<PAGE> 1
1,650,000 SHARES
ATL 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. See "Underwriting" for factors considered in determining the
initial public offering price. The Common Stock has been 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, the Company had outstanding options to purchase 879,000 shares of
Class B Common Stock at an exercise price of $5.00 per share, the fair value of
the underlying Class B Common Stock on the option grant date as determined by
the Company's Board of Directors. No shares of Class B Common Stock were
outstanding as of the date of this Prospectus. 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 40% of the net proceeds of this
Offering before deducting offering expenses 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>
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Per Share................................ $11.00 $0.77 $10.23
Total(3)................................. $18,150,000 $1,270,500 $16,879,500
=========================================================================================
</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 $20,845,000, the Underwriting Discount will
total $1,459,150 and the Proceeds to Company will total $19,385,850. 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 March 12, 1997.
------------------------
MONTGOMERY SECURITIES CRUTTENDEN ROTH
INCORPORATED
March 7, 1997
<PAGE> 2
ATL PRODUCTS
STORAGE AUTOMATION
FOR THE OPEN ENTERPRISE
[Artwork consists of a group of the Company's products]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
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> 4
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
1,900 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> 5
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 intends to apply), 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
40% of the net proceeds of this Offering before deducting offering expenses
($6.8 million assuming no exercise of the Underwriters' over-allotment option)
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 ($11.8 million if
the Underwriters' over-allotment option is exercised in full). 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> 6
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 40% of the net
proceeds of this Offering before deducting
offering expenses and for general corporate
purposes, including working capital. See "Use
of Proceeds."
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 6 of Notes to Consolidated and Combined Financial
Statements."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ------------------
1994 1995 1996 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total net sales........................... $20,506 $22,641 $29,410 $17,571 $42,452
Gross profit.............................. 4,789 5,718 10,547 5,610 17,011
Income (loss) from operations............. (1,353) (6,272) 758 (968) 5,988
Net income (loss)......................... $(1,895) $(7,515) $(1,189) $(2,421) $ 2,813
======= ======= ======= ======= =======
Net income (loss) per share............... $ (.22) $ (.89) $ (.14) $ (.29) $ .33
======= ======= ======= ======= =======
Shares used in computation of net income
(loss) per share(1).................... 8,484 8,484 8,484 8,484 8,484
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<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) See Note 1 of Notes to Consolidated and Combined Financial Statements.
(2) Adjusted to reflect the sale of 1,650,000 shares of Common Stock by the
Company at the initial public offering price of $11 per share and the
application of the 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 and assuming no exercise of the
Underwriters' over-allotment option. See "Use of Proceeds."
5
<PAGE> 7
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
expenses of 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> 8
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> 9
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%, 64%, 24%
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
8
<PAGE> 10
historically varied from period to period. Sales to DEC accounted for
approximately 18.0% of the Company's net sales for the year ended March 31,
1996. Sales to EMC accounted for approximately 12.8% 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 53.9% of the Company's net
sales during the 21 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 66 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> 11
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 21% and 19% of the
Company's 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 manner, the
10
<PAGE> 12
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> 13
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 40% of the net proceeds of this
Offering before deducting offering expenses ($6.8 million assuming no exercise
of the Underwriters' over-allotment option) 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 ($11.8 million if the Underwriters' over-allotment
option is exercised in full). 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; NO ASSURANCE OF 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 will apply), 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. In particular, although Odetics has
had a conference with the Internal Revenue Service to discuss the issuance of a
private ruling, no assurance can be given that a favorable ruling will
ultimately be received or as to the time required to obtain a ruling. 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,
12
<PAGE> 14
the Company will be able to expand into other markets. If the distributed
computing markets fail to grow or 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> 15
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> 16
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, will be $16,304,500 ($18,810,850 if
the Underwriters' over-allotment option is exercised in full).
The Company will pay to Odetics 40% of the net proceeds of this Offering
prior to deducting offering expenses ($6.8 million assuming no exercise of the
Underwriters' over-allotment option) 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 ($11.8 million if the
Underwriters' over-allotment option is exercised). 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> 17
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the Company's (i)
actual capitalization, and (ii) 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 net proceeds therefrom (after deducting the underwriting
discount and estimated offering expenses). The capitalization information set
forth in the table below is qualified by the more detailed Consolidated and
Combined 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 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 40% of the net proceeds of this Offering
before deducting offering expenses 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> 18
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 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> 19
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 and combined 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 and combined financial
statements for such period included elsewhere in this Prospectus. In the opinion
of management, such unaudited consolidated and combined 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
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated and
Combined Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales:
Products............................... $ 3,579 $ 5,592 $15,534 $15,898 $ 24,795 $ 14,391 $38,267
Service and spare parts................ 4,270 4,344 4,972 6,743 4,615 3,180 4,185
------- ------- ------- ------- ------- ------- -------
Total net sales.......................... 7,849 9,936 20,506 22,641 29,410 17,571 42,452
------- ------- ------- ------- ------- ------- -------
Gross profit:
Products............................... 635 34 3,136 3,623 9,113 4,819 14,847
Service and spare parts................ 1,678 1,589 1,653 2,095 1,434 791 2,164
------- ------- ------- ------- ------- ------- -------
Total gross profit....................... 2,313 1,623 4,789 5,718 10,547 5,610 17,011
Expenses:
Research and development............... 1,607 1,654 2,285 3,248 1,731 1,275 3,751
Sales and marketing.................... 394 711 1,308 1,838 3,718 2,290 4,727
General and administrative............. 750 951 1,195 1,299 1,414 1,032 1,432
Charges allocated by parent............ 874 1,582 1,354 1,563 1,534 1,108 1,113
Nonrecurring charge.................... -- -- -- 4,042 1,392 873 --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............ (1,312) (3,275) (1,353) (6,272) 758 (968) 5,988
Interest charges allocated by parent..... -- -- 542 1,243 1,861 1,379 1,301
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes........ (1,312) (3,275) (1,895) (7,515) (1,103) (2,347) 4,687
Income taxes............................. -- -- -- -- 86 74 1,874
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................ $(1,312) $(3,275) $(1,895) $(7,515) $ (1,189) $ (2,421) $ 2,813
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share.............. $ (.15) $ (.39) $ (.22) $ (.89) $ (.14) $ (.29) $ .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
======= ======= ======= ======= ======= ======= =======
</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>
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> 20
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 and Combined 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.
Effective July 1, 1996, the Company established its own wholly owned
European subsidiary, ATL Products Limited ("APL"), to facilitate the Company's
sales in Europe. For periods prior to the establishment of APL, the Company
utilized a subsidiary of Odetics for administrative services related to the
distribution of its products in Europe. The revenues, costs and expenses
incurred by this entity that relate to the Company's products have been combined
in the accompanying selected financial data for all applicable periods in order
to present these activities in a manner similar to a pooling of interests.
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 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
19
<PAGE> 21
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 total net sales represented by each item in the Company's consolidated
statement of operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Products.................................. 45.6% 56.3% 75.8% 70.2% 84.3% 81.9% 90.1%
Service and spare parts................... 54.4 43.7 24.2 29.8 15.7 18.1 9.9
----- ----- ----- ----- ----- ----- -----
Total net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit:
Products.................................. 17.7 0.6 20.2 22.8 36.8 33.5 38.8
Service and spare parts................... 39.3 36.6 33.2 31.1 31.1 24.9 51.7
----- ----- ----- ----- ----- ----- -----
Total gross profit.......................... 29.5 16.3 23.4 25.3 35.9 31.9 40.1
Expenses:
Research and development.................. 20.5 16.6 11.2 14.4 5.9 7.3 8.8
Sales and marketing....................... 5.0 7.2 6.4 8.1 12.6 13.0 11.2
General and administrative................ 9.6 9.6 5.8 5.7 4.8 5.9 3.4
Charges allocated by parent............... 11.1 15.9 6.6 6.9 5.2 6.3 2.6
Nonrecurring charge....................... -- -- -- 17.9 4.8 5.0 --
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations............... (16.7) (33.0) (6.6) (27.7) 2.6 (5.6) 14.1
Interest charges allocated by parent........ -- -- 2.6 5.5 6.3 7.8 3.1
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes........... (16.7) (33.0) (9.2) (33.2) (3.7) (13.4) 11.0
Income taxes................................ -- -- -- -- 0.3 0.4% 4.4
----- ----- ----- ----- ----- ----- -----
Net income (loss)........................... (16.7)% (33.0)% (9.2)% (33.2)% (4.0)% (13.8)% 6.6%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Net Sales. Total net sales increased 141.6% to $42.5 million for the nine
month period ended December 31, 1996, as compared to total net sales of $17.6
million for the comparable nine month period in the prior fiscal year. Total net
sales increased 29.9% to $29.4 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.
Product sales increased 165.9% to $38.3 million for the nine month period
ended December 31, 1996, as compared to $14.4 million for the comparable nine
month period in fiscal 1996, primarily reflecting increased unit sales of the
Company's DLT based products. 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 9.9% of total net sales for the
nine months ended December 31, 1996 as compared to 18.1% for the comparable
period in the prior fiscal year, and declined to 15.7% 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
20
<PAGE> 22
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.
Gross Profit. Total gross profit as a percentage of total net sales
increased to 40.1% for the nine months ended December 31, 1996 from 31.9% for
the comparable period in fiscal 1996 and increased to 35.9% in fiscal 1996 from
25.3% in fiscal 1995 and 23.4% in fiscal 1994.
Gross profit on product sales was 36.8%, 22.8% and 20.2% for the years
ended March 31, 1996, 1995 and 1994, and 38.8% for the nine months ended
December 31, 1996, respectively. 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.
Research and Development. For the nine month period ended December 31,
1996, research and development expense increased to $3.8 million, or 8.8% of
total net sales, from $1.3 million, or 7.3% 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 5.9% 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.
Sales and Marketing. Sales and marketing expense increased 106.4% to $4.7
million (or 11.2% of net sales) for the nine month period ended December 31,
1996 from $2.3 million (or 13.0% of total net sales) for the comparable nine
month period in fiscal 1996. Sales and marketing expense increased 102.3% to
$3.7 million in the year ended March 31, 1996 (or 12.6% 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, particularly to support
its expanded European operations, including advertising and promotion as well as
higher sales commissions associated with higher sales. The
21
<PAGE> 23
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.
General and Administrative. General and administrative expense increased
38.8% to $1.4 million (or 3.4% of total net sales) for the nine month period
ended December 31, 1996 from $1.0 million (or 5.9% of total net sales) for the
comparable nine month period in fiscal 1996. For the year ended March 31, 1996,
general and administrative expense was $1.4 million (or 4.8% of total net sales)
which increased 8.9% 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.
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 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 129.3% 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 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 will provide that members of the Odetics consolidated group generating
tax losses after April 1, 1996 will be paid by other members which utilize such
tax losses to reduce such other members' tax liability. 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.
The provision for income taxes for the year ended March 31, 1996 is
comprised of apportioned foreign income taxes for income earned by a subsidiary
of Odetics from administrative services provided on sales of the Company's
products in Europe. The revenues, costs, and expenses incurred by this entity
that relate to the Company's products have been combined in the accompanying
selected financial data.
22
<PAGE> 24
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.
<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>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales:
Products......................... $ 2,391 $ 4,679 $ 7,321 $10,404 $ 11,418 $12,768 $ 14,081
Service and spare parts.......... 973 970 1,237 1,435 1,359 1,495 1,331
------- ------- ------ ------- ------- ------- -------
Total net sales.................... 3,364 5,649 8,558 11,839 12,777 14,263 15,412
Gross profit:
Products......................... 889 1,421 2,509 4,294 4,426 4,758 5,663
Service and spare parts.......... 226 211 354 643 500 1,216 448
------- ------- ------ ------- ------- ------- -------
Total gross profit................. 1,115 1,632 2,863 4,937 4,926 5,974 6,111
Expenses:
Research and development......... 448 419 408 456 585 1,110 2,056
Sales and marketing.............. 575 683 1,032 1,428 1,514 1,315 1,898
General and administrative....... 335 350 347 382 409 454 569
Charges allocated by parent...... 341 400 367 426 371 365 377
Nonrecurring charge.............. 62 395 416 519 -- -- --
------- ------- ------ ------- ------- ------- -------
Income (loss) from operations...... (646) (615) 293 1,726 2,047 2,730 1,211
Interest charges allocated by
parent........................... 440 456 483 482 495 434 372
------- ------- ------ ------- ------- ------- -------
Income (loss) before income
taxes............................ (1,086) (1,071) (190) 1,244 1,552 2,296 839
Income taxes....................... -- -- 74 12 621 918 335
------- ------- ------ ------- ------- ------- -------
Net income (loss).................. $ (1,086) $(1,071) $ (264) $ 1,232 $ 931 $ 1,378 $ 504
======= ======= ====== ======= ======= ======= =======
</TABLE>
The following table sets forth for the periods indicated, the percentage of
total net sales represented by each item in the Company's consolidated statement
of operations.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Products......................... 71.1% 82.8% 85.5% 87.9% 89.4% 89.5% 91.4%
Service and spare parts.......... 28.9 17.2 14.5 12.1 10.6 10.5 8.6
-------- --------- -------- --------- -------- --------- --------
Total net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit:
Products......................... 37.2 30.4 34.3 41.3 38.8 37.3 40.2
Service and spare parts.......... 23.2 21.8 28.6 44.8 36.8 81.3 33.7
-------- --------- -------- --------- -------- --------- --------
Total gross profit................. 33.1 28.9 33.5 41.7 38.6 41.9 39.7
Expenses:
Research and development......... 13.3 7.4 4.8 3.9 4.6 7.8 13.3
Sales and marketing.............. 17.1 12.1 12.0 12.0 11.8 9.2 12.4
General and administrative....... 10.0 6.2 4.1 3.2 3.2 3.2 3.7
Charges allocated by parent...... 10.1 7.1 4.3 3.6 2.9 2.6 2.4
Nonrecurring charge.............. 1.8 7.0 4.9 4.4 -- -- --
-------- --------- -------- --------- -------- --------- --------
Income (loss) from operations...... (19.2) (10.9) 3.4 14.6 16.1 19.1 7.9
Interest charges allocated by
parent........................... 13.1 8.1 5.6 4.1 3.9 3.0 2.4
-------- --------- -------- --------- -------- --------- --------
Income (loss) before income
taxes............................ (32.3) (19.0) (2.2) 10.5 12.2 16.1 5.5
Income taxes....................... -- -- .09 0.1 4.9 6.4 2.2
-------- --------- -------- --------- -------- --------- --------
Net income (loss).................. (32.3)% (19.0)% (3.1)% 10.4% 7.3% 9.7% 3.3%
======== ======== ======== ========= ======== ======== ========
</TABLE>
23
<PAGE> 25
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 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, $3.1 million and $1.1
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 $3.3 million of cash from operating activities and
used $2.4 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 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.
24
<PAGE> 26
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. Certain conditions precedent
to (A) each Lender's release of the Company from its obligations under the
Agreement, and (B) Imperial Bank's commitment to provide a line of credit to the
Company include (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 40% of the net proceeds of the Offering, before deducting
offering expenses ($6.8 million assuming no exercise of the Underwriters'
over-allotment option). No assurance can be given that the Imperial Bank
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.
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<PAGE> 27
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 1,900 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
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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.
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<PAGE> 29
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.
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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.
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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
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<PAGE> 32
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
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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
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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
33
<PAGE> 35
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 76% and 24%,
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, 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 21% 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 but is not currently marketing any of the
Company's products. The terms of any such sales will be consistent with terms
offered to the Company's VARs and OEMs. Odetics has informed the Company that it
does not intend to compete directly with the Company. OEL 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 -- Risks Associated with International Sales and New European
Subsidiary."
A small number of customers have historically accounted for a substantial
portion of the Company's net sales. Sales to DEC accounted for approximately
18.0% of the Company's net sales during the year ended March 31, 1996. Sales to
EMC accounted for approximately 12.8% 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 53.9% of the Company's sales during the 21 month
period ended December 31, 1996.
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<PAGE> 36
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.
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<PAGE> 37
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 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.
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<PAGE> 38
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.
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<PAGE> 39
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.
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<PAGE> 40
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 15,333(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.
39
<PAGE> 41
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 $5.00, representing the
fair market value of the Company's underlying Class B Common Stock on the
grant date, as determined by the Company's Board of Directors. The
Company's Class B Common Stock is not convertible into Common Stock, and no
shares of Class B Common Stock are outstanding as of the date of this
Prospectus. See "-- 1996 Stock Incentive Plan."
40
<PAGE> 42
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information with respect to
exercises of options to purchase Odetics Class A Common Stock during fiscal 1996
by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995
AND OPTION VALUES FOR FISCAL YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT MARCH 31, 1996 AT MARCH 31, 1996($)(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 $ 9.00 $ 4.25 8.67 years
Gregory A. Miner..... 05/23/95 23,000 15,333 4.25 9.00 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.
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<PAGE> 43
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
42
<PAGE> 44
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.
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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.
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<PAGE> 46
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 40% of the net proceeds of this Offering
before deducting offering expenses ($6.8 million assuming no exercise of the
Underwriters' over-allotment option) 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 ($11.8 million if the Underwriters' over-allotment
option is exercised in full). 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
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<PAGE> 47
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.
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<PAGE> 48
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 in an amount equal to the taxes
attributable to the operations of the Company on the consolidated federal income
tax returns and combined or consolidated state income or franchise tax returns
filed by Odetics for the period commencing on April 1, 1996 and ending on the
date on which the Company ceases to be a member of the Odetics consolidated
group. The Tax Allocation Agreement will require Odetics to indemnify the
Company against any unpaid taxes due for periods prior to April 1, 1996. Neither
the Company nor Odetics is aware of any such unpaid taxes. In addition, the Tax
Allocation Agreement will provide that members of the Odetics consolidated group
generating tax losses after April 1, 1996 will be paid by the other members
which utilize such losses to reduce such other members' tax liability.
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<PAGE> 49
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.
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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 Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "ATLPA."
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<PAGE> 51
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. This two
year holding period will be reduced to one year as of April 27, 1997.
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."
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<PAGE> 52
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
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Montgomery Securities................................................... 896,000
Cruttenden Roth Incorporated............................................ 224,000
Alex. Brown & Sons Incorporated......................................... 70,000
Hambrecht & Quist LLC................................................... 70,000
Robertson, Stephens & Company LLC....................................... 70,000
Adams, Harkness & Hill, Inc. ........................................... 40,000
Dain Bosworth Incorporated.............................................. 40,000
Doft & Co., Inc. ....................................................... 40,000
Hanifen, Imhoff Inc. ................................................... 40,000
Needham & Company, Inc. ................................................ 40,000
Nutmeg Securities, Ltd. ................................................ 40,000
Soundview Financial Group............................................... 40,000
H.C. Wainwright & Co., Inc. ............................................ 40,000
---------
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 $0.39 per share; and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $0.10 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 and Odetics have
agreed to indemnify the several Underwriters and their controlling persons
against certain liabilities, including liabilities under the Securities Act.
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<PAGE> 53
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.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock on the Nasdaq National
Market or otherwise. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
predictions as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price was negotiated between the Company and
the Representatives. Among the factors 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.
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<PAGE> 54
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.
53
<PAGE> 55
ATL PRODUCTS, INC.
INDEX TO CONSOLIDATED AND COMBINED 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 and Combined 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 and Combined 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 and Combined 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 and Combined Financial Statements............................ F-7
</TABLE>
F-1
<PAGE> 56
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 and combined 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 and combined 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> 57
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> 58
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED AND COMBINED 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:
Products................................. $15,534 $15,898 $24,795 $14,391 $38,267
Service and spare parts.................. 4,972 6,743 4,615 3,180 4,185
-------- -------- -------- -------- --------
Total net sales.................. 20,506 22,641 29,410 17,571 42,452
Cost of sales:
Products................................. 12,398 12,275 15,682 9,572 23,420
Service and spare parts.................. 3,319 4,648 3,181 2,389 2,021
-------- -------- -------- -------- --------
Total cost of sales.............. 15,717 16,923 18,863 11,961 25,441
-------- -------- -------- -------- --------
Gross profit............................... 4,789 5,718 10,547 5,610 17,011
Expenses:
Research and development................. 2,285 3,248 1,731 1,275 3,751
Sales and marketing...................... 1,308 1,838 3,718 2,290 4,727
General and administrative............... 1,195 1,299 1,414 1,032 1,432
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) 758 (968) 5,988
Interest charge allocated by Parent........ 542 1,243 1,861 1,379 1,301
-------- -------- -------- -------- --------
Income (loss) before income taxes.......... (1,895) (7,515) (1,103) (2,347) 4,687
Income taxes (Note 4)...................... -- -- 86 74 1,874
-------- -------- -------- -------- --------
Net income (loss).......................... $(1,895) $(7,515) $(1,189) $(2,421) $ 2,813
======== ======== ======== ======== ========
Net income (loss) per share (Note 1)....... $ (.22) $ (.89) $ (.14) $ (.29) $ .33
======== ======== ======== ======== ========
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> 59
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED AND COMBINED 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................. -- -- -- (86) -- (86)
Net loss............................. -- -- -- (1,189) -- (1,189)
--
----- ------ ------- -------
Balance at March 31, 1996.............. 8,005 1 1,009 (11,123) -- (10,113)
Foreign currency translation
adjustment........................ -- -- -- -- 6 6
Allocation to Parent................. -- -- -- (873) -- (873)
Net income........................... -- -- -- 2,813 -- 2,813
--
----- ------ ------- -------
Balance at December 31, 1996........... 8,005 $1 $1,009 $ (9,183) $ 6 $ (8,167)
===== == ====== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
CONSOLIDATED AND COMBINED 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) $(1,189) $(2,421) $ 2,813
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) (2,648) (969) 3,320
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 3,146 1,124 (2,367)
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities................................... 5,463 6,171 3,146 1,124 (2,367)
------- ------- ------- ------- -------
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> 61
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED 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. Additionally, for periods prior to the
establishment of APL, the Company utilized a subsidiary of the Parent for
administrative services related to the distribution of its products in Europe.
The accompanying financial statements combine the revenues, costs and expenses
incurred by this entity that relate to the Company's products in all applicable
periods in order to present these activities in a manner similar to a pooling of
interests. 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> 62
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED 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.
F-8
<PAGE> 63
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 U.S. and state income taxes are computed in accordance with
consolidated return Section 1552(a)(1) of the Internal Revenue Code. Under this
allocation, 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. Effective upon the
closing of the Company's initial public offering, the Company will enter into a
new Tax Allocation Agreement to be effective retroactively to April 1, 1996,
whereby the consolidated federal and state income tax liabilities for a given
tax year will be allocated to the companies in the Parent's group according to
their relative separate taxable income for such year.
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
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 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).
F-9
<PAGE> 64
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 provision for income taxes for the year ended March 31, 1996 is
comprised of apportioned foreign income taxes for income earned by a subsidiary
of the Parent from administrative services provided on sales of the Company's
products in Europe. The revenues, costs and expenses incurred by this entity
that relate to the Company's products have been combined in the accompanying
financial statements as described in Note 1.
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> 65
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED 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 have
identical rights except for 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 Class B
common stock is not convertible into Class A common stock. Management of the
Company has no present intention to convert the Class B common stock into Class
A common stock or to list the Class B common stock for trading on any exchange.
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 fair value of the
underlying Class B common stock as of the date of grant as determined by the
Board of Directors. 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
F-11
<PAGE> 66
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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............................................ $2,801
Pro forma net income per share.................................. $ .33
</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.
F-12
<PAGE> 67
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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............................................................. $38,010 $4,442
Net income(loss).................................................. 2,885 (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 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED
------------------------ DECEMBER 31,
1994 1995 1996 1996
---- ---- ------ ------------
<S> <C> <C> <C> <C>
Europe............................................ $-- $453 $4,644 $2,003
Canada and Australia.............................. 22 811 1,389 1,603
</TABLE>
F-13
<PAGE> 68
ATL PRODUCTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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> 69
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> 70
======================================================
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............................. 26
Management........................... 37
Relationship between the Company and
Odetics............................ 45
Principal Stockholder................ 48
Description of Securities............ 48
Shares Eligible for Future Sale...... 50
Underwriting......................... 51
Legal Matters........................ 53
Experts.............................. 53
Additional Information............... 53
Index to Consolidated and Combined
Financial Statements............... F-1
</TABLE>
----------------------------
Until April 1, 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 LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
CRUTTENDEN ROTH
INCORPORATED
March 7, 1997
======================================================
