker
II-4 62 EXHIBIT 23.1 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 November 27, 1996 relating to the financial statements of Advanced Digital Information Corporation, which appears in such Prospectus. We also consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-3 of our report dated November 27, 1996 included in Advanced Digital Information Corporation's Annual Report on Form 10-K for the year ended October 31, 1996. We also consent to the application of such report to the Financial Statement Schedule for the three years ended October 31, 1996 when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included the Financial Statement Schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. Price Waterhouse LLP Seattle, Washington February 17, 1997 II-5 63 EXHIBIT INDEX
EXHIBIT NUMBER - ------ 1.1 Form of Underwriting Agreement 4.1 Rights Agreement, dated as of August 12, 1996, between ADIC and ChaseMellon Shareholders Services, L.L.C., as Rights Agent (Exhibit 4.2)* 5.1 Opinion of Perkins Coie regarding legality of the Common Stock being registered 23.1 Consent of Price Waterhouse LLP, independent accountants (contained on page II-5) 23.2 Consent of Perkins Coie (contained in opinion filed as Exhibit 5.1) 24.1 Power of attorney (contained on signature page) 27.1 Financial Data Schedule
- --------------- * Incorporated herein by reference to the Company's Registration Statement on Form 10, as amended, effective as of September 10, 1996, filed with the Securities and Exchange Commission. EX-1.1 2 UNDERWRITING AGREEMENT 1 ADVANCED DIGITAL INFORMATION CORPORATION 1,725,000 SHARES1 COMMON STOCK (NO PAR VALUE) UNDERWRITING AGREEMENT March , 1997 HAMBRECHT & QUIST LLC DAIN BOSWORTH INCORPORATED As Representatives of the Several Underwriters Named on Schedule I hereto c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Advanced Digital Information Corporation, a Washington corporation (herein called the Company), proposes to issue and sell 1,700,000 shares of its authorized but unissued Common Stock, no par value (herein called the Common Stock), and a stockholder of the Company named in Schedule II hereto (herein called the Selling Securityholder) proposes to sell 25,000 shares of Common Stock of the Company (said 1,725,000 shares of Common Stock being herein called the Underwritten Stock). The Company proposes to grant to the Underwriters (as hereinafter defined) an option to purchase up to 258,750 additional shares of Common Stock (herein called the Option Stock and with the Underwritten Stock herein collectively called the Stock). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company and the Selling Securityholder severally hereby confirm the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting as Representatives, named in Schedule I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form S-3 (No. 333- ), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act) of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. - -------- 1 Plus an option to purchase from the Company up to 258,750 additional shares to cover over-allotments. 2 The term Registration Statement as used in this agreement shall mean such registration statement, including all documents incorporated by reference therein, all exhibits and all financial statements and all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus, including the documents incorporated by reference therein, relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or of the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus, including the documents incorporated by reference therein, included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SECURITYHOLDER. (a) The Company hereby represents and warrants as follows: (i) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole). The Company does not own or control, directly or indirectly, any corporation, association or other entity other than ADIC Europe SARL. (ii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iii) The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be 2 3 purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the Exchange Act, and the rules and regulations of the Commission thereunder; on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iii) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (iv) The Company's outstanding capital stock has been validly authorized, is fully paid and nonassessable, was issued in compliance with the registration and qualification provisions of applicable federal and state securities laws and was issued free of any preemptive right, right of first refusal or similar right. The Stock is duly and validly authorized, is (or, in the case of shares of the Stock to be sold by the Company, will be, when issued and sold to the Underwriters as provided herein) duly and validly issued, fully paid and nonassessable and conforms to the description thereof in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the transfer and sale of the Stock to be sold by the Selling Securityholder or the issuance and sale of the Stock as contemplated herein. No preemptive right, or right of first refusal in favor of stockholders, exists with respect to the Stock, or the issue and sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the Company, and there is no contractual preemptive right, right of first refusal, right of co-sale or similar right which exists and has not been waived with respect to the issue and sale of the Stock or, to the Company's knowledge, with respect to the Stock being sold by the Selling Securityholder. (v) The Registration Statement has become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and, to the Company's knowledge, no proceeding for that purpose has been instituted or is contemplated by the Commission. (vi) This Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the Representatives, constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except as rights to indemnity or contribution may be limited by federal or state securities laws and except as enforcement (i) may be limited by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance and other similar laws relating to or affecting the rights of creditors generally, (ii) is subject to general principles of equity and similar principles, including, without limitation, concepts of materiality, reasonableness, unconscionability, good faith and fair dealing and the possible unavailability of specific performance, injunctive relief or other equitable remedies, regardless of whether considered in a proceeding in equity or at law, or (iii) is subject to the effect of public policy. (vii) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement, and the issue and sale by the Company of the shares of Stock to be sold by the Company as provided herein will not conflict with, 3 4 or result in a breach of, the Certificate of Incorporation or Bylaws of the Company or any material agreement or instrument to which the Company is a party or any applicable law or regulation, or any judgment, order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality binding on the Company. (viii) No holders of securities of the Company have rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company. (ix) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated herein, except such as have been (or will before the Closing Date have been) obtained under the Securities Act, the Exchange Act, or the rules and regulations of the National Association of Securities Dealers, Inc. (the NASD) and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters. (x) To the best of its knowledge, the Company is not infringing or otherwise violating any patent, copyright, trade secret, trademark, service mark, trade name, technology, know-how or other proprietary information or material of others. The Company has not received any notice of infringement or conflict with (and the Company knows of no conflict or infringement with) asserted rights of others with respect to any patents, copyrights, trademarks, service marks, trade names, technology or know-how, which could result in any material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (xi) The Company owns or possesses sufficient licenses or other rights to use all patents, copyrights, trade secrets, trademarks, service marks, trade names, technology, know-how or other proprietary information or materials necessary to conduct the business now being conducted by the Company as described in the Prospectus. (xii) There is no legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or its subsidiaries is subject that is required to be described in the Registration Statement or the Prospectus and is not so described, nor is there any statute, regulation, contract or other document that is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described or filed. (xiii) The Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all governmental authorities, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file such would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (xiv) The Company is familiar with the Investment Company Act of 1940, as amended (the 1940 Act), and the rules and regulations thereunder, and has in the past conducted its affairs in such a manner as to ensure that it is not an "investment company" within the meaning of the 1940 Act and such rules and regulations. 4 5 (xv) The Stock has been approved for listing on the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market. The Company has duly filed a Nasdaq National Market Notification Form for Listing of Additional Shares and a Form 10-C with respect to the sale and issuance of the Stock in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. (herein called the NASD). (xvi) The Company has not distributed and will not distribute prior to the Closing Date any offering material in connection with the offering and sale of the Stock other than the Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the Securities Act. (xvii) Each of the Company and its subsidiaries maintains insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. The Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), operations or business of the Company and its subsidiaries, taken as a whole. (xviii) Neither the Company nor any of its subsidiaries has at any time during the last five (5) years in any jurisdiction (A) made any unlawful contribution to any candidate for office, or failed to disclose fully any contribution in violation of law, or (B) made any payment to any governmental officer or official, or other person charged with similar public or quasi-public duties other than payments required or permitted by the laws of the United States. (xix) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes. (xx) Each of the Company and its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to its assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to differences. (xxi) Each of the Company and its subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or any of its subsidiaries that could have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole; and all tax liabilities are adequately provided for on the books of the Company and its subsidiaries. 5 6 (xxii) To the best of Company's knowledge, no labor disturbance by the employees of the Company or its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, value added resellers or distributors that might reasonably be expected to have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole. No collective bargaining agreement exists with any of the Company's or its subsidiaries' employees and, to the best of the Company's knowledge, no such agreement is imminent. (xxiii) The consolidated financial statements, including the notes thereto, and supporting schedules included or incorporated by reference in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the dates indicated and the results of its operations for the periods specified. Such consolidated financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, are correct and complete, and are in accordance with the books and records of the Company in all material respects. (xxiv) The Company and its subsidiaries have good and marketable title to all the properties and assets reflected as owned in the financial statements (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in the financial statements (or elsewhere in the Prospectus), or (ii) those which are not material in amount and do not materially adversely affect the use made and proposed to be made of such property by the Company. The Company holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company. Except as disclosed in the Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (xxv) Neither the Company, its subsidiaries nor, to the Company's knowledge, any other party is in violation or breach of, or in default with respect to complying with, any material provision of any contract, agreement, instrument, lease, license, arrangement or understanding which is material to the Company, and each such contract, agreement, instrument, lease, license, arrangement and understanding is in full force and is the legal, valid and binding obligation of the Company and, to the Company's knowledge, the other parties thereto and is enforceable against the Company and, to the Company's knowledge, against the other parties thereto in accordance with its terms except as enforcement (i) may be limited by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance and other similar laws relating to or affecting the rights of creditors generally, (ii) is subject to general principles of equity and similar principles, including, without limitation, concepts of materiality, reasonableness, unconscionability, good faith and fair dealing and the possible unavailability of specific performance, injunctive relief or other equitable remedies, regardless of whether considered in a proceeding in equity or at law or (iii) is subject to the effect of public policy. Each of the Company and its subsidiaries enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. Each of the Company and its subsidiaries is not in violation or breach of, or in default with respect to, any term of its Certificate of Incorporation or Bylaws. (xxvi) Each of the Company and its subsidiaries (A) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (herein called Environmental Laws), (B) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and 6 7 (C) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (xxvii) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (xxviii)Except for the proxy statement relating to the Company's 1997 annual meeting of shareholders, the Company has duly filed on a timely basis with the Commission all reports, registration statements and other documents required by the Securities Act, the Exchange Act, or the rules and regulations of the Commission promulgated pursuant to the Securities Act or the Exchange Act. All of such reports, registration statements and other documents conformed in all material respects to the requirements of the Securities Act, the Exchange Act or the rules and regulations of the Commission promulgated pursuant to the Securities Act or Exchange Act, as appropriate. None of such reports, registration statements or other documents, at the time of their filing with the Commission, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (b) The Selling Securityholder hereby represents and warrants as follows: (i) The Selling Securityholder has good and marketable title to all the shares of Stock to be sold by such Selling Securityholder hereunder, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever, with full right and authority to deliver the same hereunder, subject to the rights of ChaseMellon Shareholder Services, as Custodian (herein called the Custodian), and that upon the delivery of and payment for such shares of the Stock hereunder, the several Underwriters will receive good and marketable title thereto, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever. There is no contractual preemptive right, right of first refusal, right of co-sale or similar right that exists with respect to the stock being sold by the Selling Securityholder. (ii) Certificates in negotiable form for the shares of the Stock to be sold by such Selling Securityholder have been placed in custody under a Custody Agreement (as hereinafter defined) for delivery under this Agreement with the Custodian; such Selling Securityholder specifically agrees that the shares of the Stock represented by the certificates so held in custody for such Selling Securityholder are subject to the interests of the several Underwriters and the Company, that the arrangements made by such Selling Securityholder for such custody, including the Power of Attorney provided for in such Custody Agreement, are to that extent irrevocable, and that the obligations of such Selling Securityholder shall not be terminated by any act of such Selling Securityholder or by operation of law, whether by the death or incapacity of such Selling Securityholder (or, in the case of a Selling Securityholder that is not an individual, the dissolution or liquidation of such Selling Securityholder) or the occurrence of any other event; if any such death, incapacity, dissolution, liquidation or other such event should occur before the delivery of such shares of the Stock hereunder, certificates for such shares of the Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, 7 8 incapacity, dissolution, liquidation or other event had not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity, dissolution, liquidation or other event. (iii) Such Selling Securityholder has reviewed the Registration Statement and Prospectus and, although such Selling Securityholder has not independently verified the accuracy or completeness of all the information contained therein, nothing has come to the attention of such Selling Securityholder that would lead such Selling Securityholder to believe that on the Effective Date, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus contained and, on the Closing Date and any later date on which Option Stock is to be purchased, contains any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iv) All information furnished in writing by or on behalf of such Selling Securityholder for use in the Registration Statement and Prospectus is, and on the Closing Date will be, true, correct, and complete, and does not, and on the Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (v) Such Selling Securityholder has no reason to believe that any representation or warranty of the Company set forth in Section 2(a) above is untrue or inaccurate in any material respect. (vi) The sale of the Stock by such Selling Securityholder pursuant hereto is not prompted by any adverse information concerning the Company which is not set forth in the Registration Statement and Prospectus. (vii) The execution and delivery by such Selling Securityholder of, and the performance by such Selling Securityholder of its obligations under, this Agreement, the Custody Agreement signed by such Selling Securityholder and the Custodian, relating to the deposit of the Stock to be sold by such Selling Securityholder (the Custody Agreement) and the power of attorney appointing certain individuals as such Selling Securityholder's attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement (the Power of Attorney) will not contravene any provision of applicable law, or the certificate or articles of incorporation or by-laws of such Selling Securityholder (if such Selling Securityholder is a corporation), or any agreement or other instrument binding upon such Selling Securityholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Securityholder, and no consent, approval, authorization or order of or qualification with any court or governmental body or agency is required for the performance by such Selling Securityholder of its obligations under this Agreement, the Custody Agreement or the Power of Attorney of such Selling Securityholder, except such as may be required under the Securities Act, by the NASD, or by the securities or Blue Sky laws of various states in connection with the offer and sale of the Stock by the Underwriters. (viii) Such Selling Securityholder has, and on the Closing Date will have, the legal right and power, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement and the Power of Attorney and to sell, transfer and deliver in the manner provided in this Agreement the shares of Stock to be sold by such Selling Securityholder. 8 9 (ix) Each of this Agreement, the Custody Agreement and the Power of Attorney has been duly authorized, executed and delivered by or on behalf of such Selling Securityholder and, assuming due authorization, execution and delivery by the other parties thereto, constitutes a valid and binding obligation of such Selling Securityholder enforceable in accordance with its terms, except as rights to indemnity or contribution may be limited by federal or state securities laws and except as enforcement (i) may be limited by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance and other similar laws relating to or affecting the rights of creditors generally, (ii) is subject to general principles of equity and similar principles, including, without limitation, concepts of materiality, reasonableness, unconscionability, good faith and fair dealing and the possible unavailability of specific performance, injunctive relief or other equitable remedies, regardless of whether considered in a proceeding in equity or at law or (iii) is subject to the effect of public policy. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell 1,700,000 shares of the Underwritten Stock to the several Underwriters, the Selling Securityholder agrees to sell to the several Underwriters the number of shares of the Underwritten Stock set forth in Schedule II opposite the name of such Selling Securityholder, and each of the Underwriters agrees to purchase from the Company and the Selling Securityholder the respective aggregate number of shares of Underwritten Stock set forth opposite its name in Schedule I. The price at which such shares of Underwritten Stock shall be sold by the Company and the Selling Securityholder and purchased by the several Underwriters shall be $____ per share. The obligation of each Underwriter to the Company and the Selling Securityholder shall be to purchase from the Company and the Selling Securityholder that number of shares of the Underwritten Stock which represents the same proportion of the total number of shares of the Underwritten Stock to be sold by each of the Company and the Selling Securityholder pursuant to this Agreement as the number of shares of the Underwritten Stock set forth opposite the name of such Underwriter in Schedule I hereto represents of the total number of shares of the Underwritten Stock to be purchased by all Underwriters pursuant to this Agreement, as adjusted by you in such manner as you deem advisable to avoid fractional shares. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Company or the Selling Securityholder shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters 9 10 agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company and the Selling Securityholder shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company and the Selling Securityholder shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company and the Selling Securityholder shall make arrangements within the 24-hour periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company or the Selling Securityholder to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company or the Selling Securityholder. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, up to 258,750 shares of the Option Stock from the Company at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the last paragraph on the front cover page and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock filed by the Company (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on 10 11 behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Perkins Coie, 1201 Third Avenue, 40th Floor, Seattle, Washington 98101-3099 at 7:00 a.m., Seattle time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company, the Selling Securityholder and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of Perkins Coie, 1201 Third Avenue, 40th Floor, Seattle, Washington 98101-3099 at 7:00 a.m., Seattle time, on the third business day after the exercise of such option. (c) Payment for the Stock purchased from the Company shall be made to the Company or its order, and payment for the Stock purchased from the Selling Securityholder shall be made to the Custodian, for the account of the Selling Securityholder, in each case by one or more certified or official bank check or checks in same day funds. Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company and the Selling Securityholder for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDER. Each of the Company and the Selling Securityholder, as applicable, respectively covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in 11 12 writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of 12 13 the Stock in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. (NASD) of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. The Selling Securityholder will pay any transfer taxes incident to the transfer to the Underwriters of the shares of the Stock being sold by the Selling Securityholder. (j) The Company agrees to reimburse you, for the account of the several Underwriters, for reasonable fees and related disbursements (including counsel fees and disbursements and costs of photocopying memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state securities or blue sky laws and in the review of the offering by the NASD. (k) The provisions of paragraphs (i) and (j) of this Section are intended to relieve the Underwriters from the payment of the expenses and costs which the Company and the Selling Securityholder hereby agree to pay and shall not affect any agreement which the Company 13 14 and the Selling Securityholder may make, or may have made, for the sharing of any such expenses and costs. (l) The Company hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a period of ninety (90) days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, 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 Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by the Company upon the exercise of options granted under the stock option or stock purchase plans of the Company (the Plans), all as described in footnote (1) to the table under the caption "Capitalization" in the Preliminary Prospectus, and (C) options to purchase Common Stock granted under the Plans. (m) The Company is familiar with the 1940 Act and will in the future conduct its affairs, in such a manner to ensure that the Company will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of 1940 Act, and the rules and regulations thereunder. 7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company, and the Selling Securityholder severally and not jointly agree to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise, and the Company and the Selling Securityholder severally and not jointly agree to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company and the Selling Securityholder contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in 14 15 conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person (excluding the documents incorporated therein by reference) and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of the Company and the Selling Securityholder contained in this paragraph (a) and the representations and warranties of the Company, and the Selling Securityholder contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, and the Selling Securityholder from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in 15 16 any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but 16 17 also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Securityholder on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the Selling Securityholder and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) Neither the Company nor the Selling Securityholder will, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (f) The liability of the Selling Securityholder under the indemnity, contribution and reimbursement agreements contained in the provisions of this Section 7 and Section 11 hereof shall be limited to an amount equal to the initial public offering price of the Stock sold by the Selling Securityholder to the Underwriters. In addition, the Selling Securityholder shall not be liable under the expense, indemnity and contribution agreements of Sections 6, 7 and Section 11 hereof unless and until the Underwriters have made written demand on the Company for payment 17 18 under such Sections which shall not have been paid by the Company within 60 days after receipt of such demand. The Company and the Selling Securityholder may agree, as between themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company and the Selling Securityholder if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange or The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities, (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States or (vii) any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company or the Selling Securityholder to the Underwriters and no liability of the Underwriters to the Company or the Selling Securityholder; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholder under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the Company and by the Selling Securityholder of all their respective obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus 18 19 (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Fenwick & West LLP, counsel for the Underwriters. (c) You shall have received from Perkins Coie, counsel for the Company and the Selling Securityholder, an opinion, addressed to the Underwriters and dated the Closing Date, covering the matters set forth in Annex A hereto, and if Option Stock is purchased at any date after the Closing Date, an additional opinion from such counsel, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor any of its subsidiaries has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company or any of its subsidiaries is a party or of which property of the Company or any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable, in your reasonable judgment, to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the Chief Executive Officer, the Chief Operating Officer and the Chief Accounting Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of paragraph (d) of this Section 9 are true and correct. (f) You shall have received from Price Waterhouse LLP, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the 19 20 Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of its subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (g) You shall have received from Price Waterhouse LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at October 31, 1996, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Stock to be issued and sold by the Company shall have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. (j) On or prior to the Closing Date, you shall have received from all directors and officers and each stockholder holding at least 5% all of the outstanding shares of Common Stock agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters such person will not, for a period of ninety (90) days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge, or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire Common Stock. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Fenwick & West LLP, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company and to the Selling Securityholder. Any such termination shall be without liability of the Company or the Selling Securityholder to the Underwriters and without liability of the Underwriters to the Company or the Selling Securityholder; provided, however, that (i) in the event of such termination, the Company and the Selling Securityholder agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholder under this Agreement, including all costs and expenses referred to in paragraphs (i) 20 21 and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company or the Selling Securityholder to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING SECURITYHOLDER. The obligation of the Company and the Selling Securityholder to deliver the Stock shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company and the Selling Securityholder by giving notice to you. Any such termination shall be without liability of the Company and the Selling Securityholder to the Underwriters and without liability of the Underwriters to the Company or the Selling Securityholder; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholder under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other obligations under Section 7 of this Agreement (and subject, in the case of the Selling Securityholder, to the provisions of paragraph (f) of Section 7), the Company and the Selling Securityholder hereby jointly and severally agree to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company, the Selling Securityholder and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company, the Selling Securityholder and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104, Attn: 21 22 Kenneth Hao (with a copy to the General Counsel); and if to the Company or the Selling Securityholder, shall be mailed, telegraphed or delivered to it at its office, 10201 Willows Road, Redmond, Washington 98052, Attention: Peter H. van Oppen. All notices given by telegraph shall be promptly confirmed by letter. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or the Selling Securityholder or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraph (l) of Section 6 hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 22 23 Please sign and return to the Company and to the Selling Securityholder in care of the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company, the Selling Securityholder and the several Underwriters in accordance with its terms. Very truly yours, ADVANCED DIGITAL INFORMATION CORPORATION By:___________________________________________________ Peter H. van Oppen, President and Chief Executive Officer SELLING SECURITYHOLDER: By:____________________________________________________ Peter H. van Oppen, Attorney-in-Fact for the Selling Securityholder named in Schedule II hereto The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC DAIN BOSWORTH INCORPORATED By Hambrecht & Quist LLC By:_____________________________________ Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 23 24 SCHEDULE I UNDERWRITERS
Number of Shares Underwriters to be Purchased - ------------ ---------------- Hambrecht & Quist LLC.................................. Dain Bosworth Incorporated............................. Total......................................... 1,725,000 =========
25 SCHEDULE II SELLING SECURITYHOLDER
Number of Shares of Underwritten Name of Selling Securityholder Stock to be Sold - ------------------------------ ---------------- Foundation for the Future 25,000 Total..................................... 25,000 ======
EX-5.1 3 OPINION OF PERKINS COIE 1 Exhibit 5.1 [PERKINS COIE LETTERHEAD] February 18, 1997 Advanced Digital Information Corporation 10201 Willows Road Redmond, WA 98052 Gentlemen and Ladies: 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 1,700,000 shares (the "Company Shares") of the Company's common stock, having no par value (the "Common Stock"), and the sale of up to 25,000 shares of the Common Stock (the "Selling Shareholder Shares") offered by a certain Company shareholder (the "Selling Shareholder"), together with an additional 258,750 shares of Common Stock if and to the extent the underwriters exercise their over-allotment option (the "Over-Allotment Shares"), and the preparation and filing of a registration statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as amended, which you are filing with the Securities and Exchange Commission with respect to the Company Shares, the Selling Shareholder Shares and the Over-Allotment Shares (collectively, the "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 Shares, (c) the offering and sale of the Shares as contemplated by the Registration Statement, and (d) receipt by the Company of the consideration required for the Company Shares and the Over-Allotment Shares, if applicable, as contemplated by the Registration Statement, the 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 2 Advanced Digital Information Corporation February 18, 1997 Page 2 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 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS 3-MOS OCT-31-1996 NOV-01-1996 JAN-31-1997 1 6,796 0 15,295 (210) 12,982 35,571 3,596 (1,905) 37,492 8,387 0 0 0 21,555 7,550 37,492 20,069 20,069 14,097 14,097 3,679 0 115 2,546 885 1,661 0 0 0 1,661 .20 .20
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