<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to __________________
Commission file number 000-22037
--------------------------------------------
ATL PRODUCTS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-3824281
------------------------------- ------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2801 KELVIN AVENUE, IRVINE, CALIFORNIA 92614
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(714) 774-6900
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Addressed and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of November 12, 1997
Class A Common Stock - 9,655,000 shares
Class B Common Stock - No shares outstanding
<PAGE> 2
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements (Unaudited) Page
-----
<S> <C> <C>
Consolidated Balance Sheets as of September 30, 1997 and March 31, 1997.................... 3
Consolidated Statements of Operations for the three months and six months ended
September 30, 1997 and 1996................................................................ 5
Consolidated Statements of Cash Flows for the six months ended
September 30, 1997 and 1996................................................................ 6
Notes to Condensed Consolidated Financial Statements ...................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders....................................... 15
ITEM 6. Exhibits and Reports on Form 8-K .......................................................... 15
Signatures ........................................................................................ 16
</TABLE>
-2-
<PAGE> 3
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
(UNAUDITED)
----------- -----------
ASSETS (IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,876 $ 9,494
TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $458 IN SEPTEMBER 1997 AND $319 IN MARCH 1997 19,456 12,730
INVENTORIES:
MATERIALS AND SUPPLIES 8,053 8,671
WORK IN PROCESS 2,276 1,019
FINISHED GOODS 3,428 2,937
PREPAID EXPENSES AND OTHER 225 355
-------- --------
TOTAL CURRENT ASSETS 35,314 35,206
BUILDINGS AND EQUIPMENT
LEASEHOLD IMPROVEMENTS 1,015 596
EQUIPMENT 5,189 3,967
ALLOWANCES FOR DEPRECIATION (2,300) (1,844)
-------- --------
BUILDINGS AND EQUIPMENT, NET 3,904 2,719
======== ========
TOTAL ASSETS $ 39,218 $ 37,925
======== ========
</TABLE>
-3-
<PAGE> 4
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
(UNAUDITED)
--------- --------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $ 8,477 $ 9,676
ACCRUED PAYROLL AND RELATED 2,033 1,545
INCOME TAXES PAYABLE 1,937 2,018
DEFERRED SERVICE INCOME 1,948 1,116
OTHER ACCRUED EXPENSES 1,361 1,199
PAYABLE TO PARENT 169 509
CURRENT PORTION OF NOTE PAYABLE TO PARENT 3,249 3,249
-------- --------
TOTAL CURRENT LIABILITIES 19,174 19,312
LONG-TERM NOTE PAYABLE TO PARENT 8,402 9,748
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, PAR VALUE $.0001;
5,000,000 SHARES AUTHORIZED, NO SHARES
ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997 AND
MARCH 31, 1997
-- --
COMMON STOCK, PAR VALUE $.0001; 45,000,000 CLASS A
SHARES AND 5,000,000 CLASS B SHARES AUTHORIZED;
9,655,000 CLASS A SHARES ISSUED AND OUTSTANDING AT
SEPTEMBER 30, 1997 AND MARCH 31, 1997; NO CLASS B
SHARES ISSUED AND OUTSTANDING 1 1
ADDITIONAL PAID IN CAPITAL 16,927 16,927
ACCUMULATED DEFICIT (5,284) (8,065)
CUMULATIVE TRANSLATION ADJUSTMENT (2) 2
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,642 8,865
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,218 $ 37,925
======== ========
</TABLE>
-4-
<PAGE> 5
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES:
PRODUCTS $19,816 $12,768 $36,493 $24,186
SERVICE AND SPARE PARTS 3,086 1,495 4,976 2,854
------- ------- ------- -------
TOTAL NET SALES 22,902 14,263 41,469 27,040
COST OF SALES:
PRODUCTS 12,433 8,010 22,406 15,002
SERVICE AND SPARE PARTS 1,707 279 2,922 1,138
------- ------- ------- -------
TOTAL COST OF SALES 14,140 8,289 25,328 16,140
------- ------- ------- -------
GROSS PROFIT 8,762 5,974 16,141 10,900
EXPENSES:
RESEARCH AND DEVELOPMENT 1,837 1,110 3,598 1,695
SALES AND MARKETING 3,022 1,315 5,720 2,829
GENERAL AND ADMINISTRATIVE 992 819 1,653 1,599
------- ------- ------- -------
INCOME FROM OPERATIONS 2,911 2,730 5,170 4,777
INTEREST CHARGED BY PARENT 259 434 535 929
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,652 2,296 4,635 3,848
INCOME TAXES 1,061 918 1,854 1,539
------- ------- ------- -------
NET INCOME $ 1,591 $ 1,378 $ 2,781 $ 2,309
======= ======= ======= =======
NET INCOME PER SHARE $ 0.16 $ 0.16 $ 0.29 $ 0.27
======= ======= ======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 9,687 8,484 9,655 8,484
======= ======= ======= =======
</TABLE>
-5-
<PAGE> 6
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------- -------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 2,781 $ 2,309
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
DEPRECIATION AND AMORTIZATION 817 199
PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE 139 (518)
PROVISION FOR INVENTORY WRITE-DOWN 270 (827)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (4) (2)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE (6,865) 2,448
(INCREASE) DECREASE IN INVENTORIES (1,761) (2,259)
(INCREASE) DECREASE IN PREPAID EXPENSES
AND OTHER ASSETS 130 (19)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 202 (622)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,291) 709
INVESTING ACTIVITIES
PURCHASES OF LEASEHOLD IMPROVEMENTS
AND EQUIPMENT (1,641) (684)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,641) (684)
FINANCING ACTIVITIES
NET CASH PAID TO PARENT (1,686) (25)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,686) (25)
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,618) 0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,494 1
======= =======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,876 $ 1
======= =======
</TABLE>
-6-
<PAGE> 7
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Note A - Basis of Presentation
The accompanying unaudited (except for balance sheet information as of March 31,
1997) consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The accompanying consolidated financial statements do not include
certain footnotes and financial presentation normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended March 31, 1997. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
Note B - Distribution of Parent Company's Equity Interest in Company
On October 2, 1997, Odetics, Inc., the Company's Parent, announced that it had
received a favorable Section 355 distribution ruling from the Internal Revenue
Service allowing it to distribute, on a tax free basis, its 82.9% ownership of
the Company to Odetics shareholders. On October 31, 1997, Odetics completed the
distribution by issuing approximately 1.1 shares of ATL Products, Inc. Class A
Common Stock for each share of Odetics Class A Common Stock and Class B Common
Stock outstanding.
Note C - Earnings per Share
Earnings per share is based on the weighted average number of shares of common
stock and the dilutive effects of common stock equivalents (stock options),
determined using the treasury stock method.
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, effective for both
interim and annual periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. The impact of this statement on the
calculation of primary and fully diluted earnings per share for the three and
six month periods ended September 30, 1997 and 1996 is not expected to be
material.
-7-
<PAGE> 8
ITEM 2. 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 related Notes thereto contained
elsewhere in this Report and the Consolidated and Combined Financial Statements
and the related Notes thereto included in the latest Annual Report on Form 10-K
of ATL Products, Inc. (the "Company"). This Report contains forward-looking
statements including, among others, statements concerning projected revenues,
funding requirements, manufacturing efficiencies and supply issues, that involve
a number of risks and uncertainties including, without limitation, those set
forth at the end of this section under the caption "Risk Factors". The Company's
actual results may differ materially from any forward-looking statements
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations. Readers are cautioned not to place undue reliance on
these forward looking statements which speak only as of the date hereof. The
Company undertakes no obligation to republish revised forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
Net Sales. Total net sales increased 61% to $22,902,000 for the second
quarter of fiscal 1998 as compared to total net sales of $14,263,000 in the
second quarter of the prior fiscal year, and increased 53% to $41,469,000 for
the six month period ended September 1997 as compared to total net sales of
$27,040,000 for the same period of the prior fiscal year.
Product sales increased 55% to $19,816,000 for the second quarter of fiscal
1998 as compared to $12,768,000 in the corresponding period of the prior fiscal
year and increased 51% to $36,493,000 for the six month period ended September
30, 1997 as compared to $24,186,000 for the same prior year period. The
increases for both the three and six month periods ended September 30, 1997 are
primarily attributable to higher sales of the 7100 series libraries which began
shipping in the last quarter of fiscal 1997 and accounted for approximately 26%
of second quarter product sales and approximately 22% of six month product
sales. Sales of 2640 series libraries increased in both the three and six month
periods ended September 30, 1997 while sales of 520 series libraries were
relatively flat for the same periods due primarily to a product mix shift into
the Company's new 7100 series libraries. Also contributing to the increased
fiscal 1998 second quarter sales performance was an overall increase in the
availability of DLT7000 drives. Sales in the OEM and VAR channels each accounted
for approximately 50% of product sales for the three and six month periods ended
September 30, 1997 compared to OEM sales of approximately 28% for the three and
six month prior year periods.
Service and parts sales include revenue derived from the sale of spare
parts and service contracts to support the installed base of the Company's
products. Service sales increased 106% to $3,086,000 for the second quarter of
fiscal 1998 as compared to $1,495,000 in the corresponding prior year period,
and increased 74% to $4,976,000 for the six month period ended September 30,
1997 as compared to $2,854,000 for the comparable prior year period. These
increases are due primarily to both higher parts and service contract sales
consistent with a growing installed base of libraries now totaling approximately
3,500 units.
Gross Profit. Gross profit decreased to 38.3% for the second quarter of
fiscal 1998 from 41.9% for the comparable prior year quarter and decreased to
38.9% for the six month period ended September 30, 1997 from 40.3% for the same
comparable prior year period.
Gross profit on product sales remained unchanged at 37.3% for the second
quarter of fiscal 1998 as compared to the second quarter of the prior fiscal
year, and increased to 38.6% for the six month period ended September 30, 1997
as compared to 38.0% for the same prior year period. The change in product gross
profit percentage is attributable to improved manufacturing overhead absorption
resulting from the increased sales volume. This improvement was offset by a
reduction in gross profit due to a change in sales mix that included higher OEM
revenue at lower sales prices and an increase in the average value of the drive
component of the products shipped. The Company anticipates that overall gross
profit margin may decline due to a continued shift toward increased OEM revenues
and an increase in the average value of the drive component of the products
shipped. While the Company continues working with its suppliers to reduce its
costs of materials and to
-8-
<PAGE> 9
improve manufacturing efficiencies, there can be no assurance these actions will
be sufficient to offset future reductions in sales prices.
Gross profit on service and spare parts sales decreased to 44.7% for the
second quarter of fiscal 1998 as compared to 81.3% for the second quarter of the
prior fiscal year and decreased to 41.3% for the six month period ended
September 30, 1997 as compared to 60.1% for the same period of the prior fiscal
year. The decrease for both periods reflects a nonrecurring adjustment to
inventory reserves in the second quarter of fiscal 1997.
Research and Development. Research and development expense increased 65% to
$1,837,000 (or 8.0% of total net sales) for the second quarter of fiscal 1998 as
compared to $1,110,000 (or 7.8% of total net sales) in the comparable prior year
period and increased 112% to 3,598,000 (or 8.7% of total net sales) for the six
month period ended September 1997 as compared to $1,695,000 (or 6.3% of total
net sales) for the same period of the prior fiscal year. Research and
development expense for the three and six month periods of fiscal 1998 was
driven primarily by increased development, testing and preproduction costs
associated with the Company's Prism products. The Company expects expenditures
for research and development to increase over time and to be higher during
periods of new product development when significant expenditures are incurred
for preproduction activities and increased testing. These expenditures may,
therefore, fluctuate as a percentage of total net sales from period to period.
Sales and Marketing. Sales and marketing expense increased to $3,022,000
(or 13.2% of total net sales) for the second quarter of fiscal 1998 as compared
to $1,315,000 (or 9.2% of total net sales) in the corresponding period of the
prior fiscal year and increased to $5,720,000 (or 13.8% of total net sales) for
the six month period ended September 30, 1997 as compared to $2,829,000 (or
10.7% of total net sales) for the same period of the prior fiscal year. The
increases for both comparable periods is primarily attributable to additional
personnel and general infrastructure growth, higher promotional spending and
increased sales expenditures consistent with increased sales volume.
General and Administrative. General and administrative expense, which
includes charges allocated by the Parent increased in dollars to $992,000 (or
4.3% of total net sales) for the second quarter of fiscal 1998 compared to
$819,000 (or 5.7% of total net sales) in the prior year quarter and increased to
$1,653,000 (or 4.0% of total net sales) for the six month period ended September
1997 as compared to $1,599,000 (or 5.9% of total net sales) for the same period
of the prior fiscal year. The increase for both comparable periods primarily
reflects the addition of personnel to support the Company's increased
operations. Charges allocated by Parent in the second quarter of fiscal 1998
were approximately $175,000 compared to $365,000 allocated in the second quarter
of fiscal 1997 and were approximately $350,000 for the six month period ended
September 30, 1997 as compared to $736,000 for the same period of the prior
fiscal year. The decline in charges allocated by the Parent was due to the
transition of various operating activities to the Company which were previously
provided by the Parent.
Interest Charged by Parent. The Company's Parent, Odetics Inc. has
historically advanced funds to meet the Company's capital requirements and has
charged the Company interest on the resulting intercompany balance determined
using Odetics' cost of related borrowed funds. On April 1, 1997, after
completion of the Company's initial public offering ("IPO") and payment to
Odetics of $6.8 million of the net proceeds of the IPO, the Company entered into
a four year promissory note payable to Odetics in the original principal amount
of $13.0 million which represented the aggregate total of the intercompany
balance due to Odetics. As a result of the reduction in debt to the Parent,
interest decreased 40% to $259,000 for the second quarter of fiscal 1998 as
compared to $434,000 in the corresponding period of the prior fiscal year, and
decreased 42% to $535,000 for the six month period ended September 1997 compared
to $929,000 for the same period of the prior fiscal year. In addition, effective
April 1, 1997, the Company has assumed responsibility for many of the charges
that were historically processed through intercompany obligations prior to the
Company's IPO. All intercompany obligations incurred after April 1, 1997 are
paid on a non-interest bearing open account basis.
Income Taxes. The Company is included in the consolidated federal tax
return of Odetics. The Company is a party to 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 equal
to the taxes attributable to the operations of the Company on the consolidated
federal income tax returns and consolidated or combined state tax returns filed
by Odetics. In addition, the Tax Allocation Agreement provides that members of
the Odetics' consolidated group generating tax losses will be paid by other
members which utilize tax losses to reduce such other members' tax liability.
The Company's effective tax rate was 40% for the second quarter of fiscal 1998
and the six months ended September 1997 and both comparable periods of the prior
fiscal year.
-9-
<PAGE> 10
Liquidity and Capital Resources
For the six months ended September 30, 1997, the Company incurred a reduction in
cash and cash equivalents of $7,618,000. Operating activities consumed
$4,291,000 which included net income of $2,781,000 that was reduced by increases
in accounts receivable of $6,865,000 and increases in inventory of $1,761,000
resulting from sales growth during the period. The Company also used $1,641,000
to purchase equipment and make leasehold improvements in its principal operating
facilities, and paid $1,686,000 in principal on its note payable to its Parent,
Odetics, and other net intercompany account obligations due to Odetics.
The Company has a $5,000,000 bank line of credit which provides for borrowings
generally at the lesser of the bank's prime rate (8.5% at September 30, 1997) or
the bank's LIBOR rate plus 2.25%. The Company had no borrowings against the bank
line of credit at September 30, 1997. Any borrowings under the Company's bank
line of credit will be secured by substantially all of the Company's assets. The
Company believes that cash flow generated from operations, in conjunction with
funds available under the Company's bank line of credit, will be adequate to
execute its current operating plans and meet its obligations on a timely basis.
The Company does not have any material commitments for capital expenditures as
of September 30, 1997.
RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. The following risks should be considered carefully in addition
to the other information contained in this Report in evaluating the Company and
its business before purchasing the shares of the Company's Class A Common Stock
("Common Stock").
Fluctuations in Quarterly Operating Results
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. 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. There can be no assurance that the Company will achieve
profitability on a quarterly or annual basis in the future. 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.
Dependence on Quantum Corporation and DLT Technology
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
-10-
<PAGE> 11
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 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. 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 Company's success also depends in large part upon
its relationship with Quantum, who has the exclusive worldwide manufacturing
rights for the DLT technology and is the sole supplier of DLT tape drives, and
upon the Company's ability to continue to obtain adequate supplies of DLT drives
from Quantum. Growth in the demand for the DLT7000 drives could result in
limitations in the availability of these drives and there can be no assurance
that Quantum will otherwise continue to provide an adequate supply of the
DLT7000 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 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.
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 P1000 (which was introduced in May 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 P1000 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
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.
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, Breece Hill Technologies, Hewlett-Packard, Overland
Data and StorageTek. 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. 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. The Company also expects additional competition
from large integrated computer
-11-
<PAGE> 12
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.
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 24% and 33% of the
Company's total net sales in fiscal 1996 and 1997, respectively and
approximately 50% in the first six months of fiscal 1998. 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. 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. Three customers, Sun Microsystems, EMC Corporation, and Digital
Equipment Corporation, together accounted for approximately 45% of the Company's
total net sales during the first six months of fiscal 1998. 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.
Management of Expanding Operations; Limited History as an Independent Entity
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 September 30, 1997, the
size of the Company's staff increased from 66 to 247 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. Through September 30, 1997 the Company, as a subsidiary
of Odetics, had no operating history as an independent public company. The
Company's ability to manage growth effectively will require it to install its
own operational, financial and management controls, reporting systems and
procedures independent from Odetics, 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, 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.
-12-
<PAGE> 13
Possibility of Substantial Sales of Common Stock
On October 31, 1997, Odetics distributed all of its Common Stock of the Company
to the stockholders of Odetics (the "Distribution"). The Distribution involved
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.
Risks Associated with International Sales
International product sales represented approximately 19% and 21% of the
Company's total net sales during fiscal 1996 and 1997, respectively and 24% in
the first six months of fiscal 1998. 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. 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 net sales 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.
Dependence on Proprietary Technology; Risks of Infringement
The Company's ability to compete effectively depends in part on its ability to
develop and maintain the proprietary aspects of its technology. 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. 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.
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.
Future Capital Requirements
The Company's ability to fund its activities from operations is directly
dependent upon its rate of growth, ability to effectively manage its inventory,
the terms under which suppliers extend credit to the Company, the terms under
which the Company extends credit to its customers and its ability to collect
under such terms, the manner in which it finances any capital expansion and the
Company's ability to access external sources of financing. The Company has
entered into a four year promissory note payable to Odetics in the amount of
approximately $13.0 million as of April 1, 1997. This note is payable in sixteen
equal quarterly installments of principal plus interest beginning June 30,
1997. The Company believes that cash flow
-13-
<PAGE> 14
generated from operations, in conjunction with funds available under the
Company's bank line of credit, will be adequate to execute its current
operating plans and meet its obligations on a timely basis.
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 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.
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 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 and may make 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.
-14-
<PAGE> 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on September 4, 1997.
The following elections and proposals were approved at the Company's Annual
Meeting:
<TABLE>
Votes Votes Votes
For Against Abstentions Withheld
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
Kevin C. Daly, Ph.D. 9,413,756 -0- -0- 500
Crandall Gudmundson 9,413,756 -0- -0- 500
Joel Slutzky 9,413,756 -0- -0- 500
Paul E. Wright 9,413,756 -0- -0- 500
Proposal to approve the 1997 Stock Incentive Plan
and reservation of 200,000 shares of Class A
Common Stock for issuance thereunder 9,209,680 195,876 8,700 -0-
Proposal to ratify Ernst & Young LLP as the
Company's independent auditors for the fiscal
year ending March 31, 1998 9,411,046 -0- 3,200 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended September 30,
1997.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATL PRODUCTS, INC.
(Registrant)
By /s/ Mark P. deRaad
----------------------------
Mark P. deRaad
Chief Financial Officer
By /s/ James A. Pipp
----------------------------
James A. Pipp
Vice President, Controller
(Principal Accounting Officer)
Dated: November 12, 1997
-16-
<PAGE> 17
EXHIBIT INDEX
Exhibits
- --------
27 Financial Data Schedule
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,876
<SECURITIES> 0
<RECEIVABLES> 19,456
<ALLOWANCES> 458
<INVENTORY> 13,757
<CURRENT-ASSETS> 35,314
<PP&E> 6,204
<DEPRECIATION> 2,300
<TOTAL-ASSETS> 39,218
<CURRENT-LIABILITIES> 19,174
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 11,641
<TOTAL-LIABILITY-AND-EQUITY> 39,218
<SALES> 41,469
<TOTAL-REVENUES> 41,469
<CGS> 25,328
<TOTAL-COSTS> 25,328
<OTHER-EXPENSES> 10,971
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 535
<INCOME-PRETAX> 4,635
<INCOME-TAX> 1,854
<INCOME-CONTINUING> 2,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,781
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
