<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1997
REGISTRATION NO. 333-15837
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ATL PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3572 95-3824281
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1515 SOUTH MANCHESTER AVENUE
ANAHEIM, CALIFORNIA 92802-2907
(714) 780-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KEVIN C. DALY, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATL PRODUCTS, INC.
1515 SOUTH MANCHESTER AVENUE
ANAHEIM, CALIFORNIA 92802-2907
(714) 780-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PATRICK ARRINGTON, ESQ. JEFFREY D. SAPER, ESQ.
ELLEN S. BANCROFT, ESQ. HOWARD S. ZEPRUN, ESQ.
SUSAN N. CAYLEY, ESQ. KAIVAN M. SHAKIB, ESQ.
NEEL GROVER, ESQ. MATTHEW MACKENZIE, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
4675 MACARTHUR COURT, SUITE 1000 PROFESSIONAL CORPORATION
NEWPORT BEACH, CALIFORNIA 92660 650 PAGE MILL ROAD
(714) 752-7535 PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
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, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 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 3, 1997
1,650,000 SHARES
LOGO
COMMON STOCK
All of the shares of Class A Common Stock, $.0001 par value, (the "Common
Stock") offered hereby are being sold by ATL Products, Inc. (the "Company").
Prior to this Offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $10 and $12 per share. See "Underwriting" for factors to be
considered in determining the initial public offering price. The Company has
applied to have the Common Stock approved for quotation on the Nasdaq National
Market under the symbol "ATLPA."
The Company has two classes of common stock authorized, the Class A Common
Stock and the Class B Common Stock. The rights, preferences and privileges of
each class of common stock are identical in all respects except for voting
rights. Each share of Common Stock entitles its holder to one vote and each
share of Class B Common Stock entitles its holder to .05 votes. The Class B
Common Stock is not convertible into the Common Stock. As of the date of this
Prospectus, no shares of Class B Common Stock were outstanding. Unless otherwise
indicated, all references to "Common Stock" shall refer to the Company's Class A
Common Stock. See "Description of Securities."
Prior to this Offering, Odetics, Inc., a Delaware corporation ("Odetics"),
owns 100% of the outstanding shares of the Company's Common Stock, and upon
completion of this Offering Odetics will own 82.9% of the Company's Common Stock
(or 80.9% if the Underwriters' overallotment option is exercised in full) and
will continue to control the Company. Odetics has announced its intention,
subject to satisfaction of certain conditions, to divest its ownership interest
in the Company by December 31, 1997 by means of a tax-free distribution to its
stockholders. The Company intends to use the lesser of 40% of the net proceeds
of this Offering before deducting estimated offering expenses or $10 million to
repay certain indebtedness to Odetics. See "Principal Stockholder" and
"Relationship Between the Company and Odetics."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
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.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- -----------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total(3)................................. $ $ $
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $575,000.
(3) The Company has granted to the Underwriters a 30 day option to purchase up
to 245,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any orders in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
------------------------
MONTGOMERY SECURITIES CRUTTENDEN ROTH
INCORPORATED
, 1997
<PAGE> 3
ATL
PRODUCTS
STORAGE AUTOMATION
FOR THE OPEN ENTERPRISE
(Artwork consists of a group of the Company's products)
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 TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
ATL PROVIDES
BROAD DATA MANAGEMENT
SUPPORT IN DISTRIBUTED
COMPUTING ENVIRONMENTS
* Database backup
* Network backup
* Disaster recovery
* Data warehousing
* Rapid access secondary storage
[Artwork consists of a photo of a network computer control center
featuring the Company's products and includes a photo of the Company's
Internet browser screens, IntelliGrip(TM) robotics and the control
panel for one of the Company's products]
Captions:
Web-based administration and
management software provides
universal access for library control
DLT tape cartridges provide up to
35 gigabyte capacity
520 Family libraries provide departmental
and LAN level data management
Browser-like user interface
provides comprehensive control
on the 520 library control panel
2640 Family libraries provide
high capacity storage for central
system-level data management
ATL Products
IntelliGrip(TM)
robotics technology
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information including "Risk Factors" and Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus. The shares of Common Stock
offered hereby involve a high degree of risk. This Prospectus contains, in
addition to historical information, forward looking statements that involve
certain risks and uncertainties. The Company's actual results may differ
substantially from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the sections entitled "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as those discussed elsewhere in this Prospectus.
THE COMPANY
ATL Products, Inc. (the "Company") designs, manufactures, markets and
services automated magnetic tape libraries used to manage, store, and transfer
data in networked computing environments. The Company is a leading provider of
Digital Linear Tape ("DLT") automated tape libraries for the high end of the
networked computing market (one terabyte capacity and above), shipping over
2,000 systems during the past three years. The Company's products provide a high
performance, reliable, cost effective and scaleable storage solution for
organizations requiring the backup, archival and recovery of critical computer
data.
The Company's products incorporate DLT(TM) tape drives as well as the
Company's proprietary IntelliGrip(TM) cartridge handling system, providing end
users with rapid and reliable access to computer data across a wide variety of
networks. The Company believes that the growing market acceptance of DLT
technology has been driven by a number of factors, including performance, cost,
reliability and durability advantages over competing storage technologies. The
Company's proprietary robotics system within each automated tape library
provides additional speed and reliability due to the accurate and timely manner
in which tape cartridges are loaded to and unloaded from the DLT drives. The
Company's products are compatible with commonly used network operating systems,
protocols and topologies as well as with a broad range of storage management
software. In addition, these products are highly scaleable and permit flexible
configuration. For example, the Company's 2640 Series is capable of storing 9.2
terabytes of data as a standalone unit or up to 46 terabytes of data with the
SystemLink Option, which links up to five 2640 units together for larger storage
requirements.
The Company's objective is to be the leading provider of automation
solutions for the management and protection of data storage in distributed
computing environments. The key elements of the Company's strategy to achieve
this objective are (i) to develop new products incorporating improved robotics,
advanced network connectivity and evolving storage technologies, (ii) to develop
additional proprietary software to enhance performance in the areas of system
monitoring and volume management, (iii) to broaden the range of product
offerings to address both the rapidly growing Windows NT market as well as the
high performance data warehousing market, (iv) to continue to strengthen and
enhance relationships with both original equipment manufacturers ("OEMs") and
value added resellers ("VARs"), and (v) to provide extensive customer support to
end users. In early 1997, the Company plans to introduce its Prism product line,
providing broader market coverage, additional software functionality and a rack
mounted design for easy integration into existing storage systems.
The Company sells its products through indirect distribution channels,
including OEMs such as Auspex, EMC, Hewlett-Packard and Sun Microsystems, as
well as a network of VARs who specialize in storage solutions. In addition, the
Company maintains cooperative marketing relationships with a number of
independent software developers whose product offerings are complementary to
those of the Company. Selected end users of the Company's automated tape
libraries include Intel, AT&T, Hewlett-Packard, IBM, Chevron, Bank of Boston,
Warner Bros., British Airways and Swiss Bank Corporation.
The Company was established in 1990 as a division of Odetics and was
incorporated in California in February 1993 as a wholly owned subsidiary of
Odetics and was reincorporated in Delaware in December 1996. The Company's
executive offices are located at 1515 South Manchester Avenue, Anaheim,
California 92802-2907, and its telephone number at that location is (714)
780-7200.
3
<PAGE> 6
RELATIONSHIP WITH ODETICS, INC.
Odetics currently owns 100% of the Company's outstanding Common Stock. Upon
consummation of this Offering, Odetics will own 82.9% of the total voting power
of the outstanding Common Stock (or 80.9% if the Underwriters' over-allotment
option is exercised in full). See "Principal Stockholder." As a result of its
ownership interest, Odetics will be able to control the vote on most matters
submitted to stockholders, including the election of directors and the approval
of extraordinary corporate transactions. The Company and Odetics have entered
into a number of agreements for the purpose of defining their ongoing
relationship. While these agreements will continue to provide the Company with
certain services, the Company is entitled to the ongoing assistance of Odetics
only for a limited time and it may not receive such services beyond the terms of
the agreements. Odetics has announced that, subject to certain conditions
(including the receipt of a favorable private letter ruling from the Internal
Revenue Service concerning the tax free nature of the Distribution, for which
Odetics has applied), Odetics intends to distribute (the "Distribution") to its
stockholders prior to December 31, 1997, all of the Common Stock of the Company
owned by Odetics following the Offering. The Company will pay to Odetics the
lesser of 40% of the net proceeds of this Offering before deducting estimated
offering expenses or $10 million to reduce the Company's obligations to Odetics.
Such obligations, which consisted of advances from Odetics for services and
support provided to the Company and for additional working capital, were
approximately $19.6 million as of December 31, 1996. Upon consummation of the
Offering, the Company will enter into a Promissory Note payable to Odetics
representing the balance of its obligations to Odetics (which is estimated to be
$12.8 million assuming an initial public offering price of $11 per share). Such
Note will accrue interest at the lowest rate charged to Odetics from time to
time by either of its principal lenders (8.25% as of December 31, 1996) and is
payable in sixteen equal quarterly installments of principal plus accrued
interest. Management of Odetics believes that financing for the Company's
operations is available on more favorable terms if the Company becomes
independent from Odetics. See "Risk Factors -- Control by Odetics Pending the
Distribution," "-- Absence of History as an Independent Entity; Limited
Relevance of Historical Financial Information," "Relationship between the
Company and Odetics" and "Principal Stockholder."
- ---------------
Except as otherwise indicated, all information contained in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes
no exercise of options to purchase 879,000 shares of Class B Common Stock
granted under the 1996 Stock Incentive Plan in December 1996, and (iii) gives
effect to the reincorporation of the Company as a Delaware corporation and the
recapitalization effected in connection therewith, including the authorization
of two classes of common stock, the Common Stock and the Class B Common Stock,
the exchange of each share of the Company's previously issued common stock for
8,005 shares of Common Stock. See "Underwriting" and "Management -- 1996 Stock
Incentive Plan."
StorLink, IntelliGrip, Data Storm, Prism, ATL 7100, ATL 520, ATL 2640, ATL
6/176, ATL 9/88, ATL 4/52 and ATL 2/28 are trademarks of the Company. This
Prospectus also includes trade names and trademarks of companies other than the
Company.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 1,650,000 shares
Common Stock to be outstanding after the
Offering......................................... 9,655,000 shares(1)
Use of proceeds.................................... For the repayment of certain indebtedness to
Odetics in an amount equal to the lesser of 40%
of the net proceeds of this Offering before
deducting estimated offering expenses or $10
million and for general corporate purposes,
including working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol............. ATLPA
</TABLE>
- ---------------
(1) Excludes 879,000 shares of Class B Common Stock issuable upon the exercise
of stock options granted on December 19, 1996 under the 1996 Stock Incentive
Plan at an exercise price of $5.00 per share. An additional 1,121,000 shares
of Common Stock have been reserved for issuance under this plan. The Class B
Common Stock is substantially identical to the Common Stock except that each
share of Class B Common Stock is entitled to .05 of one vote. The Company's
Class B Common Stock is not convertible into Common Stock, and no shares of
the Company's Class B Common Stock are outstanding as of the date of this
Prospectus. See "Management -- 1996 Stock Incentive Plan," "Description of
Securities" and "Note 10 of Notes to Consolidated Financial Statements."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------------------- ----------------------------------
PRO FORMA(1) PRO FORMA(1)
1994 1995 1996 1996 1995 1996 1996
------- ------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales................ $20,506 $22,641 $27,433 $29,410 $16,102 $41,915 $42,452
Gross profit............. 4,789 5,718 9,091 10,547 4,504 16,508 17,011
Income (loss) from
operations............. (1,353) (6,272) 417 758 (1,264) 5,800 5,988
Net income (loss)........ $(1,895) $(7,515) $(1,444) $(1,189) $(2,643) $ 2,700 $ 2,813
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share.................. $ (.22) $ (.89) $ (.17) $ (.14) $ (.31) $ .32 $ .33
======= ======= ======= ======= ======= ======= =======
Shares used in
computation of net
income (loss) per
share(2)............... 8,484 8,484 8,484 8,484 8,484 8,484 8,484
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................................................. $ (9,974) $ 19,148
Total assets.............................................................. 19,295 28,848
Total liabilities......................................................... 27,462 20,710
Total stockholders' equity (deficit)...................................... (8,167) 8,138
</TABLE>
- ---------------
(1) The pro forma presentation includes the portions of total sales revenues
from European customers earned by Odetics Europe Limited, a subsidiary of
Odetics, and related expenses as if such sales had been made through the
Company's European subsidiary established July 1, 1996.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) Adjusted to reflect the sale of 1,650,000 shares of Common Stock by the
Company at an assumed public offering price of $11 per share and the
application of the estimated net proceeds therefrom including the payment of
$6.8 million to Odetics which represents 40% of the net proceeds of this
Offering before deducting offering expenses. See "Use of Proceeds."
5
<PAGE> 8
RISK FACTORS
This Prospectus contains forward looking statements which involve a number
of risks and uncertainties. Actual results could differ materially from those
discussed in the forward looking statements. Factors that could cause actual
results to differ materially include, without limitation, the risk factors
discussed below as well as the risks discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus. In addition to the other information contained in
this Prospectus, the following Risk Factors should be considered carefully in
evaluating the Company and its business before purchasing the Common Stock
offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; HISTORY OF OPERATING LOSSES
The Company's quarterly operating results have fluctuated in the past and
may continue to fluctuate in the future based on a number of factors, not all of
which are in the Company's control. These factors include, without limitation,
the size and timing of significant customer orders; the introduction of new
products by competitors; the availability of components used in the manufacture
of the Company's products; changes in pricing policies by the Company, its
suppliers or its competitors; the ability of the Company to develop, introduce,
market and gain market acceptance of new products, applications and product
enhancements in a timely manner and to control costs; the Company's success in
expanding and implementing its sales and marketing programs; technological
changes in the distributed computing markets; the mix of sales among the
Company's channels; deferrals of customer orders in anticipation of new
products, applications or product enhancements; currency fluctuations; and
general economic and market conditions. Moreover, the Company's sales in any
quarter typically consist of a relatively small number of large OEM and VAR
customer orders, and the timing of a small number of orders can impact quarter
to quarter results. The loss of or a substantial reduction in orders from any
significant customer, such as the cancellation by E-Systems in 1994 of purchase
orders in the amount of $2.0 million for the Company's products, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Since the Company's sales are primarily made through OEMs
and VARs who typically provide the Company with relatively short lead times, it
is often difficult for the Company to forecast the timing and quantity of orders
accurately. The Company's expense levels and its purchases of parts, components
and subassemblies are based in part upon its expectations concerning future
revenues. Accordingly, if revenue levels are below expectations, whether as a
result of product transition or otherwise, operating results are likely to be
adversely affected.
While the Company has generated net income in its last three fiscal
quarters, it incurred significant losses in all prior fiscal periods since its
formation. Although the Company has experienced significant growth in revenues
in recent periods, such growth may not be sustainable and may not be indicative
of future operating results. The Company also currently expects to incur
approximately $500,000 in the fiscal year ended March 31, 1997 under an
administrative services agreement with Odetics which will adversely affect
operating results while the Company establishes its own administrative
functions. There can be no assurance that the Company will achieve profitability
on a quarterly or annual basis in the future. During the first calendar quarter
of 1997, the Company plans to relocate its corporate headquarters and
manufacturing facilities to a new plant in Irvine, California. This relocation
could have a disruptive effect upon the Company's manufacturing operations, and
the Company's inability to manage the relocation effectively and efficiently
would have a material adverse affect on the Company's results of operations for
that period. Due to all of the foregoing factors and other risks discussed
below, it is possible that in some future period the Company's operating results
may be below the expectations of analysts and investors. In such event, the
price of the Company's Common Stock would probably be materially and adversely
affected. See "-- Reliance on OEMs and VARs; Concentration of Sales,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Manufacturing" and "-- Facilities."
DEPENDENCE ON QUANTUM CORPORATION
The Company's success depends in large part upon its relationship with
Quantum Corporation ("Quantum"), which has the exclusive worldwide manufacturing
rights for the DLT technology and is the sole supplier of DLT tape drives. The
Company currently derives substantially all of its revenues from the sale of its
DLT based products and related services, and the Company expects that revenues
from its DLT based products will continue to account for substantially all of
the Company's revenues for the foreseeable future.
6
<PAGE> 9
The Company's future operating results will depend substantially on the
Company's relationship with Quantum and the Company's ability to continue to
obtain adequate supplies of DLT drives from Quantum. While the Company has not
experienced allocation shortages to date, Quantum has in the past been unable to
supply certain of its customers with their full allocation of drives. The
Company has not been able to secure any guarantee of the future supply of DLT
drives from Quantum. The Company's agreement with Quantum permits Quantum to
terminate its arrangement with the Company for any reason upon providing 90 days
written notice to the Company. The disruption or termination of the Company's
supply of DLT drives from Quantum would have a material adverse effect on the
Company's business, financial condition and results of operations. Quantum has
also historically sold DLTStore(TM), a competing tape library addressing the
lower end of the distributed computing market and may introduce other storage
libraries in the future. To the extent such products marketed by Quantum compete
directly with the Company's products, the existence of such products could
disrupt the Company's relationship with Quantum, particularly if Quantum chooses
to satisfy its own demand first. In addition, Quantum currently supplies drives
to all of the Company's competitors, and there can be no assurance that the
Company's competitors will not establish relationships with Quantum in which the
competitors could achieve higher priority in the supply of DLT drives. Moreover,
since Quantum has only one manufacturing facility for DLT drives located in
Colorado Springs, Colorado, any disruption in Quantum's ability to continue to
manufacture and supply the Company with DLT tape drives, whether as a result of
a natural disaster or otherwise, would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Single Product Line; Dependence on DLT."
SINGLE PRODUCT LINE; DEPENDENCE ON DLT
The Company's current product families are all based on DLT technology, and
the Company expects that revenues from DLT products will continue to account for
substantially all of the Company's revenues for the foreseeable future.
Accordingly, the Company's operating results for the foreseeable future will be
substantially dependent on the continued market acceptance of DLT technology and
growth of the DLT library market. The DLT market is relatively new, and there
can be no assurance that another technology will not replace or adversely affect
DLT technology as a widely accepted data storage medium. In addition, due to the
relatively recent emergence of the DLT market, the Company expects that
additional companies may introduce products incorporating DLT technology
competing directly with the Company. Any decline in the rate of growth of the
DLT market or failure of the market to sustain acceptance of DLT technology, or
any decline in unit prices of the Company's products as a result of increased
competition, technological change or otherwise, would have a material adverse
effect on the business, operating results and financial condition of the
Company. The life cycle of the Company's current products is difficult to
estimate due to the recent emergence of the DLT market and uncertainties
associated with potential introductions of new products and technologies by
competitors, as well as potential technological changes in the secondary storage
industry in which DLT operates. The Company's future financial performance will
depend upon the continued market success of DLT technology, as well as the
Company's ability to successfully develop, introduce and achieve market
acceptance of new products, applications and product enhancements as the data
storage market evolves. There can be no assurance that the Company will continue
to be successful in marketing its DLT products or in developing and marketing
any new products, applications or product enhancements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Products," "-- Research and Development" and "-- Competition."
EFFECT OF NEW PRODUCT INTRODUCTIONS
The Company's future operating results will depend significantly on the
degree and timing of market acceptance of the Company's 7100 Series (which was
introduced in November 1996), the new Prism product family (which the Company
plans to introduce in calendar 1997) and other new products. It is difficult to
predict the effect that the announcement of these or other new products (or
enhancements to existing products) will have on sales of current products
pending the full availability of the new products, or the rate at
which such products will be accepted by the market, if at all. For example, the
DLT 7100 and the Prism products could result in a reduction in the sales of the
Company's 520 Series products in anticipation of the new libraries by the
Company's customers. In addition, manufacturing defects or other operational
problems
7
<PAGE> 10
commonly associated with new product introductions could adversely affect the
successful introduction of such new products. There can be no assurance that the
Company will be able to introduce new products or enhancements to existing
products on a timely basis, if at all, or the effect to which such introductions
will have on sales of existing products. See "Business -- Products Under
Development" and "-- Competition."
COMPETITION
The data storage market is intensely competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Competitors
vary in the number, scope and breadth of the products and services offered.
Management believes eight tape library manufacturers currently provide DLT based
products, including the Company's principal competitors, Advanced Digital
Information Corporation ("ADIC"), Breece Hill Technologies, Hewlett-Packard and
StorageTek. Since DLT is still an emerging technology and currently represents
one of the smallest segments of the tape storage market, the Company competes
indirectly with a large number of manufacturers offering tape storage systems
using formats other than DLT, including 8mm, 4mm (DAT), half inch format (3480)
and QIC. Many of these indirect competitors have larger installed bases and may
be expected to continue to provide intense competition for the DLT format. These
competitors include ADIC, Exabyte, Fujitsu, Hitachi, IBM, Spectra Logic and
StorageTek. The Company also competes with suppliers of other removable storage
media such as optical storage systems and floppy disks. These competitors are
expected to expand the functionality and performance of their selected storage
technologies which may render such technologies even more competitive as
compared to DLT. In addition, if DLT continues to maintain market acceptance,
many of these competitors could elect to offer DLT systems. The Company also
expects additional competition from large integrated computer equipment
companies, many of whom have historically incorporated their own tape storage
products into their mainframe systems, and are broadening their focus to include
the distributed computing markets. In addition, because there are relatively low
barriers to entrance into the tape library market, the Company anticipates
increased competition from other established and emerging companies. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse affect upon the
Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, technical, manufacturing, marketing and other resources than the
Company, and may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than the Company.
Accordingly, there can be no assurance that the Company will be able to continue
to compete effectively. See "Business -- Competition."
RELIANCE ON OEMS AND VARS; CONCENTRATION OF SALES
The Company relies heavily upon its relationships with selected OEMs who
sell and support the Company's products as part of their comprehensive data
storage systems. Sales through OEMs accounted for approximately 100%, 65%, 29%
and 26% of the Company's total revenues in fiscal 1994, 1995, 1996 and the nine
months ended December 31, 1996, respectively. The Company is currently
investing, and intends to continue to invest, significant resources to develop
these OEM relationships. These expenditures could materially and adversely
affect the Company's operating margins unless the Company is able to achieve
commensurate growth in sales to OEMs. In addition, the Company is dependent upon
its OEMs' ability to develop new products, applications and product enhancements
incorporating the Company's products in a timely and cost effective manner that
will meet changing customer needs and respond to emerging industry standards and
other technological changes. There can be no assurance that the Company's OEM
customers will continue to meet these challenges effectively. The Company also
relies heavily on selected VARs who integrate the Company's products with
storage management software to provide comprehensive storage solutions. Most of
the Company's VARs carry product lines that are competitive with those of the
Company, and there can be no assurance that they will give the marketing of the
Company's products high priority, or that they will continue to carry the
Company's products. The Company's agreements with VARs and OEMs are generally
not required to be exclusive, and in many cases may be terminated by either
party at any time with limited notice and without cause. A small number of
customers has historically accounted for a substantial portion of the Company's
net sales and the identity of the Company's significant customers has
historically varied from period to period. Sales to DEC and Odetics Europe
Limited accounted for
8
<PAGE> 11
approximately 16.4% and 14.5%, respectively, of the Company's net sales for the
year ended March 31, 1996. Sales to EMC accounted for approximately 13.7% of the
Company's net sales for the nine months ended December 31, 1996. No other
customer accounted for 10% or more of net sales during these periods. The
Company's largest ten customers, however, accounted for an aggregate of
approximately 55.9% of the Company's net sales during the 18 month period ending
December 31, 1996. The loss of important OEMs or VARs, their reduced focus on
the Company's products, or the inability to obtain additional OEMs as the market
evolves could materially and adversely affect the Company's business, financial
condition and operating results. See "Business -- Sales and Marketing; Principal
Customers."
DEPENDENCE ON INDEPENDENT SOFTWARE DEVELOPERS
The utility of an automated tape library is highly dependent upon the
storage management software which supports the library and integrates it into
the user's computing environment to provide a complete storage solution. The
Company does not develop such storage management software and relies on
independent software developers to provide software support and integration for
tape libraries for distributed computing environments. Accordingly, the
continued development and future growth of the market for the Company's products
will depend in large part upon the success of software developers to meet the
overall data storage and management needs of end users and the Company's ability
to maintain strong relationships with these firms. The Company has established
marketing relationships with more than 40 independent software developers to
provide broad compatibility for the Company's products. There can be no
assurance, however, that the Company will be able to maintain its existing
relationships or enter into new relationships with such software developers. The
Company's failure to do so could adversely affect sales of the Company's current
products. See "-- Dependence on Quantum" and "Business -- Sales and Marketing;
Principal Customers."
MANAGEMENT OF EXPANDING OPERATIONS
The Company is currently experiencing a period of rapid growth which has
placed and is expected to continue to place a considerable strain on the
Company's management and its administrative, sales and marketing, financial,
information systems and operational resources. From April 1, 1995 to December
31, 1996, the size of the Company's staff increased from 76 to 154 employees
including approximately 25 new employees hired as a result of the acquisition of
certain sales and service divisions of Odetics. Further significant increases in
the number of employees are anticipated during calendar 1997. The Company
believes its success will depend, in part, on its ability to integrate these and
additional new employees into the Company rapidly to respond to the anticipated
growth of the Company. Moreover, the Company has to date operated as a wholly
owned subsidiary of Odetics and has relied on Odetics for certain operational
and administrative systems. The Company and Odetics have entered into certain
agreements pursuant to which Odetics will continue to provide certain
facilities, information systems, payroll and benefits administration, financial
services and financial accounting services to the Company, pending the
establishment of an independent infrastructure by the Company. Although the
Company believes that this arrangement is satisfactory for its immediately
foreseeable future, the Company's ability to manage growth effectively will
require it to install its own operational, financial and management controls,
reporting systems and procedures, to establish new management information and
control systems and to train, motivate and manage its employees. There can be no
assurance that the Company will be able to install such operational, financial
and management information and control systems in an efficient and timely manner
or that the new structures, systems and controls will be adequate to support the
Company's operations and prevent the occurrence of unforeseen management or
financial issues. Continued growth will also require the Company to recruit
additional key management personnel (including a chief financial officer),
expand its engineering and product development capabilities, expand its sales
and marketing capabilities, improve its customer service and support functions
and to train, motivate and manage additional employees. There can be no
assurance that the Company will be able to manage these changes and implement
the required programs successfully, and its failure to do so could have a
material adverse effect upon the Company's business, financial condition and
operating results. See "Business -- Employees," "-- Customer Service and
Support," and "Relationship between the Company and Odetics."
9
<PAGE> 12
ABSENCE OF HISTORY AS AN INDEPENDENT ENTITY; LIMITED RELEVANCE OF HISTORICAL
FINANCIAL INFORMATION
The Company has operated as a wholly owned subsidiary of Odetics since
January 1993 and, accordingly, has had no independent operating history. After
the Offering and prior to the Distribution (as defined below), the Company will
continue to be a subsidiary of Odetics, but will, subject to Odetics' rights as
a controlling stockholder, operate as an independent company. There can be no
assurance that the Company will be able to develop the operational, financial,
management, administrative and other resources or systems which were previously
provided by Odetics and which are necessary to operate as an independent
company. Although the Company and Odetics have entered into general agreements
intended to facilitate the Company's transition to an independent public
company, there can be no assurance that the Company will be able to manage this
transition or to develop these independent resources successfully. Although the
Company's net revenue has increased each year since fiscal 1993, the Company's
financial results as a subsidiary of Odetics may not be representative of what
the Company's results of operations and financial condition would have been had
the Company been a separate, standalone company during the periods presented or
be indicative of future results of operations and the financial condition of the
Company. See "Relationship Between the Company and Odetics" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POSSIBILITY OF SUBSTANTIAL SALES OF COMMON STOCK
The Distribution, which the Company currently plans to effect prior to
December 31, 1997 (but will not in any event effect for 180 days following the
date of this Prospectus), would involve the distribution of an aggregate of
approximately 8,005,000 shares of Common Stock of the Company to the
stockholders of Odetics. Substantially all of such shares would be eligible for
immediate resale in the public market. Sales of substantial amounts of Common
Stock in the open market in anticipation of, or following, the Distribution, or
the market perception that such sales might occur, whether as a result of the
Distribution or otherwise, could materially and adversely affect the market
price of the Company's Common Stock. See "Shares Eligible for Future Sale."
RAPID TECHNOLOGICAL CHANGE
The distributed computing market and the related data storage market are
characterized by rapid technological change, frequent new product introductions
and enhancements, and evolving industry standards. This industry has been
subject to fundamental changes reflecting the migration from mainframe based
systems to distributed computing environments, the significant increase in the
amount of data generated and stored in such environments and end users'
increasing dependence on near online access to such data. The Company's ability
to remain competitive will depend in part on its ability to develop new and
enhanced automated tape libraries in a timely and cost effective manner in order
to integrate the latest technological advancements in storage media and to
accommodate changes in the evolving distributed computing networks. Since all of
the Company's products are currently based on DLT technology, any change in DLT
technology or the emergence and acceptance of any new technologies may require
the Company to incur substantial unanticipated costs to incorporate such
changes, for which there can be no assurance that the Company will be able to
complete on a timely basis, if at all. The Company's inability to incorporate
advances or fundamental changes in storage media could materially and adversely
affect the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND NEW EUROPEAN SUBSIDIARY
International product sales represented approximately 28% and 19% of the
Company's pro forma net sales during fiscal 1996 and during the nine month
period ended December 31, 1996, respectively. The Company maintains sales and
support offices in England, Germany and Taiwan. The Company believes that
international sales will continue to represent a significant portion of its
revenues, and that continued growth and profitability will require further
expansion of its international operations. To continue to expand international
sales, the Company has established ATL Products Limited ("APL"), a wholly owned
subsidiary headquartered in the United Kingdom. The Company is currently in the
process of hiring additional personnel and building an infrastructure to support
this subsidiary. The Company may establish additional international operations,
hire additional personnel and recruit additional international VARs. These
efforts will require significant management attention and financial resources,
and could materially and adversely affect the Company's operating margins. To
the extent that the Company is unable to make these additions in a timely
10
<PAGE> 13
manner, the Company's business, operating results and financial condition could
be materially and adversely affected. The Company's international sales are
currently denominated in U.S. dollars, and an increase in the relative value of
the dollar could make the Company's products more expensive and, therefore,
potentially less price competitive in international markets. Additional risks
inherent in international business activities generally include unexpected
changes in regulatory requirements, tariffs and other trade barriers, longer
accounts receivable payment cycles, difficulties in managing and staffing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, the burdens of compliance with a
wide variety of foreign laws, currency fluctuations and political and economical
instability. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results and financial condition.
Furthermore, as the Company increases its international sales, its total
revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing; Principal Customers."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
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 one U.S. patent and has applications for additional patents
pending. The Company also relies on a combination of copyright, trademark, trade
secret and other intellectual property laws to protect its proprietary rights.
There can be no assurance, however, that any future patents will be granted or
that any issued patents or other intellectual property rights of the Company
will provide meaningful protection for the Company's product innovations.
Moreover, such rights may not preclude competitors from developing substantially
equivalent or superior products to the Company's products. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. Accordingly, effective protection of
intellectual property may be unavailable or limited in certain foreign
countries. There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate, or that
competitors will not independently develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology, or
design around any patent of the Company.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend the Company against claims of
infringement or invalidity by others. 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 such 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
obtain licenses under patents or proprietary rights of others, there can be no
assurance that any required licenses would be made available on terms acceptable
to the Company, if at all. In addition, the cost of addressing any intellectual
property litigation claim, both in legal fees and expenses and the diversion of
management resources, regardless of whether the claim is valid, could be
significant and could have a material adverse effect on the Company's results of
operations. See "Business -- Proprietary Rights."
WARRANTY EXPOSURE
The Company's products generally carry a one year warranty which includes
next day, onsite customer assistance within the United States and, in certain
circumstances, the Company may provide longer warranties to select high volume
OEMs. Although the Company has established reserves for the estimated liability
associated with product warranties, most of the Company's products are
relatively new with limited history of warranty experience. Accordingly, it is
difficult to estimate the extent of the Company's future warranty exposure.
There can be no assurance that such reserves will be adequate, or that the
Company will not incur substantial warranty expenses in the future with respect
to its products. See "Business -- Customer Service and Support."
11
<PAGE> 14
BENEFITS OF OFFERING TO ODETICS
This Offering will provide several significant benefits to Odetics
including the establishment of a public market for the shares of Common Stock of
the Company retained by Odetics and the creation of an opportunity to accomplish
the Distribution. In addition, the Company intends to use a substantial portion
of the net proceeds from this Offering to repay intercompany indebtedness to
Odetics.
FUTURE CAPITAL REQUIREMENTS
The Company has agreed to pay to Odetics the lesser of 40% of the net
proceeds of this Offering before deducting estimated offering expenses or $10
million to reduce the Company's obligations to Odetics (which obligations were
$19.6 million as of December 31, 1996). The Company will enter into a four year
Promissory Note payable to Odetics representing the balance of the Company's
obligation to Odetics (which is estimated to be $12.8 million assuming an
initial public offering price of $11 per share). Such note will be payable in
sixteen equal quarterly installments of principal plus accrued interest
commencing June 30, 1997. Accordingly, the Company will continue to have limited
capital resources after the Offering. The Company believes that in order to
remain competitive, it may require additional financial resources over the next
several years for working capital, research and development, and the expansion
of sales and marketing expenditures. While the Company plans to obtain a credit
facility upon consummation of this Offering, there can be no assurance that such
facility or any additional financial resources will be available on acceptable
terms, if at all. See "Principal Stockholder," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Use of Proceeds" and "Dilution."
CONTROL BY ODETICS PENDING THE DISTRIBUTION
The Company is currently a wholly owned subsidiary of Odetics, and has no
operating history as an independent public company. Following the completion of
this Offering, Odetics will own approximately 82.9% of the outstanding shares of
Common Stock (or 80.9% if the Underwriters' over-allotment option is exercised
in full) and will continue to be able to elect the entire Board of Directors and
otherwise control the management and affairs of the Company, including any
determinations with respect to acquisitions, dispositions, borrowings, issuances
of Common Stock or other securities or the declaration and payment of any
dividends on the Common Stock. Similarly, Odetics will have the power to
determine matters submitted to a vote of the Company's stockholders without the
consent of the Company's other stockholders, will have the power to prevent a
change of control of the Company, and could take other actions that might be
favorable to Odetics. Conflicts of interest may arise between the Company and
Odetics in a number of areas relating to their past and ongoing relationships,
tax and employee benefit matters, indemnity arrangements, sales or distributions
by Odetics of its remaining shares of Common Stock, and the exercise by Odetics
of its ability to control the management and affairs of the Company. Odetics has
announced that, subject to certain conditions (including the receipt of a
favorable private letter ruling from the Internal Revenue Service concerning the
tax free nature of the Distribution, for which Odetics has applied), Odetics
intends to distribute to its stockholders prior to December 31, 1997, all of the
Common Stock of the Company owned by Odetics following the Offering. No
assurance can be given, however, that such conditions will be satisfied or
waived, or that the Distribution will occur. For the Distribution to occur, the
Board of Directors of Odetics must conclude, at the time of the Distribution
that the Distribution is in the best interest of the stockholders of Odetics.
Failure to undertake the Distribution could materially and adversely affect the
market price of the Company's Common Stock. See "-- Possibility of Substantial
Sales of Common Stock," "Principal Stockholder" and "Relationship Between the
Company and Odetics."
DEPENDENCE UPON CONTINUED GROWTH IN THE DISTRIBUTED COMPUTING MARKETS
The Company's line of automated tape libraries addresses backup data
storage requirements, archiving and data warehouse functions and hierarchical
storage management, all of which are emerging applications dependent upon the
continued expansion of the distributed computing environments. There can be no
assurance that the distributed computing markets will continue to grow or that,
if they do continue to grow, the Company will be able to expand into other
markets. If the distributed computing markets fail to grow or
12
<PAGE> 15
grow more slowly than the Company currently anticipates, the Company's business,
operating results and financial condition would be materially and adversely
affected. See "Business -- Industry Background."
DEPENDENCE UPON KEY PERSONNEL; NEW MANAGEMENT PERSONNEL
The Company's future performance depends to a significant extent on its
senior management and other key employees, in particular its Chief Executive
Officer, Kevin C. Daly, Ph.D., who has more than ten years experience in the
field of data storage technologies. The loss of Dr. Daly's services would have a
material adverse effect on the Company's development and marketing efforts. The
Company's future success will also depend in large part upon its ability to
attract, retain and motivate highly skilled employees. In addition, the Company
is actively seeking to retain a successor chief financial officer. Competition
for such employees, particularly development engineers and an experienced chief
financial officer, is intense, and there can be no assurance that the Company
will be able to continue to attract and retain sufficient numbers of such highly
skilled employees. The Company's inability to attract and retain additional key
employees or the loss of one or more of its current key employees could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Management" and "Business -- Employees."
BROAD DISCRETION OVER USE OF PROCEEDS
A significant portion of the estimated net proceeds of this Offering have
not been allocated to a particular purpose, and management's allocation
decisions concerning such net proceeds are dependent on a variety of factors,
including the Company's ability to operate as a standalone corporation and the
timing and status of new product developments. Accordingly, management will have
broad discretion in allocating the net proceeds of this Offering, and no
stockholder approval will be required for such allocations. There can be no
assurance that the proceeds will be allocated in a manner deemed acceptable by
the stockholders. See "Use of Proceeds."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on shares of its capital stock.
The Company currently intends to retain any future earnings in its business and
does not anticipate paying any cash dividends in the foreseeable future.
Furthermore, the Company's agreement with its lender currently limits the
Company's ability to pay cash dividends. See "Dividend Policy."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering. The initial
offering price will be determined by negotiation between the Company and the
Underwriters based upon a number of factors and may not be indicative of future
market prices. See "Underwriting" for information relating to the method of
determining the initial public offering price. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products, applications or product enhancements by the Company
or its competitors, changes in financial estimates by securities analysts and
other events or factors. In addition, the stock market has experienced
volatility which has particularly affected the market prices of equity
securities of many high technology companies and which often has been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. See
"Underwriting."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION; BYLAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will
13
<PAGE> 16
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
the Company is subject to the antitakeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing a change of control of the Company. Further, certain
provisions of the Company's Certificate of Incorporation and Bylaws and of
Delaware law could delay or make more difficult a merger, tender offer or proxy
contest involving the Company, which could adversely affect the market price of
the Company's Common Stock. See "Description of Securities -- Preferred Stock,"
and "-- Delaware Law."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors participating in this Offering will
incur immediate and substantial dilution. To the extent outstanding options to
purchase Common Stock or Class B Common Stock of the Company are exercised,
there will be further dilution. See "Dilution."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which are intended to be covered
by the safe harbors created thereby. Investors are cautioned that all forward
looking statements involve risks and uncertainty. Although the Company believes
that all assumptions underlying the forward looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
14
<PAGE> 17
USE OF PROCEEDS
The principal purposes of this Offering are to create a public market for
the Company's Common Stock and raise necessary capital for the Company. The net
proceeds to the Company from the sale of the 1,650,000 shares of Common Stock
offered by the Company hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$16,304,500 ($18,810,850 if the over-allotment option is exercised in full).
The Company will pay to Odetics the lesser of 40% of the net proceeds of
this Offering prior to deducting estimated offering expenses or $10 million to
reduce the Company's obligations to Odetics. Such obligations, which consisted
of advances from Odetics for services and support provided to the Company and
for additional working capital, were approximately $19.6 million as of December
31, 1996. The Company will enter into a Promissory Note payable to Odetics
representing the balance of its obligations to Odetics (which is estimated to be
$12.8 million assuming an initial public offering price of $11 per share.) Such
note will accrue interest at the lowest rate charged to Odetics from time to
time by either of its principal lenders (8.25% as of December 31, 1996) and is
payable in sixteen equal quarterly installments of principal plus accrued
interest commencing June 30, 1997. The balance of the proceeds will be used for
general corporate purposes, including the funding of working capital
requirements, the repayment of the balance due under the note to Odetics, the
expansion of its sales and marketing activities for existing products and any
new products and investment in new technologies. The Company has not yet
identified the specific amount of proceeds to be expended for the respective
corporate purposes. The amounts actually expended for each purpose may vary
significantly depending on a number of factors, including future revenue growth,
if any, the amount of cash generated or used by the Company's operations, the
progress of the Company's new product development efforts, technological
advances and the status of competitive products. Accordingly, management will
have significant discretion in the application of a substantial portion of the
net proceeds from this Offering. Pending the use thereof, the Company intends to
invest the proceeds of this Offering in short term interest bearing marketable
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for future growth and, therefore, does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's credit agreement contains financial covenants which prohibit the
Company from paying cash dividends without its lenders' consent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." See "Risk Factors -- Absence of
Dividends."
15
<PAGE> 18
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the Company's (i)
actual capitalization, and (ii) pro forma capitalization as adjusted to reflect
the sale by the Company of the 1,650,000 shares of Common Stock offered hereby
and application of the estimated net proceeds therefrom (after deducting the
estimated underwriting discount and estimated offering expenses). The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto and Pro Forma
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus and should be read in conjunction with such financial statements and
notes.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Obligation payable to Odetics(1)....................................... $19,569 $12,817
------- -------
Stockholders' equity(2):
Preferred Stock, par value $.0001 per share; 5,000,000 shares
authorized; no shares issued or outstanding....................... -- --
Common Stock, par value $.0001 per share; 45,000,000 shares
authorized; 8,005,000 shares issued and outstanding, actual;
9,655,000 shares issued and outstanding, as adjusted.............. 1 1
Class B Common Stock, par value $.0001 per share, 5,000,000 shares
authorized, no shares issued and outstanding...................... -- --
Additional paid-in capital........................................... 1,009 17,314
Accumulated deficit.................................................. (9,183) (9,183)
Currency translation adjustment...................................... 6 6
------- -------
Total stockholders' equity (deficit).............................. (8,167) 8,138
------- -------
Total capitalization......................................... $11,402 $20,955
======= =======
</TABLE>
- ---------------
(1) Represents intercompany payables to Odetics. Upon consummation of the
Offering, the Company will execute a four year promissory note payable to
Odetics to memorialize this obligation. Upon consummation of this Offering,
the Company will pay to Odetics the lesser of 40% of the net proceeds of
this Offering before deducting estimated offering expenses or $10 million to
reduce the outstanding balance of the Odetics Note. See "Use of Proceeds."
(2) On December 19, 1996, the Company was reincorporated in Delaware and in
connection therewith, the Company (i) established two classes of common
stock, the Common Stock and Class B Common Stock, (ii) increased its
authorized common stock to 50,000,000 shares from 10,000 shares (45,000,000
shares of Common Stock and 5,000,000 shares of Class B Common Stock), (iii)
effected an 8,005-for-1 stock split on its Common Stock, and (iv) authorized
a new class of stock consisting of 5,000,000 shares of Preferred Stock.
Stockholders' equity excludes options to purchase up to 2,000,000 shares of
Class B Common Stock which have been reserved for issuance under the 1996
Stock Incentive Plan, of which 879,000 options were granted thereunder in
December 1996 at an exercise price of $5.00 per share.
16
<PAGE> 19
DILUTION
The deficit in net tangible book value of the Company as of December 31,
1996 was $8.2 million, or $1.02 per share. "Net tangible book value per share"
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the receipt by the Company of the net proceeds from the sale of
the shares of Common Stock offered hereby and the application of the estimated
net proceeds therefrom, after deducting the underwriting discount and estimated
offering expenses, the net tangible book value of the Company as of December 31,
1996 would have been $8.1 million, or $.84 per share. This represents an
immediate increase in net tangible book value of $1.86 per share to the existing
stockholder and an immediate dilution of $10.16 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $11.00
Deficit in net tangible book value per share before this
Offering...................................................... $(1.02)
Increase per share attributable to new investors................. 1.86
------
Net tangible book value per share after this Offering.............. .84
------
Dilution per share to new investors................................ $10.16
======
</TABLE>
The following table summarizes, as of December 31, 1996, the differences
between Odetics and new investors (before deducting underwriting discounts and
commissions and estimated offering expenses) with respect to the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Odetics............................. 8,005,000 82.9% $ 1,010,000 5.3% $ .13
New Investors....................... 1,650,000 17.1 18,150,000 94.7 $ 11.00
--------- ----- ----------- -----
Total..................... 9,655,000 100.0% $19,160,000 100.0%
========= ===== =========== =====
</TABLE>
The computations in the tables set forth above exclude options to purchase
an aggregate of 879,000 shares of Class B Common Stock outstanding as of
December 31, 1996 under the 1996 Stock Incentive Plan at an exercise price of
$5.00 per share.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of March 31, 1995 and
1996 and December 31, 1996 and for each of the years ended March 31, 1994, 1995
and 1996 and the nine months ended December 31, 1996 has been derived from the
consolidated financial statements of the Company audited by Ernst & Young LLP,
independent auditors, included elsewhere herein. Selected consolidated financial
data as of March 31, 1992, 1993 and 1994 and for each of the years ended March
31, 1992 and 1993 has been derived from the Company's unaudited consolidated
financial statements not included herein. The selected consolidated financial
data for the nine months ended December 31, 1995 has been derived from the
Company's unaudited consolidated financial statements for such period included
elsewhere in this Prospectus. In the opinion of management, such unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
for such periods. The consolidated statement of operations data for the nine
month period ended December 31, 1996 are not necessarily indicative of the
results to be expected for the full fiscal year ending March 31, 1997 or any
future period. The unaudited pro forma consolidated financial information gives
effect to the Company's formation of a European sales subsidiary and the
processing of all European sales through this new subsidiary rather than through
Odetics Europe Limited, a wholly-owned subsidiary of Odetics ("OEL"), net of the
elimination of intercompany sales and profits. Information for European sales of
the Company's products and related expenses has been derived from the unaudited
financial statements of OEL. The pro forma adjustments necessary to present
fairly the Company's pro forma results of operations are based on available
information and certain assumptions considered reasonable in the circumstances
and include adjustments to eliminate intercompany sales and profits. THE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA SET FORTH BELOW IS
NOT NECESSARILY INDICATIVE OF ACTUAL OPERATING RESULTS THAT WOULD HAVE OCCURRED
HAD THE TRANSACTIONS OCCURRED AS OF THE BEGINNING OF THE PERIODS PRESENTED, NOR
DO THEY PURPORT TO INDICATE THE CONSOLIDATED RESULTS OF OPERATIONS FOR ANY
FUTURE PERIOD. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and notes thereto, and
Unaudited Pro Forma Consolidated Financial Information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996 1995 1996 1996
------- ------- ------- ------- -------- --------- -------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales:
Products........................ $ 3,579 $ 5,592 $15,534 $15,445 $ 18,076 $24,795 $ 9,747 $36,264 $38,267
Service and spare parts......... 4,270 4,344 4,972 6,743 4,615 4,615 3,180 4,185 4,185
Sales to affiliates............. -- -- -- 453 4,742 -- 3,175 1,466 --
------- ------- ------- -------- -------- -------- -------- -------- --------
Total net sales................... 7,849 9,936 20,506 22,641 27,433 29,410 16,102 41,915 42,452
------- ------- ------- -------- -------- -------- -------- -------- --------
Gross profit:
Product sales................... 635 34 3,136 3,510 5,871 9,113 2,598 13,852 14,847
Service and spare parts......... 1,678 1,589 1,653 2,095 1,434 1,434 791 2,164 2,164
Sales to affiliates............. -- -- -- 113 1,786 -- 1,115 492 --
------- ------- ------- -------- -------- -------- -------- -------- --------
Total gross profit................ 2,313 1,623 4,789 5,718 9,091 10,547 4,504 16,508 17,011
Expenses:
Research and development........ 1,607 1,654 2,285 3,248 1,731 1,731 1,275 3,751 3,751
Sales and marketing............. 394 711 1,308 1,838 2,719 3,718 1,561 4,462 4,727
General and administrative...... 750 951 1,195 1,299 1,298 1,414 951 1,382 1,432
Charges allocated by parent..... 874 1,582 1,354 1,563 1,534 1,534 1,108 1,113 1,113
Nonrecurring charge............. -- -- -- 4,042 1,392 1,392 873 -- --
------- ------- ------- -------- -------- -------- -------- -------- --------
Income (loss) from operations..... (1,312) (3,275) (1,353) (6,272) 417 758 (1,264) 5,800 5,988
Interest charges allocated by
parent.......................... -- -- 542 1,243 1,861 1,861 1,379 1,301 1,301
------- ------- ------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................... (1,312) (3,275) (1,895) (7,515) (1,444) (1,103) (2,643) 4,499 4,687
Income taxes...................... -- -- -- -- -- 86 -- 1,799 1,874
------- ------- ------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $(1,312) $(3,275) $(1,895) $(7,515) $ (1,444) $(1,189) $ (2,643) $ 2,700 $ 2,813
======= ======= ======= ======== ======== ======== ======== ======== ========
Net income (loss) per share....... $ (.15) $ (.39) $ (.22) $ (.89) $ (.17) $ (.14) $ (.31) $ .32 $ .33
======= ======= ======= ======== ======== ======== ======== ======== ========
Shares used in computation of net
income (loss) per share......... 8,484 8,484 8,484 8,484 8,484 8,484 8,484 8,484 8,484
======= ======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, DECEMBER 31,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital deficit........... $ (460) $ (71) $(2,875) $(9,990) $(11,313) $(12,011) $(9,974)
Total assets...................... 6,410 7,961 13,195 11,253 16,748 12,027 19,295
Total liabilities................. 6,410 7,298 14,743 20,091 26,861 23,070 27,462
Total stockholders' equity
(deficit)....................... -- 663 (1,548) (8,838) (10,113) (11,043) (8,167)
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and the Unaudited Pro
Forma Consolidated Financial Statements and Notes thereto contained elsewhere in
this Prospectus. This Prospectus contains forward looking statements that
involve a number of risks and uncertainties including, without limitation, those
set forth in "Risk Factors." The Company's actual results may differ materially
from any future performance discussed in the forward looking statements and in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
OVERVIEW
The Company was established in 1990 as a division of Odetics to use its
technical expertise in information automation technology to develop automated
tape libraries that replace the manual storage and retrieval of computer tapes.
Initially, the Company teamed with E-Systems, Inc. to develop and provide a 19
mm automated tape cartridge handling subsystem which the Company introduced in
1992. In 1992, the Company also introduced automated tape handling products for
systems employing IBM 3480 and similar industry standard tape cartridges. In
1994, the Company introduced the ATL 2640, its first automated tape library
designed for distributed computing environments, based on the DLT format. The
Company extended its line of DLT based automated tape libraries in 1995 by
introducing its 520 Series, designed for smaller libraries in the midrange and
Unix client/server environments, applications which historically required less
storage capacity and less formal data processing. In November 1996, the Company
announced the introduction of its ATL 7100 tape library series, which was
designed for enterprise system administrators who require multiple terabyte
backup and archiving. Prior to fiscal 1995, the Company's sales, which consisted
primarily of 19 mm and 3480 tape libraries, experienced modest growth to
approximately $20.5 million in fiscal 1994. In fiscal 1995, sales of these
products declined significantly, but the rapid increase in DLT product sales
resulted in a $2.1 million net sales growth from the prior year. Since 1995, the
rapid increase in DLT product sales has led to significant quarter-to-quarter
revenue growth. All of the Company's net product sales are currently derived
from DLT based automated tape libraries.
Effective December 31, 1996, Odetics transferred to the Company that
portion of its business which provided service and support for the Company's
products. The transfer was made at book value and resulted in an increase of
$2.3 million in the Company's obligations to Odetics. For financial accounting
purposes the transaction has been treated in a manner similar to a pooling of
interests, and the financial information for this operation has been included in
the Company's financial information for all annual and interim periods
presented.
The Company's consolidated financial statements discussed below reflect the
Company's results of operations during periods when it was operated as a
business unit of Odetics. Prior to July 1, 1996, the Company's sales to European
customers were primarily made through OEL, a wholly owned subsidiary of Odetics
which markets products for several divisions of Odetics. Such European sales
were recorded at agreed upon intercompany prices and are reported as "sales to
affiliates." These intercompany prices were lower than those which would have
been obtained had the Company sold its products through its own subsidiary.
Effective July 1, 1996, the Company established its own wholly owned European
subsidiary, APL, and from that date European sales made by APL have been
included in the Company's net sales. The unaudited pro forma financial
information for the nine months ended December 31, 1996 and fiscal year ended
March 31, 1996 assumes the consolidation of the Company's domestic operations
with those operations of OEL which are related to the Company's products.
Accordingly, the pro forma information includes higher levels of net sales and
operating expenses than the historical information for the same period.
The Company's operating expenses have increased significantly in recent
periods, since the introduction of the Company's DLT based product lines, as the
Company has expended resources to support growth in the volume of DLT product
sales. The Company expects to incur approximately $200,000 of expenses in the
quarter ending March 31, 1997 in connection with the relocation of the Company's
facilities. The Company also expects operating expenses to increase as the
Company continues to build its management and
19
<PAGE> 22
information systems and other infrastructure to support recent growth and any
additional growth in the future and to increase its administrative staff to
perform many services previously performed by Odetics, including public company
reporting requirements. Accordingly, historical overhead expense included herein
is not necessarily indicative of the expense which may be incurred by the
Company in future periods.
Odetics and the Company have entered into certain agreements providing for
the Distribution and governing various interim and continuing relationships
between the companies, including (i) a Separation and Distribution Agreement
which sets forth the principal corporate transactions required to effect the
Separation, the Offering and the Distribution, (ii) a Tax Allocation Agreement
which will govern the allocation of tax liabilities between the Company and
Odetics, and (iii) a Services Agreement, pursuant to which Odetics will continue
for an interim period following the Offering and the Distribution to perform
certain financial, management information and other services for the Company.
See "Relationship Between the Company and Odetics." The Company anticipates that
charges paid to Odetics pursuant to the Services Agreement will decline in
future periods, as the Company begins to build its own infrastructure and to
incur directly expenses that otherwise would have been included in charges
allocated by Odetics.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages
of historical total net sales represented by each item in the Company's
statement of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996 1995 1996 1996
----- ----- ----- ----- ----- ---------- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Products........ 45.6% 56.3% 75.8% 68.2% 65.9% 84.3% 60.5% 86.5% 90.1%
Service and
spare parts... 54.4 43.7 24.2 29.8 16.8 15.7 19.8 10.0 9.9
Sales to
affiliates.... -- -- -- 2.0 17.3 -- 19.7 3.5 --
----- ----- ----- ----- ----- ---- ----- ----- ----
Total net sales... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit:
Product sales... 17.7 0.6 20.2 22.7 32.5 36.8 26.7 38.2 38.8
Service and
spare parts... 39.3 36.6 33.2 31.1 31.1 31.1 24.9 51.7 51.7
Sales to
affiliates.... -- -- -- 24.9 37.7 -- 35.1 33.6 --
----- ----- ----- ----- ----- ---- ----- ----- ----
Total gross
profit.......... 29.5 16.3 23.4 25.3 33.1 35.9 28.0 39.4 40.1
Expenses:
Research and
development... 20.5 16.6 11.2 14.4 6.3 5.9 7.9 9.0 8.8
Sales and
marketing..... 5.0 7.2 6.4 8.1 9.9 12.6 9.7 10.6 11.2
General and
administrative.. 9.6 9.6 5.8 5.7 4.7 4.8 5.9 3.3 3.4
Charges
allocated by
parent........ 11.1 15.9 6.6 6.9 5.6 5.2 6.9 2.7 2.6
Nonrecurring
charge........ -- -- -- 17.9 5.1 4.8 5.4 -- --
----- ----- ----- ----- ----- ---- ----- ----- ----
Income (loss) from
operations...... (16.7) (33.0) (6.6) (27.7) 1.5 2.6 (7.8) 13.8 14.1
Interest charges
allocated by
parent.......... -- -- 2.6 5.5 6.8 6.3 8.6 3.1 3.1
----- ----- ----- ----- ----- ---- ----- ----- ----
Income (loss)
before income
taxes........... (16.7) (33.0) (9.2) (33.2) (5.3) (3.7) (16.4) 10.7 11.0
Income taxes...... -- -- -- -- -- 0.3 -- 4.3 4.4
----- ----- ----- ----- ----- ---- ----- ----- ----
Net income
(loss).......... (16.7)% (33.0)% (9.2)% (33.2)% (5.3)% (4.0)% (16.4)% 6.4% 6.6%
===== ===== ===== ===== ===== ==== ===== ===== ====
</TABLE>
20
<PAGE> 23
Net Sales. Total net sales increased 160% to $41.9 million for the nine
month period ended December 31, 1996, as compared to total net sales of $16.1
million for the comparable nine month period in the prior fiscal year. Total net
sales increased 21.2% to $27.4 million for the fiscal year ended March 31, 1996
from $22.6 million in fiscal 1995, and increased 10.4% in fiscal 1995 from $20.5
million in fiscal 1994.
Net product sales increased 272% to $36.3 million for the nine month period
ended December 31, 1996, as compared to $9.7 million for the comparable nine
month period in fiscal 1996, primarily reflecting increased unit sales of the
Company's DLT based products and to a lesser extent, the establishment of the
Company's European subsidiary. Net product sales in fiscal 1995 were relatively
flat as compared to fiscal 1994 reflecting the net impact of increasing sales of
DLT based products, offset by declining sales of 19 mm format tape library
products which were discontinued in fiscal 1995.
Service and spare parts sales include revenue derived from the sales of
spare parts and service activities to support the installed base of the
Company's products. Service revenue constituted 10.0% of total net sales for the
nine months ended December 31, 1996 as compared to 19.8% for the comparable
period in the prior fiscal year, and declined to 16.8% of total net sales in
fiscal 1996 from 29.8% and 24.2% in fiscal years 1995 and 1994, respectively.
The increase in service and spare parts revenue in fiscal 1995 reflected a large
nonrecurring purchase of spare parts by a major OEM customer under a program
which has since been discontinued. Service and spare parts revenue have
otherwise remained relatively flat over the periods reported, and have declined
as a percentage of total net sales because of increasing sales during those
periods. The Company anticipates that service revenue in future periods will
increase modestly as the twelve month warranty on increasing sales of DLT based
products begin to decline and customers begin to acquire service contracts.
Sales to affiliates in each of the years and interim periods presented
represent sales to OEL. Sales prices to OEL were determined by agreement between
Odetics and the Company at prices below those which would have been obtained had
the Company been selling through its own European subsidiary. Sales to
affiliates in the nine months ended December 31, 1996 declined 53.9% as compared
to the nine months ended December 31, 1995. Sales to affiliates during the nine
month period ended December 31, 1996, includes only three months of European
sales to OEL. All European sales subsequent to July 1, 1996 were made through
the Company's own European subsidiary, APL, and, accordingly, are included in
net product sales.
The increase in pro forma sales of products and services for nine month
period ended December 31, 1996 and year ended March 31, 1996, over the
historical sales for the comparable periods, reflects sales as if conducted by
the Company through its own European subsidiary.
Gross Profit. Total gross profit as a percentage of total net sales
increased to 39.4% for the nine months ended December 31, 1996 from 28.0% for
the comparable period in fiscal 1996 and increased to 33.1% in fiscal 1996 from
25.3% in fiscal 1995 and 23.4% in fiscal 1994. The increases in gross profit on
product sales during the interim periods and in fiscal 1996 were primarily due
to improved absorption of manufacturing overhead resulting from continued
increases in sales of DLT based products, as well as reductions in the costs of
materials for the Company's DLT products.
Gross profit on product sales in fiscal 1995 also reflected, to a lesser
extent, improved margins on the Company's first DLT based library products, as
compared to margins on declining sales of the Company's pre-DLT products.
Average sales prices declined slightly during fiscal 1996 and the interim period
as a result of increased competition, but these declines have been offset by
manufacturing efficiencies attributable to higher sales volumes and other cost
reductions. The Company expects average selling prices on product sales will
continue to decline in the future as a result of increased competition, and
there can be no assurance that the Company will be able to offset these declines
through improved manufacturing efficiencies or otherwise.
Gross profit on the service and spare parts sales was approximately 31.1%,
31.1% and 33.2% for years ended March 31, 1996, 1995 and 1994, respectively.
Gross profit on service and spare parts sales during the nine months ended
December 31, 1996 was 51.7%, reflecting a nonrecurring adjustment to inventory
reserves during that period. The increased gross profit in fiscal 1995 as
compared to fiscal 1994 was primarily due to a higher level of service and spare
parts sales in fiscal 1995, relating to sales to a former major OEM customer of
the Company of discontinued 19 mm format product spare parts, which typically
generate higher margins.
21
<PAGE> 24
Historical gross profit on sales to affiliates was a result of agreed upon
transfer pricing between the Company and Odetics.
Pro forma gross profit on product sales to affiliates for the nine month
period ended December 31, 1996 and the year ended March 31, 1996 is higher than
the historical gross profit on product sales for comparable periods, due to
increased sales at market prices to European customers.
Research and Development. For the nine month period ended December 31,
1996, research and development expense increased to $3.8 million, or 9.0% of
total net sales, from $1.3 million, or 7.9% of total net sales, for the
comparable nine month period of fiscal 1996. Research and development expense
decreased 46.7% to $1.7 million in fiscal 1996 (or 6.3% of total net sales) from
$3.2 million in fiscal 1995 (or 14.4% of total net sales), and increased 42.1%
from $2.3 million (or 11.2% of total net sales) in fiscal 1994. The interim
period increase was primarily due to development costs, including development,
testing and preproduction manufacturing, incurred in connection with development
of the Company's ATL 7100 and Prism products and the incorporation of Quantum's
new DLT7000 tape drives into the Company's current products. The decline of
research and development expense in fiscal 1996, in both absolute dollars and as
a percentage of sales, reflected the completion during fiscal 1995 of the
development cycle for the Company's 2640 and 520 series libraries. The increase
in research and development expense in fiscal 1995 as compared to fiscal 1994
related to increased engineering labor and related costs, consulting and
prototype materials costs incurred in the development of the Company's 2640 and
520 Series of DLT based tape libraries. Management expects the Company's
expenditures for research and development generally to increase over time and to
be higher during periods of new product development, when significant research
and development expenditures are incurred in preproduction manufacturing and
testing. Such expenditures may, therefore, fluctuate as a percentage of sales
from period to period.
All research and development is conducted by the Company. Accordingly, no
difference exists between historical and pro forma research and development
expense.
Sales and Marketing. Sales and marketing expense increased 186% to $4.5
million (or 10.6% of net sales) for the nine month period ended December 31,
1996 from $1.6 million (or 9.7% of total net sales) for the comparable nine
month period in fiscal 1996. Sales and marketing expense increased 47.9% to $2.7
million in the year ended March 31, 1996 (or 9.9% of total net sales) as
compared to $1.8 million (or 8.1% of total net sales) in fiscal 1995, and
increased 40.5% from $1.3 million (or 6.4% of total net sales) in fiscal 1994.
The interim period increase was primarily due to the Company's efforts to expand
its sales and marketing resources, including increased expenditures for
advertising, promotion and trade show participation. The increase in fiscal 1996
was primarily due to increased expenses for payroll and related costs incurred
in the expansion of the Company's marketing activities, including advertising
and promotion as well as higher sales commissions associated with higher sales.
The increase in fiscal 1995 was primarily due to the expansion of the Company's
sales organization and increased advertising and promotion expenditures
accompanying the introduction of the Company's first DLT based products.
Pro forma sales and marketing costs are higher than historical amounts for
the comparable periods, due to the inclusion of sales and marketing costs
associated with European operations.
General and Administrative. General and administrative expense increased
45.3% to $1.4 million (or 3.3% of total net sales) for the nine month period
ended December 31, 1996 from $951,000 (or 5.9% of total net sales) for the
comparable six month period in fiscal 1996. For the year ended March 31, 1996,
general and administrative expense was $1.3 million (or 4.7% of total net sales)
which was substantially unchanged as compared to fiscal 1995, and general and
administrative expense increased 8.7% in fiscal 1995 (or 5.7% of total net
sales) from $1.2 million (or 5.8% of total net sales) in fiscal 1994. The
increases in all periods presented reflect the addition of administrative
personnel to support increased sales volume.
Pro forma general and administrative costs are higher than historical
amounts for comparable periods, due to the inclusion of administrative costs
associated with European operations.
General and administrative expense does not reflect all general and
administrative expenses which the Company expects to incur as a standalone
entity since certain corporate general and administrative functions
22
<PAGE> 25
have been performed for the Company by Odetics, and the related costs have been
included in charges allocated by parent.
Charges Allocated by Parent. Odetics performs certain corporate general
and administrative functions and charges the Company a pro rata portion of the
costs Odetics incurs for such services. Charges allocated by parent were
relatively flat during the three year period ended March 31, 1996 and the
interim period ended December 31, 1996 compared to the nine months ended
December 31, 1995. Charges allocated by parent remained relatively constant
during these periods because the Company directly incurred most of the increases
in administrative infrastructure necessary to support the growth of its
business.
Nonrecurring Charge. Nonrecurring charges were $1.4 million and $4.0
million in the years ended March 31, 1996 and 1995, respectively. The fiscal
1996 expense was comprised of legal expenses incurred in connection with
litigation with E-Systems, which was settled in May 1996. The charges in fiscal
1995 related to asset write downs, severance costs related to staffing
reductions and legal fees incurred in this litigation.
Interest Charges Allocated by Parent. Odetics has historically advanced
funds to meet the Company's capital requirements and has charged the Company
interest expense on the resulting intercompany account balance determined using
Odetics' cost of the related borrowed funds. Interest charges by parent
decreased 5.7% to $1.3 million for the nine month period ended December 31, 1996
from $1.4 million for the comparable nine month period in fiscal 1996 because of
a reduction in average outstanding intercompany borrowings during the most
recent nine month period. Interest charges by parent increased 49.7% to $1.9
million in the year ended March 31, 1996 as compared to $1.2 million in fiscal
1995, and increased 129% from $542,000 in fiscal 1994. The increase in interest
charges by parent in all annual periods reflects increased intercompany
borrowings necessary to support the Company's working capital requirements and
operations.
Income Taxes. The Company is included in the consolidated federal tax
return of Odetics. Members of the consolidated group that generate taxable
losses are not allocated any tax benefit for such losses if the consolidated
group as a whole is profitable. Accordingly, for periods prior to April 1, 1996,
during which the Company incurred losses, the Company had no domestic income tax
provision or benefit. In addition, because the Company's losses have been used
to offset Odetics' taxable income in the consolidated federal tax returns, the
Company has no loss carryforward available to offset future taxable income. For
periods subsequent to April 1, 1996, the Company has entered into a Tax
Allocation Agreement with Odetics pursuant to which the Company will make a
payment to Odetics, or Odetics will make a payment to the Company, as
appropriate, in an amount in respect of the taxes shown as due attributable to
the operations of the Company on the consolidated federal income tax return
filed by Odetics. The Company expects to report taxable income in fiscal 1997
and has provided income taxes at an estimated effective tax rate of 40% for the
nine month period ended December 31, 1996.
23
<PAGE> 26
QUARTERLY RESULTS
The following tables present selected quarterly financial information for
each of the seven quarters through December 31, 1996 and the percentage
relationship of certain items to net sales for the respective periods. This
information is unaudited, but in the opinion of the Company's management,
reflects all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of this information in
accordance with generally accepted accounting principles. Such quarterly results
are not necessarily indicative of future results of operations. Prior to July 1,
1996, the Company conducted its European sales through OEL. Effective July 1,
1996, the Company established APL and from that date such European sales have
been included in net sales.
The pro forma information gives effect to the Company's formation of APL at
the beginning of each quarter presented and the processing of all European sales
through APL, rather than through OEL. Sales to OEL were made at prices below
those which would have been obtained had the Company sold its products through
its own subsidiary. The pro forma quarterly summary data has been derived from
the unaudited pro forma financial statements of the Company appearing elsewhere
in this Prospectus. THE UNAUDITED PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS
DATA SET FORTH BELOW IS NOT NECESSARILY INDICATIVE OF ACTUAL OPERATING RESULTS
THAT WOULD HAVE OCCURRED HAD THE TRANSACTIONS OCCURRED AS OF THE BEGINNING OF
THE PERIODS PRESENTED, NOR DO THEY PURPORT TO INDICATE THE CONSOLIDATED RESULTS
OF OPERATIONS FOR ANY FUTURE PERIOD.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA SUMMARY OF OPERATIONS DATA:
Net sales.............................. $ 3,364 $ 5,649 $8,558 $11,839 $ 12,777 $14,263 $ 15,412
Gross profit........................... 1,115 1,632 2,863 4,937 4,926 5,974 6,111
Income (loss) before taxes............. (1,086) (1,071) (191) 1,245 1,552 2,295 840
Net income (loss)...................... (1,086) (1,071) (214) 1,182 931 1,378 504
PRO FORMA SUMMARY OF OPERATIONS DATA:
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........................... 33.1 28.9 33.5 41.7 38.6 41.9 39.7
Income (loss) before taxes............. (32.3) (19.0) (2.2) 10.5 12.1 16.1 5.5
Net income (loss)...................... (32.3) (19.0) (2.5) 10.0 7.3 9.7 3.3
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED SUMMARY OF
OPERATIONS DATA:
Net sales:
Product sales........................ $ 1,531 $ 3,655 $4,561 $ 8,329 $ 9,414 $12,769 $ 14,081
Service and spare parts.............. 973 970 1,236 1,436 1,359 1,495 1,331
Sales to affiliates.................. 550 636 1,989 1,567 1,466 -- --
------- ------- ------ ------- ------- ------- --------
Total net sales........................ 3,054 5,261 7,786 11,332 12,239 14,264 15,412
Gross profit:
Product sales........................ 439 928 1,231 3,273 3,430 4,759 5,663
Service and spare parts.............. 226 211 354 643 500 1,216 448
Sales to affiliates.................. 266 258 642 620 492 -- --
------- ------- ------ ------- ------- ------- --------
Total gross profit..................... 931 1,397 2,227 4,536 4,422 5,975 6,111
Expenses:
Research and development............. 448 419 408 456 585 1,110 2,056
Sales and marketing.................. 360 471 731 1,157 1,250 1,314 1,898
General and administrative........... 303 317 330 348 357 456 569
Charges allocated by parent.......... 341 400 367 426 379 357 377
Nonrecurring charge.................. 62 395 416 519 -- -- --
------- ------- ------ ------- ------- ------- --------
Income (loss) from operations.......... (583) (605) (25) 1,630 1,851 2,738 1,211
Interest charges allocated by parent... 440 456 484 481 487 442 372
------- ------- ------ ------- ------- ------- --------
Income (loss) before income taxes...... (1,023) (1,061) (509) 1,149 1,364 2,296 839
Income taxes........................... -- -- -- -- 546 918 335
------- ------- ------ ------- ------- ------- --------
Net income (loss)...................... $(1,023) $(1,061) $ (509) $ 1,149 $ 818 $ 1,378 $ 504
======= ======= ====== ======= ======= ======= ========
HISTORICAL CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales:
Product sales........................ 50.1% 69.5% 58.6% 73.5% 76.9% 89.5% 91.4%
Service and spare parts.............. 31.9 18.4 15.9 12.7 11.1 10.5 8.6
Sales to affiliates.................. 18.0 12.1 25.5 13.8 12.0 -- --
------- ------- ------ ------- ------- ------- --------
Total net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit:
Product sales........................ 28.7 25.4 27.0 39.3 36.4 37.3 40.2
Service and spare parts.............. 23.2 21.8 28.6 44.8 36.8 81.3 33.7
Sales to affiliates.................. 48.4 40.6 32.3 39.6 33.6 -- --
------- ------- ------ ------- ------- ------- --------
30.5 26.6 28.6 40.0 36.1 41.9 39.7
Expenses:
Research and development............. 14.7 8.0 5.2 4.0 4.8 7.8 13.3
Sales and marketing.................. 11.8 9.0 9.4 10.2 10.2 9.2 12.3
General and administrative........... 9.9 6.0 4.2 3.1 2.9 3.2 3.7
Charges allocated by parent.......... 11.2 7.6 4.7 3.8 3.1 2.5 2.5
Nonrecurring charge.................. 2.0 7.5 5.4 4.6 -- -- --
------- ------- ------ ------- ------- ------- --------
Income (loss) from operations.......... (19.1) (11.5) (.3) 14.3 15.1 19.2 7.9
Interest charges allocated by parent... 14.4 8.7 6.2 4.2 4.0 3.1 2.4
------- ------- ------ ------- ------- ------- --------
Income (loss) before income taxes...... (33.5) (20.2) (6.5) 10.1 11.1 16.1 5.5
Income taxes........................... -- -- -- -- 4.5 6.4 2.2
------- ------- ------ ------- ------- ------- --------
Net income (loss)...................... (33.5)% (20.2)% (6.5)% 10.1% 6.6% 9.7% 3.3%
======= ======= ====== ======= ======= ======= ========
</TABLE>
25
<PAGE> 28
Pro forma net sales have increased for each of the last seven quarters
ended December 31, 1996, reflecting higher unit sales quarter to quarter due to
increasing market acceptance of the Company's DLT based automated tape
libraries. Increases in pro forma gross profit across the periods presented
generally reflect manufacturing efficiencies associated with higher sales
volume, as well as cost reductions in certain materials included in the
Company's DLT product line. Commencing during the quarter ended March 31, 1996,
gross profit as a percentage of net sales improved primarily as a result of
rapid acceleration of unit sales and a corresponding increase in production
resulting in greater absorption of manufacturing overhead. Operating expenses
also increased sequentially across the quarters presented, commensurately with
increases in net sales. Research and development expense tends to fluctuate
significantly across periods, depending upon the Company's product development
cycles. Such expenses increased significantly in the quarters ended September
30, 1996 and December 31, 1996 reflecting preproduction costs and quality and
reliability testing for the Company's new 7100 Series of automated tape
libraries, continuing research and development dedicated to products
incorporating the Prism architecture expected to be commercially released in
calendar 1997, as well as the integration of the new DLT7000 tape drive into the
Company's existing products.
BACKLOG
The Company builds products to order rather than to forecast, but has
achieved a relatively short manufacturing cycle. Accordingly, the Company's net
sales during any period are substantially dependent on orders booked and shipped
during that period. The Company includes in its backlog those customer orders
for which it has received orders and for which shipment is scheduled within the
next twelve months; however, most orders are filled within 90 days. In general,
all purchase orders are cancellable under certain circumstances. As a result of
potential cancellation of orders and delays in customer shipments and delivery
schedules, the Company's backlog at any particular date may not be indicative of
actual sales for any succeeding period. At December 31, 1996, the Company's
backlog was $6.1 million as compared to $3.6 million at December 31, 1995 and
$4.4 million at March 31, 1996 as compared to $1.0 million at March 31, 1995.
Although the Company builds to order, in order to achieve a reasonably
short manufacturing cycle, it must purchase components and subassemblies and
incur operating expenses which are relatively fixed in nature based on forecast
orders and sales. If orders and revenue do not meet the Company's forecasts in
any given quarter, the adverse impact of a shortfall in revenue may be magnified
by the Company's inability to reduce expenditures quickly, and could have a
material adverse effect upon the Company's results of operations for that
period. See "Risk Factors -- Fluctuations in Quarterly Operating Results;
History of Operating Losses."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has relied upon equity capital investments
and interest bearing advances from Odetics to provide necessary financing for
its operating and investing activities. At December 31, 1996, these amounts
aggregated $20.6 million, of which $19.6 million represented advances bearing
interest at variable rates (8.25% at December 31, 1996) and $1.0 million
represented Odetics' investment in the Company's Common Stock. For the years
ended March 31, 1994, 1995 and 1996 and the nine month period ended December 31,
1995, the Company required $5.5 million, $6.2 million, $3.4 million and $1.3
million, respectively, to fund its net losses and changes in operating assets
and liabilities which was provided by Odetics and reflected as an increase in
the Company's obligation to Odetics. In the nine month period ended December 31,
1996, the Company generated $3.2 million of cash from operating activities and
used $2.3 million to reduce its liability to Odetics. During the years ended
March 31, 1994, 1995 and 1996 and the nine months ended December 31, 1995 and
1996, the Company's purchases of equipment and investments in leasehold
improvements totalled $923,000, $283,000, $498,000, $155,000 and $953,000,
respectively, financing for which was also provided by Odetics. At December 31,
1996, the Company purchased from
26
<PAGE> 29
Odetics the net assets of the division of Odetics which provided service and
support for the Company's products for $2.3 million, the purchase price for
which was reflected as an increase in the Company's obligation to Odetics.
The Company and Odetics are co-borrowers under a joint Loan and Security
Agreement (the "Agreement") with Imperial Bank and Comerica Bank-California
(together, the "Lenders") and are jointly and severally liable for all amounts
advanced to either borrower thereunder. The maximum credit facility is $17.0
million, of which approximately $9.4 million was outstanding at December 31,
1996. Pursuant to this agreement, the Company has granted to the Lenders a
security interest in substantially all of the Company's assets. Subject to the
completion of this Offering and certain other conditions, each Lender has agreed
to release the Company from all of its obligations under the Agreement. The
Company has also received a commitment letter from Imperial Bank for the
establishment of a $5.0 million line of credit which will bear interest at such
bank's prime rate as announced from time to time. Imperial Bank's commitment to
provide a line of credit is subject to certain conditions including (i) the
completion of a public offering yielding at least $17.0 million gross proceeds,
and the use of certain of the proceeds to reduce the Company's obligation to
Odetics, (ii) the completion of loan documentation satisfactory to the lender,
and (iii) the perfection of the lender's security interest. The required amount
of the reduction of the Company's obligation to Odetics will be the lesser of
$10 million or 40% of the net proceeds of the Offering, before deducting
estimated offering expenses. No assurance can be given that the commitment
letter will result in a binding line of credit. The Company's failure to obtain
a binding line of credit could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company entered into a new lease and plans to relocate to its new
facility in Irvine, California during the first calendar quarter of 1997.
Although the Company has no material capital expenditure commitments, it does
anticipate incurring costs of approximately $200,000 for relocation, leasehold
improvements and capital equipment for the new facility.
At December 31, 1995, the Company had a net capital deficiency of $11.0
million and a working capital deficiency of $12.0 million. The Company's working
capital requirements have historically been funded by Odetics. The Company had a
net capital deficiency of $8.2 million and working capital deficiency of $10.0
million at December 31, 1996. Upon the completion of the Offering, the Company
will have a net capital surplus and working capital sufficient to provide for at
least 12 months. If the Offering is not completed, Odetics will continue to fund
the Company's operating capital requirements.
The Company anticipates that cash flow generated from operations,
prospective bank arrangements, and the net proceeds to the Company from the
Offering will be adequate to meet its capital requirements and enable it to
execute its operating plans and meet its obligations on a timely basis for at
least a twelve month period following the completion of the Offering.
27
<PAGE> 30
BUSINESS
This Prospectus contains forward looking statements that involve a number
of risks and uncertainties including, without limitation, those set forth in
"Risk Factors" and elsewhere in this Prospectus. The Company's actual results
may differ materially from any future performance discussed in the forward
looking statements and in this Business Section.
The Company designs, manufactures, markets and services automated magnetic
tape libraries used to manage, store, and transfer data in networked computing
environments. The Company is a leading provider of Digital Linear Tape ("DLT")
automated tape libraries for the high end of the networked computing market (one
terabyte capacity and above), shipping over 2,000 systems during the past three
years. The Company's products provide a high performance, reliable, cost
effective and scaleable storage solution for organizations requiring the backup,
archival and recovery of critical computer data.
The Company's products incorporate DLT tape drives as well as the Company's
proprietary IntelliGrip cartridge handling system, providing end users with
rapid and reliable access to computer data across a wide variety of networks.
The Company believes that the growing market acceptance of DLT technology has
been driven by a number of factors, including performance, cost, reliability and
durability advantages over competing storage technologies. The Company's
proprietary robotics system within each automated tape library provides
additional speed and reliability due to the accurate and timely manner in which
tape cartridges are loaded and unloaded into the DLT drives. The Company's
products are compatible with commonly used network operating systems, protocols
and topologies as well as with a broad range of storage management software. In
addition, these products are highly scaleable and permit flexible configuration.
For example, the Company's 2640 Series is capable of storing 9.2 terabytes of
data as a standalone unit or up to 46 terabytes of data with the SystemLink
Option, which links up to five 2640 units together for larger storage
requirements.
INDUSTRY BACKGROUND
In recent years, there has been a rapid proliferation of computers
throughout business organizations and a corresponding increase in the amount of
data that is generated, analyzed, distributed and stored. As a result, the
amount of disk storage capacity has grown significantly during recent years.
According to International Data Corporation, shipped hard disk capacity grew
from 76,000 terabytes in 1995 to an estimated 185,000 terabytes in 1996, and is
projected roughly to double on an annual basis through the year 2000. This
growth in the amount of data generated and stored has been driven by growth in
the installed base of computers, complex enterprise wide software applications
used in open system environments, and the emergence of data intensive image,
voice, video and multimedia processing. The increased demand for storage
products has also been fueled by a reduction in the cost of storage by 40% to
60% annually over each of the past three years.
Concurrently, with the increase in data storage requirements, business
processes have transitioned from manual operations and mainframe based systems
to complex and sophisticated networked computing environments in which critical
data is widely distributed throughout an organization. Strategic Research Corp.
estimates that the average amount of data stored in Unix networks will increase
from 138 gigabytes in 1994 to approximately 583 gigabytes in 1999. As dependence
on shared data has become more prevalent, network users are increasingly relying
on rapid access to computer files and data including sales and marketing data,
customer information, accounting records, project specifications and other
business critical information stored across local and wide area networks. In
addition, organizations are seeking to access and analyze large volumes of data
previously stored in archives through data warehousing and data mining
techniques in order to better manage and track their customer interactions and
business processes.
As both the volume and importance of data distributed across networks has
increased, the efficient and cost effective protection, management and
availability of stored data have become critical components of the overall
management of the network. The demand for effective access to this data has
generated a wide variety of storage management solutions utilizing both magnetic
and optical disks and a range of magnetic tape technologies. Each of these
solutions involves compromise among a variety of factors including data
integrity and reliability, cost, capacity, speed and scaleability. Most data
management systems are optimized for backup, archival, disaster recovery or
hierarchical storage management ("HSM"). HSM, an established
28
<PAGE> 31
application in the mainframe market and an emerging feature of the network
computing environment, classifies stored data according to the frequency and
timeliness with which the organization requires access to such data, providing
rapid access to critical data and less immediate retrieval of infrequently used
data.
Cartridge based magnetic tape has emerged as the medium of choice for
backing up, archiving and recovering data in distributed computing environments
due to its cost effectiveness, high reliability and its ability to provide
nearline availability of data. Magnetic tape solutions have evolved considerably
over the past twenty years and have historically included two distinct
technologies: linear recording technology such as the 3480 and QIC which
provided high data integrity and rapid data accessibility but relatively low
storage density; and helical tape technology such as the 8 mm and 4 mm tape
systems which provided higher density, but generally resulted in lower data
transfer rates, increased maintenance requirements, less effective access to
random data and reduced data integrity.
DLT, a tape format introduced by Digital Equipment Corporation ("DEC") in
1993 and acquired by Quantum in 1994, incorporates the key advantages of linear
recording and helical tape technologies into a single technology. DLT is a high
performance, half inch, linear serpentine recording tape solution designed to
meet the capacity and reliability needs of high duty cycle applications such as
network server backup devices, midrange applications, multimedia processes and
online transactions. DLT utilizes a simple tape path and operates at a low,
constant tension, minimizing the wear on both the tape and head. The Company
believes DLT tape drives offer certain performance, durability, error
correction, cost and reliability advantages over competitive technologies,
including high speed data transfer rates, greater capacity and better data
integrity than other tape formats, and, in general, represent a balance between
price and performance for the distributed computing environment.
In selecting alternatives for the protection, management and storage of
data, network administrators are primarily concerned with providing a storage
solution that meets their own needs for availability and capacity. To provide a
complete storage solution, however, tape library systems must also meet the
demanding needs of users relying on the network on a continuing basis.
Therefore, key criteria used to evaluate storage alternatives also include the
following: (i) reliability of the mechanical assemblies which handle and
transport storage media, (ii) the degree of system automation, (iii) the
compatibility with existing network operating systems, protocols and topologies,
(iv) the expandability and upgradeability of the storage device over time, (v)
the expected life cycle of the product, and (vi) the physical configuration of
the equipment. All of these factors must be considered in the context of the
overall operational cost of a given storage system, which includes both the
upfront cost of a particular storage system, as well as the annual cost of
operating, maintaining and supporting the systems and its users.
THE ATL SOLUTION
The Company's automated tape libraries provide a high performance, cost
effective, scaleable data storage solution for the protection, management and
accessibility of stored data across distributed networks. The Company's products
utilize DLT technology which is rapidly becoming a standard storage solution for
backup, archival and disaster recovery applications within the distributed
computing market. The Company's automated tape libraries incorporate the
Company's proprietary IntelliGrip robotics for the reliable, accurate and high
speed handling and loading of the DLT tape cartridges. These robotics provide
improved access times, reduced occurrence of human error and greater automation
which permits unattended automated backup and archiving. The Company's products
offer compatibility with commonly used network operating systems, protocols and
topologies, as well as with a broad range of storage management software. The
Company's products permit the network user prompt and convenient access to
stored data within the time constraints imposed by critical business operations.
In addition, the modular and scaleable design of the Company's products enables
users to upgrade storage capacity readily as their storage needs continue to
grow. The Company believes that its comprehensive knowledge of network storage
will enable it to provide additional cost effective storage solutions as storage
technologies and network architectures and technologies continue to evolve.
29
<PAGE> 32
STRATEGY
The Company's objective is to be the leading provider of automation
solutions for the management of data storage in distributed computing
environments. Key elements of the Company's strategy include the following:
Maintain Technological Leadership. The Company is a leading provider of
DLT based storage solutions. The Company's products utilize advanced
technologies such as the IntelliGrip robotics systems and sophisticated control
software in order to provide a high degree of reliable, cost effective and user
friendly storage systems. The Company intends to continue to dedicate
significant resources to develop products incorporating improved proprietary
robotics and advanced network connectivity, and to incorporate additional
evolving storage technologies and applications such as HSM. In mid 1997, the
Company expects to introduce a new generation of automated tape library systems
incorporating its Prism architecture, integrating into its system a high
performance, industry standard PCI bus. Libraries utilizing this architecture
will address an expanded range of applications from backup of Windows NT
networks to large data mining and warehousing applications.
Incorporate New Software Based Functionality. The Company is developing
additional software elements to complement its automated tape libraries and to
enhance their functionality in system monitoring and volume management. These
software elements will comply with industry standard application programming
interfaces, including the Simplified Network Management Protocol ("SNMP") and
Java Management Applications Programming Interface ("JMAPI"), and will permit
remote access for system monitoring and management within the internal network
and across the Internet.
Broaden Market Coverage. The Company's Prism product line is intended to
extend the Company's market position in distributed computing environments to
pursue opportunities at both the high end and low end of the automated tape
library market. At the low end, the Company plans to address the rapidly
emerging NT network opportunity by providing much of the high end functionality
featured in the Company's current products in a smaller, lower capacity entry
level product. The initial Prism product is expected to consist of a rack
mounted system having a capacity of 0.25 terabytes, and to offer effective
migration paths to higher capability and higher performance systems. At the high
end of this market, the Company intends to leverage critical elements of the
hardware in different system configurations to address high performance data
warehousing applications.
Enhance Indirect Distribution Channels. The Company sells its products
primarily through a leveraged indirect channel consisting of selected VARs who
have a strong market presence, have demonstrated the ability to work directly
with the end users, and who maintain relationships with major vendors of storage
management software. The Company intends to continue to devote substantial
marketing resources to support this important distribution channel. In addition,
the Company is implementing programs such as its expanded demonstration
equipment plan, warranty programs and "Certified Maintainer" programs to
complement the capabilities of its reseller channel partners. The Company
believes its VAR distribution channels to be particularly important for emerging
segments of the market where customer relationships and support are critical to
product acceptance.
Strengthen and Expand OEM Relationships. The Company also has established
and is pursuing additional relationships with major OEM customers and platform
and storage system vendors who the Company believes are essential to its
continued revenue growth and to the development of both its technology and
operating processes. The Company's OEM customers include Auspex, DEC, EMC and
Sun Microsystems, among others. The architecture of the Company's Prism product
line, which was developed in close cooperation with existing and potential OEM
customers, provides substantially enhanced compatibility with a wide range of
hardware and software interfaces. This more flexible architecture creates a
significant opportunity for the Company's OEM customers to add their own
proprietary technological functionality to the Company's automated tape
libraries, and to provide differentiated product offerings which would include
the Company's automated tape library as a fully integrated element.
30
<PAGE> 33
Provide Extensive Customer Support. The Company maintains two dedicated
service centers and has qualified more than 25 of its VAR and OEM customers as
certified maintenance providers to ensure prompt and reliable service of the
Company's products. The Company also works closely with its OEM customers in the
development of their products in order to obtain valuable input from end users
and to expedite product development. The Company believes extensive customer
support is an essential element of its success and intends to increase its focus
on customer service and support in the future.
PRODUCTS
The Company's product families consist of the ATL 7100, the ATL 520 and the
ATL 2640 Automated DLT Library Series. Within each product family, customers may
specify the type and quantity of DLT drives, the maximum number of cartridges
and a number of interface options. The Company's products are compatible with
major hardware platforms including Sun Microsystems, DEC, Hewlett Packard, IBM
and Silicon Graphics, and are supported by approximately 40 storage management
software applications.
The Company's products are specifically designed electromechanical and
robotic systems under the precise digital control of dedicated electronics
utilizing the Motorola 68332 microcontroller. These electronics control the
robot, load port, tape drives, control panel, position sensors and environmental
sensors. The products also include a wide variety of SCSI-2 interfaces
configured to meet specific needs of end users. The wide SCSI-2 interface
permits data transfer at rates up to 20 megabytes per second on each host
connection. The assignment of the library and drives among the SCSI interfaces
may be selected at installation of the products. The products permit sharing of
the library among several hosts to permit, for example, concurrent backup from
several local area networks.
All of the Company's current products are based upon DLT technology which
is a high performance, half inch, linear serpentine recording tape solution
designed to meet the capacity and reliability needs of high duty cycle
applications such as network backup servers, midrange data servers, multimedia
processing, and online transaction processing. DLT utilizes a simple tape path
and operates at a low, constant tension which minimizes both head and tape wear.
The Company believes that DLT tape drives offer certain performance,
reliability, durability, error correction and cost advantages over competitive
technologies which result in greater capacity, higher transfer rates and better
data integrity than other tape offerings.
The Company's products have demonstrated high field reliability comparable
to RAID disk arrays, even surpassing the Company's own rigid specifications. The
Company has also demonstrated that DLT drives exhibit greater reliability within
the Company's products than in other applications. The 7100 Series and 520
Series require only minimal installation support and have twelve month
recommended preventive maintenance intervals. In addition, the scaleable
architecture of the Company's products permits flexible configuration and
permits the upgrade of installed products to increase capacity, throughput or
connectivity. This versatility allows end users to purchase entry level systems
at lower costs and to upgrade those systems in a cost effective manner as their
data management needs grow.
The Company's products share the following common features:
Advanced Robotics. The Company's products include the Company's
IntelliGrip precision cartridge handling system which is designed to load and
unload the drives in a highly accurate and controlled manner, thus increasing
cartridge longevity and enhancing system reliability. The IntelliGrip system
features automatic calibration and precisely controlled force which enables the
IntelliGrip to firmly grasp and gently exchange the DLT cartridges reducing wear
contaminants.
Unique System Configurations. The Company's products are manufactured from
electronic and electromechanical subassemblies which have been uniquely designed
to meet the demanding requirements for reliable automation by the DLT
technology. The frames of the libraries, for example, utilize a welded unibody
construction technique to provide a highly stable environment for the robotics
instead of the more typical rivet or screw construction techniques. Each product
series utilizes an architecture which can be adapted to a wide range of product
configurations. Because the Company's product families are typically designed to
address different market segments, several configuration options are available
within each product family.
31
<PAGE> 34
System Compatibility. The Company's products incorporate industry standard
interfaces and protocols and, therefore, are compatible with most common
platforms and operating systems used in the networked computing environment. The
Company has developed the active support of over 40 key storage management
software developers for the Unix, NT and NetWare environments to expand the
compatibility of the Company's products to include a wide range of data
management applications. Currently, most Unix data management applications
directly support the Company's products and, as data management requirements
increase in the NetWare and NT environments, a growing number of applications
for these network operating systems have begun providing direct support.
The following table illustrates the common configuration options for the
Company's products:
<TABLE>
<CAPTION>
TYPE OF NO. OF CARTRIDGE LIBRARY LIBRARY
TAPE DRIVES DRIVES CAPACITY CAPACITY* THROUGHPUT*
----------- ------ --------- --------- -------------
(TB) (GB/PER HOUR)
<S> <C> <C> <C> <C> <C>
7100 SERIES
ATL 2/68................... DLT 4000 2 68 1.4 10.8
DLT 7000 2 68 2.4 36.0
ATL 4/100.................. DLT 4000 4 100 2.0 21.6
DLT 7000 4 100 3.5 72.0
ATL 7/100.................. DLT 4000 7 100 2.0 37.8
DLT 7000 7 100 3.5 126.0
520 SERIES
ATL 2/28................... DLT 4000 2 28 0.6 10.8
DLT 7000 2 28 1.0 36.0
ATL 4/52................... DLT 4000 4 52 1.0 21.6
DLT 7000 4 52 1.8 72.0
2640 SERIES
ATL 2640................... DLT 4000 3 264 5.3 16.2
DLT 7000 3 264 9.2 54.0
ATL 6/176.................. DLT 4000 6 176 3.6 32.4
DLT 7000 6 176 6.2 108.0
ATL 9/88................... DLT 4000 9 88 1.8 48.6
DLT 7000 9 88 3.1 162.0
</TABLE>
- ---------------
* All values reflect native (uncompressed) mode.
7100 SERIES
In November 1996, the Company announced the introduction of its 7100
Series. The 7100 Series affords a cost effective solution for enterprise system
administrators by providing multi-terabyte backup and archiving capability in a
compact system configuration, with a high degree of commonality with the
products in the 520 Series in terms of parts, operations and training. The 7100
Series was designed for network environments requiring online disk capacities
which will exceed 250 gigabytes in the near future. The products in the 7100
Series are particularly appropriate for environments which already contain
products in the 520 Series due to the high degree of operational and support
compatibility between these two product families. The 7100 Series also
represents an attractive choice for rapidly growing network environments as a
result of the relatively low entry costs of these products and the significant
potential offered for cost effective field upgrades.
The 7100 Series currently includes twelve product configurations which
contain between two and seven DLT4000 or DLT7000 drives and are available with
either a 68 or 100 maximum cartridge capacity. The 7100 Series delivers capacity
ranging from 1.4 to 3.5 terabytes and backup performance of up to 126 gigabytes
per hour. A fully configured 7100 library achieving a 2:1 data compression can
backup a one terabyte database in only four hours. In addition, the 7100 Series
libraries can provide room for seven generations of a single
32
<PAGE> 35
terabyte backup. The 7100 Series also includes several advanced features such as
a touch screen control panel with a browser-like GUI for "point-and-click"
library management as well as enhanced access to both the DLT drives and
cartridges. The 7100 Series will also permit "hot swap" of the DLT drives during
library operation to maximize library availability. The Company intends to ship
its first products in the 7100 Series during the first calendar quarter of 1997.
The end user list prices for products in the 7100 Series typically will range
from approximately $65,000 to approximately $130,000 depending primarily on
drive configuration.
520 SERIES
The Company introduced the 520 Series departmental libraries in 1995 for
Unix network environments. The design of the 520 Series was optimized for the
DLT4000 and DLT7000 drive technology. The 4/52 and 2/28 models of the 520 Series
are designed for the demanding networked computing environment. The 4/52 models
primarily address high speed backup, archiving and HSM applications while the
2/28 models are used by companies making the transition from single drive to
multiple drive data storage management and are easily upgradeable to address
future requirements.
The 520 Series currently includes sixteen product configurations which
contain either two or four DLT4000 or DLT7000 drives and are available with
either a 28 or 52 maximum cartridge capacity. The 520 Series delivers capacity
ranging from 0.6 to 1.8 terabytes and backup performance of up to 72 gigabytes
per hour. All of the products in the 520 Series have demonstrated extremely high
field reliability and have achieved DLT drive reliability which exceed the
manufacturer's specifications. The Company has shipped over 1,200 products in
the 520 Series to date. The end user list prices for products in the 520 Series
generally range from approximately $50,000 to approximately $75,000 per library
depending primarily on drive configuration.
2640 SERIES
The 2640 Series was the Company's first product family to incorporate DLT
technology. The 2640 was originally developed pursuant to a strategic alliance
with DEC in 1993. The basic architecture of the 2640 was adapted from the
Company's earlier developments in midrange 3480 and 3490 tape libraries. The
2640 Series is sold primarily to the data intensive midrange segment of the
market. The 2640 Series products are used by companies which require unattended
backup of large quantities of data in a safe, reliable manner and by
organizations which have migrated to more demanding HSM applications. The
flexible design of the 2640 Series may be adapted to a variety of configurations
to deal with large amounts of data and is easily upgraded to meet future needs
in terms of both data capacity and transfer rate.
Libraries in the 2640 Series are controlled by the host computer through
either an RS-232C or a SCSI-2 interface. Products in the 2640 Series may be
integrated into configurations of up to five units which can be operated as a
single library to accommodate significant growth in end user requirements. The
2640 Series currently includes nine product configurations which contain between
three and nine DLT4000 or DLT7000 drives and have maximum capacities ranging
from 88 to 264 cartridges. The 2640 Series delivers capacity ranging from 1.8 to
9.2 terabytes per unit and backup performance of up to 162 gigabytes per hour
per unit. End user configurations of up to five units in the 2640 Series can be
created with the SystemLink option either at system installation, or at a later
time as requirements grow. The end user list prices for products in the 2640
Series generally range from approximately $75,000 to approximately $155,000
depending primarily on drive configuration.
PRODUCTS UNDER DEVELOPMENT
PRISM SERIES. In 1997, the Company expects to introduce a new generation
of automated tape library systems which will include a high performance,
industry standard PCI bus, to address both the emerging NT market and large data
mining and warehousing applications. One of the initial Prism products will
consist of a rack mounted system with a capacity of 0.25 terabytes, and will
offer effective migration paths to higher capability and higher performance
systems. The Company intends to develop future versions within this product
family which will also contain features to increase speed and cartridge capacity
and to enhance their
33
<PAGE> 36
integration into both high end network and data archiving applications. The
initial Prism products were developed in close cooperation with existing and
potential OEM customers and provide substantially enhanced compatibility with a
wide range of hardware and software interfaces. Current automated tape library
architectures are restricted by the SCSI-2 specification which limits the
integration of these products into complex systems and network topologies. The
Prism architecture will permit remote monitoring and management of libraries
distributed throughout an enterprise, provide interface flexibility for a wide
range of network and channel protocols (including SCSI, FDDI, FC/AL and ATM),
and facilitate a much closer integration between the library and other elements
of the storage management system. These products will also provide significant
added value opportunities for the Company's OEM partners.
SOFTWARE ENHANCEMENTS. The Company is developing additional software
elements to complement its automated tape libraries and to enhance their
functionality in system monitoring and volume management. These proprietary
software elements will comply with industry standard application programming
interfaces, including SNMP and JMAPI, and will provide remote access for system
monitoring and management within the internal network and across the Internet.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are principally focused on
the development of new generations of storage products for the networked
computer market. The Company employs 37 engineers and maintains key design teams
in the areas of electromechanical, electronic, software, system and process
design. The Company has also engaged a number of third parties for product
development activities including a recently announced OEM relationship with
Veritas Software to develop the industry's first Internet tape library
management product. In addition, the Company continuously solicits and receives
consultation from its end users regarding system features and capabilities, and
works closely with its OEMs during the development and integration of the OEM
products.
In the near future, the Company intends to focus its development activities
to continue to accommodate advances in DLT technology for integration into the
Company's current products. As a leading supplier of DLT libraries, the Company
has been able to work closely with Quantum during the early stages of the
development of the new DLT7000 drive which has facilitated the Company's rapid
development of products using this new technology. While all of the Company's
products currently feature DLT technology, the Company believes the continued
system evolution in the networked computing market has led to an increasing need
for automated tape libraries which provide functional capabilities beyond those
available with current DLT technology. Accordingly, the Company continues to
evaluate emerging drive technologies which it believes will complement DLT.
The Company has gained significant expertise in the development of
automated tape libraries which extends beyond DLT technology and includes, among
other things, process automation knowledge and systems design and management
experience. The Company intends to continue to leverage this expertise to
support the development of additional removable storage media technologies which
it anticipates will play an important role in the distributed computer market.
The Company believes this expertise, together with its experience with a wide
variety of tape media, will enable the Company to adapt its products to
accommodate evolving storage technologies. There can be no assurance that the
Company will be able to make such adaptations on a timely basis, if at all.
The Company believes that, in order to provide comprehensive solutions for
the emerging requirements of storage management, it must also design and
introduce tape libraries that incorporate embedded firmware and software to
further support archiving, data warehousing and HSM applications. The Company is
currently developing software elements which will complement the use of its
products in the Unix market and which will enhance the introduction of its
products into the rapidly developing NT market. These products, which are being
developed in conjunction with Veritas Software, a major file system provider,
will permit monitoring and management of the Company's products either within a
network structure or through resources such as an enterprise wide intranet and
the Internet, and should substantially improve the efficiency and effectiveness
of the use of multiple libraries within a single organization. In addition,
these products will permit volume
34
<PAGE> 37
management of libraries without requiring extensive backup, archiving or HSM
applications, thereby making the products more attractive for smaller scale
networks, representing a majority of the NT installations.
The data storage market is characterized by rapid technological change and
is highly competitive with respect to product innovation and introduction. The
Company believes its continued success depends in part on its ability to enhance
its existing products and develop new products that incorporate the latest
technological advancements. While the Company intends to continue to make
significant investments in research and development, there can be no assurance
that it will be able to modify its existing products or introduce new products
which incorporate new storage technology on a timely basis, if at all.
COMPETITION
The Company competes directly, both domestically and internationally, with
a number of companies offering data storage products using various technologies,
including Sun Microsystems, Silicon Graphics, Compaq, Hewlett-Packard and
others. Management believes eight tape library manufacturers currently provide
DLT based products, including the Company's principal competitors, ADIC, Breece
Hill Technologies, Hewlett-Packard and StorageTek. DLT is still an emerging
technology and currently represents one of the smallest segments of the tape
storage market. The Company competes indirectly with a large number of
manufacturers offering tape storage systems using formats other than DLT
including 8 mm, 4 mm (DAT), 3480 and QIC that have larger installed bases and
may be expected to continue to provide intense competition for the DLT format.
These competitors include ADIC, Exabyte, Fujitsu, Hitachi, IBM, Spectra Logic
and StorageTek. The Company anticipates these competitors will expand the
functionality and performance of their selected storage technologies to compete
effectively with DLT. In addition, if DLT continues to maintain market
acceptance, many of these competitors could elect to offer DLT systems. The
Company also expects increased competition from large integrated computer
equipment companies, many of whom have historically incorporated their own tape
storage products into their mainframe systems, and are broadening their focus to
include the distributed computing market. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, all
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many of the Company's current and potential competitors have substantially
greater name recognition and financial, marketing, technical and other resources
than the Company. The Company's current and potential competitors may develop
new technologies and products that are more effective than the Company's
products. In addition, many of these companies sell directly to end users, which
the Company believes may provide a competitive edge over the Company when
marketing either similar products or alternative data storage solutions. The
Company is not ISO-9000 certified, unlike certain of its competitors, which may
limit certain customers' ability to purchase directly from the Company. There
can be no assurance that the Company will be able to compete successfully
against either current or potential competitors or that competition will not
have a material adverse effect on the Company's business, operation results and
financial condition.
The market for the Company's products is highly competitive and is
characterized by rapidly changing technology and evolving standards. The Company
believes that its ability to compete depends on a number of factors, including
the success and timing of new product development by the Company and its
competitors, compatibility of the Company's products with a broad range of
computing systems, product performance, reliability and price, and customer
support. The Company believes that the principal competitive factors in the
networked computing market are storage capacity, data transfer rate, low cost of
ownership, price, product quality and reliability, timing of new product
introductions and ability to meet customer volume needs.
SALES AND MARKETING; PRINCIPAL CUSTOMERS
The Company markets and sells its products through indirect sales channels
comprised primarily of VARs and OEMs pursuant to strategic arrangements and
individual purchase agreements. Sales of new technological advancements are
often initially made through VARs who generally evaluate, integrate and adopt
new technology more quickly than OEMs. As a technology achieves greater market
acceptance, OEM
35
<PAGE> 38
sales generally have represented an increased portion of the sales of the
products incorporating that technology. During the year ended March 31, 1996,
direct sales to VARs and OEMs accounted for approximately 70% and 30%,
respectively, of the Company's net sales.
The Company has relationships with more than 100 VARs who integrate the
Company's products with storage management software to provide comprehensive
storage solutions. The Company has certified 40 independent software developers
including EMC, Hewlett-Packard, Legato, OpenVision, Spectralogic and Workstation
Solutions, among others, who provide storage management software which is
compatible with the Company's products. The Company's strategy is to pursue VARs
who have expertise in storage management, strong established relationships with
end users and the experience to understand and respond to their customers'
critical needs. The Company typically enters into a one year Reseller Agreement
with its VARs, which are usually subject to cancellation by the Company in the
event the VAR does not meet certain requirements. The Company provides marketing
and training support for its VARs and offers cooperative marketing programs to
certain VARs.
The Company has also entered into agreements with several major OEMs,
including, among others, Auspex, DEC, EMC and Sun Microsystems, who incorporate
the Company's products into systems sold by the OEMs. The Company has entered
into strategic relationships with certain of these OEMs which has enabled the
Company to work with OEMs early in their product development cycle thereby
providing valuable development feedback to the Company. The sales cycle for OEMs
often encompasses a long lead time and generally involves extensive product and
system qualification, evaluation, integration and verification. The Company
believes the OEM channel is also critical to the Company's success because OEMs
have traditionally taken a more active role in the development, support and
servicing of the Company's products.
The Company maintains full time sales personnel in five regional sales
locations including Boston, Chicago, Dallas, San Francisco and Washington to
facilitate close cooperation and communication with its VAR and OEM customers.
The Company also employs four international sales managers who assist in the
marketing of the Company's products to VARs and OEMs throughout Europe and Asia.
International sales constituted approximately 28% of the Company's sales during
the year ended March 31, 1996. The Company anticipates that international sales
will continue to represent a significant portion of the Company's net sales. The
Company undertook a sales initiative for Europe in late fiscal 1995 and fiscal
1996 utilizing the pre-existing infrastructure of OEL, which offered products
manufactured by other business units of Odetics. In order to establish a
European presence dedicated solely to expanding the sales of the Company's
products, the Company formed APL in the United Kingdom to conduct its European
operations. While ATL expects its future sales in the European market primarily
will be made through APL, OEL continues to retain nonexclusive distribution
rights for the Company's products and continues to distribute products offered
by the remaining divisions of Odetics. Sales to customers outside the United
States are subject to certain risks. See "Risk Factors -- International
Operations; Risks Associated with International Sales."
A small number of customers have historically accounted for a substantial
portion of the Company's net sales. Sales to DEC and OEL accounted for
approximately 19.3% and 17.3%, respectively, of the Company's net sales during
the year ended March 31, 1996. Sales to EMC accounted for approximately 12.9% of
the Company's net sales for the nine months ended December 31, 1996. No other
customer accounted for 10% or more of net sales during these periods. The
Company's ten largest customers; however, accounted for an aggregate of 55.9% of
the Company's sales during the eighteen month period ended December 31, 1996.
36
<PAGE> 39
END USERS
End users of the Company's products include a number of large corporations
in a variety of industries. A representative list of end users of the Company's
products is set forth below:
TELECOMMUNICATIONS
ADC Telecommunications, Inc.
AT&T Corporation
Bell Northern Research
Hughes Aircraft Company
Warner Brothers Inc.
TRANSPORTATION
British Airways
BMW
Ford Motor Company
Rover Group PLC
FINANCIAL SERVICES
Bank of Boston Corporation
MBNA America Bank, N.A.
Swiss Bank Corporation
HEALTH SERVICES
Aetna, Inc.
HealthNet
TECHNOLOGY
Adobe Systems Incorporated
Advanced Micro Devices, Inc.
CREO Products, Inc.
Electronic Data Systems Corporation
Hewlett-Packard Company
Intel Corporation
Motorola, Inc.
Nokia Corporation
Sun Microsystems, Inc.
Texas Instruments Incorporated
INDUSTRIAL
Arco Chemical Company
Chevron Corporation
Mattel, Inc.
Carolina Power and Light Company
Wisconsin Power & Light Company
RESEARCH AND DEVELOPMENT
CERN (Centre Europeen pour la Recherche Nucleaire)
Charles Stark Draper Laboratory, Inc.
National Oceanic and Atmospheric
Administration (NOAA)
Sandia Laboratory
USAF -- Edwards Air Force Base
CUSTOMER SERVICE AND SUPPORT
The quality and reliability of the Company's products and the ongoing
support of these products is a key element of the Company's business. All of the
Company's products include a one year warranty which provides onsite customer
assistance on the next business day in the United States. In addition, warranty
coverage may be upgraded to include onsite customer assistance with a four hour
response time, which assistance is available 24 hours per day, seven days a
week.
The Company maintains two dedicated service centers and has qualified more
than 25 of its VAR and OEM customers as certified maintenance providers ("CMPs")
to service and provide support for the Company's products. The Company provides
a formal training program for its CMPs. The CMPs often provide the initial
physical response for onsite repairs, typically replacing parts and possibly
even reconfiguring the systems. The CMPs also gather critical data at each call
which enables the Company to continue to monitor its robotics systems.
To supplement its own nationwide field service program, the Company has
contracted with a national organization to provide on-call field service to the
Company's customers.
MANUFACTURING
The Company manufactures all of its tape libraries at its facility in
Anaheim, California. The Company's manufacturing operations currently occupy
approximately 25,000 square feet which the Company leases from Odetics. The
Company has leased and plans to relocate its corporate headquarters and
manufacturing facilities
37
<PAGE> 40
to a new 120,000 square foot facility located in an industrial complex in
Irvine, California, during the first calendar quarter of 1997, of which
approximately 50,000 square feet will be attributed to manufacturing space. The
Company currently operates three assembly lines during one daily eight hour
shift and plans to expand to four lines in its new Irvine facility.
The Company manufactures the robotics subassemblies used in its automated
tape libraries and performs final assembly and testing of purchased components.
The Company's manufacturing processes consist primarily of final systems
integration and quality assurance. Seventy percent of the manufacturing process
consists of quality assurance and testing which is conducted on a 24 hour basis.
The Company depends, to a large degree, on outside suppliers to provide most of
the components incorporated in the Company's products including the DLT drives,
circuit boards, moldings and chassis. The Company intends to continue to
outsource as much of the manufacturing as possible in order to maximize
manufacturing flexibility. While many of the parts and components used in the
Company's products are available from a number of fabricators in California, the
DLT drives are available only from a single supplier, Quantum. Quantum may
terminate its agreement with the Company for any reason upon 90 days notice. Any
disruption in the Company's relationship with such supplier would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Dependence on Quantum." In addition,
the Company currently purchases most of its circuit boards from one supplier.
The Company has, however, qualified a second supplier who can also provide the
boards.
EMPLOYEES
At December 31, 1996, the Company employed 154 employees, including 54 in
manufacturing, 39 in engineering, 28 in customer service, 21 in sales and
marketing and 12 in finance and administration. The Company also employs a small
number of temporary and contract employees. The Company is not a party to any
collective bargaining agreement or other similar agreement. The Company has not
experienced any work stoppages to date. The Company believes that its
relationship with its employees is good.
FACILITIES
The Company's principal administrative, engineering and manufacturing
facilities are located in one 65,000 square foot facility in Anaheim,
California, which the Company leases from Odetics for which the Company is
charged approximately $60,000 per month which includes the Company's share of
the operating expenses, property tax and insurance premiums on the building. The
Company plans to relocate its corporate headquarters and manufacturing
facilities to a new 120,000 square foot facility in Irvine, California during
the first calendar quarter of 1997. The new lease expires in October 2003, but
the Company has an option to extend the lease for an additional five year
period. The Company believes this new facility will be sufficient for its needs
through at least the next five years. The Company also leases office space for
its sales representatives in Boston, Chicago, England and Taiwan.
LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in legal
proceedings from time to time. As of the date of this Prospectus, there are no
material legal proceedings pending against the Company.
38
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Kevin C. Daly, Ph.D. .............. 52 President, Chief Executive Officer and
Chairman of the Board
Gregory A. Miner(1)................ 42 Chief Financial Officer
Chester Baffa...................... 57 Vice President, Marketing and Sales
Todd Kreter........................ 37 Vice President, Operations
Steve Morihiro..................... 38 Vice President, Engineering
James A. Pipp...................... 51 Vice President, Controller and Secretary
Mark Spowart....................... 45 Vice President, Worldwide Sales
Joel Slutzky....................... 57 Director
Crandall Gudmundson................ 66 Director
</TABLE>
- ---------------
(1) Mr. Miner is the Chief Financial Officer of Odetics and is serving as Chief
Financial Officer of the Company on an interim basis pending the Company's
retention of a successor.
Kevin C. Daly, Ph.D. has served as President and Chief Executive Officer
and a member of the Board of Directors of the Company since its formation in
January 1993, and Chairman of the Board since December 1996. Dr. Daly has served
as a member of the Board of Directors of Odetics since June 1993 and as Vice
President and Chief Technical Officer of Odetics since 1987. Prior to that, Mr.
Daly served as the Director of Space Systems of Odetics since 1985 when he
joined Odetics. From March 1974 until June 1985, Dr. Daly served as Director of
Control and Dynamics Division of the Charles Stark Draper Laboratory. During
that period, Dr. Daly participated in the design and development of guidance,
navigation and control systems for several major space programs including the
United States Space Shuttle program. Dr. Daly served as a manager of electronic
systems for a major space program of the United States Air Force from March 1970
to March 1974. Dr. Daly has also served on several advisory committees to the
United States Government. Dr. Daly holds a Bachelor of Science degree in
Electrical Engineering from the University of Notre Dame, and a Master of
Science, a Master of Arts and a Ph.D. degree in Engineering from Princeton
University.
Gregory A. Miner has served as Vice President of Finance and Chief
Financial Officer of the Company and Odetics since January 1994. Prior to
joining the Company, Mr. Miner served as Vice President, Chief Financial Officer
and a member of the Board of Directors of Laser Precision Corporation, a
manufacturer of telecommunications test equipment, from January 1984 until
December 1993. Mr. Miner has a Bachelor of Arts degree from California
Polytechnic State University, San Luis Obispo, and is a certified public
accountant.
Chester Baffa has served as Vice President, Marketing and Sales since June
1995. Prior to joining the Company, Mr. Baffa was Senior Vice President,
Marketing and Sales at Micropolis, Inc., a manufacturer of high capacity disk
and RAID storage products from May 1983 until September 1994. Prior to May 1983,
Mr. Baffa was Vice President, Marketing and Sales at Oki Data Corp. Mr. Baffa
holds a Bachelor of Arts degree in Economics from Allegheny College.
Todd Kreter has served as the Company's Vice President, Operations since
June 1996 and as Director of Operations from January 1993 until June 1996. Mr.
Kreter served as a project manager at Odetics from 1990 until 1992. Mr. Kreter
was an engineer for Omutec, a division of Odetics which is engaged in production
of flight control hardware for commercial and military aircraft from 1986 until
1990. Prior to 1986, Mr. Kreter was a research and development engineer at Ford
Aerospace Corporation. Mr. Kreter holds a Bachelor of Science degree in
Mechanical Engineering from California State University, Fullerton.
39
<PAGE> 42
Steve Morihiro has served as the Company's Vice President, Engineering
since June 1996. Mr. Morihiro served as the Company's Director of Engineering
from December 1994 until June 1996, as engineering manager from October 1992
until December 1994 and as a Project Manager from January 1992 until October
1992. Mr. Morihiro served as a mechanical engineering manager at Odetics for the
Advanced Intelligent Machines division from October 1990 until October 1991 and
as operations manager from October 1991 until December 1991. Prior to joining
Odetics, Mr. Morihiro served from 1979 until 1982, and then again from 1983
until 1990, in various engineering and program management capacities at Western
Design Corporation, a developer and manufacturer of material handling equipment
for the defense industry. Mr. Morihiro holds a Bachelor of Science degree in
Mechanical Engineering from the University of California at Berkeley, and a
Master of Science degree in Physics from the University of California at Irvine.
James A. Pipp has served as the Vice President, Controller since June 1996
and as Controller since January 1993. From 1981 to 1993, Mr. Pipp served as the
Corporate Controller of Odetics. Mr. Pipp holds a Bachelor of Science degree in
Accounting from California State University, Long Beach, and is a certified
public accountant.
Mark Spowart has served as Vice President, Worldwide Sales since June 1996
and has been responsible for the development and organization of the Company's
sales force since March 1992. Prior to joining the Company, Mr. Spowart served
in general sales management positions in various segments of the computer
industry including mainframe systems, Unix client servers and PC LAN. From April
1990 to March 1992, Mr. Spowart was District Manager for Auspex Systems, and
from March 1982 until April 1990, Mr. Spowart was employed by Memorex Telex in
general sales management positions. Mr. Spowart holds a Master of Business
Administration and a Bachelor of Science degree in Graphic Communications from
California State Polytechnic University, San Luis Obispo.
Joel Slutzky has served as a director of the Company since its formation in
January 1993. Mr. Slutzky has served as Chairman of the Board and Chief
Executive Officer of Odetics since he cofounded Odetics in 1969. From August
1993 until January 1994, Mr. Slutzky served as the Chief Financial Officer of
Odetics, and as President of Odetics from 1969 to 1975. Prior to founding
Odetics, Mr. Slutzky was an engineering manager at Leach Corporation, now part
of the Lockheed Electronics Division of Lockheed Corporation. Mr. Slutzky holds
a Bachelor of Science degree in both Electrical Engineering and Mechanical
Engineering and a Master of Science degree in Mechanical Engineering from the
University of Illinois.
Crandall Gudmundson has served as a director of the Company since February
1993. Mr. Gudmundson is a cofounder of Odetics, has served as President of
Odetics since 1975 and has been a director of Odetics since 1979.
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified or upon their earlier
resignation or removal. Officers are appointed to serve at the discretion of the
Board of Directors.
40
<PAGE> 43
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by any
person for all services rendered in all capacities to the Company to the Chief
Executive Officer and to each of the three additional most highly compensated
executive officers (the "Named Executive Officers") whose salary and bonus
exceeded $100,000 for the fiscal year ended March 31, 1996. No other executive
officer's total annual salary and bonus exceeded $100,000. Prior to the
Offering, the Named Executive Officers were compensated by Odetics and
participated in Odetics' other employee plans. Except as indicated below, no
Named Executive Officer received other compensation in excess of the lesser of
$50,000 or 10% of such officer's compensation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
NUMBER OF
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL ----------------------------------- STOCK UNDERLYING COMPENSATION
POSITIONS YEAR SALARY($)(1) BONUS($)(2) AWARDS($)(3) OPTIONS(#)(4) ($)(5)
- --------------------------- ------ ------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kevin C. Daly, Ph.D........ 1996 $164,104 $50,000 $2,465 12,000 $6,600
Chief Executive Officer, 10,000(6)
President and Chairman of
the Board
Gregory A. Miner........... 1996 135,042 38,800 2,567 12,000 6,600
Chief Financial Officer 10,000(6)
Chester Baffa.............. 1996 100,067 36,668 1,914 -- --
Vice President,
Marketing and Sales
Mark Spowart............... 1996 83,712 173,739 2,567 -- 6,600
Vice President,
Worldwide Sales
</TABLE>
- ---------------
(1) Represents amounts paid by Odetics and its subsidiaries on an aggregate
basis. The salaries of Messrs. Daly, Baffa and Spowart were charged by
Odetics to the Company. Following the Offering, the Company will pay to
Odetics fifty percent of Mr. Miner's salary while Mr. Miner continues to
serve as Chief Financial Officer. Also includes amounts earned in fiscal
1996 but deferred under Odetics' Executive Deferral Plan and 401(k) Plan.
(2) Represents amounts earned under Odetics' Officer Compensation Program in
fiscal 1996 and paid in fiscal 1997.
(3) Represents the Named Executive Officer's share of Odetics' contribution to
the Odetics Associate Stock Ownership Plan during fiscal 1996 based on the
closing price of Odetics' Class A Common Stock at March 31, 1996.
(4) Represents options to purchase Odetics Class A Common Stock.
(5) Represents Odetics' matching contribution under Odetics 401(k) plan to the
respective accounts of the Named Executive Officers.
(6) During fiscal 1996, Odetics offered all holders of options that were granted
in fiscal 1994 the opportunity to have the option exercise price of the
outstanding fiscal 1994 options reduced to the then current 1996 market
price. In connection with any such option repricing, one third of any
repriced options were required to be canceled.
41
<PAGE> 44
OPTION GRANTS
The following table sets forth information concerning the grant to each of
the Named Executive Officers of options to purchase Odetics Class A Common Stock
during the fiscal year ended March 31, 1996. Prior to the Offering, the Named
Executive Officers were entitled to participate in Odetics' 1994 Incentive Stock
Plan.
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
POTENTIAL
REALIZATION VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OF OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE ---------------------
NAME GRANTED(1) FISCAL 1996 ($/SH)(2) EXPIRATION DATE 5% 10%
- --------------------------- ---------- ------------ ----------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kevin C. Daly, Ph.D.(4).... 12,000 5.8% $4.25 5/23/05 $32,074 $81,281
Gregory A. Miner........... 12,000 5.8 4.25 5/23/05 32,074 81,281
Chester Baffa(4)........... -- -- -- -- -- --
Mark Spowart(4)............ -- -- -- -- -- --
</TABLE>
- ---------------
(1) The options granted to the Named Executive Officers were granted on May 23,
1995 pursuant to Odetics' 1994 Incentive Stock Plan and entitle the
optionee to purchase shares of Class A Common Stock of Odetics. Such
options have a maximum term of ten years, subject to earlier termination in
the event of the optionee's termination of employment with the Company.
Options vest in three equal annual installments commencing in May 1996.
(2) The exercise price per share of the options granted represented the bid
price of the underlying shares of Odetics Class A Common Stock on the date
the options were granted.
(3) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission and do not represent
management's estimate or projection of future trading prices of the Class A
Common Stock of Odetics.
(4) On December 19, 1996, the Company granted to Messrs. Daly, Baffa and
Spowart, options to purchase 250,000 shares, 50,000 shares and 50,000
shares, respectively, of the Company's Class B Common Stock, pursuant to
the Company's 1996 Stock Incentive Plan. Such options vest in three equal
annual installments commencing December 1997 and expire in December 2006.
The exercise price per share of these options is $5.00, representing the
fair market value of the Company's underlying Class B Common Stock on the
grant date, as determined by the Company's Board of Directors. The
Company's Class B Common Stock is not convertible into Common Stock, and no
shares of Class B Common Stock are outstanding as of the date of this
Prospectus. See "-- 1996 Stock Incentive Plan."
42
<PAGE> 45
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information with respect to
exercises of options to purchase Odetics Class A Common Stock during fiscal 1996
by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995
AND OPTION VALUES FOR FISCAL YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT MARCH 31, 1996 AT MARCH 31, 1996($)(2)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) (1)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin C. Daly, Ph.D. ......... 10,000 $ 35,000 20,217 18,083 $39,276 $49,437
Gregory A. Miner.............. -- -- 10,222 17,111 30,666 51,333
Chester Baffa................. -- -- -- -- -- --
Mark Spowart.................. -- -- -- -- -- --
</TABLE>
- ---------------
(1) Value realized is determined by subtracting the exercise price from the fair
market value (the closing price for Odetics Class A Common Stock as
reported by the Nasdaq National Market) as of October 31, 1995 (the date
that the options were exercised), which was $8.125, and multiplying the
resulting number by the number of underlying shares of Odetics Class A
Common Stock.
(2) Value is determined by subtracting the exercise price from the fair market
value (the closing price for the Class A Common Stock of Odetics as
reported by the Nasdaq National Market) as of March 31, 1996 ($7.25 per
share) and multiplying the resulting number by the underlying shares of
Odetics Class A Common Stock.
REPRICED OPTIONS
In May 1995, Odetics repriced certain outstanding stock options which were
originally granted in January 1994. The repricing was accomplished by means of
an offer by Odetics to the holders of the options, including certain of the
Named Executive Officers, to reduce by one third the number of shares covered by
these options in consideration for a reduction in the exercise price of the
options from their original exercise price to the market price of Odetics Class
A Common Stock as of the date of the offer. The following table sets forth
certain information with respect to the repricing of such options held by the
Named Executive Officers.
TEN YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
AMENDED ORIGINAL
ORIGINAL NUMBER OF OPTION
NUMBER OF SECURITIES MARKET PRICE EXERCISE TERM
UNDERLYING UNDERLYING OF STOCK AT PRICE AT NEW REMAINING
OPTIONS OPTIONS THE TIME OF TIME OF EXERCISE AT DATE OF
NAME DATE REPRICED(#) REPRICED(#) REPRICING($) REPRICING($) PRICE($) REPRICING
- --------------------- --------- ------------- ------------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Kevin C. Daly........ 05/23/95 15,000 10,000 $ 4.25 $ 9.90 $ 4.25 8.67 years
Gregory A. Miner..... 05/23/95 23,000 15,333 4.25 9.90 4.25 8.67 years
Chester Baffa........ -- -- -- -- -- -- --
Mark Spowart......... -- -- -- -- -- -- --
</TABLE>
1996 STOCK INCENTIVE PLAN
The Company's 1996 Stock Incentive Plan (the "1996 Plan") became effective
on December 19, 1996 upon adoption by the Board of Directors and the Company's
sole stockholder, Odetics. A total of 2,000,000 shares of Class B Common Stock
have been authorized for issuance under the 1996 Plan. In no event may any one
participant in the 1996 Plan receive option grants or direct stock issuances for
more than 250,000 shares per calendar year.
43
<PAGE> 46
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, nonemployee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Class B Common Stock at an exercise price not less
than the fair market value of those shares on the grant date, (ii) the Stock
Issuance Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Class B Common Stock directly, through the
purchase of such shares at a price not less than fair market value at the time
of issuance or as a bonus awarded for services rendered the Company, and (iii)
the Automatic Option Grant Program under which option grants will automatically
be made at periodic intervals to eligible nonemployee Board members to purchase
shares of Class B Common Stock at an exercise price equal to 100% of the fair
market value of those shares on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Company's Compensation Committee. The Compensation
Committee as Plan Administrator will have complete discretion to determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the status of any granted
option as either an incentive stock option or a nonstatutory stock option under
the Federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the Automatic Option Grant Program will be
self executing in accordance with the express provisions of that program.
The exercise price for the shares of Class B Common Stock subject to option
grants made under the 1996 Plan may be paid in cash or in shares of Class B
Common Stock valued at fair market value on the exercise date. The option may
also be exercised through a same day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more individuals in their acquisition of shares of common stock
through option exercises or direct issuances by allowing such individuals to
deliver a full recourse, interest bearing promissory note in payment of the
applicable exercise or issue price and any associated withholding taxes incurred
in connection with their acquisition of those shares.
In the event that the Company is acquired by merger or sale of
substantially all of the Company's assets or more than 50% of the Company's
outstanding voting securities, each outstanding option under the Discretionary
Option Grant Program which is not to be assumed by the successor corporation,
replaced with a cash incentive program or otherwise does not continue in effect
will automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have the authority under the
Discretionary Option Grant and Stock Issuance Programs to grant options and to
structure repurchase rights so that the shares subject to those options or
repurchase rights will automatically vest in the event the individual's service
is terminated, whether involuntarily or through a resignation for good reason,
within a designated period (not to exceed eighteen (18) months) following (i) an
acquisition in which those options are assumed or those repurchase rights are
assigned or (ii) a hostile change in control of the Company effected by a
successful tender offer for more than 50% of the Company's outstanding voting
stock or by proxy contest for the election of Board members.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Class B Common Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share not less than the fair market value of the Class B
Common Stock on the new grant date.
Under the Automatic Option Grant Program, each individual who first joins
the Board after the effective date of this Offering as a nonemployee Board
member will receive an option grant for 10,000 shares of Class B
44
<PAGE> 47
Common Stock at the time of his or her commencement of Board service, provided
such individual has not otherwise been in the prior employ of the Company, its
parent corporation or any subsidiary of the Company. In addition, at each annual
stockholders meeting, beginning with the first annual meeting held after the
effective date of this Offering, each individual who is to continue to serve as
a nonemployee Board member will receive an option grant to purchase 7,000 shares
of Class B Common Stock.
Each automatic grant will have an exercise price equal to the fair market
value per share of Class B Common Stock on the grant date and will have a
maximum term of ten years, subject to earlier termination following the
optionee's cessation of Board service. The initial grant will vest immediately
and each annual grant thereafter will vest over three years measured from the
grant date. However, the shares subject to each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company's or (ii) the death or disability of the optionee while serving as a
Board member.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on December 18, 2006, unless sooner terminated by the Board.
On December 19, 1996, the Board granted options to purchase 879,000 shares
of Class B Common Stock in the aggregate under the 1996 Plan to certain
employees of the Company, including the following executive officers: Chester
Baffa, Kevin C. Daly, Ph.D., Todd Kreter, Steve Morihiro, James A. Pipp and Mark
Spowart. The options vest over a three year period commencing one year from the
grant date and have an exercise price of $5.00 per share. Such exercise price is
equal to the fair market value of the Class B Common Stock on the grant date, as
determined by the Board based on a number of factors, including the reduced
voting rights of the shares, and reflects the volatile nature of the stock
market and the uncertainty which existed at the time of grant as to the ultimate
completion of the Offering.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL
ARRANGEMENTS
The Company does not currently have any employment contracts in effect with
any of its executive officers. The Company provides incentives such as salary,
benefits and option grants (which are typically subject to a four year vesting
schedule) to attract and retain executive officers and other key employees. The
Compensation Committee, as Plan Administrator of the 1996 Plan, will have the
authority to provide for the accelerated vesting of the shares of Class B Common
Stock subject to any outstanding options held by any unvested shares of Class B
Common Stock held by such individual, in connection with the termination of the
individual's employment following an acquisition in which these options are
assumed or the repurchase rights with respect to the unvested shares are
assigned or certain hostile changes in control of the Company.
BOARD COMMITTEES
Upon consummation of the Offering, the Company intends to establish a
Compensation Committee, which will administer the Company's Stock Option Plans,
and an Audit Committee which will supervise and make recommendations and
decisions with respect to the periodic audits of the Company's financial
results. The Company intends to appoint two outside directors following this
Offering who will serve on these committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Slutsky and Gudmundson, directors of the Company, are stockholders,
executive officers and directors of Odetics. No other interlocking relationship
exists between the Company's Board of Directors or Compensation Committee and
the board of directors of any other company.
DIRECTOR COMPENSATION
The Company currently does not provide any cash compensation to its
directors but does reimburse out-of-pocket expenses incurred by its directors in
connection with attendance at board and committee meetings.
45
<PAGE> 48
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). The Company's Bylaws provide that the Company will
indemnify its directors and officers to the fullest extent permitted by law and
require the Company to advance litigation expenses upon receipt by the Company
of an undertaking by the director or officer to repay such advances if it is
ultimately determined that the director or officer is not entitled to
indemnification. The Bylaws further provide that rights conferred under such
Bylaws do not exclude any other right such persons may have or acquire under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
The Company's Certificate of Incorporation provides that, pursuant to
Delaware Law, its directors shall not be liable for monetary damages for breach
of the directors fiduciary duty of care to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware Law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
The Company has entered into agreements to indemnify its directors and
certain of its officers in addition to the indemnification provided for in the
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and certain of its officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of the Company, on account of services as a director or officer of
the Company, or as a director or officer of any other company or enterprise to
which the person provides services at the request of the Company.
46
<PAGE> 49
RELATIONSHIP BETWEEN THE
COMPANY AND ODETICS
Prior to this Offering, the Company has been a wholly owned subsidiary of
Odetics. As the sole stockholder, Odetics was responsible for providing the
Company with financial, management, administrative and other resources.
Furthermore, Odetics had maintained substantial control over the operations of
the Company. Accordingly, the Company has had no recent history of operating as
an independent entity.
Prior to this Offering, Odetics provided the Company with significant
management functions and services, including treasury, accounting, tax, internal
audit, legal, human resources, sales and marketing and other support services.
The Company was charged and/or allocated expenses of $1.4 million, $1.6 million
and $1.5 million for the years ended March 31, 1994, 1995 and 1996,
respectively, and $1.1 million for each of the nine month periods ended December
31, 1995 and 1996. The costs of these services have been directly charged and/or
allocated using methods that the Company's management believes are reasonable.
Such charges and allocations are not necessarily indicative of the costs the
Company would have incurred to obtain these services had it been a separate
entity. Neither Odetics nor the Company has conducted any study or obtained any
estimates from third parties to determine what the cost of obtaining such
services from third parties may have been. See Note 2 of Notes to Consolidated
Financial Statements.
The Company will pay to Odetics the lesser of 40% of the net proceeds of
this Offering before deducting estimated offering expenses or $10 million to
repay the Company's obligations to Odetics. Upon consummation of the Offering,
such obligations, which consist of advances from Odetics for services and
support provided to the Company and for additional working capital, were
approximately $19.6 million as of December 31, 1996. The Company will enter into
a Promissory Note payable to Odetics representing the balance of its obligation
to Odetics (which is estimated to be approximately $12.8 million assuming an
initial public offering price of $11 per share). Such note will accrue interest
at the lowest rate charged to Odetics by either of its principal lenders from
time to time (8.25% as of December 31, 1996). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Use of Proceeds."
The Company and Odetics have entered into a number of agreements for the
purpose of defining their continuing relationship. These agreements were
negotiated in the context of a parent-subsidiary relationship and therefore are
not the result of negotiations between independent parties. It is the intention
of the Company and Odetics that such agreements and the transactions provided
for therein, taken as a whole, should accommodate the parties' interests in a
manner that is fair to both parties, while continuing certain mutually
beneficial joint arrangements. The parties intend that such agreements and
transactions provide fair market value to them on terms no less favorable to the
Company as would otherwise be available from unaffiliated parties. Because of
the complexity of the various relationships between the Company and Odetics,
however, there can be no assurance that each of such agreements, or the
transactions provided for therein, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties. The agreements summarized in this section have been filed as exhibits
to the Registration Statement of which this Prospectus forms a part, and the
following summaries are qualified in their entirety by reference to the
agreements as filed. While these agreements will provide the Company with
certain benefits, the Company is only entitled to the ongoing assistance of
Odetics for a limited time and it may not enjoy benefits from its relationship
with Odetics beyond the term of the agreements. There can be no assurance that
the Company upon termination of such assistance from Odetics will be able to
provide adequately such services internally or obtain favorable arrangements
from third parties to replace such services. See "Risk Factors -- Absence of
History as an Independent Entity; Limited Relevance of Historical Financial
Information" and "-- Control by Odetics Pending the Distribution."
Additional or modified arrangements and transactions may be entered into by
the Company and Odetics upon consummation of this Offering. Any such future
arrangements and transactions will be determined through negotiation between the
Company and Odetics. The Company has adopted a policy that all future agreements
between the Company and Odetics will be on terms that the Company believes are
no less favorable to the Company than the terms the Company believes would be
available from unaffiliated parties. In that regard, the Company intends to
follow the procedures provided by the Delaware General Corporation
47
<PAGE> 50
Law which include a vote to affirm any such future agreements by a majority of
the Company's directors who are not employees of Odetics (even though such
directors may be less than a quorum). There can be no assurance that any such
arrangements or transactions will be the same as that which would be negotiated
between independent parties.
The following is a summary of certain prospective arrangements between the
Company and Odetics.
SEPARATION AND DISTRIBUTION AGREEMENT
The Separation and Distribution Agreement sets forth the agreements between
the Company and Odetics with respect to the principal corporate transactions
required to effect the Separation, the Offering and the Distribution, and
certain other agreements governing the relationship among the parties
thereafter. To effect the Separation, Odetics sold or agreed to sell all assets
related to the business of the Company to the Company. The Company has assumed
or agreed to assume and has agreed faithfully to perform and fulfill all related
liabilities and obligations. All assets conveyed have been transferred for a
purchase price equal to their respective book values, calculated in accordance
with generally accepted accounting principles, which the parties believe is
equivalent to the fair market value thereof.
The Separation and Distribution Agreement provides that, subject to the
terms and conditions thereof, Odetics and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied and to effect the Distribution. The Directors of Odetics will have
the sole discretion to determine the date of consummation of the Distribution.
Odetics has agreed to consummate the Distribution no later than December 31,
1997, subject to the satisfaction or waiver by its Board, in its sole
discretion, of the following conditions:
(i) a private letter ruling from the IRS shall have been obtained, and
shall continue in effect, to the effect that, among other things, the
Distribution will qualify as a tax free distribution for federal income tax
purposes under Section 355 of the Code, and such ruling shall be in form
and substance satisfactory to Odetics, in its sole discretion;
(ii) any material governmental approvals and consents necessary to
consummate the Distribution shall have been obtained and be in full force
and effect;
(iii) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect, and no other event
outside the control of Odetics shall have occurred or failed to occur that
prevents the consummation of the Distribution; and
(iv) no other events or developments shall have occurred that, in the
judgment of the Board of Directors of Odetics, would result in the
Distribution having a material adverse effect on Odetics or on its
stockholders.
Odetics has agreed to consummate the Distribution as promptly as
practicable following the satisfaction or waiver of all such conditions.
The Company and Odetics have agreed that, neither of the parties will take,
or permit any of their affiliates to take, any action which reasonably could be
expected to prevent the Distribution from qualifying as a tax free distribution
within the meaning of Section 355 of the Code. The parties have also agreed to
take any reasonable actions necessary for the Distribution to qualify as a tax
free distribution pursuant to Section 355 of the Code.
The Separation and Distribution Agreement also provides for a full and
complete release and discharge upon consummation of this Offering of all
liabilities existing or arising from all acts and events occurring or failing to
occur or alleged to have occurred or to have failed to occur and all conditions
existing or alleged to have existed on or before the Offering, between or among
the Company and its affiliates, on the one hand, and Odetics and its affiliates,
on the other hand (including any contractual agreements or arrangements existing
or alleged to exist between or among them on or before the Offering), except as
expressly set forth in the Separation and Distribution Agreement. Neither the
Company nor Odetics is aware of any such liabilities existing as of the date of
this Prospectus.
48
<PAGE> 51
The Company has agreed to indemnify, defend and hold Odetics and its
affiliates harmless from and against all liabilities relating to, arising out of
or resulting from (i) the failure of the Company or any other person to pay,
perform or otherwise promptly discharge any Company liabilities in accordance
with their respective terms, (ii) the Company's business, or any contract of the
Company, (iii) any breach by the Company or of the Separation and Distribution
Agreement or any ancillary agreements, and (iv) any untrue statement or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, with respect to all information contained in this
Prospectus or the Registration Statement of which it forms a part.
Odetics has agreed to indemnify, defend and hold the Company and its
affiliates from and against all liabilities relating to, arising out of or
resulting from (i) the failure of Odetics or any other person to pay, perform or
otherwise promptly discharge any liabilities of Odetics, (ii) the business of
Odetics or any contract of Odetics, and (iii) any breach by Odetics or any of
its affiliates of the Separation and Distribution Agreement or any ancillary
agreements. Neither the Company nor Odetics is aware of any liabilities existing
as of the date of this Prospectus which would give rise to an indemnification
obligation under the Separation and Distribution Agreement.
The Separation and Distribution Agreement also provides that during the
period prior to the Distribution, the Company will reimburse Odetics for its
proportionate share of premiums paid or accrued on insurance policies under
which the Company continues to have coverage.
SERVICES AGREEMENT
The Company and Odetics will enter into an administrative services
agreement (the "Services Agreement") upon consummation of this Offering,
pursuant to which Odetics will continue to provide limited services to the
Company, including treasury, accounting, tax, internal audit, legal and human
resources functions. The Company estimates its aggregate costs under the
Services Agreement for the fiscal year ended March 31, 1997 will be
approximately $500,000. The actual expenditures will depend on numerous factors,
some of which are beyond the Company's control. There can be no assurance that
the actual expenses will not be significantly greater than anticipated. See
"Risk Factors -- Absence of History as an Independent Entity; Limited Relevance
of Historical Financial Information."
TAX ALLOCATION AGREEMENT
The Company and Odetics will enter into a tax allocation agreement (the
"Tax Allocation Agreement") upon the consummation of this Offering, pursuant to
which the Company will make a payment to Odetics, or Odetics will make a payment
to the Company, as appropriate, of an amount in respect of taxes shown as due
attributable to the operations of the Company on the consolidated federal income
tax return and combined or consolidated state income or franchise tax returns
filed by Odetics for the short period commencing on April 1, 1997 and ending on
the date on which the Company ceases to be a member of the Odetics consolidated
group.
49
<PAGE> 52
PRINCIPAL STOCKHOLDER
Prior to the Offering, all of the outstanding shares of Common Stock will
be owned by Odetics. After the Offering, Odetics will own approximately 82.9% of
the Common Stock then outstanding (80.9% if the Underwriters' over-allotment
option is exercised in full). Except as described above, the Company is not
aware of any person or group who will beneficially own more than 1% of the
Common Stock following the Offering. The address for Odetics is 1515 South
Manchester Avenue, Anaheim, California 92802-2907.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 45,000,000 shares of
Common Stock, $.0001 par value per share, 5,000,000 shares of Class B Common
Stock, $.0001 par value per share, and 5,000,000 shares of Preferred Stock,
$.0001 par value per share.
The following summary of certain provisions of the Company's securities
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the Company's Certificate of Incorporation, which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part, and by the provisions of applicable law.
COMMON STOCK
The Company has authorized two classes of common stock. The rights,
preferences and privileges of each class of common stock are identical in all
respects except for voting rights. The Common Stock and the Class B Common Stock
are entitled to share equally in dividends from sources available therefor when
and if declared by the Board of Directors. See "Dividend Policy." In the event
of a liquidation, dissolution or winding up of the Company, holders of both
classes of common stock would be entitled to share ratably in all assets
remaining after the payment of liabilities and the liquidation preference of any
then outstanding Preferred Stock. Holders of both classes of common stock have
no preemptive rights and no rights to convert their shares of either class of
common stock into any other securities. There are no redemption rights or
sinking fund provisions applicable to either class of common stock. All shares
of each class of common stock are, and all shares to be sold and issued as
contemplated hereby will be, fully paid and nonassessable. The Board of
Directors is authorized to issue additional shares of each class of common stock
within the limits authorized by the Company's Certificate of Incorporation and
without any further stockholder action.
Class A Common Stock. As of December 31, 1996, 8,005,000 shares of Common
Stock were outstanding and held by Odetics. Each holder of Common Stock is
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders.
Class B Common Stock. As of December 31, 1996, no shares of Class B Common
Stock were outstanding. Each holder of Class B Common Stock is entitled to .05
votes for each share held of record on all matters submitted to a vote of the
stockholders. The Class B Common Stock is not convertible into the Common Stock.
The Class B Common Stock is not tradeable on any stock exchange and there is no
expectation an active trading market for the Class B Common Stock will ever be
established. The Company has granted options to purchase 879,000 shares of Class
B Common Stock under the 1996 Stock Incentive Plan and has reserved options to
purchase an additional 1,121,000 shares of Class B Common Stock under such plan.
See "Management -- 1996 Stock Incentive Plan."
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of either class of common stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of Preferred Stock.
50
<PAGE> 53
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
Law, an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of a
corporation's outstanding voting stock. This provision may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
National Bank of Boston.
LISTING
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "ATLPA."
51
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
The 1,650,000 shares sold in the Offering (1,895,000 if the Underwriters
exercise their over-allotment option in full) will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities Act")
except for any such shares which may be acquired by an "affiliate" of the
Company (an "Affiliate") as that term is defined in Rule 144 ("Rule 144")
promulgated under the Securities Act, which shares will remain subject to the
resale limitations of Rule 144.
The 8,005,000 shares of the Company's Common Stock that will continue to be
held by Odetics after the offering constitute "restricted securities" within the
meaning of Rule 144, and will be eligible for sale by Odetics in the open market
after the Offering, subject to certain contractual lockup provisions and the
applicable requirements of Rule 144, both of which are described below.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares of Common Stock for at least two years will be entitled to
sell on the open market in broker's transactions within any three month period a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of Common Stock and (b) the average weekly trading volume in
the Common Stock on the open market during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain notice requirements
and the availability of current public information about the Company.
In the event that any person other than Odetics who is deemed to be an
Affiliate purchases Common Stock pursuant to the Offering or acquires Common
Stock pursuant to an employee benefit plan of the Company, the shares held by
such person are required under Rule 144 to be sold in broker's transactions,
subject to the volume limitations described above. Shares properly sold in
reliance upon Rule 144 to persons who are not Affiliates are thereafter freely
tradeable without restriction or registration under the Securities Act.
Sales of substantial amounts of the Common Stock in the open market, or the
availability of such shares for sale, could adversely affect prevailing market
prices. Odetics has advised the Company that, subject to certain conditions,
Odetics intends to distribute its ownership interest in the Company to Odetics'
shareholders in mid 1997. The shares to be distributed by Odetics will be
eligible for immediate resale in the public market without restrictions by
persons other than Affiliates of the Company because while no registration of
such shares will be made, holders who are not Affiliates will be able to sell
their shares without restriction pursuant to Section 4(l) of the Securities Act.
Any Affiliates would be subject to the restrictions of Rule 144 other than the
two year holding period requirement.
The Company and Odetics have agreed, subject to certain exceptions, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
shares of Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Montgomery Securities. See
"Underwriters."
52
<PAGE> 55
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities and Cruttenden Roth Incorporated (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Montgomery Securities...................................................
Cruttenden Roth Incorporated............................................
---------
Total......................................................... 1,650,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters
initially propose to offer the Common Stock to the public on the terms set forth
on the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $ per share; and the Underwriters
may allow, and such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable for 30
calendar days after the date of this Prospectus, to purchase up to a maximum of
245,000 additional shares of Common Stock, solely to cover over-allotments. If
the Underwriters exercise this over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 1,650,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the 1,650,000 shares of
Common Stock.
The Company and its executive officers and directors and Odetics have
agreed not to offer, sell, contract to sell or dispose of any shares of Common
Stock or any securities convertible into or exchangeable for any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Montgomery Securities, except for securities issued
pursuant to its stock option plans. Montgomery Securities may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements.
The Underwriting Agreement provides that the Company has agreed to
indemnify the several Underwriters and their controlling persons against certain
liabilities, including liabilities under the Securities Act.
The Representatives have advised the Company that it does not intend to
confirm sales to discretionary accounts by the Underwriters in excess of 5% of
the total number of shares of Common Stock offered by them.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, are the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
53
<PAGE> 56
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP, Newport Beach,
California. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements and schedules of the Company at March 31, 1995 and
1996 and December 31, 1996, and for each of the three years in the period ended
March 31, 1996 and the nine months ended December 31, 1996, included in this
Prospectus and the Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. Certain items are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048, and copies of all or any part thereof. The
Registration Statement may be obtained from such office upon the payment of fees
prescribed by the Commission. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements which will be audited by its independent
auditors, and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.
54
<PAGE> 57
ATL PRODUCTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of ATL Products, Inc.
Report of Ernst & Young LLP, Independent Auditors.................................. F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996 and December 31, 1996.... F-3
Consolidated Statements of Operations for the years ended March 31, 1994, 1995 and
1996 and for the nine months ended December 31, 1995 (unaudited) and 1996....... F-4
Consolidated Statements of Net Capital Deficiency for the years ended March 31,
1994, 1995 and 1996 and for the nine months ended December 31, 1996............. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1994, 1995 and
1996 and for the nine months ended December 31, 1995 (unaudited) and 1996....... F-6
Notes to Consolidated Financial Statements......................................... F-7
Unaudited Pro Forma Consolidated Financial Information............................... F-15
Unaudited Pro Forma Consolidated Statement of Income for the nine months ended
December 31, 1996............................................................... F-16
Unaudited Pro Forma Consolidated Statement of Operations for the year ended March
31, 1996........................................................................ F-17
Notes to Unaudited Pro Forma Consolidated Financial Statements..................... F-18
</TABLE>
F-1
<PAGE> 58
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholder and Board of Directors
ATL Products, Inc.
We have audited the accompanying consolidated balance sheets of ATL
Products, Inc. (the Company), a wholly-owned subsidiary of Odetics, Inc.
(Parent), as of March 31, 1995 and 1996 and December 31, 1996, and the related
consolidated statements of operations, net capital deficiency, and cash flows
for each of the three years in the period ended March 31, 1996 and the nine
months ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 2, the Company has material transactions
with its Parent and affiliates.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ATL Products, Inc. at March 31, 1995 and 1996 and December 31, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996 and the nine months ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
January 29, 1997
F-2
<PAGE> 59
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 1 $ 1 $ 1
Trade accounts receivable, net of allowance for doubtful
accounts of $627 at March 1995, $662 at March 1996
and $229 at December 1996............................ 4,412 10,159 10,278
Inventories:
Finished goods....................................... 1,180 1,886 1,840
Work in process...................................... 347 487 654
Materials and supplies............................... 4,052 2,944 4,640
Prepaid expenses and other.............................. 109 71 75
------- -------- -------
Total current assets............................ 10,101 15,548 17,488
Leasehold improvements and equipment:
Leasehold improvements.................................. 356 -- 90
Equipment............................................... 2,043 2,541 3,404
Allowances for depreciation............................. (1,247) (1,341) (1,687)
------- -------- -------
1,152 1,200 1,807
------- -------- -------
Total assets.............................................. $11,253 $ 16,748 $ 19,295
======= ======== =======
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Trade accounts payable.................................. $ 1,444 $ 4,301 $ 4,161
Accrued payroll and related............................. 494 945 896
Income taxes payable.................................... -- -- 1,293
Other accrued expenses.................................. 322 552 1,543
Payable to Parent (Note 2).............................. 17,831 21,063 19,569
------- -------- -------
Total current liabilities....................... 20,091 26,861 27,462
Commitments and contingencies (Note 7)
Net capital deficiency (Notes 6):
Preferred stock, $.0001 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- none
Common stock, $.0001 par value:
Authorized shares -- 45,000,000 Class A;
5,000,000 Class B
Issued and outstanding shares -- 8,005,000
Class A at March 31, 1995 and 1996 and
December 31, 1996; no Class B...................... 1 1 1
Additional paid in capital........................... 1,009 1,009 1,009
Accumulated deficit..................................... (9,848) (11,123) (9,183)
Cumulative translation adjustment....................... -- -- 6
------- -------- -------
Net capital deficiency.................................... (8,838) (10,113) (8,167)
------- -------- -------
Total liabilities and net capital deficiency.............. $11,253 $ 16,748 $ 19,295
======= ======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 60
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------ ---------------------
1994 1995 1996 1996
-------- -------- -------- 1995 -------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Net product sales......................... $ 15,534 $ 15,445 $ 18,076 $ 9,747 $36,264
Service and spare parts................... 4,972 6,743 4,615 3,180 4,185
Sales to affiliates (Note 2).............. -- 453 4,742 3,175 1,466
-------- -------- -------- -------- --------
Total net sales................... 20,506 22,641 27,433 16,102 41,915
Cost of sales:
Product sales............................. 12,398 11,935 12,205 7,149 22,412
Service and spare parts................... 3,319 4,648 3,181 2,389 2,021
Sales to affiliate (Note 2)............... -- 340 2,956 2,060 974
-------- -------- -------- -------- --------
Total cost of sales............... 15,717 16,923 18,342 11,598 25,407
-------- -------- -------- -------- --------
Gross profit................................ 4,789 5,718 9,091 4,504 16,508
Expenses:
Research and development.................. 2,285 3,248 1,731 1,275 3,751
Sales and marketing....................... 1,308 1,838 2,719 1,561 4,462
General and administrative................ 1,195 1,299 1,298 951 1,382
Charges allocated by Parent (Note 2)...... 1,354 1,563 1,534 1,108 1,113
Nonrecurring charge (Note 3).............. -- 4,042 1,392 873 --
-------- -------- -------- -------- --------
Income (loss) from operations............... (1,353) (6,272) 417 (1,264) 5,800
Interest charge allocated by Parent......... 542 1,243 1,861 1,379 1,301
-------- -------- -------- -------- --------
Income (loss) before income taxes........... (1,895) (7,515) (1,444) (2,643) 4,499
Income taxes (Note 4)....................... -- -- -- -- 1,799
-------- -------- -------- -------- --------
Net income (loss)........................... $ (1,895) $ (7,515) $ (1,444) $ (2,643) $ 2,700
======== ======== ======== ======== ========
Net income (loss) per share (Note 1)........ $ (.22) $ (.89) $ (.17) $ (.31) $ .32
======== ======== ======== ======== ========
Shares used in computation of net income
(loss) per share.......................... 8,484 8,484 8,484 8,484 8,484
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 61
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
-------------- PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
----- ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993.............. 8,005 $ 1 $1,009 $ (347) $ -- $ 663
Allocation to Parent................. -- -- -- (316) -- (316)
Net loss............................. -- -- -- (1,895) -- (1,895)
----- --- ------ -------- ---- --------
Balance at March 31, 1994.............. 8,005 1 1,009 (2,558) -- (1,548)
Allocation to Parent................. -- -- -- 225 -- 225
Net loss............................. -- -- -- (7,515) -- (7,515)
----- --- ------ -------- ---- --------
Balance at March 31, 1995.............. 8,005 1 1,009 (9,848) -- (8,838)
Allocation to Parent................. -- -- -- 169 -- 169
Net loss............................. -- -- -- (1,444) -- (1,444)
----- --- ------ -------- ---- --------
Balance at March 31, 1996.............. 8,005 1 1,009 (11,123) -- (10,113)
Foreign currency translation
adjustment........................ -- -- -- -- 6 6
Allocation to Parent................. -- -- -- (760) -- (760)
Net income........................... -- -- -- 2,700 -- 2,700
----- --- ------ -------- ---- --------
Balance at December 31, 1996........... 8,005 $ 1 $1,009 $ (9,183) $ 6 $ (8,167)
===== === ====== ======== ==== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 62
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- ---------------------
1994 1995 1996 1995 1996
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................. $(1,895) $(7,515) $(1,444) $(2,643) $ 2,700
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 330 458 450 339 346
Provision for losses on accounts
receivable................................ 75 648 39 29 163
Write-down of inventories.................... -- 2,015 -- -- --
Foreign currency translation adjustment...... -- -- -- -- 6
Changes in operating assets and liabilities
(Note 9).................................. (3,050) (1,494) (1,948) 1,084 (8)
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities................................... (4,540) (5,888) (2,903) (1,191) 3,207
INVESTING ACTIVITIES
Purchases of property, plant and equipment..... (923) (283) (498) (155) (953)
------- ------- ------- ------- -------
Net cash used in investing activities.......... (923) (283) (498) (155) (953)
FINANCING ACTIVITIES
Net cash received from (paid to) Parent........ 5,463 6,171 3,401 1,346 (2,254)
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities................................... 5,463 6,171 3,401 1,346 (2,254)
------- ------- ------- ------- -------
Net change in cash............................. -- -- -- -- --
Cash at beginning of period.................... 1 1 1 1 1
------- ------- ------- ------- -------
Cash at end of period.......................... $ 1 $ 1 $ 1 $ 1 $ 1
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 63
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
ATL Products, Inc. (the Company), a wholly owned subsidiary of Odetics,
Inc. (Parent), designs, manufactures, markets and services automated magnetic
libraries used to manage, store and transfer data in networked computing
environments. The Company's customers are original equipment manufacturers,
value added resellers and storage system integrators located primarily in North
America and Europe. The Company has formed a wholly owned subsidiary, ATL
Products Limited (APL), which effective July 1, 1996 distributes the Company's
products in Europe.
Basis of Presentation
The accompanying financial statements include the accounts of the Company
and its subsidiary. Effective December 31, 1996, the Parent transferred to the
Company the portion of its business that provided worldwide service and support
for the Company's products. The transfer was made at book value and resulted in
the Company obtaining net assets with a carrying value of $2.3 million related
to the service and support operations and a corresponding increase in the amount
due to Parent. The financial information for the service and support operations
has been included in the Company's financial statements for all periods because
the transfer was treated in a manner similar to a pooling of interests for
financial accounting purposes. The net income or loss from these operations for
periods prior to December 31, 1996 has been retained by the Parent and are
reflected as "Allocation to Parent" in the accompanying consolidated statements
of net capital deficiency. Intercompany balances and transactions have been
eliminated.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, inventory reserves and income tax
valuation allowances.
Revenue Recognition
Sales and related cost of sales are recognized on the date of shipment or,
if required, upon acceptance by the customer.
Fair Values of Financial Instruments
The fair value of amounts payable to Parent approximates its carrying value
because interest charges thereon are based on the prevailing market rates of
interest charged to the Parent under related borrowings.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are recorded at cost. Leasehold
improvements are amortized on a straight-line basis over the life of the lease.
Equipment is depreciated principally by the declining balance method over its
estimated useful lives (four to eight years).
F-7
<PAGE> 64
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS No. 121), in March 1995. SFAS
No. 121 requires long-lived assets and certain intangibles held and used by the
Company to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability test is to be performed at the lowest level at
which undiscounted net cash flows can be directly attributable to long-lived
assets. The Company adopted SFAS No. 121 on April 1, 1996 with no material
effect on the Company's financial statements.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
To calculate the pro forma information required by Statement 123, the
Company uses the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's option, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Earnings Per Share
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the year. In
accordance with the accounting rules of the Securities and Exchange Commission,
stock options issued by the Company in the twelve month period prior to the
Company's initial public offering have been included in the calculation of
common and common equivalent shares as if they were outstanding for all periods
presented, computed using the treasury stock method and the assumed initial
offering price.
Research and Development Expenditures
Research and development expenditures are charged to expense in the period
incurred.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expenses
totaled $31,000, $106,000, $121,000 and $251,000 in the years ended March 31,
1994, 1995 and 1996, and in the nine months ended December 31, 1996,
respectively.
Income Taxes
The Company is included in the consolidated federal income tax return with
its Parent. The Company and the Parent have entered into a tax sharing
arrangement whereby income taxes are computed in accordance with consolidated
return Section 1552(a)(1) of the Internal Revenue Code. Under this allocation,
F-8
<PAGE> 65
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the consolidated tax liability for a given tax year is allocated only to
companies in the group which have separate taxable income for that year. The tax
liability is allocated pro rata based on each Company's relative separate
taxable income. Companies with losses are not allocated any of the tax liability
and are not given any benefit for their losses.
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities based on
enacted tax laws and rates applicable to the period in which differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to amounts which are more likely than
not to be realized. The provision for income taxes consists of the taxes payable
or refundable for the period plus or minus the change during the period in
deferred income tax assets and liabilities.
Warranty
The Company provides a one year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The Company
has reserved $221,000, $100,000, $183,000 and $293,000 representing the
Company's estimated warranty liability at March 31, 1994, 1995 and 1996, and
December 31, 1996, respectively.
Interim Financial Information
The financial statements for the nine months ended December 31, 1995 are
unaudited and condensed, but include all adjustments (consisting of only normal
recurring adjustments) which the Company considers necessary for a fair
statement of the financial position, operating results and cash flows for the
interim periods. Results for the interim periods are not necessarily indicative
of results to be expected for the entire year.
2. TRANSACTIONS WITH PARENT AND AFFILIATES
Prior to the formation of APL on July 1, 1996, the Company distributed its
products in Europe through a wholly owned subsidiary of the Parent, Odetics
Europe, Limited (OEL). Sales to OEL were consummated at prices and terms agreed
upon annually and are reported in the accompanying statements of operations as
sales to affiliates.
During fiscal 1994 and 1995 the Company purchased components for certain
discontinued products from the Odetics Broadcast Division of its Parent.
Component purchases from affiliates totaled $1,576,000 and $1,196,000 for the
years ended March 31, 1994 and 1995, respectively.
The Company and its Parent have entered into an agreement whereby the
Company is charged for certain corporate general and administrative functions
performed by the Parent. These charges are included in the caption "Charges
allocated by Parent" in the accompanying consolidated statements of operations
and consist of certain accounting, auditing, income tax, payroll and treasury
functions; administration of employee incentive programs; marketing support;
facilities management; certain legal services; and other support services.
Charges are allocated to the Company based on actual amounts incurred on behalf
of the Company or agreed upon amounts or percentages that management of the
Company believes are reasonable.
The Parent also manages consolidated domestic cash flows. Pursuant to this
cash management program the Company transfers any accumulated cash surplus to
the Parent's accounts and the Parent funds cash disbursements, as needed, to
maintain minimum account balances. The Company and its Parent have entered
F-9
<PAGE> 66
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
into an agreement whereby the Parent charges the Company interest based on the
Company's net payable to the Parent balance calculated using the Parent's cost
of related borrowed funds (8.25% at December 31, 1996).
The net payable to Parent represents the net of the following transactions:
cash advances to and from the Parent in connection with cash management policy;
proceeds from sales to affiliates; payments for purchases from affiliates; and
corporate charges for general corporate overhead and interest.
3. NONRECURRING CHARGES
In December 1994, the Company recorded nonrecurring charges of $4,042,000
related to downsizing and restructuring in response to a deterioration in the
Company's contractual relationship with E-Systems, Inc., which was then a major
customer. The fiscal 1995 charges consisted of a $3,694,000 write-down of
inventories and accounts receivable to net realizable value, $283,000 of
severance costs and other charges and $65,000 of legal fees. In fiscal 1996 the
Company incurred an additional $1,392,000 of legal fees associated with the
E-Systems dispute (Note 7).
4. INCOME TAXES
As a result of its tax sharing agreement with the Parent (Note 1), the
Company has received no tax benefit from its losses and through March 31, 1996
has not paid or accrued federal or state income taxes. The Company's taxable
losses through March 31, 1996 have been used to offset the Parent's taxable
income for such periods and as a result are not available to provide any tax
benefit in future periods.
The Company expects to report taxable income in the year ending March 31,
1997 and therefore has provided income taxes at a combined estimated effective
tax rate of 40% for the nine month period ended December 31, 1996 consisting of
federal taxes of 34% and state taxes, net of federal benefit, of 6%. If the
Company had filed separate income tax returns in prior years, its taxable loss
carryforwards would have been available to offset anticipated income and,
therefore, no provision for federal income taxes would have been necessary.
The components of the Company's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............................. $ -- $ (24) $ (23)
------- ------- -------
Total deferred tax liabilities.................. -- (24) (23)
Deferred tax assets:
Inventory reserves...................................... 1,598 1,899 1,429
Deferred compensation and other payroll................. 175 215 220
Warranty reserves....................................... 40 73 118
Bad debt reserve........................................ 252 266 92
Other................................................... 26 19 103
------- ------- -------
Total deferred tax assets....................... 2,091 2,472 1,962
Valuation allowance for deferred tax assets............... (2,091) (2,448) (1,939)
------- ------- -------
Net deferred tax assets................................... -- 24 23
------- ------- -------
Net deferred tax assets (liabilities)..................... $ -- $ -- $ --
======= ======= =======
</TABLE>
F-10
<PAGE> 67
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Any future benefits recognized from the reduction of the valuation
allowance will result in a reduction of income tax expense.
5. EMPLOYEE INCENTIVE PROGRAMS
Under the terms of the Parent's Profit Sharing Plan, the Company
contributes to a trust fund such amounts as are determined annually by the
Company's Board of Directors. No contributions were made in the years ended
March 31, 1994, 1995 or 1996 or in the nine months ended December 31, 1996.
The Company's employees participate in the Parent's 401(k) Plan. Under the
401(k) Plan, eligible employees voluntarily contribute to the plan up to 15% of
their salary through payroll deductions. The Company matches 50% of
contributions up to a stated limit. Under the provisions of the 401(k) Plan,
employees have four investment choices, one of which is the purchase of Odetics,
Class A common stock at market price. Company matching contributions were
approximately $50,000, $109,000, $115,000 and $103,000 in the years ended March
31, 1994, 1995 and 1996 and the nine months ended December 31, 1996,
respectively.
The Company's employees with more than six months of eligible service
participate in the Parent's noncontributory Associate Stock Ownership Plan
(ASOP). The ASOP provides that Company contributions, which are determined
annually by the Board of Directors, may be in the form of cash or shares of the
Parent's stock. The Company contributions to the ASOP were approximately
$97,000, $0, $98,000 and $0 in the years ended March 31, 1994, 1995 and 1996 and
the nine months ended December 31, 1996, respectively.
Certain executives of the Company participate in the Parent's Executive
Deferral Plan under which a portion of their annual compensation may be
deferred. The plan guarantees each executive a minimum annual return of 10% for
deferred amounts up to $20,000 annually through 1994. Effective April 1, 1994,
all subsequent deferred amounts and previous annual amounts in excess of $20,000
have no guaranteed rate of return. Compensation charged to operations and
deferred under the plan totaled $20,000, $20,000, $20,000 and $15,000 for the
years ended March 31, 1994, 1995 and 1996 and the nine months ended December 31,
1996, respectively.
6. COMMON STOCK AND STOCK OPTION PLANS
On December 19, 1996, the Company was reincorporated as a Delaware
corporation and effected a recapitalization in which two classes of common stock
were authorized, consisting of 45,000,000 shares of Class A common stock and
5,000,000 shares of Class B common stock, and each share of the Company's no par
common stock was recapitalized into 8,005 shares of Class A common stock, par
value $.0001 per share. All share and per share information included in the
accompanying financial statements has been restated to reflect the
reincorporation and the stock split. Class A and Class B common stock are
identical in all respects except voting rights. The Class A common stock has one
vote per share while Class B common stock has .05 of one vote per share.
The Company's Board of Directors and its Parent have adopted and approved
the ATL Products, Inc. 1996 Stock Incentive Plan (the Plan), authorized
2,000,000 shares of the Company's Class B common stock for issuance under the
Plan, and granted thereunder options to purchase 879,000 shares of Class B
common stock at an exercise price of $5.00 per share. The options were granted
on December 19, 1996, vest over a three year period, and none are exercisable as
of December 31, 1996. Under terms of the Plan, eligible key employees, directors
and consultants can receive options to purchase shares of the Company's common
stock at prices not less than 100% for incentive stock options and not less than
85% for nonqualified stock options of the fair value on the date of grant as
determined by the Board of Directors. Options expire ten years after date of
grant or 90 days after termination of employment.
F-11
<PAGE> 68
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In calculating pro forma information regarding net income and net income
per share, as required by Statement 123, the fair value was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's Class B common
stock: risk-free interest rate of 6.5%; a dividend yield of 0%; volatility of
the expected market price of the Company's common stock of .40; and a
weighted-average expected life of the option of 4 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the nine months ended December 31, 1996 follows (in
thousands, except per share information):
<TABLE>
<S> <C>
Pro forma net income............................................ $2,688
Pro forma net income per share.................................. $ .32
</TABLE>
The Company also participates in its Parent's Associate Stock Option Plan
which provides that options for shares of the Parent's unissued Class A common
stock may be granted to employees of the Company. Options granted enable the
option holder to purchase shares of Odetics Class A common stock at prices which
are equal to or greater than the fair market value of the shares at the date of
grant. Options for shares have been granted at prices ranging from $4.38 to
$9.00 per share of the Parent's Class A common stock representing in each case
the fair market value at the date of grant. Options expire ten years after date
of grant or 90 days after termination of employment and vest ratably at 33% or
25% on each of the first three or four anniversaries of the grant date,
respectively, depending on the date of grant.
7. COMMITMENTS AND CONTINGENCIES
In November 1994 and February 1995 the Parent and E-Systems, Inc.
(E-Systems), respectively filed legal actions related to E-Systems' cancellation
of purchase orders for ATL Product's DataLibrary and DataTower products. In May
1996, the parties entered into a settlement agreement under which, among other
things, E-Systems agreed to pay the Parent $6,160,000, all claims asserted by
the parties were released and the litigation dismissed. In addition, the parties
agreed to an equitable disposition of disputed inventory and entered into a five
year service agreement for Odetics to service units that had been sold to
E-Systems at agreed upon prices. The Parent allocated $3,964,000 of the
settlement proceeds to the Company and retained the balance of the settlement to
provide for the estimated cost of service obligations under the settlement
agreement. As a result, the Company recovered the net carrying value of its
accounts receivable and inventories related to the E-Systems litigation and
recognized no gain or loss on the settlement.
The Company and its Parent are co-borrower and cross-guarantor under a loan
agreement with the Parent's banks. Virtually all of the Company's assets have
been pledged as collateral under the agreement. The maximum credit facility is
$17.0 million of which $9.4 million was outstanding at December 31, 1996.
The Company has leased and plans to relocate to a new facility in Irvine,
California during the first calendar quarter of 1997. The annual commitment
under this noncancelable operating lease at December 31, 1996 is as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................................ $ 789
1998................................................................ 833
1999................................................................ 877
2000................................................................ 922
2001................................................................ 966
Thereafter.......................................................... 1,975
</TABLE>
F-12
<PAGE> 69
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SEGMENT AND SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
The Company operates in one industry segment (Note 1). Sales to major
customers in the years ended March 31, 1994, 1995 and 1996 and the nine months
ended December 31, 1996, and the related accounts receivable balances at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SALES DECEMBER
---------------------------------------- 31, RECEIVABLE BALANCE
CUSTOMER 1994 1995 1996 1996 AT DECEMBER 31, 1996
- -------- ---------- ---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
A $ -- $ -- $ -- $5,427,000 $2,246,000
B 1,950,000 4,996,000 5,306,000 3,822,000 533,000
C 6,433,000 8,747,000 -- -- --
D 3,372,000 -- -- -- --
</TABLE>
No other customer represented more than 10% of the Company's annual sales.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and within amounts provided through
the allowances for doubtful accounts.
Information regarding the Company's activities by geographical region for
the nine months ended December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE
------- ------
<S> <C> <C>
Sales............................................................. $37,473 $4,442
Net income(loss).................................................. 2,772 (72)
Identifiable assets............................................... 16,578 2,717
</TABLE>
Prior to July 1, 1996 the Company had no foreign operations. All products
sold by the Company's subsidiary in Europe are acquired from ATL at agreed upon
transfer prices.
Export sales to all foreign customers, other than to OEL (Note 2),
principally in Canada and Australia, were approximately $22,000, $811,000,
$1,389,000 and $1,603,000 in the years ended March 31, 1994, 1995 and 1996, and
nine months ended December 31, 1996, respectively.
An integral component of the Company's products is a data library tape
drive that is available from a single supplier. Demand for the supplier tape
drives is high and it is possible that in the near term the supply of tape
drives could be disrupted. Any disruption of the supply of tape drives would
cause delays in production that may be detrimental to the Company's financial
performance.
F-13
<PAGE> 70
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ------------------
1994 1995 1996 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) changes in
operating assets and liabilities:
(Increase) decrease in accounts
receivable.............................. $(2,011) $ 217 $(5,786) $ (713) $ (282)
(Increase) decrease in inventories......... (2,658) (1,102) 262 (258) (1,817)
(Increase) decrease in prepaid expenses and
other assets............................ (47) (11) 38 (16) (4)
Increase (decrease) in accounts payable and
accrued expenses........................ 1,666 (598) 3,538 2,071 2,095
------ ------ ------ ------ ------
Net cash provided by (used in) changes in
operating assets and liabilities:.......... $(3,050) $(1,494) $(1,948) $ 1,084 $ (8)
====== ====== ====== ====== ======
</TABLE>
F-14
<PAGE> 71
ATL PRODUCTS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
In connection with this offering of the Company's common stock, the Company
assumed responsibility for the sale of its products in Europe effective July 1,
1996 by establishing its own wholly owned subsidiary, ATL Products Ltd. (APL)
An unaudited pro forma consolidated balance sheet of the Company as of
December 31, 1996 is not presented because all assets and liabilities of APL are
reflected in the historical balance sheet of the Company at December 31, 1996.
The following unaudited pro forma consolidated statements of income for the
nine months ended December 31, 1996 and for the year ended March 31, 1996 have
been prepared as if the Company had formed APL at the beginning of each period
presented and processed all European sales through that subsidiary.
The information with respect to the Company in the following unaudited pro
forma statements has been derived from the consolidated financial statements of
the Company appearing elsewhere in this Prospectus. The information with respect
to the statement of income for ATL European operations has been derived from the
unaudited income statement of Odetics Europe, Ltd. for the three months ended
June 30, 1996 and for the year ended March 31, 1996. The pro forma adjustments
necessary to present fairly the Company's pro forma results of operations are
based on available information and certain assumptions considered reasonable in
the circumstances.
The pro forma consolidated financial information should be read in
conjunction with the historical consolidated financial statements of the Company
and notes thereto and management's discussion thereof contained elsewhere in
this Prospectus. The pro forma operating results are not necessarily indicative
of actual operating results that would have occurred had the transactions
occurred as of the beginning of the period indicated, nor do they purport to
indicate the results of operations as of any future date or period.
F-15
<PAGE> 72
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ATL ATL PRO FORMA
PRODUCTS, INC. EUROPEAN ADJUSTMENTS PRO FORMA
HISTORICAL OPERATIONS AND ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Net product sales......................... $ 36,264 $2,003 $ -- $ 38,267
Service and spare parts................... 4,185 -- -- 4,185
Sales to affiliates....................... 1,466 -- (1,466)(1) --
-------- ------ -------- --------
Total net sales...................... 41,915 2,003 (1,466) 42,452
Cost of sales:
Product sales............................. 22,412 1,500 (492)(1) 23,420
Service and spare parts................... 2,021 -- -- 2,021
Sales to affiliates....................... 974 -- (974)(1) --
-------- ------ -------- --------
25,407 1,500 (1,466) 25,441
-------- ------ -------- --------
Gross profit................................... 16,508 503 17,011
Expenses:
Research and development..................... 3,751 3,751
Sales and marketing.......................... 4,462 265 4,727
General and administrative................... 1,382 50 1,432
Charges allocated by parent.................. 1,113 1,113
-------- ------ -------- --------
Income from operations......................... 5,800 188 5,988
Interest charges allocated by parent........... 1,301 1,301
-------- ------ -------- --------
Income before income taxes..................... 4,499 188 4,687
Income taxes................................... 1,799 75 1,874
-------- ------ -------- --------
Net income..................................... $ 2,700 $ 113 -- $ 2,813
======== ====== ======== ========
Net income per share........................... $ .32 $ .33
======== ========
Shares used in computation of income
per share.................................... 8,484 8,484
======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE> 73
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
ATL ATL
PRODUCTS, INC. EUROPEAN PRO FORMA PRO FORMA
HISTORICAL OPERATIONS ADJUSTMENTS CONSOLIDATED
-------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales:
Net product sales............................ $ 18,076 $6,719 $ -- $ 24,795
Service and spare parts...................... 4,615 -- -- 4,615
Sales to affiliates.......................... 4,742 -- (4,742)(1) --
-------- ------ ------- --------
Total net sales......................... 27,433 6,719 (4,742) 29,410
Cost of sales:
Product sales................................ 12,205 5,263 (1,786)(1) 15,682
Service and spare parts...................... 3,181 -- -- 3,181
Sales to affiliates.......................... 2,956 -- (2,956)(1) --
-------- ------ ------- --------
18,342 5,263 (4,742) 18,863
Gross profit...................................... 9,091 1,456 10,547
Expenses:
Research and development........................ 1,731 1,731
Sales and marketing............................. 2,719 999 3,718
General and administrative...................... 1,298 116 1,414
Charges allocated by parent..................... 1,534 1,534
Nonrecurring charge............................. 1,392 1,392
-------- ------ ------- --------
Income from operations............................ 417 341 758
Interest charges allocated by parent.............. 1,861 1,861
-------- ------ ------- --------
Income before income taxes........................ (1,444) 341 (1,103)
Income taxes...................................... -- 86 86
-------- ------ ------- --------
Net income (loss)................................. $ (1,444) $ 255 -- $ (1,189)
======== ====== ======= ========
Net income (loss) per share....................... $ (.17) $ (.14)
======== ========
Shares used in computation of income (loss)
per share....................................... 8,484 8,484
======== ========
</TABLE>
See accompanying notes.
F-17
<PAGE> 74
ATL PRODUCTS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Represents the elimination of sales and related intercompany profit on sales
from the Company to Odetics, for the year ended March 31, 1996 and the nine
months ended December 31, 1996. Those sales were made at intercompany prices
established by agreement between the Company and Odetics.
F-18
<PAGE> 75
ATL PROVIDES STORAGE AUTOMATION
FOR THE OPEN ENTERPRISE
[Artwork consists of a system diagram of a complex enterprise
with multiple levels of networking featuring a number of
the Company's products.]
<PAGE> 76
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative or any 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 or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the shares of Common
Stock to which it relates or an offer to, or a solicitation of, any person in
any jurisdiction in which such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 28
Management........................... 39
Relationship between the Company and
Odetics............................ 47
Principal Stockholder................ 50
Description of Securities............ 50
Shares Eligible for Future Sale...... 52
Underwriting......................... 53
Legal Matters........................ 54
Experts.............................. 54
Additional Information............... 54
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
----------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,650,000 SHARES
[ATL PRODUCTS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
CRUTTENDEN ROTH
INCORPORATED
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee. All of the
expenses below will be paid by the Registrant.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Registration fee.......................................................... $ 6,891
NASD filing fee........................................................... 2,774
Nasdaq National Market listing (entry) fee................................ 42,250
Blue Sky fees and expenses................................................ 7,500
Printing and engraving expenses........................................... 105,000
Legal fees and expenses................................................... 200,000
Accounting fees and expenses.............................................. 140,000
Transfer Agent and Registrar fees......................................... 7,500
Miscellaneous............................................................. 63,085
--------
Total........................................................... $575,000
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws (Exhibit 3.3 hereto) provides that the
Registrant shall indemnify its directors and officers to the fullest extent
permitted by Delaware law. The Bylaws require the Registrant, subject to certain
limitations, to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the directors and
officers to repay such advances if it is ultimately determined that the
directors or officers are not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws shall not be deemed to be
exclusive of any other right such persons may have or acquire under any
agreement, vote of stockholders or disinterested directors, or otherwise. The
Registrant believes that indemnification under its Bylaws covers at least
negligence and gross negligence.
In addition, the Registrant's Certificate of Incorporation (the
"Certificate") (Exhibit 3.1 hereto) provides that the Registrant shall indemnify
its directors and officers if such persons acted (i) in good faith, (ii) in a
manner reasonably believed to be in or not opposed to the best interests of the
Registrant, and (iii) with respect to any criminal action or proceeding, with
reasonable cause to believe such conduct was lawful. The Certificate also
provides that, pursuant to Delaware law, its directors shall not be liable for
monetary damages for breach of the directors' fiduciary duty of care to the
Registrant and its stockholders. This provision in the Certificate does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Certificate further
provides that the Registrant be authorized
II-1
<PAGE> 78
to indemnify its directors and officers to the fullest extent permitted by law
through the Bylaws, agreement, vote of stockholders or disinterested directors,
or otherwise.
The Registrant intends to obtain directors' and officers' liability
insurance in connection with this Offering.
In addition, the Registrant has entered or, concurrently with this
Offering, will enter, into agreements to indemnify its directors and certain of
its officers in addition to the indemnification provided for in the Certificate
and Bylaws. These agreements will, among other things, indemnify the
Registrant's directors and certain of its officers for certain expenses
(including attorneys fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Registrant, on account of services by that person as a director or
officer of the Registrant or as a director or officer of any subsidiary of the
Registrant, or as a director or officer of any other company or enterprise that
the person provides services to at the request of the Registrant.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant, its officers and
directors and by the Registrant of the Underwriter, for certain liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1996, the Registrant has sold and issued the following
unregistered securities:
1. In December 1996, the Registrant granted nonstatutory stock options
to certain employees of the Registrant under its 1996 Stock Incentive Plan
covering an aggregate of 879,000 shares of the Registrant's Class B Common
Stock, at an exercise price of $5.00 per share. These options vest over a
three year period commencing one year following the date of grant. All of
such options were issued in consideration for employment services rendered
to the Registrant. None of the optionees paid any cash consideration for
these options. The sale and issue of these securities was deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were offered and sold either pursuant
to a written compensatory benefit plan or pursuant to written contract
relating to compensation, as provided by Rule 701.
2. In December 1996, the Registrant effected a reincorporation in
Delaware which included a recapitalization in which two classes of common
stock were authorized, and each share of the Registrant's no par Common
Stock was exchanged for 8,005 shares of Common Stock, par value $.0001 per
share. Such issuance was exempt from registration under Section 2(3) of the
Securities Act on the basis that such transaction did not involve a "sale"
of securities.
There were no underwriters, brokers or finders employed in connection with
any of the transactions set forth above.
II-2
<PAGE> 79
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation of the Registrant as filed with the Delaware Secretary
of State on December 19, 1996.**
3.2 Certificate of Merger of the Registrant as filed with the Delaware Secretary of
State on December 19, 1996.**
3.3 Bylaws of the Registrant.**
4.1 Specimen certificate representing shares of Common Stock of the Registrant.
4.2 1996 Stock Incentive Plan.
4.3 Form of Notice of Grant of Stock Option and related Stock Option Agreement under
1996 Stock Incentive Plan.**
5.1 Form of Opinion of Brobeck, Phleger & Harrison LLP.**
10.1 Form of Indemnification Agreement.**
10.2 Real Property lease, dated October 9, 1996, by and between Thomas M. Zapara and
Violet J. Zapara, Trustees of the Zapara Family Trust U/D/T dated December 7, 1995
and Registrant, a wholly owned subsidiary of Odetics, Inc.
10.3 Form of Separation and Distribution Agreement between the Registrant and Odetics.**
10.4 Form of Tax Allocation Agreement between the Registrant and Odetics.**
10.5 Form of Services Agreement between the Registrant and Odetics.**
10.6 Form of Value Added Reseller Agreement.**
10.7 Form of International Value Added Reseller Agreement.**
10.8 Technical Support Agreement dated May 6, 1996, between Technology Service Solutions
and Odetics, Incorporated, as amended May 7, 1996.+**
10.9 Tape Library OEM Purchase Agreement dated August 28, 1996, between Quantum
Corporation and Registrant.+**
10.10 Veritas Software License Agreement, dated November 8, 1996, between Veritas Software
Corporation and Registrant.+**
10.11 Agreement dated December 18, 1995, between Hewlett-Packard GmbH Local Products
Organization and Registrant.+**
10.12 Basic Order Agreement dated April 15, 1993, between Digital Equipment Corporation
and Odetics, Inc. and Registrant, as amended January 11, 1994, March 25, 1994,
October 19, 1994, October 27, 1994 and January 12, 1995.+**
10.13 Basic Ordering Agreement dated September 14, 1995 between EMC(2) Corporation and
Registrant.+**
10.14 Form of Promissory Note between the Registrant and Odetics.**
10.15 Form of Odetics Associate Agreement.**
10.16 Commitment Letter Agreement dated December 19, 1996 between the Registrant and
Imperial Bank.
10.17 Commitment Letter Agreement dated December 20, 1996 among the Registrant, Imperial
Bank and Comerica Bank -- California.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1).
24.1 Power of Attorney.**
27.1 Financial Data Schedules.
</TABLE>
- ---------------
* to be filed by amendment
** previously filed
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
II-3
<PAGE> 80
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE
- ------------
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted as to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of the registration statement in reliance upon Rule 430A and contained
in the 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 the registration statement as of the time it was declared
effective;
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing as specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Anaheim, State of California, on the 31st day of
January, 1997.
ATL PRODUCTS, INC.
By: /s/ KEVIN C. DALY
--------------------------------------
Kevin C. Daly, Ph.D.
Chief Executive Officer, President
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Amendment No. 2 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------- --------------------------------- ------------------
<S> <C> <C>
/s/ KEVIN C. DALY
- --------------------------------- Chief Executive Officer, January 31, 1997
Kevin C. Daly, Ph.D. President and Chairman of the
Board
(principle executive officer)
*
- --------------------------------- Director January 31, 1997
Joel Slutzky
*
- --------------------------------- Director January 31, 1997
Crandall Gudmundson
/s/ GREGORY A. MINER
- --------------------------------- Chief Financial Officer January 31, 1997
Gregory A. Miner (principal
financial and accounting officer)
*By: /s/ KEVIN C. DALY
---------------------------
Kevin C. Daly, Ph.D.
(Attorney-in-fact)
</TABLE>
II-5
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
ATL Products, Inc.
We have audited the financial statements of ATL Products, Inc. as of March
31, 1995 and 1996, and for each of the three years in the period ended March 31,
1996, and have issued our report thereon dated January 29, 1997 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
January 29, 1997
S-1
<PAGE> 83
SCHEDULE II
ATL PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGES
BEGINNING COSTS AND TO OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1994
Deducted from assets accounts:
Allowance for doubtful accounts.... $ -- $ 75 $ -- $ -- $ 75
Reserve for inventory
obsolescence.................... -- 363 -- 300 63
------ ------ ------ --- ------
Total...................... $ -- $ 438 $ -- $300 $ 138
====== ====== ====== === ======
YEAR ENDED MARCH 31, 1995
Deducted from assets accounts:
Allowance for doubtful accounts.... $ 75 $ 648 $ -- $ 96 $ 627
Reserve for inventory
obsolescence.................... 63 4,080 -- 161 3,982
------ ------ ------ --- ------
Total...................... $ 138 $4,728 $ -- $257 $ 4,609
====== ====== ====== === ======
YEAR ENDED MARCH 31, 1996
Deducted from assets accounts:
Allowance for doubtful accounts.... $ 627 $ 38 $ -- $ 3 $ 662
Reserve for inventory
obsolescence.................... 3,982 750 -- -- 4,732
------ ------ ------ --- ------
Total...................... $4,609 $ 788 $ -- $ 3 $ 5,394
====== ====== ====== === ======
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ --------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement**...........................................
3.1 Certificate of Incorporation of the Registrant as filed with the Delaware
Secretary of State on December 19, 1996**..................................
3.2 Certificate of Merger of the Registrant as filed with the Delaware
Secretary of State on December 19, 1996**..................................
3.3 Bylaws of the Registrant**.................................................
4.1 Specimen certificate representing shares of Common Stock of the
Registrant.................................................................
4.2 1996 Stock Incentive Plan..................................................
4.3 Form of Notice of Grant of Stock Option and related Stock Option Agreement
under 1996 Stock Incentive Plan**..........................................
5.1 Form of Opinion of Brobeck, Phleger & Harrison LLP**.......................
10.1 Form of Indemnification Agreement**........................................
10.2 Real Property lease, dated October 9, 1996, by and between Thomas M. Zapara
and Violet J. Zapara, Trustees of the Zapara Family Trust U/D/T dated
December 7, 1995 and Registrant, a wholly owned subsidiary of Odetics,
Inc........................................................................
10.3 Form of Separation and Distribution Agreement between the Registrant and
Odetics**..................................................................
10.4 Form of Tax Allocation Agreement between the Registrant and Odetics**......
10.5 Form of Services Agreement between the Registrant and Odetics**............
10.6 Form of Value Added Reseller Agreement**...................................
10.7 Form of International Value Added Reseller Agreement**.....................
10.8 Technical Support Agreement dated May 6, 1996, between Technology Service
Solutions and Odetics, Incorporated, as amended May 7, 1996+**.............
10.9 Tape Library OEM Purchase Agreement dated August 28, 1996, between Quantum
Corporation and Registrant+**..............................................
10.10 Veritas Software License Agreement, dated November 8, 1996, between Veritas
Software Corporation and Registrant+**.....................................
10.11 Agreement dated December 18, 1995, between Hewlett-Packard GmbH Local
Products Organization and Registrant+**....................................
10.12 Basic Order Agreement dated April 15, 1993, between Digital Equipment
Corporation and Odetics, Inc. and Registrant, as amended January 11, 1994,
March 25, 1994, October 19, 1994, October 27, 1994 and January 12,
1995+**....................................................................
10.13 Basic Ordering Agreement dated September 14, 1995 between EMC(2)
Corporation and Registrant+**..............................................
10.14 Form of Promissory Note between the Registrant and Odetics**...............
10.15 Form of Odetics Associate Agreement**......................................
10.16 Commitment Letter Agreement dated December 19, 1996 between the Registrant
and Imperial Bank..........................................................
10.17 Commitment Letter Agreement dated December 20, 1996 among the Registrant,
Imperial Bank and Comerica Bank -- California..............................
11.1 Statement Regarding Computation of Earnings Per Share......................
23.1 Consent of Independent Auditors............................................
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1)......
24.1 Power of Attorney**........................................................
27.1 Financial Data Schedules...................................................
</TABLE>
- ---------------
* to be filed by amendment
** previously filed
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 4.1
CLASS A COMMON STOCK CLASS A COMMON STOCK
ATL PRODUCTS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR
BOSTON, MA OR NEW YORK, NY CERTAIN DEFINITIONS
CUSIP 00207M 10 2
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS A COMMON STOCK,
PAR VALUE $.0001 PER SHARE, OF
--------------------------ATL PRODUCTS, INC.------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
ATL PRODUCTS, INC.
(CORPORATE SEAL)
1996
DELAWARE
/s/ James A. Pipp /s/ Kevin C. Daly
----------------- -----------------
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
BY [SIG]
-------------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
-------- ---------
TEN ENT - as tenants by the (Cust) (Minor)
entireties
under Uniform Gifts to
JT TEN - as joint tenants with Minors Act
right of survivorship ---------------
and not as tenants (State)
in common
UNIF TRF MIN ACT - Custodian (until age )
------ --
(Cust)
under Uniform Transfers
-------
(Minor)
to Minors Act
-----------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
-----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the Class A Common Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
--------------------
X
---------------------------------------------------
X
---------------------------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
NOTICE: WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
-------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 4.2
ATL PRODUCTS, INC.
1996 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Incentive Plan is intended to promote the interests
of ATL Products, Inc., a Delaware corporation, by providing eligible persons
with the opportunity to acquire a proprietary interest, or otherwise increase
their proprietary interest, in the Corporation as an incentive for them to
remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Class B Common Stock,
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares of
Class B Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary), and
(iii) the Automatic Option Grant Program under which
eligible non-employee Board members shall automatically receive option grants at
periodic intervals to purchase shares of Class B Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE> 2
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Effective with the Section 12 Registration Date, the Primary Committee shall
have sole and exclusive authority to administer the Discretionary Option Grant
and Stock Issuance Programs with respect to Section 16 Insiders. Administration
of the Discretionary Option Grant and Stock Issuance Programs with respect to
all other persons eligible to participate in those programs may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee, or the
Board may retain the power to administer those programs with respect to all such
persons.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
E. Administration of the Automatic Option Grant shall be
self-executing in accordance with the terms of those programs, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under those programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
2.
<PAGE> 3
(ii) non-employee members of the Board or the board
of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
to be paid for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members after the Plan Effective Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (ii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant Program at the time he or she
first becomes a non-employee Board member, but shall be eligible to receive
periodic option grants under the Automatic Option Grant Program while he or she
continues to serve as a non-employee Board member.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Class B Common Stock, including shares repurchased by
the Corporation on the open market. The maximum number of shares of Class B
Common Stock initially reserved for issuance over the term of the Plan shall not
exceed two million (2,000,000) shares.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than two hundred fifty
3.
<PAGE> 4
thousand (250,000) shares of Class B Common Stock in the aggregate per calendar
year, beginning with the 1997 calendar year.
C. Shares of Class B Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent those
options expire or terminate for any reason prior to exercise in full. Unvested
shares issued under the Plan and subsequently repurchased by the Corporation, at
the original issue price paid per share, pursuant to the Corporation's
repurchase rights under the Plan shall be added back to the number of shares of
Class B Common Stock reserved for issuance under the Plan and shall accordingly
be available for reissuance through one or more subsequent option grants or
direct stock issuances under the Plan. However, should the exercise price of an
option under the Plan be paid with shares of Class B Common Stock or should
shares of Class B Common Stock otherwise issuable under the Plan be withheld by
the Corporation in satisfaction of the withholding taxes incurred in connection
with the exercise of an option or the vesting of a stock issuance under the
Plan, then the number of shares of Class B Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Class B Common Stock issued to the holder of such option or
stock issuance.
D. If any change is made to the Class B Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Class B Common
Stock as a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities for which
any one person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under this Plan per calendar
year, (iii) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan. Such adjustments to the outstanding options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
4.
<PAGE> 5
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Class B Common Stock on the option grant date.
However, if the person to whom the option is granted is a 10% Stockholder, then
the exercise price per share shall not be less than one hundred ten percent
(110%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
or
(ii) shares of Common Stock or Class B Common Stock held
for the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market Value
on the Exercise Date.
Should the Class B Common Stock be registered under Section 12(g) of the
1934 Act at the time the option is exercised, then the exercise price for
any vested shares purchased under the option may be paid through a special
sale and remittance procedure pursuant to which the Optionee shall
concurrently provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares to such
brokerage firm in order to complete the sale.
5.
<PAGE> 6
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from
the limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
6.
<PAGE> 7
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect
to one or more additional installments in which the Optionee would have
vested had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. UNVESTED SHARES. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Class B Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, all or (at the discretion of the Corporation and with the consent of the
Optionee) any of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
any option grant or any shares of Class B Common Stock subject to the option
which is more restrictive than twenty percent (20%) per year vesting, with the
initial vesting to occur not later than one (1) year after the option grant
date.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options designated as Non-Statutory Options when issued under the Plan
shall not be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may be granted only to Employees.
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Class B Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which
7.
<PAGE> 8
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Class B Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Class B Common Stock. Subject to Section
III.E. of this Article Two, an unvested outstanding option shall not so
accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation (or
parent thereof) or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the Class B Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also
8.
<PAGE> 9
be made to (i) the exercise price payable per share under each outstanding
option, provided the aggregate exercise price payable for such securities shall
remain the same, (ii) the maximum number and/or class of securities available
for issuance over the remaining term of the Plan and (iii) the maximum number
and/or class of securities for which any one person may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan per calendar year.
E. Notwithstanding Section III.A. of this Article Two, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed or replaced in the
Corporate Transaction. In addition, the Plan Administrator shall have the
discretionary authority to structure one or more of the Corporation's repurchase
rights so that those rights shall not be assignable in connection with a
Corporate Transaction and shall accordingly terminate upon the consummation of
such Corporate Transaction, and the shares subject to those terminated
repurchase rights shall immediately vest in full, whether or not the options
under which those shares are purchasable are to be assumed by the successor
corporation.
F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed or replaced and do not otherwise accelerate. Any options so
accelerated shall remain exercisable for fully-vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of the one
(1)-year period measured from the effective date of the Involuntary Termination.
In addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights so that those
repurchase rights shall immediately terminate with respect to any shares held by
the Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated rights shall accordingly vest in full.
G. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one ore
more outstanding options under the Discretionary Option Grant Program upon (i) a
Change in Control or (ii) the subsequent termination of the Optionee's Service
by reason of an Involuntary Termination within a designated period (not to
exceed eighteen (18) months) following the effective date of such Change in
Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Optionee's cessation of Service. In addition, the Plan Administrator shall have
the discretionary authority to structure one or more of the
9.
<PAGE> 10
Corporation's repurchase rights so that those repurchase rights shall
immediately terminate with respect to any shares held by the Optionee at the
time of such Change in Control or Involuntary Termination, and the shares
subject to those terminated rights shall accordingly vest in full.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or
different number of shares of Class B Common Stock but with an exercise price
per share equal to the Fair Market Value per share of Class B Common Stock on
the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have the authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Class B Common Stock
and the surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price payable
for such shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of
10.
<PAGE> 11
Class B Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to
the later of (a) five (5) business days after the receipt of the rejection
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Takeover, each individual
holding one or more options with such a limited stock appreciation right
shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Takeover) to surrender each such option to
the Corporation, to the extent the option is at the time exercisable for
vested shares of Class B Common Stock. In return for the surrendered
option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Takeover Price of
the shares of Class B Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) The Plan Administrator shall pre-approve, at the time
the limited right is granted, the subsequent exercise of that right in
accordance with the terms of the grant and the provisions of this Section
V. No additional approval of the Plan Administrator or the Board shall be
required at the time of the actual option surrender and cash distribution.
(iv) The balance of the option (if any) shall remain outstanding
and exercisable in accordance with the documents evidencing such option.
11.
<PAGE> 12
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Class B Common Stock may be issued under the Stock
Issuance Program through direct and immediate issuances without any intervening
option grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Class B Common Stock on the issuance date. However,
the purchase price per share of Common Stock issued to a 10% Stockholder shall
not be less than one hundred and ten percent (110%) of such Fair Market Value.
2. Subject to the provisions of Section I of Article Five,
shares of Class B Common Stock may be issued under the Stock Issuance Program
for any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation,
or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Class B Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Class B Common Stock by reason of any stock dividend, stock
split, recapitalization, combination of shares, exchange of
12.
<PAGE> 13
shares or other change affecting the outstanding Class B Common Stock as a class
without the Corporation's receipt of consideration shall be issued subject to
(i) the same vesting requirements applicable to the Participant's unvested
shares of Class B Common Stock and (ii) such escrow arrangements as the Plan
Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Class B Common Stock issued to the Participant under
the Stock Issuance Program, whether or not the Participant's interest in those
shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Class B Common Stock issued under the
Stock Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Class B Common Stock, then those
shares shall be immediately surrendered to the Corporation for cancellation, and
the Participant shall have no further stockholder rights with respect to those
shares. The Corporation shall repay to the Participant any cash consideration
paid for the surrendered shares and shall cancel the unpaid principal balance of
any outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Class B Common
Stock which would otherwise occur upon the cessation of the Participant's
Service or the non-attainment of the performance objectives applicable to those
shares. Such waiver shall result in the immediate vesting of the Participant's
interest in the shares as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Class B Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Corporate Transaction, except to the extent (i)
those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed in the Stock
Issuance Agreement.
B. Notwithstanding Section II.A. of this Article Three, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation's
repurchase rights with respect to those shares remain outstanding under the
Stock Issuance Program, to structure one or more of those repurchase rights so
that such rights shall not be assignable in connection with a Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated repurchase
rights shall immediately vest in full, in the event
13.
<PAGE> 14
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
repurchase rights are assigned to the successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding under the Stock Issuance Program, to structure one or more of those
repurchase rights so that such rights shall automatically terminate in whole or
in part, and the shares of Class B Common Stock subject to those terminated
rights shall immediately vest, upon (i) a Change in Control or (ii) the
subsequent termination of the Participant's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control or Involuntary
Termination.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
14.
<PAGE> 15
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Plan Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase ten thousand (10,000) shares of Class B Common
Stock, provided that individual is not then in the employ of the Corporation or
any Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a
non-employee Board member, whether or not that individual is standing for
re-election to the Board at that particular Annual Meeting, shall automatically
be granted a Non-Statutory Option to purchase seven thousand (7,000) shares of
Class B Common Stock. There shall be no limit on the number of such 7,000-share
option grants any one non-employee Board member may receive over his or her
period of Board service, and non-employee Board members who have previously been
in the employ of the Corporation (or any Parent or Subsidiary) shall be eligible
to receive one or more such annual option grants over their period of continued
Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Class B Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each initial 10,000-share option
grant shall be immediately exercisable for any or all of the option shares as
fully-vested shares of Class B Common Stock and shall remain so exercisable
until the expiration or sooner termination of the option term. Each annual
7,000-share option grant shall also be immediately exercisable for any or all of
the option shares. However, the shares of Class B Common Stock purchased under
each annual 7,000-share option grant shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to
15.
<PAGE> 16
vesting in those shares. Each annual 7,000-share grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) successive
equal annual installments upon the Optionee's completion of each year of Board
service over the four (4)-year period measured from the option grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Class B Common Stock for which the option is exercisable
at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully- vested shares of Class B Common Stock.
(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Board
service for any reason other than death or Permanent Disability, terminate
and cease to be outstanding to the extent the option is not otherwise at
that time exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE
TAKEOVER
A. In the event of any Corporate Transaction, the shares of Class B
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Class B Common Stock
16.
<PAGE> 17
at the time subject to such option and may be exercised for all or any portion
of those shares as fully-vested shares of Class B Common Stock. Immediately
following the consummation of the Corporate Transaction, each automatic option
grant shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Class B
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Class B Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Class B Common Stock. Each such option shall remain
exercisable for such fully-vested option shares until the expiration or sooner
termination of the option term or the surrender of the option in connection with
a Hostile Takeover.
C. Upon the occurrence of a Hostile Takeover, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Takeover Price of the shares of Class B Common Stock at the
time subject to each surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution shall be paid within five
(5) days following the surrender of the option to the Corporation. Shareholder
approval of the Plan shall constitute pre-approval of the grant of each such
option surrender right under this Automatic Option Grant Program and the
subsequent exercise of such right in accordance with the terms and provisions of
this Section II.C. No additional approval of the Board or any Plan Administrator
shall be required at the time of the actual option surrender and cash
distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
17.
<PAGE> 18
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
18.
<PAGE> 19
ARTICLE FIVE
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Class B Common
Stock upon the exercise of options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Class B Common Stock
under the Plan (other than the options granted or the shares issued under the
Automatic Option Grant Program) with the right to use shares of Class B Common
Stock in satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options or the vesting of their shares.
Such right may be provided to any such holder in either or both of the following
formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Class B Common Stock otherwise issuable upon the
exercise of such Non-Statutory Option or the vesting of such shares, a portion
of those shares with an aggregate Fair Market Value equal to the percentage of
the Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Class B Common Stock or Common Stock previously acquired by such
holder (other than in connection with the option exercise or share vesting
triggering the Taxes) with an aggregate Fair Market Value equal
19.
<PAGE> 20
to the percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date, and options may be granted under the Discretionary Option Grant
and Automatic Option Grant Programs at any time on or after the Plan Effective
Date. However, no options granted under the Plan may be exercised, and no shares
shall be issued under the Stock Issuance Program, until the Plan is approved by
the Corporation's stockholders. If such stockholder approval is not obtained
within twelve (12) months after the Plan Effective Date, then all options
previously granted under the Discretionary Option Grant or Automatic Option
Grant Program shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall terminate upon the earliest of (i) December 18,
2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such a
clause (i) plan termination, any outstanding option grants and unvested stock
issuances shall thereafter continue to have force and effect in accordance with
the provisions of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Class B Common Stock may be granted
under the Discretionary Option Grant Program and shares of Class B Common Stock
may be issued under the Stock Issuance Program that are in each instance in
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held in
escrow until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Class B Common Stock available for issuance
under the Plan. If such stockholder approval is not obtained within twelve (12)
months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
20.
<PAGE> 21
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Class B Common Stock under the Plan shall be used for general
corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Class B Common Stock (i) upon
the exercise of any granted option or (ii) under the Stock Issuance Program
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the shares of Class B Common Stock issued pursuant
to it.
B. No shares of Class B Common Stock or other assets shall be issued
or delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws, including
the filing and effectiveness of the Form S-8 registration statement for the
shares of Class B Common Stock issuable under the Plan, and all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Class B Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
21.
<PAGE> 22
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. CLASS B COMMON STOCK shall mean the Corporation's Class B common stock.
F. COMMON STOCK shall mean the Corporation's common stock.
G. CORPORATE TRANSACTION shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons
1.
<PAGE> 23
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
H. CORPORATION shall mean ATL Products, Inc., a Delaware corporation, and
any successor corporation which shall assume the Plan and the outstanding
options and stock issuances under the Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Class B Common Stock or Common Stock on
any relevant date shall be determined in accordance with the following
provisions:
(i) If the Class B Common Stock or Common Stock is at the time
traded on the Nasdaq National Market, then the Fair Market Value shall be
deemed equal to the closing selling price per share of Class B Common
Stock or Common Stock on the date in question, as such price is reported
on the Nasdaq National Market or any successor system. If there is no
closing selling price for the Class B Common Stock or Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Class B Common Stock or Common Stock is at the time
listed on any Stock Exchange, then the Fair Market Value shall be deemed
equal to the closing selling price per share of Class B Common Stock or
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Class B Common
Stock or Common Stock, as such price is officially quoted in the composite
tape of transactions on such exchange. If there is no closing selling
price for the Class
A-2.
<PAGE> 24
B Common Stock or Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(iii) If the Fair Market Value of Class B Common Stock or Common
Stock is not determinable pursuant to subparagraph (i) or (ii) of this
provision, then the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it shall deem
appropriate.
N. HOSTILE TAKEOVER shall mean the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning of
Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders which the Board does not recommend such stockholders
to accept.
O. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and target
bonus under any corporate-performance based bonus or incentive programs)
by more than fifteen percent (15%) or (C) a relocation of such
individual's place of employment by more than fifty (50) miles, provided
and only if such change, reduction or relocation is effected by the
Corporation without the individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner.
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
A-3.
<PAGE> 25
T. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Automatic Option Grant or Director Fee Option Grant
Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Class B
Common Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
X. PLAN shall mean the Corporation's 1996 Stock Incentive Plan, as set
forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. PLAN EFFECTIVE DATE shall mean December 19, 1996, the date on which the
Plan was adopted by the Board.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AB. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AC. SECTION 12 REGISTRATION DATE shall mean the date on which the Class B
Common Stock is first registered under Section 12(g) of Section 16 of the 1934
Act.
A-4.
<PAGE> 26
AD. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AE. SERVICE shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AF. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
AG. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Class B
Common Stock under the Stock Issuance Program.
AH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.
AI. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AJ. TAKEOVER PRICE shall mean the greater of (i) the Fair Market Value per
share of Class B Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Takeover or (ii) the highest reported
price per share of Class B Common Stock paid by the tender offeror in effecting
such Hostile Takeover. However, if the surrendered option is an Incentive
Option, the Takeover Price shall not exceed the clause (i) price per share.
AK. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Class B Common Stock in connection with the exercise of those options
or the vesting of those shares.
AL. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AM. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-5.
<PAGE> 27
AN. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-6.
<PAGE> 1
Exhibit 10.2
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes
only, October 9, 1996, is made by and between Thomas M. Zapara
and Violet J. Zapara, Trustees of the Zapara Family Trust U/D/T
dated December 7, 1995 ("Lessor") and ATL Products, Inc., a
California corporation, a wholly owned subsidiary of ODETICS,
Inc., a California corporation ("Lessee"), (collectively the
"Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this
Lease, and commonly known by the street address of 2801 Kelvin
Avenue, Irvine, located in the county of Orange, State of
California, and generally described as (describe briefly the
nature of the property) an approximate 123,412 square foot
industrial building, together with a separate parking area, more
particularly described on Exhibit "A" attached hereto and
incorporated herein by this reference ("Premises"). (See
Paragraph 2 for further provisions.)
1.3 Term: Seven (7) years and -0- months ("Original Term")
commencing November 1, 1996 ("Commencement Date") and ending
October 31, 2003 ("Expiration Date"). (See Paragraph 3 for
further provisions.)
1.4 Early Possession: Upon mutual execution of this Lease ("Early
Possession Date"). (See Paragraphs 3.2 and 3.3 for further
provisions.)
1.5 Base Rent: $65,408.36 per month ("Base Rent"), payable on the
first day of each month commencing November 1, 1996, subject to
the terms of the Addendum attached hereto. (See Paragraph 4 for
further provisions.)
/X/ If this box is checked, there are provisions in this Lease
for the Base Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $65,408.36 as Base Rent for the
period November 1 through November 30, 1996.
1.7 Security Deposit: $65,408.36 ("Security Deposit"). (See
Paragraph 5 for further provisions.)
1.8 Permitted Use: Electronic assembly, warehousing and other
related uses. (See Paragraph 6 for further provisions.)
1.9 Insuring Party: Lessee is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist
in this transaction and are consented to by the Parties (check
applicable boxes):
Lee & Associates, c/o John Matus and Dennis Highland represents
/X/ Lessor exclusively ("Lessor's Broker");
/ / both Lessor and Lessee, and
CB Commercial, c/o Pat Cavanaugh represents
/X/ Lessee exclusively ("Lessee's Broker");
/ / both Lessee and Lessor.
(See Paragraph 15 for further provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by ODETICS, Inc., a California corporation
("Guarantor"). (See Paragraph 37 for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 57 and Exhibits "A" and "B" all of which
constitute a part of this Lease.
<PAGE> 2
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental,
and upon all of the terms, covenants and conditions set forth in
this Lease. Unless otherwise provided herein, any statement of
square footage set forth in this Lease, or that may have been
used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not
subject to revision whether or not the actual square footage is
more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee
that the existing plumbing, fire sprinkler system, lighting, air
conditioning, heating, and loading doors, if any, in the
Premises, other than those constructed by Lessee, shall be in
good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a of non-compliance with this
warranty within thirty (30) days after the Commencement Date,
correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code.
Lessor warrants to Lessee that the improvements on the Premises
comply with all applicable covenants or restriction of record
and applicable building codes, regulations and ordinances in
effect on the Commencement Date (See Addendum). Said warranty
does not apply to the use to which Lessee will put the Premises
or to any Alterations or Utility Installations (as defined in
Paragraph 7.3(a)) made or to be made by Lessee. If the Premises
do not comply with said warranty, Lessor shall, except as
otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specifically the
nature and extent of such non-compliance, rectify the same at
Lessor's expense. If Lessee does not give Lessor written notice
of a non-compliance with this warranty with six (6) months
following the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it
has been advised by the Brokers to satisfy itself with respect
to the condition of the Premises (including but not limited to
the electrical and fire sprinkler systems, security,
environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability
of the Premises for Lessee's intended use, (b) that Lessee has
made such investigation as it deems necessary with reference to
such matters and accepts the Premises in their "as is" condition
(except as otherwise provided in the Lease), and (c) that
neither Lessor, nor any of Lessor's agents, has made any oral
or written representations or warranties with respect to the
said matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately
prior to the date set forth in Paragraph 1.1 Lessee was the
owner or occupant of the Premises. In such event, Lessee shall,
at Lessee's sole cost and expense, correct any non-compliance of
the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early
possession. All other terms of this Lease, however, (including
but not limited to the obligations to pay Real Property Taxes
and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not
affect nor advance the Expiration Date of the Original Term.
<PAGE> 3
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the
Early Possession Date, if one is specified in Paragraph 1.4, or,
if no Early Possession Date is specified, by the Commencement
Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the
obligations of Lessee hereunder, or extend the term hereof, but
in such case, Lessee shall not, except as otherwise provided
herein, be obligated to pay rent or perform any other obligation
of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after
the Commencement Date, Lessee may, at its option, by notice in
writing to Lessor within ten (10) days thereafter, cancel this
Lease, in which event the Parties shall be discharged from all
obligations hereunder; provided, however, that if such written
notice by Lessee is not received by Lessor within said ten (10)
day period, Lessee's right to cancel this Lease shall terminate
and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the term actually commences, if
possession is not tendered to Lessee when required by this Lease
and Lessee does not terminate this Lease, as aforesaid, the
period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of
delivery of possession and continue for a period equal to what
Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions
of Lessee.
4. Rent
4.1 Base Rent. Lessee shall cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time,
to be received by Lessor in lawful money of the United States,
without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent
and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based
upon the actual number of days of the calendar month involved.
Payment of Base Rent and other charges shall be made to Lessor
at its address stated herein or to such other persons or at such
other addresses as Lessor may from time to time designate in
writing to Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee
fails to pay Base Rent or other rent or charges due hereunder, or otherwise
Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use,
apply or retain all or any portion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor properly uses or
applies all or any portion of said Security Deposit, Lessee shall within
ten (10) days after written request therefor deposit moneys with Lessor
sufficient to restore said Security Deposit to the full amount required by
this Lease. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, or Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be
considered to be held in trust, to bear interest or other increment for its
use, or to be prepayment for any moneys to be paid by Lessee under this
Lease.
6. Use
6.1 Use. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is
comparable thereto, and for no other purpose. Lessee shall not
use or permit the use of the Premises in a manner that creates
waste or a nuisance, or that disturbs owners and/or occupants
of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessees assignees or
subtenants, and by prospective assignees and subtenants of the
Lessee, its assignees and subtenants, for a modification of said
permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural
integrity of the improvements on the Premises, the mechanical or
electrical systems therein, is not significantly more burdensome
to the Premises and
<PAGE> 4
the improvements thereon, and is otherwise permissible pursuant
to this Paragraph 6. If Lessor elects to withhold such consent,
Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation
of Lessor's reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product,
substance, chemical, material or waste whose presence,
nature, quantity and/or intensity of existence, use
manufacture, disposal, transportation, spill, release or
effect, either by itself or in combination with other
materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or
monitored by any governmental authority, or (iii) a basis
for liability of Lessor to any governmental agency or third
party under any applicable statute or common law theory.
Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any
products, by-products or fractions thereof. Lessee shall not
engage in any activity in, on or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of
Hazardous Substances without the express prior written
consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i)
the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that
requires a permit from, or with respect to which a report,
notice, registration or business plan is required to be
filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in,
on or about the Premises of a Hazardous Substance with
respect to which any Applicable Law requires that a notice
be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing,
Lessee may, without Lessor's prior consent, but in
compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by Lessee
in the normal course of Lessee's business permitted on the
Premises, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to
any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may
(but without any obligation to do so) condition its consent
to the use or presence of any Hazardous Substance, activity
or storage tank by Lessee upon Lessee's giving Lessor such
additional assurances as Lessor, in its reasonable
discretion, deems necessary to protect itself, the public,
the Premises and the environment against damage,
contamination or injury and/or liability therefrom or
therefor, including but not limited to, the installation
(and removal on or before Lease expiration or earlier
termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements)
and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition
involving or resulting from same, has come to be located in,
on, under or about the Premises, other than as previously
consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report,
notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received
from, any governmental authority or private party, or
persons entering or occupying the Premises, concerning the
presence, spill, release, discharge of, or exposure to, any
Hazardous Substance or contamination in, on, or about the
Premises, including but not limited to all such documents as
may be involved in any Reportable Uses involving the
Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground
lessor, if any, and the Premises, harmless from and against
any and all loss of rents and/or damages, liabilities,
judgments, costs, claims, liens, expenses, penalties,
permits and attorney's and consultant's fees arising out of
our involving any Hazardous Substance or storage tank
brought onto the Premises by or for Lessee or under Lessee's
control. Lessee's obligations under this Paragraph 6 shall
include, but not be limited
<PAGE> 5
to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee,
and the cost of investigation (including consultant's and
attorney's fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into
by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous
Substances or storage tanks, unless specifically so agreed
by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in
this Lease, Lessee, shall, at Lessee's sole cost and expense,
fully, diligently and in a timely manner, comply with all
"Applicable Law," which term is used in this Lease to include
all laws, rules, regulations, ordinances, directives, covenants,
easements and restrictions of record, permits, the requirements
of any applicable fire insurance underwriter or rating bureau,
and the recommendations of Lessor's engineers and/or
consultants, relating in any manner to the Premises (including
but not limited to matter pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii)
the use, generation, manufacture, production, installation,
maintenance, removal, transportation, storage, spill or release
of any Hazardous Substance or storage tank), now in effect or
which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing
policy. Lessee shall, within five (5) days after receipt of
Lessor's written request, provide Lessor with copies of all
documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable
Law specified by Lessor, and shall immediately upon receipt,
notify Lessor in writing (with copies of any documents involved)
of any threatened or actual claim, notice, citation, warning,
compliant or report pertaining to or involving failure by Lessee
or the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance, Lessor and Lessor's Lender(s) (as
defined in Paragraph 8.3 (a)) shall have the right to enter the
Premises at any time, in the case of an emergency, and otherwise
at reasonable times, upon reasonable prior notice to Lessee, for
the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease and all
Applicable Laws (as defined in Paragraph 6.3), and to employ
experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but
not limited to the installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a
Default or Breach of this Lease, violation of Applicable Law, or
a contamination, caused or materially contributed to by Lessee
is found to exist or be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result
of any such existing or imminent violation or contamination. In
any such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses
of such inspections.
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to
compliance with covenants, etc.).
7.2 (Lessor's obligations to repair), 9 (damage and destruction),
and 14 (condemnation), and except as otherwise provided in the
Addendum. Lessee shall, at Lessee's sole cost and expense and at
all times, keep the Premises and every part thereof in good
order, condition and repair, structural and non-structural
whether or not such portion of the Premises requiring repairs,
or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises) including,
without limiting the generality of the foregoing, all equipment
or facilities serving the Premises, such as plumbing, heating,
air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire sprinkler
and/or standpipe and hose
<PAGE> 6
or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire
hydrants, fixtures, walls (interior and exterior), foundations,
ceilings, roofs, floor, windows, doors, plate glass, skylights
landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent
to the Premises. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer
system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended,
whether or not formally ordered of required, for the cleanup of
any contamination of, and for the maintenance, security, and/or
monitoring of the Premises, the elements surrounding same, or
neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the
Premises by or for Lessee or under its control. Lessee, in
keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's
obligations shall include restorations, replacements or renewals
when necessary to keep the Premises and all improvements thereon
or a part thereof in good order, condition and state of repair.
If Lessee occupies the Premises for seven (7) years or more,
Lessor may require Lessee to repaint the exterior of the
buildings on the Premises as reasonably required, but not more
frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form
and substance for, and with contractors specializing and
experienced in, the inspection, maintenance and service of
the following equipment and improvements, if any, located on
the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels,
(iii) fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing systems, including fire alarm
and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi)
asphalt and parking lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements
of Lessor contained in Paragraphs 2.2 (relating to condition of
the Premises), 2.3 (relating to compliance with covenants,
restrictions and building code), 9 (relating to destruction of
the Premises) and 14 (relating to condemnation of the Premises),
and except as otherwise provided in the Addendum. It is intended
by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether
structural or non structural, all of which obligations are
intended to be that of the Lessee under paragraph 7.1 hereof. It
is the intention of the Parties that the terms of this Lease
govern the respective obligations of the Parties as to
maintenance and repair of the Premises. Lessee and Lessor
expressly waive the benefit of any statue now or hereafter in
effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by
reason of any needed repairs.
This section 7.3 shall not apply to the "Lessee Improvements",
which shall be handled as provided in the Addendum.
7.3 Utility installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in Lease to refer to all carpeting,
window coverings, air lines, power panels, electrical
distribution, security, fire protection systems,
communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing and
fencing in, on or about the Premises. The term "Trade
Fixtures" shall mean Lessee's machinery and equipment that
can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification
of the improvements on the Premises from that which are
provided by Lessor under the terms of this Lease, other than
Utility Installations or Trade Fixtures, whether by addition
or deletion. "Lessee Owned Alterations and/or Utility
Installations" are defined as Alterations and/or Utility
Installations made by lessee that are not yet owned by
Lessor as defined in Paragraph 7.4(a). Lessee shall not make
any Alterations or Utility Installations in, on, under or
about the Premises
<PAGE> 7
without Lessor's prior written consent. Lessee may, however,
make non-structural Utility Installations to the interior of
the Premises (excluding the roof), as long as they are not
visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and
the cumulative cost thereof during the term of this Lease as
extended does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of
the Lessor shall where appropriate be presented to Lessor in
written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by
subsequent specific consent, shall be deemed conditioned
upon: (i) Lessee's acquiring all applicable permits required
by governmental authorities, (ii) the furnishing of copies
of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to
Lessor prior to commencement of the work thereon, and (iii)
the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or
Utility Installations by Lessee during the term of this
Lease shall be done in a good and workmanlike manner, with
good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may (but without obligation
to do so) condition its consent to any requested Alteration
or Utility Installation that costs $10,000 or more upon
Lessee's providing Lessor with a lien and completion bond in
an amount equal to the estimated cost of such Alteration or
Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor under Paragraph 36
hereof.
(c) Indemnification. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been
furnished to or for Lessee at or for use on the Premises,
which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor no less than ten (10)
day's notice prior to the commencement of any work in, on or
about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy
any such adverse judgment that may be rendered thereon
before the enforcement thereof against the Lessor or the
Premises. If Lessor shall require, Lessee shall furnish to
Lessor a surety bond satisfactory to Lessor in an amount
equal to one and one-half times the amount of such contested
lien claim or demand, indemnifying Lessor against liability
for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's
attorney's fees and costs in participating in such action if
Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal or become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Additions
made to the Premises by Lessee shall be the property of and
owned by Lessee, but considered a part of the Premises.
Lessor may, at any time and at its option, elect in writing
to Lessee to be the owner of all or any specified part of
the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per subparagraph 7.4(b) hereof,
all Lessee Owned Alterations and Utility Installations
shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon and be
surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require at the time of and as a condition to the giving of
its consent to a proposed Alteration or Utility Installation
that any or all Lessee Owned Alterations or Utility
Installations be removed by the expiration or earlier
termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor
may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installation made
without the required consent of Lessor.
<PAGE> 8
(c) Surrender/Restoration. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier
termination date, with all of the improvements, parts and
surfaces thereof clean and free of debris and in good
operating order, condition and state of repair, ordinary
wear and tear excepted. "Ordinary wear and tear" shall not
include any damage or deterioration that would have been
prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except
as otherwise agreed or specified in writing by Lessor, the
Premises, as surrendered, shall include the Utility
installations. The obligations of Lessee shall include the
repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures,
furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank
installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by
Applicable Law and/or good service practice. Lessee's Trade
Fixtures shall remain the property of Lessee and shall be
removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment for Insurance. Lessee is the Insuring Party, Lessee
shall pay for all insurance required under this Paragraph 8.
Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the
Lease term. Payment shall be made by Lessee to Lessor within ten
(10) days following receipt of an invoice for any amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term Lease a Commercial General Liability policy
of insurance protecting Lessee (as an additional insured)
against claims for bodily injury, personal injury, and
property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an
amount not less than $1,000,000 per occurrence with an
"Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution
Exclusion" for damage caused by heat, smoke or fumes from a
hostile fire. The policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of
Lessee's indemnity obligations under this Lease. The limits
of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor
relieve Lessee of any obligation hereunder. All insurance to
be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or
policies in the name of Lessor, with loss payable to Lessor
and to the holders of any mortgages, deeds of trust or
ground leases on the Premises ("Lender(s)"), insuring loss
or damage to the Premises. The amount of such insurance
shall be equal to the full replacement cost of the premises,
as the same shall exist from time to time, or the amount
required by Lenders, but in no event more than the
commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the
improvements involved, such latter amount is less than full
replacement cost. Lessee Owned Alterations and Utility
Installations shall be insured by Lessee under Paragraph. If
the coverage is available and commercially appropriate, such
policy or policies shall insure against all risks or direct
physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage
for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any
ordinance or law regulating the reconstruction or
replacement of any undamaged sections of the Premises
required to be demolished or
<PAGE> 9
removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered
cause of loss. Said policy or policies shall also contain an
agreed valuation provision in lieu of any coinsurance
clause, waiver of subrogation, and inflation guard
protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the
Premises are located. If such insurance coverage has
deductible clause, the deductible amount shall not exceed
$1,000 per occurrence, and Lessee shall be liable for such
deductible amount in the event of an Insured Loss, as
defined in Paragraph 9.1 (c).
(b) Rental Value. The Insuring Party shall, in addition, obtain
and keep in force during the term of this Lease a policy or
policies in the name of Lessor, with loss payable to Lessor
and Lender(s), insuring the loss of full rental and other
charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs,
and any scheduled rental increases). Said insurance shall
provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for
one full year's loss of rental revenues from the date of any
such loss. Said insurance shall contain an agree valuation
provision in lieu of any coinsurance clause, and the amount
of coverage shall be adjusted annually to reflect the
projected rental income, property taxes, insurance premium
costs and other expenses, if any, otherwise payable by
Lessee, for the next twelve (12) month period. Lessee shall
be liable for any deductible amount in the event of such
loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or if the Premises are part of a group of
buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the
premiums for the property insurance of such building or
buildings if said increase is caused by the Lessee's acts,
omissions, use or occupancy of the Premises.
(d) Tenant's Improvements. Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall
insure Lessee Owned Alterations and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate
policy or, at Lessor's option, by endorsement to a policy
already carried, maintain insurance coverage on all of Lessee's
personal property, Lessee Owned Alterations and Utility
installations in, on, or about the Premises similar in coverage
to that carried by the Insuring Party under Paragraph 8.3. Such
insurance shall be full replacement cost coverage with a
deductible of not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee
Owned Alterations and Utility Installations. Lessee shall be the
Insuring Party with respect to the insurance required by this
Paragraph 8.4 and shall proved Lessor with written evidence that
such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where
the Premises are located, and maintaining during the policy term
a "General Policyholders Rating" of at least B+, V, or such
other rating as may be required by a Lender having a lien on the
Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done
anything which shall invalidate the insurance policies referred
to in this Paragraph 8. Lessee shall cause to be delivered to
Lessor at the execution of Lease and prior to Lessee's taking
occupancy of the Premises, certified copies of policies of such
insurance or certificates evidencing the existence and amounts
of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancellable or
subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal
thereof, or Lessor may order such insurance and charge the cost
thereof to Lessee, which amount shall be payable by Lessee to
Lessor upon demand. If the Insuring Party shall fail to procure
and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but
shall not be required to, procure and maintain the same, but at
Lessee's expense.
<PAGE> 10
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby
release and relieve the other, and waive their entire right to
recover damages (whether in contract or in tort) against the
other, for loss of or damage to the Waiving Party's property
arising out of or incident to the perils required to be insured
against under Paragraph 8. The effect of such releases and
waivers of the right to recover damages shall not be limited by
the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and
hold harmless the Premises, Lessor and its agents, Lessor's
master or ground lessor, partners and Lenders, from and against
any and all claims, loss of rents and/or damages, costs, liens,
judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in
dealing with, the occupancy of the Premises by Lessee, the
conduct of Lessee's business, any act, omission or neglect of
Lessee, its agent, contractors, employees or invitees, and out
of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed
under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of
claims made against Lessor) litigated and/or reduced to
judgement, and whether well founded or not. In case any action
or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend
the same at Lessee's expense by counsel reasonably satisfactory
to Lessor and Lessor shall cooperate with Lessee in such
defense. Lessor need not have first paid any such claim in order
to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise
or other property of Lessee, Lessee's employees, contractors,
invitees, customers, or any other person in or about the
Premises, whether such damage or injury is caused by or results
from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires , appliances, plumbing, air conditioning or
lighting fixtures, or from any other cause, whether the said
injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the
Premises are a part, or from other sources or places, and
regardless of whether the cause of such damage or injury or the
means of repairing the same is accessible or not. Lessor shall
not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence
or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income
or profit therefrom.
9. Damage or Destruction
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, the repair cost of
which damage or destruction is less than 50% of the then
Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the
value of the land and Lessee Owned Alterations and Utility
Installations.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned
Alterations and Utility Installations the repair cost of
which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the
value of the land and Lessee Owned Alterations and Utility
Installations.
(c) "Insured Loss" shall mean damage or destruction to
improvement on the Premises, other than Lessee Owned
Alterations and Utility Installations, which was caused by
an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
<PAGE> 11
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the
occurrence to their condition existing immediately prior
thereto, including demolition, debris removal and upgrading
required by the operation of applicable building codes,
ordinances or laws, and without deduction for deprecation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in
Paragraph 6.2(a), in, on, or under the Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's
expense, repair such damage (but not Lessee's Trade Fixtures or
Lessee Owned Alterations and Utility Installations) as soon as
reasonably possible and this Lease shall continue in full force
and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total
cost to repair of which is $10,000 or less, and in such event,
Lessor shall make the insurance proceeds available to Lessee on
a reasonable basis for that purpose. Notwithstanding the
foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in
proceeds (except as to the deductible which is Lessee's
responsibility) as and when required to complete such said
repairs. In the event, however, the shortage in proceeds was due
to the fact that, by reason of the unique nature of the
improvements, full replacement cost insurance coverage was not
commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of
written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said
ten (10) day period, the party responsible for making the
repairs shall complete them as soon as reasonably possible and
this Lease shall remain in full force and effect. If Lessor does
not receive such funds or assurance within said period, Lessor
may nevertheless elect by written notice to Lessee within ten
(10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force
and effect. If in such case Lessor does not so elect, then this
Lease shall terminate sixty (60) days following the occurrence
of the damage or destruction. Unless otherwise agreed, Lessee
shall in no event have any right to reimbursement from Lessor
for any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but
the net proceeds of any such insurance shall be made available
for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent
or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense and this Lease shall continue in
full force and effect, but subject to Lessor's rights under
Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense,
in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30)
days after receipt by Lessor of knowledge of the occurrence of
such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the
event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten
(10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the
required funds or satisfactory assurance thereof within thirty
(30) days following Lessee's said commitment. In such event this
Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and
the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the
times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
<PAGE> 12
9.4 Total Destruction. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs (including any
destruction required by any authorized public authority), this
Lease shall terminate sixty (60) days following the date of
such Premises Total Destruction, whether or not the damage or
destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage
or destruction was caused by Lessee, Lessor shall have the
right to recover Lessor's damages from Lessee except as
released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the
cost to repair exceed two (2) month's Base Rent, whether or not
an Insured Loss, Lessor may, at Lessor's option, terminate this
Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the
date of occurrence of such damage. Provided, however, if Lessee
at that time has an exercisable option to extend this Lease or
to purchase the Premises, then Lessee may preserve this Lease
by, within twenty (20) days following the occurrence of the
damage, or before the expiration of the time provided in such
option for its exercise, whichever is earlier ("Exercise
Period"), (i) exercising such option and (ii) providing Lessor
with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises
such option during said Exercise Period and provides Lessor
with funds (or adequate assurance thereof) to cover any
shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee
fails to exercise such option and provide such funds or
assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as the expiration of said
sixty (60) day period following the occurrence of such damage
by giving written notice to Lessee of Lessor's election to do
so within ten (10) days after the expiration of the Exercise
Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured) or 9.3 or 9.4 whether or not Lessor or
Lessee repairs or restores the Premises, the Base Rent, Real
Property Taxes, insurance premiums, and other charges, if
any, payable by Lessee hereunder for the period during which
such damage, its repair of the restoration continues shall
be abated in proportion to the degree to which Lessee's use
of the Premises is impaired. Except for abatement of Base
Rent, Real Property Taxes, insurance premiums, and other
charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee
shall have no claim against Lessor for any damage suffered
by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall
not commence, in a substantial and meaningful way, the
repair or restoration of the Premises within (90) days after
such obligation shall accrue, Lessee may, at any time prior
to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee
has actual notice of Lessee's election to terminate this
Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor
and such Lenders and such repair or restoration is not
commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified
in said notice. If Lessor or a Lender commences the repair
or restoration of the Premises within thirty (30) days after
receipt of such notice, this Lease shall continue in full
force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the
actual work on the Premises, whichever first occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor
(in which case Lessee shall make the investigation and
remediation thereof required by Applicable Law and this Lease
shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either
(i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at
<PAGE> 13
Lessor's expense, in which event this Lease shall continue in
full force in effect, or (ii) if the estimated cost to
investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate
this Lease as of the date sixty (60) days following the giving
of such notice. In the event Lessor elects to give such notice
of Lessor's intention to terminate this Lease, Lessee shall have
the right within ten (10) days after the receipt of such notice
to give written notice to Lessor of Lessee's commitment to pay
for the investigation and remediation of such Hazardous
Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount
equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with
the funds required of Lessee or satisfactory assurance thereof
within thirty (30) days following Lessee's said commitment. In
such event this Lease shall continue in full force and effect,
and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and
provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous
Substance Condition occurs for which Lessee is not legally
responsible, there shall be abatement of Lessee's obligations
under this Lease to the same extent as provided in Paragraph
9.6(a) for a period of not to exceed twelve (12) months.
9.8 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments
made by Lessee to Lessor. Lessor shall, in addition, return to
Lessee so much Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of
the Premises with respect to the termination of this Lease and
hereby waive the provisions of any present or future statute to
the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the
Premises during the term of this Lease. Subject to Paragraph
10.1(b), all such payments shall be made at least ten (10)
days prior to the delinquency date of the applicable
installment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any
such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration of earlier termination
of the term hereof, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within
the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such
proration. If Lessee shall fail to pay any Real Property
Taxes required by this Lease to be paid by Lessee, Lessor
shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor
reserves the right, at Lessor's option, to estimate the
current Real Property Taxes applicable to the Premises, and
to require such current year's Real Property Taxes to be
paid in advance to Lessor by Lessee, either: (i) in a lump
sum amount equal to the installment due, at least twenty
(20) days prior to the applicable delinquency date, or (ii)
monthly in advance with the payment of the Base Rent. If
Lessor elects to require payment monthly in advance, the
monthly payment shall be that equal monthly amount which,
over the number of months remaining before the month in
which the applicable tax installment would become delinquent
(and without interest thereon), would provide a fund large
enough to fully discharge before delinquency the estimated
installment of taxes to be paid. When the actual amount of
the applicable tax bill is known, the amount of such equal
monthly advance payment shall be adjusted as required to
provide the fund needed to pay the applicable taxes before
delinquency. If the amounts paid to Lessor by Lessee under
the provisions of this Paragraph are insufficient to
discharge the obligations of Lessee to pay such Real
Property Taxes as the same become due, Lessee shall pay to
Lessor, upon Lessor's demand, such additional sums as are
<PAGE> 14
necessary to pay such obligations. All moneys paid to Lessor
under this Paragraph may be intermingled with other moneys
of Lessor and shall not bear interest. In the event of a
Breach by Lessee in the performance of the obligations of
Lessee under this Lease, then any balance of funds paid to
Lessor under the provisions of this Paragraph may, subject
to proration as provided in Paragraph 10.1(a), at the option
of Lessor, be treated as an additional Security Deposit
under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of real estate tax
or assessment, general, special, ordinary or extraordinary, and
any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or
estate taxes) imposed upon the Premises by any authority having
the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof,
levied against any legal or equitable interest of Lessor in the
Premises or in the real property or which the Premises are a
part, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "Real
Property Taxes" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason
of events occurring, or changes in applicable law taking effect,
during the term of this Lease, including but not limited to a
change in the ownership of the Premises or in the improvements
thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated
by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real
Property Taxes for all of the land and improvements included
within that tax parcel assessed, such proportion to be
determined by Lessor from the respective valuations assigned in
the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof,
in good faith, shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings,
equipment and all personal property of Lessee contained in the
Premises or elsewhere. When possible, Lessee shall cause its
Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real
property of Lessor. If any of Lessee's said personal property
shall be assessed with Lessor's real property, Lessee shall pay
Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as
provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to
be determined by Lessor, of all charges jointly metered with other
premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. See Addendum.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber
(collectively, "assignment") or sublet all or any part of
Lessee's interest in this Lease or in the Premises without
Lessor's Prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a
cumulative basis, of twenty-five percent (25%) or more of
the voting control of Lessee shall constitute a change in
control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale,
acquisition, financing, refinancing, transfer, leveraged
buy-out or otherwise), whether or not a formal assignment or
hypothecation of the Lease or Lessee's
<PAGE> 15
assets occurs, which results or will result in a reduction
of the New Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five (25%) of such
Net Worth of Lessee as it was represented to Lessor at the
time of the execution by Lessor of this Lease or at the time
of the most recent assignment to which Lessor has consented,
or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be
considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of
Lessee (excluding any guarantors) established under
generally accepted accounting principles consistently
applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall,
at Lessor's option, be a Default curable after notice per
Paragraph 13.1(c), or a noncurable Breach without the
necessity of any notice and grace period. If lessor elects
to treat such unconsented to assignment or subletting as a
noncurable Breach, Lessor shall have the right to either:
(i) terminate this Lease, or (ii) upon thirty (30) days
written notice ("Lessor's Notice"), increase the monthly
Base Rent to fair market rental value or one hundred ten
percent (110%) of the Base Rent then in effect, whichever is
greater. Pending determination of the new fair market rental
value, if disputed by Lessee, Lessee shall pay the amount
set forth in Lessor's Notice, with any overpayment credited
against the next installment(s) of Base Rent coming due, and
any underpayment for the period retroactively to the
effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the
event of such Breach and market value adjustment, (i) the
purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then
fair market value (without the Lease being considered an
encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest
and best use and in good condition), or one hundred ten
percent (110%) of the price previously in effect, whichever
is greater, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be
adjusted to require that the base index be determined with
reference to the index applicable to the time of such
adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in
the same ratio as the new market rental bears to the Base
Rent in effect immediately prior to the market value
adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and
injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written
assumption by such assignee of sublessee of the obligations
of Lessee under this Lease, (ii) release Lessee of any
obligations hereunder, or (iii) alter the primary liability
of Lessee for the payment of Base Rent and other sums due
Lessor hereunder or for the performance of any other
obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending
approval or disapproval of an assignment. Neither a delay in
the approval or disapproval of such assignment nor the
acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its
remedies for the Default or Breach by Lessee of any of the
terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or
subletting by Lessee or to any subsequent or successive
assignment or subletting by the sublessee. However, Lessor
may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable on the Lease or
sublease and without
<PAGE> 16
obtaining their consent, and such action shall not relieve
such persons from liability under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly
against Lessee, any Guarantors or any one else responsible
for the performance of the Lessee's obligations under this
Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity
responsible therefor to Lessor, or any security held by
Lessor or Lessee.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to
Lessor's determination as to the financial and operational
responsibility and appropriateness of the proposed assignee
or sublessee, including but not limited to the intended use
and/or required modifications of the Premises, if any,
together with a non-refundable deposit of $1000 or ten
percent (10%) of the current monthly Base Rent, whichever is
greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee
agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such
sublease, be deemed, for the benefit of Lessor, to have
assumed and agreed to conform and comply with each and every
term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said
assignment or sublease other than such obligations as are
contrary to or inconsistent with provisions of an assignment
or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in Paragraph
12.1(c) shall give Lessor the right (but not the obligation)
to require that the Security Deposit be increased to an
amount equal to six (6) times the then monthly Base Rent,
and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a
condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and
adjustment structure of the rent payable under this Lease be
adjusted to what is then the market value and/or adjustment
structure for property similar to the Premises as then
constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by
Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not
expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any
sublease of all or a portion of the Premises heretofore or
hereafter made by Lessee, and Lessor may collect such rent
and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as
defined in Paragraph 13.1) shall occur in the performance of
Lessee's obligations under this Lease, Lessee may, except as
otherwise provided in the Lease, receive, collect and enjoy
the rents accruing under such sublease. Lessor shall not, by
reason of this or any other assignment of such sublease to
Lessor, nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure
of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such sublease. Lessee
hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents and
other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to
Lessor without any obligation or right to inquire as to
whether such Breach exists and notwithstanding any notice
from or claim from Lessee to the
<PAGE> 17
contrary. Lessee shall have no right or claim against said
sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and
without any obligation to do so, may require any sublessee
to attorn to Lessor, in which event Lessor shall undertake
the obligations of the sublessor under such sublease from
the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable
for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor
herein.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right
to cure the Default of Lessee within the grace period, if
any, specified in such notice. The sublessee shall have a
right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a bonafide Lessee
Default or Breach (as hereinafter defined), $350.00 is a
reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a
notice of Default, and that Lessor may include the cost of
such services and costs in said notice as rent due and
payable to cure said Default. A "default" is defined as a
failure by the Lessee to observe, comply with or perform any
of the terms, covenants, conditions or rules applicable to
Lessee under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults,
and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to
the expiration of the applicable grace period, shall entitle
Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(b) Except as expressly otherwise provided in this Lease, the
failure by lessee to make any payment of Base Rent as and
when due, or any other monetary payment required to be made
by Lessee hereunder, whether to lessor or to a third party,
within 10 days of the due date for such other monetary
payment, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required
under this lease, or the failure of Lessee to fulfill any
obligation under this Lease which endangers or threatens
life or property, where such failure continues for a period
of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in the Lease, the
failure by Lessee to provide Lessor with reasonable written
evidence (in duly executed original form, if applicable) of
(i) compliance with Applicable Law per Paragraph 6.3, (ii)
the inspection, maintenance and service contracts required
under Paragraph 7.1 (b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1
(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v)
the subordination or non-subordination of this Lease per
Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under
Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any
other documentation or information which Lessor may
reasonably require of lessee under the terms of this Lease,
where any such failure continues for a period of ten (10)
days following written notice by or on behalf of Lessor to
Lessee.
<PAGE> 18
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof, that are to be observed, complied with
or performed by Lessee, other than those described in
subparagraphs (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written
notice thereof by or on behalf of Lessor to Lessee;
provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach of
this lease by Lessee if Lessee commences such cure within
said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The
making by lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee's becoming a
"debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless, in the case of a petition
filed against Lessee, the same is dismissed within sixty
(60) days); (iii) the appointment of a trustee or receiver
to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this
Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in
this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any
applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement given
to Lessor by Lessee or any Guarantor of Lessee's obligations
hereunder was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a guarantor, (ii) the
termination of a guarantor's liability with respect to this
Lease other than in accordance with the terms of such
guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, or (iv) a guarantor's
refusal to honor the guaranty, and Lessee's failure, within
sixty (60) days following written notice by or on behalf of
Lessor to Lessee of any such event, to provide Lessor with
written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of lessee and
the guarantors that existed at the time of execution of this
Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days
after written notice of Lessee (or in case of an emergency,
without notice), Lessor may at its option (but without
obligation to do so), perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any
such performance by Lessor shall be due and payable by Lessee to
Lessor upon invoice therefor. If any check given to Lessor by
Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be
made under this Lease by Lessee to be made only by cashier's
check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or
demand, and without limiting Lessor in the exercise of any right
or remedy which Lessor may have by reason of such Breach, Lessor
may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term
hereof shall terminate and Lessee shall immediately
surrender possession of the Premises to Lessor. In such
event lessor shall be entitled to recover from Lessee: (i)
the worth at the time of the award of the unpaid rent which
had been earned at the time of termination; (ii) the worth
at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the
time of award exceeds the amount of such rental loss that
the Lessee proves could have been reasonably avoided; (iii)
the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee
proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the detriment
proximity caused by the Lessee's failure to perform its
obligations under this Lease or which in
<PAGE> 19
the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of
reletting, including necessary renovation and alternation of
the Premises, reasonable attorney's fees, and that portion
of the leasing commission paid by Lessor applicable to the
unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the prior
sentence shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco
at the time of award plus one percent (1%). Efforts by
lessor to mitigate damages causes by Lessee's Default or
Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph. If termination of this
Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable
therein, or Lessor may reserve therein the right to recover
all or any part thereof in a separate suit for such rent
and/or damages. If a notice and grace period required under
subparagraphs 13.1 (b), (c) or (d) was not previously given,
a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing
the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes
required by subparagraphs 13.1 (b), (c) or (d). In such
case, the applicable grace under subparagraphs 13.1 (b), (c)
or (d) and under the unlawful detainer statute shall run
concurrently after the one such statutory notice, and the
failure of Lessee to cure the Default within the greater of
the two such grace periods shall constitute both an unlawful
detainer and a Breach of the Lease entitling Lessor to the
remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section
1951.4) after Lessee's Breach and abandonment and recover
the rent as it becomes due, provided Lessee has the right to
sublet or assign, subject only to reasonable limitations.
See Paragraphs 12 and 36 for the limitations on assignment
and subletting which limitations Lessee and Lessor agree are
reasonable. Acts of maintenance or preservation, efforts to
relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not
constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein
the Premises are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not
relieve Lessee from liability under any indemnity provisions
of this lease as to matters occurring or accruing during the
term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the
Premises, or for the giving or paying by lessor to or for Lessee
of any cash or other bonus, inducement or consideration for
Lessee's entering into this Lease, all of which concessions are
hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance
of all of the terms, covenants and conditions of this Lease to
be performed or observed by Lessee during the term hereof as the
same may be extended. Upon the occurrence of a Breach of this
Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from
this Lease and of no further force or effect, and the
unamortized portion of any rent, other charge, bonus, inducement
or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by lessor as
additional rent due under this Lease, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the
operation of this Paragraph shall not be deemed a waiver by
Lessor of the provisions of this Paragraph unless specifically
so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause
Lessor to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to,
<PAGE> 20
processing and accounting charges, and late charges which may be
imposed upon Lessor by the terms of any ground lease, mortgage
or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days
after such amount shall be due, then, without any requirement
for notice to Lessee, Lessee shall pay to Lessor a late charge
equal to four percent (4%) of such overdue amount. The parties
hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of
late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or
Breach with respect to such overdue amount, nor prevent Lessor
from exercising any of the other rights and remedies granted
hereunder.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of
this Paragraph 13.5, a reasonable time shall in no event be less
than thirty (30) days after receipt by Lessor, and by the
holders of any ground lease, mortgage or deed of trust covering
the Premises whose name and address shall have been furnished
Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days after such notice are
reasonably required for its performance, then Lessor shall not
be in breach of this Lease if performance is commenced within
such thirty (30) day period and thereafter diligently pursued to
completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor areas of the Premises or more than twenty-five percent
(25%) of the land area not occupied by any building, is taken, by
condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after
the condemning authority shall have taken possession) terminate this Lease
as of the date the condemning authority takes such possession. If Lessee
does not terminate this Lease in accordance with the foregoing, this Lease
shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the
total rentable floor area of the building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises
taken is land on which there is no building. Any award for the taking of
all or any part of the Premises under the power of eminent domain of any
payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of
its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation, except to the extent that
Lessee has been reimbursed therefor by the condemning authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay
to said Brokers jointly, or in such separate shares as they may
mutually designated in writing, a fee as set forth in a separate
written agreement between Lessor and said Brokers for brokerage
services rendered by said Brokers to Lessor in this transaction.
PARAGRAPHS 15.3 AND 15.4 HAVE BEEN DELETED.
15.5 Lessee and Lessor each represent and warrant to the other that
it has had no dealings with any
<PAGE> 21
person, firm, broker or finder (other than the Brokers, if any
named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or
entity other than said named Brokers is entitled to any
commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect,
defend and hold the other harmless from and against liability
for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar party by reason of any
dealings or actions of the indemnifying Party, including any
costs, expenses, attorney's fees reasonably incurred with
respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in
Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days
after written notice form the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party
a statement in writing in form similar to the then most current
"Tenancy Statement" form published by the American Industrial
Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested
by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises,
any part thereof, or the building of which the Premises are a
part, Lessee and all Guarantors of Lessee's performance
hereunder shall deliver to any potential lender or purchaser
designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or
purchaser. All such financial statements shall be received by
Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or
by credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity
of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty
(30) days following the date on which it was due, shall bear interest from
the thirty-first (31st) day after it was due at the rate of 12% per annum,
but not exceeding the maximum rate allowed by law, in addition to the late
charge provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this
Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers
that it has made, and is relying solely upon, its own investigation as to
the nature, quality, character and financial responsibility of the other
Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with
respect to any default or breach hereof by either Party.
<PAGE> 22
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger
or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with
postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in
this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for
the purpose of mailing or delivering notices to Lessee. A copy
of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the
postmark thereon. If sent by regular mail the notice shall be
deemed given forty-eight (48) hours after the same is addressed
as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier
that guarantees next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the United
States Postal Service or courier. If any notice is transmitted
by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of
receipt of the transmission thereof, provided a copy is also
delivered via delivery or mail. If notice is received on a
Sunday or legal holiday, it shall be deemed received on the next
business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of the Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the
time of accepting rent, the acceptance of rent by Lessor shall not be a
waiver of any preceding Default or Breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so
accepted. Any payment given Lessor by Lessee may be accepted by Lessor on
account of moneys or damages due lessor, notwithstanding any qualifying
statements or conditions made by Lessee in connection therewith, which such
statements and/or conditions shall be of no force or effect whatsoever
unless specifically agreed to in writing by Lessor at or before the time of
deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of
this Lease for recording purposes. The Party requesting recordation shall
be responsible for payment of any fees or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination
of this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
<PAGE> 23
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. Subject to Paragraph 30.3 below, this Lease and
any Option granted hereby shall be subject and subordinate to
any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security
Device"), now or hereafter placed by Lessor upon the real
property of which the Premises are a part, to any and all
advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions
thereof. Lessee agrees that the Lenders holding any such
Security Device shall have no duty, liability or obligation to
perform any of the obligations of Lessor under this Lease prior
to the date on which such party or its nominee takes title to
the premises, but that in the event of Lessor's default with
respect to any such obligation, Lessee will give any Lender
whose name and address have been furnished Lessee in writing for
such purpose notice of Lessor's default and allow such Lender
thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by
reason thereof. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its
Security Device and shall give written notice thereof to Lessee,
this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provision of
Paragraph 30.3, Lessee agrees to attorn to a lender or any other
party who acquires ownership of the Premises by reason of a
foreclosure of a Security Device, and that in the event of such
foreclosure, such new owner shall not: (i) be liable for any act
or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to
any offsets or defenses which Lessee might have against any
prior lessor, or (iii) be bound by prepayment of more than one
(1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into
by Lessor, Lessee's subordination of this Lease shall be subject
to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record
owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further
documents; provided, however, that, upon written request from
Lessor or a Lender in connection with a sale, financing or
refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to
separately document any such subordination or non-subordination,
attornment and/or non-disturbance agreement as is provided for
herein.
31. Attorney's Fees. If any Party brings an action or proceeding to enforce the
terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall
be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party of its claim or
defense. The attorney's fees award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices
of Default and consultations in connection therewith, whether or not a
legal action is subsequently commenced in connection with such Default or
resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times upon reasonable prior notice
to Lessee for the purpose of showing the same prospective purchasers,
lender, or lessees, and making such alterations, repairs, improvements or
additions to the Premises or to the building of which they are a part, as
Lessor may reasonably deem necessary. Lessor may at any time place on or
about the Premises or building any ordinary "For Sale" signs and Lessor may
at any time during the last one hundred twenty (120) days of the
<PAGE> 24
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or
liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be concluded, either
voluntarily, or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the
roof) such signs as are reasonably required to advertise Lessee's own
business. The installation of any sign on the Premises by or for Lessee
shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs,
Utility Installations, Trade Fixtures and Alterations) and adherence to any
City ordinance or regulations and/or any covenants, conditions and
restrictions of record against the Premises. Unless otherwise expressly
agreed herein, Lessor reserves all rights to the use of the roof and the
right to install, and all revenues from the installation of, such
advertising signs on the Premises, including the roof, as do not
unreasonably interfere with the conduct of Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the
mutual termination or cancellation hereof, or a termination hereof by
Lessor for Breach by Lessee, shall automatically terminate any sublease or
lesser estate in the premises; provided, however, Lessor shall, in the
event of any such surrender, termination or cancellation, have the option
to continue any one or all of any existing subtenancies. Lessor's failure
within ten (10) days following any such event to make a written election to
the contrary by written notice to the holder of any such lesser interest,
shall constitute Lessor's election to have such event constitute the
termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party
is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to
architect's, attorney's, engineer's or other consultants' fees)
incurred in the consideration of, or response to, a request by
Lessee for any Lessor consent pertaining to this Lease or the
Premises, including but not limited to consents to an
assignment, a subletting or the presence or use of a Hazardous
Substance, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation
therefor. Subject to Paragraph 12.2(e) (applicable to assignment
or subletting), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor
an amount of money (in addition to the Security Deposit held
under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to
Lessee's request. Except as otherwise provided, any unused
portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease
or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this
Lease exists, nor shall such consent be deemed a waiver of any
then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such
consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to
specify herein any particular condition to Lessor's consent
shall not preclude the imposition by Lessor at the time of
consent of such further or other conditions as are then
reasonable with reference to the particular matter for which
consent is being given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, and each said Guarantor shall have the same obligations as
Lessee under this Lease, including but not limited to the
obligation to provide the Tenancy Statement and information
called for by Paragraph 16.
<PAGE> 25
37.2 It shall constitute a Default of the Lessee under this Lease if
any such Guarantor fails or refuses, upon reasonable request by
Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of
the Guarantor (and of the party signing on Guarantor's behalf)
to obligate such Guarantor on said guaranty, and including in
the case of a corporate Guarantor, a certified copy of a
resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing
the signature of the persons authorized to sign on its behalf,
(b) current financial statements of Guarantor as may from time
to time be requested by Lessor, (c) a Tenancy Statement, or (d)
written confirmation that the guaranty is still effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term here
of subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has
the following meaning: (a) the right to extend the term of the
Lease or to renew this Lease as provided in the Addendum.
PARAGRAPHS 39.2 AND 39.3 HAVE BEEN DELETED.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise the Option,
notwithstanding any provision in the grant of Option to the
contrary: (i) during the period commencing with the giving
of any notice of Default under Paragraph 13.1 and continuing
until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from
Lessee is unpaid (without regard to whether notice thereof
is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease.
(b) The period of time within which the Option may be exercised
shall not be extended or enlarged by reason of Lessee's
inability to exercise the Option because of the provisions
of Paragraph 39.4 (a).
41. Security Measures. Lessee hereby acknowledges that the rental Payable to
Lessor hereunder does include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
the same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from acts of
third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights,
and dedications that Lessor deems necessary, and to cause the recordation
of parcel maps and restrictions, so long as such easements, rights,
dedications, maps and restrictions do not unreasonably interfere with the
use of the Premises by Lessee. Lessee agrees to sign any documents
reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money
is asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall
survive the right on the part of said Party to institute suit for recovery
of such sum. If it shall be adjudged that there was no legal obligation on
the part of said Party to pay such a sum or any part thereof, said Party
shall be entitled to recover such sum or so much thereof as it was not
legally required to pay under the provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty
<PAGE> 26
(30) days after request by Lessor, deliver to Lessor evidence satisfactory
to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the type
written or handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed and offer to lease to Lessee. This
Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall
amend this Lease from time to time to reflect any adjustments that are made
to the Base Rent or other rent payable under this Lease. As long as they do
not materially change Lessee's obligations hereunder, Lessee agrees to make
such reasonable non-monetary modifications to this Lease as may be
reasonably required by an institutional, insurance company, or pension plan
Lender in connection with the obtaining of normal financing or refinancing
of the property of which the Premises are part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons of entities named herein as such Lessor or
Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE
WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
<TABLE>
<S> <C>
Executed at _________________________________ Executed at Anaheim, CA
on _________________________________________ on November 6, 1996
by LESSOR: Thomas M. Zapara and Violet J. Zapara, by LESSEE: ATL Products, Inc., a California
Trustees of the Zapara Family Trust U/D/T corporation, a wholly owned subsidiary
dated December 7, 1995 of ODETICS, Inc.
By /s/ THOMAS M. ZAPARA By /s/ GREGORY A. MINER
- ------------------------------- -------------------------------
Name Printed: Thomas M. Zapara Name Printed: Gregory A. Miner
Title: Trustee Title: V.P. & CFO
</TABLE>
<PAGE> 27
<TABLE>
<S> <C>
By /s/ VIOLET J. ZAPARA By
- ------------------------------- ---------------------------------------------
Name Printed: Violet J. Zapara Name Printed: ______________________________
Title: Trustee Title: _____________________________________
Address: 24681 La Plaza, Suite 280 Address: ___________________________________
Dana Point, California 92629 _____________________________________________
Tel. No. (714) 443-6030 Fax No. (714) 443-6033 Tel. No. ( )________ Fax No. ( )________
</TABLE>
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345 South
Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax. No.
(213) 687-8616.
<PAGE> 28
ADDENDUM TO
STANDARD INDUSTRIAL/COMMERCIAL
SINGLE-TENANT LEASE - NET
This Addendum to Standard Industrial/Commercial Single-Tenant Lease -
Net (the "Addendum") is made by and between Thomas M. Zapara and Violet J.
Zapara, as Trustees of the Zapara Family Trust, U/D/T dated December 7, 1995
("Lessor"), and ATL Products, Inc., a California corporation ("Lessee"), a
wholly-owned subsidiary of Odetics, Inc., a California corporation.
The purpose of this Addendum is to supplement and modify the terms and
provisions of that certain Standard Industrial/Commercial Single-Tenant Lease -
Net entered into effective as of October 9, 1996, between Lessor and Lessee (the
"Lease"), relating to the approximate one hundred twenty-three thousand four
hundred twelve (123,412) square foot industrial building located at 2801 Kelvin
Avenue, Irvine, California, and the parking area depicted in Exhibit "A" to the
Lease (collectively, the "Premises"). The terms and provisions of this Addendum
are hereby incorporated into, and made a part of, the Lease.
49. Early Possession.
Upon the mutual execution of this Lease, Lessor shall provide Lessee
with early possession of the Premises for the purpose of planning and
fixturization, provided (a) Lessee has paid the Base Rent to be paid upon
execution pursuant to paragraph 1.6 of the Lease, (b) Lessee has paid the
Security Deposit pursuant to paragraph 1.7 of the Lease, and (c) Lessee has
delivered to Lessor certificates of the insurance required to be carried by
Lessee as provided pursuant to paragraph 8.5 of the Lease.
50. Condition of Premises and Lessor Improvements.
Notwithstanding the provisions of Article 2 of the Lease, Lessor agrees
to perform and complete, at Lessor's sole cost and expense, the following
improvements to the Premises:
a. Lessor shall remove all asbestos found inside the building of the
Premises and in the roofing system of the building as described in the Phase I
Report - Environmental Site Assessment, prepared by ERM/West, Inc., in
compliance with all applicable laws and regulations, and shall repair those
areas where asbestos has been removed.
b. Lessor shall remove the clean rooms (but not the offices) in the
locations in the building of the Premises depicted in Exhibit "B" attached
hereto and incorporated herein by this reference.
c. Lessor shall paint the exterior of the building a color mutually
agreed upon between Lessor and Lessee.
d. Lessor shall repair the crack in the parapet on the exterior wall
facing Jamboree.
51. Additional Lessor Obligations
In addition to the obligations of Lessor set forth in paragraph 50
above, Lessor agrees to repair, at its own cost and expense, the parking lot
portion of the Premises depicted on Exhibit "A" attached to the Lease, including
installing new landscaping, repairing the sprinkler systems such that they are
in good working condition, and repairing the exterior lighting such that it is
in good working condition. Lessor shall also repair and replace as necessary the
asphalt in such parking lot such that it is in good condition and shall restripe
the entire parking lot to be in compliance with City Code, at Lessor's cost and
expense. The parking lot improvements shall be diligently prosecuted to
completion, but such work shall not be a condition to Lessee's occupancy of the
Premises nor shall it affect the Commencement Date under the Lease or the date
Base Rent becomes payable under the Lease.
<PAGE> 29
52. Base Rent.
Subject to the provisions of paragraph "50" above and the provisions of
paragraph "53" below, commencing on the Commencement Date under the Lease, and
continuing through the original term of this Lease, Lessee shall pay to Lessor
Base Rent in the amounts and for the periods set forth immediately below, which
Base Rent shall be payable by Lessee on or before the first (1st) day of each
month, without any deduction or setoff whatsoever:
<TABLE>
<CAPTION>
Base Rent Per Square
Months of Lease Term Foot Per Month Base Rent Per Month
- -------------------- -------------------- -------------------
<S> <C> <C>
1 - 12 $.53 $65,408.36
13 - 24 $.56 $69,110.72
25 - 36 $.59 $72,813.08
37 - 48 $.62 $76,515.44
49 - 60 $.65 $80,217.80
61 - 72 $.68 $83,920.16
73 - 84 $.71 $87,622.52
</TABLE>
53. Lessee Improvement Allowance.
53.1. Lessee Improvements. Lessor shall provide Lessee an improvement
allowance of Seven Hundred Thousand Dollars ($700,000.00) (the "Improvement
Allowance") to be used for the construction of improvements to the Premises (the
"Lessee Improvements"). The Lessee Improvements shall be constructed by Lessee
pursuant to the following terms and conditions:
a. Lessee shall prepare and deliver to Lessor for Lessor's approval,
which approval shall not be unreasonably withheld or delayed, one copy of plans
and working drawings for the Lessee improvements desired to be constructed by
Lessee in the Premises. Upon Lessor's approval of such plans and working
drawings, Lessee shall proceed diligently to complete the Lessee Improvements in
accordance with the approved plans and working drawings.
b. Lessee shall obtain such governmental permits and/or licenses as are
required by applicable laws to enable Lessee legally to construct the Lessee
Improvements and to conduct its business for the uses permitted hereunder from
the Premises. Lessee shall, at Lessee's expense, initiate, diligently pursue and
use its best efforts to obtain each permit and/or license.
c. Lessee's contractor shall provide evidence of California
contractor's license, certificate of insurance, labor and material releases as
appropriate, and shall provide opportunity to Lessor to post a notice of
nonresponsibility of Lessor as required pursuant to the terms of the Lease.
Lessee shall hold Lessor free and harmless and shall indemnify and defend Lessor
from and against any mechanic's liens or lawsuits from any subcontractors,
material suppliers, contractors, or others relating to or arising out of the
planning and construction of the Lessee Improvements.
d. All costs incurred in constructing the Lessee Improvements in excess
of the Improvement Allowance shall be the sole responsibility of and shall be
paid by Lessee. Upon payment of the Improvement Allowance, Lessor shall be
deemed to be the owner of all Lessee Improvements installed in the Premises by
Lessee.
<PAGE> 30
53.2. Disbursement of Improvement Allowance. Lessor shall make
disbursements of the Improvement Allowance to Lessee in accordance with the
following provisions: Upon receipt of applications for payment, including all
supporting documentation, submitted to Lessor by Lessee and not disputed by
Lessor in good faith, Lessor shall make disbursements of the Improvement
Allowance on a no more frequent basis than monthly. Disbursements of the
Improvement Allowance shall be made based on actual costs incurred by Lessee in
constructing the Lessee Improvements and, accordingly, each application for
payment shall be accompanied by appropriate invoices, payrolls and other
evidence showing actual costs incurred by Lessee in constructing the Lessee
Improvements. Disbursement of amounts requested in an application for payment
that has been approved by Lessor shall be paid by Lessor within ten (10) days
after Lessee's submission of the application for payment, together with all
required documentation. Such required documentation shall include appropriate
lien releases from Lessee's contractor and from all subcontractors, and such
other documentation and information as may be reasonably requested by Lessor.
All disbursements made to Lessee of any portion of the Improvement Allowance
may, at Lessor's option, be made by joint check made payable to Lessee and
Lessee's contractor.
53.3. Unused Improvement Allowance. In the event the cost to Lessee of
constructing the Lessee Improvements is less than the amount of the Improvement
Allowance, Lessee shall have the right to apply the unused portion of the
Improvement Allowance, up to a maximum amount of Three Hundred Thousand Dollars
($300,000.00) (the "Lessee Improvement Credit") against Lessee's obligation to
pay Base Rent during the first year of the term of this Lease. In no event may
the Lessee Improvement Credit exceed $300.000.00 and any portion of the Lessee
Improvement Credit not used within the first year of the Term of this Lease
shall expire at the end of the first year of the Term.
54. Assignment and Subletting.
54.1. Assignment to Controlling Entity. Notwithstanding the provisions
of subparagraph 12.1(b) of the Lease, Lessee may, with prior notice to Lessor,
but without the necessity of Lessor's consent and without resulting in a default
under this Lease, assign this Lease to any entity which controls, is controlled
by, or is under common control with Lessee, to any entity resulting from a
merger or consolidation with Lessee, or to any person or entity that acquires
all of the assets of Lessee as a going concern of the business that is being
conducted on the Premises or of the assets of any corporation that controls, is
controlled by, or is under common control with Lessee.
54.2. Lessee's Continuing Liability. Notwithstanding the provisions of
subparagraph 54.1 above, no subletting or assignment shall release or alter
Lessee's obligation or primary liability to pay the rental and perform all other
obligations under this Lease. The acceptance of rental by Lessor from any other
person or entity shall not be deemed a waiver by Lessor of any provision of this
Lease. In the event of default by any assignee or successor of Lessee in the
performance of any of the terms of this Lease, Lessor may proceed directly
against Lessee without the necessity of exhausting remedies against the assignee
or successor.
55. Option to Extend the Lease.
55.1 Option to Extend. Provided Lessee is not then in default under any
of the provisions or covenants of this Lease, Lessee shall have the option of
renewing the Term of the Lease for one period of sixty (60) additional months
(the "Option") by giving written notice to Lessor of Lessee's intent to renew
the Lease Term no less than one hundred eighty (180) days nor more than three
hundred sixty-five (365) days prior to the expiration of the initial Lease Term.
If the Option is duly exercised, the Lease Term shall be automatically extended
upon all of the same terms, conditions and covenants as are set forth in the
Lease, except that the Base Rent payable by Lessee for the Premises during the
term of the Option shall be equal to the "Prevailing Market Rental", as
hereinafter defined, to be determined as of the date of expiration of the
initial Term of the Lease ("Expiration Date"). Anything contained herein to the
contrary notwithstanding, if Lessee is in default under any of the terms,
covenants or conditions of this Lease either at the time Lessee exercises the
Option or any time thereafter prior to the commencement date of the term of the
Option, and such default is not cured within the applicable cure period, Lessor
shall have, in addition to all of Lessor's other rights and remedies provided in
the Lease, the right to terminate the Option already exercised by Lessee upon
notice to Lessee, in which event the expiration date of this Lease shall be and
remain the Expiration Date.
<PAGE> 31
55.2 Prevailing Market Rental. As used herein, the term "Prevailing
Market Rental" for the Premises shall mean the rental and all other monetary
payments and escalations, including, without limitation, consumer price
indexing, that Lessor could obtain from a third party desiring to lease the
Premises for the Option term taking into account the size and location of the
Premises, the rental then being obtained for new leases of space comparable to
the Premises, and all other factors that would be relevant to a third party
desiring to lease the Premises for the Option term in determining the rental
such party would be willing to pay therefor; provided, however, no allowance for
the construction of tenant improvements shall be taken into account in
determining the Prevailing Market Rental. If Lessee exercises the Option, Lessor
shall send to Lessee a notice setting forth the Prevailing Market Rental for the
Option term determined by Lessor at least one hundred twenty (120) days prior to
the Expiration Date.
55.3 Appraisal Procedures. If Lessee objects to Lessor's determination
of the Prevailing Market Rental for the Premises, Lessee shall notify Lessor
within thirty (30) days of its receipt of the notice setting forth the
Prevailing Market Rental. If Lessee fails to notify Lessor within such thirty
(30) day period, Lessee shall be deemed to have approved Lessor's determination
of the Prevailing Market Rental. If Lessee objects to Lessor's determination,
Lessor and Lessee shall each appoint its own qualified MAI appraiser to appraise
the Premises within forty-five (45) days of Lessee's objection (the "Lessor's
Appraisal" and "Lessee's Appraisal," respectively) for the purpose of
determining the Prevailing Market Rental. The Lessor's Appraisal shall be the
Prevailing Market Rental for the purpose of determining the Base Rent during the
Option term if Lessee does not employ and pay an MAI appraiser to determine the
Prevailing Market Rental for the Premises and submit to Lessor within said
forty-five (45) day period Lessee's Appraisal, together with a written summary
of the methods used and data collected to make such determination. If Lessor's
Appraisal and Lessee's Appraisal differ by (i) less than six percent (6%), the
greater of the two shall be the Prevailing Market Rental for the Premises, or
(ii) more than six percent (6%), then Lessor and Lessee shall promptly instruct
its respective appraiser to jointly appoint a third MAI appraiser, who shall
appraise the Premises within forty-five (45) days of this appointment in order
to determine the Prevailing Market Rental for the Premises (the "Third
Appraisal"). Lessor and Lessee shall each pay for the cost of its own appraisal
and for one-half (1/2) of the expenses of the Third Appraisal. The appraisal
among the three (3) that is furthest from the medium of all of the appraisals
shall be disregarded and the average of the other two (2) shall be the
Prevailing Market Rental for the Premises and shall be binding upon Lessor and
Lessee. In the event the Appraisal procedures continue past the commencement of
the Option term, until such appraisal procedures are final, Lessee shall pay to
Lessor Base Rent in the amount set forth in Lessor's notice setting forth
Lessor's determination of Prevailing Market Rental and upon completion of the
foregoing appraisal procedure, if the Prevailing Market Rental is greater than
the Base Rent being paid by Lessee, Lessee shall forthwith pay to Lessor the
difference between said Base Rent and the Prevailing Market Rental calculated on
a monthly basis, multiplied by the number of months or partial months elapsed
since the commencement of the Option term. If Lessee overpaid during such
period, then the excess payments shall be credited against the next
installment(s) of Base Rent.
55.4 Time of Essence. Time is of the essence regarding all of the
periods set forth above, including the time for the exercise of the Option and
the time for Lessee's objection to Lessor's determination of the Prevailing
Market Rental for the Premises. The failure of Lessee to timely exercise the
Option shall cause the Option to automatically cease and terminate and, in such
event, the Lease shall terminate on the Expiration Date without extension. If
Lessee fails to timely comply with the provisions regarding determination of the
Prevailing Market Rental for the Premises, Lessee shall be deemed to have
accepted the Prevailing Market Rental as determined by Lessor or Lessor's
Appraisal, as the case may be.
<PAGE> 32
56. Separate Parking Area.
In connection with Lessee's obligation to repair and maintain the
separate parking area depicted on page 4 of Exhibit "A" to the Lease, Lessee
shall also, at its sole cost and expense, repair and maintain the access
easement area used by Lessee to access the separate parking area made necessary
by reason of Lessee's use of such easement area. Furthermore, Lessee agrees to
cooperate with Lessor and the owner of the real property that includes the
access easement area to enter into an agreement or arrangement with respect to
the reasonable use by Lessor and Lessee of the access easement area, taking into
account the security needs of such owner with respect to its property and also
the reasonable requirements of Lessee's business to access the separate parking
area.
57. Conflict or Inconsistency.
In the event of any conflict or inconsistency between the terms and
provisions of this Addendum and the terms and provisions of the Lease to which
this Addendum is attached, the terms and provisions of this Addendum shall
control and govern the rights, duties and obligations of the parties.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum to Lease as of
October ___, 1996.
"Lessee" "Lessor"
ATL PRODUCTS, INC., a California THOMAS M. ZAPARA AND
corporation VIOLET J. ZAPARA, Trustees of the
Zapara Family U/D/T dated
December 7, 1995
By: /s/ GREGORY A. MINER
Name: Gregory A. Miner By: /s/ THOMAS M. ZAPARA
---------------------------------
Title: V.P. & CFO Thomas M. Zapara, Trustee
By: ______________________________ By: /s/ VIOLET J. ZAPARA
---------------------------------
Name: ____________________________ Violet J. Zapara, Trustee
Title: ___________________________
<PAGE> 33
LEGAL DESCRIPTION OF PREMISES
NOT INCLUDING PARKING LOT
ALTA PLAIN
LANGUAGE COMMITMENT OR-1505156
ALL THAT CERTAIN LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE,
CITY OF IRVINE, DESCRIBED AS FOLLOWS:
PARCEL 2, AS SHOWN ON A PARCEL MAP FILED IN BOOK 78, PAGES 12 AND 13 OF PARCEL
MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT ALL OIL, OIL RIGHTS, MINERALS, MINERAL RIGHTS, NATURAL GAS, NATURAL GAS
RIGHTS, AND OTHER HYDROCARBONS BY WHATSOEVER NAME KNOWN THAT MAY BE WITHIN OR
UNDER THE PARCEL OF LAND HEREINABOVE DESCRIBED, TOGETHER WITH THE PERPETUAL
RIGHT OF: DRILLING, MINING, EXPLORING AND OPERATING THEREFOR AND REMOVING THE
SAME FROM SAID LAND OR ANY OTHER LAND, INCLUDING THE RIGHT TO WHIPSTOCK OR
DIRECTIONALLY DRILL AND MINE FROM LANDS OTHER THAN THOSE HEREINABOVE DESCRIBED,
OIL OR GAS WELLS, TUNNELS AND SHAFTS INTO, THROUGH OR ACROSS THE SUBSURFACE OF
THE LAND HEREINABOVE DESCRIBED, AND TO BOTTOM SUCH WHIPSTOCKED OR DIRECTIONALLY
DRILLED WELLS, TUNNELS, AND SHAFTS UNDER AND BENEATH OR BEYOND THE EXTERIOR
LIMITS THEREOF, AND TO REDRILL, RETUNNEL, EQUIP, MAINTAIN, REPAIR, DEEPEN, AND
OPERATE ANY SUCH WELLS OR MINES, WITHOUT HOWEVER, THE RIGHT TO DRILL, MINE,
EXPLORE AND OPERATE THROUGH THE SURFACE OR THE UPPER FIVE HUNDRED (500) FEET OF
THE SUBSURFACE OF THE LAND HEREINABOVE DESCRIBED, AS RESERVED BY THE IRVINE
COMPANY, A CORPORATION, IN THE DEED RECORDED IN BOOK 9277 PAGE 256, OFFICIAL
RECORDS.
ALSO EXCEPT ALL OIL, OIL RIGHTS, MINERALS, MINERAL RIGHTS, NATURAL GAS, NATURAL
GAS RIGHTS, AND OTHER HYDROCARBONS BY WHATSOEVER NAME KNOWN THAT MAY BE: WITHIN
OR UNDER THE PARCEL OF LAND HEREINABOVE DESCRIBED, TOGETHER WITH THE PERPETUAL
RIGHT OF DRILLING, MINING, EXPLORING AND OPERATING THEREFOR AND STORING IN AND
REMOVING THE SAME FROM SAID LAND OR ANY OTHER LAND, INCLUDING THE RIGHT TO
WHIPSTOCK OR DIRECTIONALLY DRILL AND MINE FROM LANDS OTHER THAN THOSE
HEREINABOVE DESCRIBED, OIL OR GAS WELLS, TUNNELS AND SHAFTS INTO, THROUGH OR
ACROSS THE SUBSURFACE OF THE LAND HEREINABOVE DESCRIBED, AND TO BOTTOM SUCH
WHIPSTOCKED OR DIRECTIONALLY DRILLED WELLS, TUNNELS, AND SHAFTS UNDER AND
BENEATH OR BEYOND THE EXTERIOR LIMITS THEREOF, AND TO REDRILL, RETUNNEL, EQUIP,
MAINTAIN, REPAIR, DEEPEN, AND OPERATE ANY SUCH WELLS OR MINES, WITHOUT HOWEVER,
THE RIGHT TO DRILL, MINE, STORE, EXPLORE AND OPERATE THROUGH THE SURFACE OR THE
UPPER FIVE HUNDRED (500) FEET OF THE SUBSURFACE OF THE LAND HEREINABOVE
DESCRIBED, AS RESERVED IN THE DEED FROM THE IRVINE COMPANY, A MICHIGAN
CORPORATION, SUCCESSOR BY MERGER WITH IRVINE INDUSTRIAL COMPLEX, A CALIFORNIA
CORPORATION, RECORDED SEPTEMBER 21, 1977.
<PAGE> 34
ALTA PLAIN OR-1505156
LANGUAGE COMMITMENT
EXCEPT ALL WATER RIGHTS OR INTERESTS IN WATER RIGHTS NO MATTER HOW ACQUIRED AND
OWNED OR USED IN CONNECTION WITH OR WITH RESPECT TO SAID LAND, WHETHER SUCH
WATER RIGHTS SHALL BE RIPARIAN, OVERLYING, APPROPRIATE, PERCOLATING,
PRESCRIPTIVE OR CONTRACTUAL, PROVIDED, HOWEVER, THAT THE EXCEPTION AND
RESERVATION MADE HEREIN SHALL NOT RESERVE ANY RIGHT TO ENTER UPON THE SURFACE OF
SAID LAND, IN THE EXERCISE OF SUCH RIGHTS, AS RESERVED IN THE DEED FROM THE
IRVINE COMPANY, A MICHIGAN CORPORATION, SUCCESSOR BY MERGER WITH IRVINE
INDUSTRIAL COMPLEX, A CALIFORNIA CORPORATION, RECORDED SEPTEMBER 21, 1977.
<PAGE> 35
ALTA PLAIN
LANGUAGE COMMITMENT OR-1505157
ALL THAT CERTAIN LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE,
CITY OF IRVINE, DESCRIBED AS FOLLOWS:
PARCEL A:
PARCEL 2, AS SHOWN ON A MAP FILED IN BOOK 184, PAGE 43 OF PARCEL MAPS, IN THE
OFFICE OF THE COUNTY RECORDER OF ORANGE COUNTY, CALIFORNIA.
EXCEPT ALL OIL, OIL RIGHTS, MINERALS, MINERAL RIGHTS, NATURAL GAS, NATURAL GAS
RIGHTS, AND OTHER HYDROCARBONS BY WHATSOEVER NAME KNOWN, THAT MAY BE WITHIN OR
UNDER THE PARCEL OF LAND HEREINABOVE DESCRIBED, TOGETHER WITH THE PERPETUAL
RIGHT OF DRILLING, MINING, EXPLORING, AND OPERATING THEREFOR, AND STORING IN AND
REMOVING THE SAME FROM SAID LAND OR ANY OTHER LAND, INCLUDING THE RIGHT TO
WHIPSTOCK OR DIRECTIONALLY DRILL AND MINE FROM LANDS OTHER THAN THOSE
HEREINABOVE DESCRIBED, AND TO BOTTOM SUCH WHIPSTOCKED OR DIRECTIONALLY DRILLED
WELLS, TUNNELS, AND SHAFTS UNDER AND BENEATH OR BEYOND THE EXTERIOR LIMITS
THEREOF, AND TO REDRILL, RETUNNEL EQUIP, MAINTAIN, REPAIR, DEEPEN AND OPERATE
ANY SUCH WELLS OR MINES, WITHOUT, HOWEVER, THE RIGHT TO DRILL, MINE, STORE,
EXPLORE AND OPERATE THROUGH THE SURFACE OR THE UPPER 500 FEET OF THE SUBSURFACE
OF THE LAND HEREINABOVE DESCRIBED, AS RESERVED BY THE IRVINE COMPANY, A
CORPORATION, IN THE DEED RECORDED IN BOOK 9277, PAGE 256, OFFICIAL RECORDS.
PARCEL B:
AN EASEMENT FOR INGRESS AND EGRESS OVER THAT PORTION OF PARCEL 1 AS SHOWN ON A
MAP FILED IN BOOK 194, PAGE 43 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY
RECORDER OF ORANGE COUNTY, CALIFORNIA, INCLUDED WITHIN THAT CERTAIN STRIP
DELINEATED ON SAID MAP AS "PROPOSED EASEMENT FOR INGRESS AND EGRESS PURPOSES FOR
PARCEL 2".
<PAGE> 36
GUARANTY OF LEASE
WHEREAS, a certain Lease of even date herewith (the "Lease") has been,
or will be, executed by and between Thomas M. Zapara and Violet J. Zapara, as
Trustees of the Zapara Family Trust, U/D/T dated December 7, 1995 (hereinafter
referred to as "Lessor"), and ATL Products, Inc., a California corporation
(hereinafter referred to as "Lessee"), concerning the premises commonly known as
2801 Kelvin Avenue, Irvine, California, and a parking lot across the street
therefrom, (the "Premises"), wherein Lessor will lease the Premises to Lessee,
and
WHEREAS, Odetics, Inc. (hereinafter referred to as "Guarantor") has a
financial interest in Lessee, and
WHEREAS, Lessor requires as a condition to its execution of the Lease
that Guarantor execute and deliver to Lessor this Guaranty of Lease (the
"Guaranty"), guaranteeing the full performance of the obligations of Lessee
under the Lease, and
WHEREAS, Guarantor is desirous that Lessor enter into the Lease with
Lessee,
NOW, THEREFORE, for and in consideration of the execution of the Lease
by Lessor and as a material inducement to Lessor to execute said Lease,
Guarantor unconditionally and irrevocably guarantees the prompt payment by
Lessee of all rentals and all other sums payable by Lessee under said Lease and
the faithful, prompt and full performance by Lessee of each and every one of the
terms, conditions and covenants of the Lease to be kept and performed by Lessee.
Guarantor further agrees as follows:
It is specifically agreed and understood that the terms of the
foregoing Lease may be altered, modified, extended or changed by agreement
between Lessor and Lessee, or by a course of conduct, and no alteration,
modification, extension or change shall in any manner release or discharge
Guarantor, and that Guarantor shall thereupon and thereafter guarantee the
performance of the Lease as so altered, modified, extended or changed.
Lessor may, without notice, assign the Lease and this Guaranty in whole
or in part and no assignment or transfer shall operate to extinguish or diminish
the liability of Guarantor hereunder.
This Guaranty shall not be released, modified or affected by failure or
delay on the part of Lessor to enforce any of the rights or remedies of the
Lessor under said Lease whether pursuant to the terms thereof or at law or in
equity.
No notice of default need be given to Guarantor, it being specifically
agreed and understood that the liability of Guarantor is primary and the
Guaranty is a continuing guarantee under which Lessor may proceed forthwith and
immediately against Lessee or against Guarantor following any breach or default
by Lessee or for the enforcement of any rights which Lessor may have as against
Lessee pursuant to or under the terms of the Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantor hereunder
following any breach or default by Lessee without first proceeding against
Lessee and without previous notice to or demand upon either Lessee or Guarantor.
Guarantor shall pay Lessor's reasonable attorneys' fees and all costs and other
expenses incurred in any collection or attempted collection or enforcement
relative to the obligations under the Lease or relative to enforcing this
Guaranty.
Guarantor hereby waives (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations as to or relating to this Guaranty and the Lease, (d)
any right to require the Lessor to proceed against the Lessee or any other
Guarantor or any other person or entity liable to Lessor, (e) any right to
require Lessor to apply to any default any security deposit or other security it
may hold under the Lease, (f) any right to require Lessor to proceed under any
other remedy Lessor may have before proceeding against Guarantor, and (g) any
right of subrogation.
<PAGE> 37
Guarantor does hereby subrogate all existing or future indebtedness of
Lessee to Guarantor to the obligations owed to Lessor under the Lease and this
Guaranty.
The obligations of Lessee under the Lease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantor hereunder to do and provide the same
relative to Guarantor.
The term "Lessor" whenever hereinabove used refers to and means the
Lessor in the foregoing Lease specifically named and also any assignee of said
Lessor, whether by outright assignment or by assignment for security, and also
any successor to the interest of said Lessor or of any assignee in such Lease or
any part thereof, whether by assignment or otherwise.
The term "Lessee" whenever hereinabove used refers to and means the
Lessee in the foregoing Lease specifically named and also any assignee or
sublessee of said Lease and also any successor to the interests of said Lessee,
assignee or sublessee of such Lease or any part thereof, whether by assignment,
sublease or otherwise.
This Guaranty will continue unchanged by any bankruptcy, reorganization
or insolvency of Lessee or any successor or assignee thereof or by any
disaffirmance or abandonment of the Lease by a trustee of Lessee.
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be executed as
of the date of execution of the Lease.
"Guarantor"
ODETICS, INC., a California corporation
By: /s/ GREGORY A. MINER
Its: V.P. & CFO
By: ___________________________________
Its: ___________________________________
The authorized officers must sign on behalf of the corporation and
indicate the capacity in which they are signing. This Guaranty must be executed
by the president or vice president and the secretary or assistant secretary
unless the by-laws or a resolution of the board of directors shall otherwise
provide, in which event the by-laws or a certified copy of the resolution, as
the case may be, must be attached to this Lease. Also, the appropriate corporate
seal must be affixed.
<PAGE> 1
EXHIBIT 10.16
Imperial Bank
695 Town Center Drive
Suite 100
Costa Mesa, California
92626-1924
(714) 641-2200
December 19, 1996
Mr. Gregory A. Miner
Chief Financial Officer
ATL Products, Inc.
1515 South Manchester Avenue
Anaheim, California 92802-2907
Dear Mr. Miner:
It is with great pleasure that we extend to you the commitment of Imperial
Bank ("Bank") to make available to your company the following credit
accommodations:
BORROWER: ATL PRODUCTS, INC.
FACILITIES: $5,000,000 operating line of credit
PURPOSE: Support general working capital
requirements
MATURITY: July 31, 1998
REPAYMENT SCHEDULE: Interest only payments, due on the
first day of each month, with
principal due at maturity.
COLLATERAL: A first priority perfected security
interest in all corporate assets now
owned and hereafter acquired, but
not limited to, accounts receivable,
inventory, equipment and general
intangibles, pursuant to a Loan
Agreement and UCC-1 Financing
Statement.
INTEREST: Imperial Bank's announced Prime
Rate, as it may vary from time to
time.
Interest is calculated on a 360 day basis.
LIBOR Option: Borrower has the option
to borrow at the stated interest
rate above or Bank's defined LIBOR
Rate plus 225 basis points, with
30-day, 60-day, and 90-day
options. Amounts financed under
the LIBOR Option are for fixed
periods of time, with pre-payment
penalties, and must be at or above
$500,000, in $500,000 increments.
<PAGE> 2
ATL Products, Inc.
December 19, 1996
Page 2
LOAN FEE: A one-quarter of one percent
(0.25%) up-front loan fee will be
payable upon acceptance.
A one-quarter of one percent (0.25%)
non-use fee will be applied
quarterly, in arrears, to the
average unused amount under the
line of credit.
DEPOSITS: Borrower shall maintain all
general operating deposit accounts and
banking relationship at Bank.
EXPENSES: Borrower shall be responsible for
all direct expenses including the
costs of documentation and out of
pocket costs.
FINANCIAL REPORTING:
Borrower to provide to Bank.
o Quarterly, financial statements, and form 10-Q, within
forty-five (45) days of each quarter-end, accompanied by a
covenant compliance report;
o Annually, financial statements, and form 10-K, within ninety
(90) days of fiscal year end, to be audited by an accounting
firm acceptable to the Bank, and accompanied by a covenant
compliance report;
o Budgets, operating plans, and any other financial information
that Bank may reasonably request.
CREDIT TERMS AND CONDITIONS:
The extension of credit offered by the Bank to Borrower, as set forth
herein, will be subject to a "Loan Agreement" including, but not
limited to, financial covenants, limitations on capital expenditures,
limitations on distributions and dividends, and limitations on
officer's salaries as negotiated by and between Borrower and Bank.
CONDITIONS PRECEDENT TO LENDING:
o The completion of a successful public offering of the
Borrower's common stock, yielding at least $17,000,000 in
proceeds, of which 40% will be distributed to Odetics, Inc.,
as repayment on intercompany debt;
o Evidence, satisfactory to Bank, of the perfection of all
security interests granted to Bank.
o Completion of documentation.
<PAGE> 3
ATL Products, Inc.
December 19, 1996
Page 3
CONFIDENTIALITY:
This letter is provided solely for your information and is delivered to you
with the understanding that neither it, nor its substance, shall be disclosed
to any third person, except those who are in confidential relationship to
you, or where the same is required by law.
Please indicate your acceptance of this commitment by executing the enclosed
copy of this letter and return it to us prior to January 31, 1997, at which
time this commitment will expire unless accepted or extended by Imperial Bank
in writing. In any event, funding of the facility discussed in this commitment
letter shall occur on or before June 30, 1997, at which time this commitment
will expire.
Sincerely,
/s/ Tony Vedova /s/ Caroline Harkins
- -------------------------- ----------------------------
J. Tony Vedova Caroline Harkins
Vice President Regional Vice President
ACCEPTED AND AGREED TO:
ATL Products, Inc.
By: /s/ Gregory A. Miner, CFO
----------------------------
Date: 12/19/96
----------------------------
<PAGE> 1
EXHIBIT 10.17
December 20, 1996
Mr. Gregory A. Miner
Vice President and Chief Financial Officer
Odetics, Inc.
1515 South Manchester
Anaheim, CA 92802-2907
Dear Greg:
Reference is hereby made to that certain Loan and Security Agreement dated as
of August 30, 1994, as amended (the "Agreement"), among Odetics, Inc., ATL
Products, Inc., and Gyyr, Incorporated (collectively the "Borrowers"), Imperial
Bank ("Imperial"), and Comerica Bank-California ("Comerica"). Capitalized
terms used herein and not otherwise defined shall have the respective meanings
set forth in the Agreement.
We hereby confirm the commitment of Imperial and Comerica to enter into
Amendment Number Six to the Loan and Security Agreement (the "Sixth Agreement")
which would include, but not be limited to, the following:
1. Release of ATL Products, Inc. as a co-borrower;
2. Release of the security interest in assets owned by ATL Products,
Inc.;
3. Concurrent with the Successful Offering of ATL Products, Inc.,
revision of covenants under section 10.16 of the Agreement,
primarily sections 10.16(c), 10.16(d), and section 10.16(e).
This commitment letter is not meant to define all of the provisions which will
be contained in the definitive legal documentation for this transaction. Rather,
it is intended to outline the basic points of our understanding around which
the final terms and documentation are to be structured.
The commitment of Imperial and Comerica to enter into the Sixth Amendment is
contingent upon (a) the completion of a successful public offering of the
common stock of ATL Products, Inc., yielding at least $17,000,000 in proceeds
net of underwriting discounts and commissions ("Successful Offering"), (b) the
distribution of 40% of the net proceeds of the Successful Offering by ATL
Products, Inc. to Odetics, Inc. as a principal reduction on the intercompany
note, (c) the reduction of the outstanding principal balance under the
Agreement in an amount equal to the distribution to Odetics, Inc., (d) the
execution and delivery of documentation which shall be in form and substance
satisfactory to Imperial and Comerica and their respective counsel, and (e) the
continued satisfaction of Imperial and Comerica with the Borrowers' business
and condition (financial or otherwise).
<PAGE> 2
Mr. Gregory A. Miner
December 20, 1996
Page 2
The Borrowers agree to pay all reasonable costs, fees and expenses incurred by
Imperial and Comerica in connection with the preparation and execution of the
Sixth Amendment, including, without limitation, the fees and related
disbursements of any legal counsel.
The commitment of Imperial and Comerica contained herein shall automatically
terminate unless documentation is executed by all parties thereto on or before
March 31, 1997.
Sincerely,
IMPERIAL BANK COMERICA BANK-CALIFORNIA
/s/ CAROLINE HARKINS /s/ LORI EDWARDS
- ---------------------------- -------------------------------
Caroline Harkins Lori S. Edwards
Regional Vice President First Vice President
<PAGE> 1
EXHIBIT 11.1
ATL PRODUCTS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months
Year Ended March 31 Ended December 31
--------------------------------------------------------------------------
1994 1995 1996 1995 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average shares outstanding 8,005,000 8,005,000 8,005,000 8,005,000 8,005,000
Shares related to SAB No. 83 479,455 479,455 479,455 479,455 479,455
--------------------------------------------------------------------------
Shares used in computing net income (loss)
per share 8,484,455 8,484,455 8,484,455 8,484,455 8,484,455
==========================================================================
Net Income (Loss) (1,895,000) (7,515,000) (1,444,000) (2,643,000) 2,700,000
Income (loss) per share (.22) (.89) (.17) (.31) .32
==========================================================================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated January 29,
1997, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-15837)
and related Prospectus of ATL Products, Inc. for the registration of 1,895,000
shares of its Class A Common Stock.
/s/ ERNST & YOUNG LLP
Orange County, California
January 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 10,278
<ALLOWANCES> 229
<INVENTORY> 7,134
<CURRENT-ASSETS> 17,488
<PP&E> 1,807
<DEPRECIATION> 1,687
<TOTAL-ASSETS> 19,295
<CURRENT-LIABILITIES> 27,462
<BONDS> 0
0
0
<COMMON> 1,010
<OTHER-SE> (9,177)
<TOTAL-LIABILITY-AND-EQUITY> 19,295
<SALES> 37,830
<TOTAL-REVENUES> 41,915
<CGS> 25,407
<TOTAL-COSTS> 10,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 163
<INTEREST-EXPENSE> 1,301
<INCOME-PRETAX> 4,499
<INCOME-TAX> 1,799
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,700
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
