<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22037
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ATL PRODUCTS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-3824281
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2801 KELVIN AVENUE, IRVINE, CALIFORNIA 92614
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(Address of Principal Executive Offices) (Zip Code)
(714) 774-6900
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Addressed and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of August 11, 1997
Class A Common Stock - 9,655,000 shares
Class B Common Stock - No shares outstanding
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INDEX
ATL PRODUCTS, INC.
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1997 and June 30, 1997........... 3
Consolidated Statements of Operations for the three months ended
June 30, 1997 and June 30, 1996.............................................. 5
Consolidated Statements of Cash Flows for the three months ended
June 30, 1997 and June 30, 1996.............................................. 6
Notes to Consolidated Financial Statements ................................ 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................. 15
Signatures ........................................................................... 16
</TABLE>
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ATL PRODUCTS, INC.
(A Subsidiary of Odetics, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
March 31, 1997
1997 (unaudited)
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(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 9,494 $ 2,165
Trade accounts receivable, net of allowance for
doubtful accounts of $319 in March 1997 and
$379 in June 1997 12,730 14,437
Inventories:
Finished Goods 2,937 3,098
Work in progress 1,019 1,765
Materials and supplies 8,671 7,937
Prepaid expenses and other 355 253
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Total current assets 35,206 29,655
Buildings and equipment
Leasehold improvements 596 784
Equipment 3,967 4,329
Allowances for depreciation (1,844) (2,021)
-------- --------
2,719 3,092
======== ========
Total assets $ 37,925 $ 32,747
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</TABLE>
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ATL PRODUCTS, INC.
(A Subsidiary of Odetics, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
March 31, 1997
1997 (unaudited)
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(in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 9,676 $ 4,554
Accrued payroll and related 1,545 1,333
Income taxes payable 2,018 1,276
Deferred service income 1,116 1,149
Other accrued expenses 1,199 1,529
Payable to Parent 509 394
Current portion of note payable to Parent 3,249 3,249
-------- --------
Total current liabilities 19,312 13,484
Long-term note payable to Parent 9,748 9,219
Stockholders' equity
Preferred Stock, $.0001 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none -- --
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Common Stock, $.0001 par value:
Authorized shares - 45,000,000 Class A;
5,000,000 Class B
Issued and outstanding shares - 9,655,000
at March 31, 1997 and June 30, 1997;
no Class B 1 1
Additional paid in capital 16,927 16,927
Accumulated deficit (8,065) (6,875)
Cumulative translation adjustment 2 (9)
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Total stockholders' equity 8,865 10,044
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Total liabilities and stockholders' equity $ 37,925 $ 32,747
======== ========
</TABLE>
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ATL PRODUCTS, INC.
(A Subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
1996 1997
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<S> <C> <C>
NET SALES
Products $11,418 $16,677
Service and spare parts 1,359 1,890
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Total net sales 12,777 18,567
Cost of sales:
Products 6,992 9,973
Service and spare parts 859 1,215
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Total cost of sales 7,851 11,188
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Gross profit 4,926 7,379
Expenses:
Research and development 585 1,761
Sales and marketing 1,514 2,698
General and administrative 780 661
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Income from operations 2,047 2,259
Interest charge by Parent 495 276
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Income before income taxes 1,552 1,983
Income taxes 621 793
======= =======
Net income $ 931 $ 1,190
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Net income per share $ 0.11 $ 0.12
======= =======
Shares used in computation of net income per share 8,484 10,134
======= =======
</TABLE>
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ATL PRODUCTS, INC.
(A Subsidiary of Odetics, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1996 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 921 $ 1,190
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 86 347
Provision for losses on accounts receivable (568) 60
Provision for inventory write-down (1,330) (30)
Foreign currency translation adjustment 0 (11)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 2,986 (1,767)
(Increase) decrease in inventories (511) (313)
(Increase) decrease in prepaid expenses
and other assets (61) 102
Increase (decrease) in accounts payable and
accrued expenses 462 (5,713)
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Net cash provided by (used in) operating activities 1,985 (6,135)
INVESTING ACTIVITIES
Purchases of leasehold improvements and equipment (156) (550)
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Net cash used in investing activities (156) (550)
FINANCING ACTIVITIES
Net cash paid to Parent (1,829) (644)
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Net cash used in financing activities (1,829) (644)
Net change in cash and cash equivalents 0 (7,329)
Cash and cash equivalents at beginning of period 1 9,494
======= =======
Cash and cash equivalents at end of period $ 1 $ 2,165
======= =======
</TABLE>
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ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1998. For further information, refer to the
consolidated and combined financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1997.
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ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and related Notes thereto contained
elsewhere in this Report and the Consolidated And Combined Financial Statements
and the related Notes thereto included in the latest Annual Report on Form 10-K
of ATL Products, Inc (the "Company"). This Report contains forward-looking
statements including, among others, statements concerning projected revenues,
funding requirements, manufacturing efficiencies, and supply issues, that
involve a number of risks and uncertainties including, without limitation, those
set forth at the end of this section under quote "Risk Factors". The Company's
actual results may differ materially from any future performance or
forward-looking statements discussed in this Management's Discussion and
Analysis of Financial Condition and Results of Operations. Readers are cautioned
not to place undue reliance on these forward looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of Operations
Net Sales. Total net sales increased 45% to $18,567,000 for the first
quarter of fiscal 1998 as compared to total net sales of $12,777,000 in the
first quarter of the prior fiscal year.
Product sales increased 46% to $16,667,000 for the first quarter of
fiscal 1998 as compared to $11,418,000 in the corresponding period of the prior
fiscal year, reflecting continued growth of DLTTM library business in both unit
and sales volume. These increases are primarily attributable to higher sales of
the new 7100 series libraries that began shipping in the prior fiscal quarter,
continued strong performance in 520 and 2640 series library shipments, increased
availability of DLT7000 tape drives and higher OEM sales. Sales of DLT7000-based
libraries accounted for approximately 34% of total net sales for the quarter
ended June 1997. Sales in the OEM and VAR channels each accounted for
approximately 50% of product sales for the quarter ended June 1997, in contrast
to OEM sales of approximately 35% for the corresponding period of the prior
fiscal year.
Service and parts sales include revenue derived from the sale of spare
parts and service contract activities to support the installed base of the
Company's products. In the first quarter of fiscal 1998, service sales increased
39% to $1,890,000 as compared to $1,359,000 in the first quarter of the prior
fiscal year. This increase is due primarily to expanded service contract sales
as the installed base of units concluding their warranty period grows, and
service contracts are sold to replace the expired warranty coverage.
Gross Profit. Total gross profit as a percent of total net sales
increased to 39.7% for the first quarter of fiscal 1998 from 38.6% for the first
quarter of the prior fiscal year.
Gross profit on product sales increased to 40.2% for the first quarter
of fiscal 1998 as compared to 38.8% for the first quarter of fiscal 1997. The
increase is attributable primarily to the continued improved absorption of
manufacturing overhead resulting from the increased sales volume of DLT based
products. The gross profit percentage increase was partially offset by higher
costs of materials, primarily the DLT7000 tape drives which have a higher
purchase cost than the DLT4000 and DLT2000 tape drives that were sold in the
first quarter of fiscal 1997. The Company believes average selling prices on
product sales will decline in the future as a result of competition and the
Company's desire to increase market share. While the Company continues working
with its suppliers to reduce its costs of materials and to improve manufacturing
efficiencies, there can be no assurance these actions will be sufficient to
offset future reductions in sales prices.
Gross profit on service and spare parts sales decreased to 35.7% for
the first quarter of fiscal 1998 as compared to 36.8% for the first quarter of
fiscal 1997. This decrease in gross profit is primarily attributable to
additional infrastructure costs required to support the growth in service
contract revenue.
Research and Development. Research and development expense increased
201% to $1,761,000 for the first quarter of fiscal 1998 compared to $585,000 in
the corresponding period of the prior fiscal year. The increase in research and
development
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<PAGE> 9
expense reflects the Company's commitment to be a leading supplier of tape
library products for the networked computer market. A key element in fulfilling
that commitment is the introduction of new products into this dynamic market and
requires additional resources to maintain a suitable balance of design and
development activity in relation to sales revenue. As sales have grown during
the past fiscal year the research and development team has increased its
resources by using contract labor and hiring new personnel. The increase in
research and development expense for the first quarter of fiscal 1998 as
compared to the corresponding quarter of the prior fiscal year was driven
primarily by development, testing and preproduction costs associated with the
Company's Prism products. The Company expects expenditures for research and
development generally to increase over time and to be higher during periods of
new product development when significant expenditures are incurred for
preproduction activities and increased testing. These expenditures may,
therefore, fluctuate as a percentage of total net sales from period to period.
Sales and Marketing. Sales and marketing expense increased to
$2,698,000 (or 14.5% of total net sales) for the first quarter of fiscal 1998
compared to $1,514,000 (or 11.8% of total net sales) in the corresponding period
of the prior fiscal year. The increase is due in large part to the expansion and
strengthening of the Company's sales and marketing organization through
infrastructure growth, higher expenses, principally promotional activities and
advertising, and growth in European sales and marketing expenses.
General and Administrative. General and administrative expense, which
includes charges allocated by Parent decreased to $661,000 for the first quarter
of fiscal 1998 compared to $780,000 in the corresponding period of the prior
fiscal year. Charges allocated by Parent in the first quarter of fiscal 1998
were approximately $175,000 compared to $371,000 allocated in the first quarter
of fiscal 1997. General and administrative expense for the first quarter of
fiscal 1998 was approximately $486,000, not including charges allocated by
Parent, compared to $409,000 for the first quarter of fiscal 1997. The increase
primarily reflects the addition of personnel to support the Company's sales
growth.
Interest Charge by Parent. The Company's Parent, Odetics Inc. has
historically advanced funds to meet the Company's capital requirements and has
charged the Company interest on the resulting intercompany balance determined
using Odetics' cost of related borrowed funds. On April 1,1997, after completion
of the Company's initial public offering ("IPO") and payment to Odetics of $6.8
million of the net proceeds, the Company entered into a promissory note payable
to Odetics in the original principal amount of $13.0 million which represented
the aggregate total of the intercompany balance due to Odetics. Interest charge
by Parent decreased 44% to $276,000 for the first quarter of fiscal 1998 as
compared to $495,000 in the corresponding period of the prior fiscal year. The
decrease represents lower interest bearing obligations for the first quarter of
fiscal 1998 as compared to the first quarter of fiscal 1997. Effective April 1,
1997, the Company has assumed responsibility for many of the charges that were
processed through intercompany activity prior to the Company's IPO. All
intercompany obligations incurred after April 1, 1997 are paid on a non-interest
bearing open account basis.
Income Taxes. The Company is included in the consolidated federal tax
return of Odetics. The Company is a party to a Tax Allocation Agreement with
Odetics, pursuant to which the Company will make a payment to Odetics, or
Odetics will make a payment to the Company, as appropriate, in an amount equal
the taxes attributable to the operations of the Company on the consolidated
federal income tax returns and consolidated or combined state tax returns filed
by Odetics. In addition, the Tax Allocation Agreement provides that members of
the Odetics' consolidated group generating tax losses will be paid by other
members which utilize tax losses to reduce such other members' tax liability.
For the first quarter of fiscal 1998 and fiscal 1997, the Company's effective
tax rate was 40%.
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<PAGE> 10
Liquidity and Capital Resources
For the first quarter of fiscal 1998, the Company incurred a reduction
in cash and cash equivalents of $7,329,000. Operating activities consumed
$6,148,000 which included net income of $1,190,000 that was more than offset by
payment of accounts payable and accrued expenses of $5,713,000, and accounts
receivable increases of $1,767,000. Payment of accounts payable primarily funded
inventory increases that occurred late in the last quarter of the prior fiscal
year in support of the continued sales growth, and the timing of large quantity
inventory receipts; mainly tape drives. Accrued expense reductions primarily
consisted of income tax payments. The Company also used $550,000 to purchase
equipment and make leasehold improvements in its principal operating facilities,
and paid $644,000 in principal and interest on its note payable obligation due
Odetics, its Parent company.
The Company has a $5,000,000 bank line of credit which provides for
borrowings generally at the lesser of the bank's prime rate (8.5% at June 30,
1997) or the bank's LIBOR rate plus 2.25%. The Company had no borrowings against
the bank line of credit at June 30, 1997. The Company's borrowings under the
bank line of credit are secured by substantially all of the Company's assets.
The Company believes that cash flow generated from operations, in conjunction
with funds available under the Company's bank line of credit, will be adequate
to execute its current operating plans and meet its obligations on a timely
basis. The Company does not have any material commitments for capital
expenditures as of June 30, 1997.
RISK FACTORS
The Company's business is subject to a number of risks, some of which
are discussed below. The following risks should be considered carefully in
addition to the other information contained in this Report in evaluating the
Company and its business before purchasing the shares of the Company's Class A
Common Stock ("Common Stock").
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have fluctuated in the past
and may continue to fluctuate in the future based on a number of factors, not
all of which are in the Company's control. These factors include, without
limitation, the size and timing of significant customer orders; the introduction
of new products by competitors; the availability of components used in the
manufacture of the Company's products; changes in pricing policies by the
Company, its suppliers or its competitors; the ability of the Company to
develop, introduce, market and gain market acceptance of new products,
applications and product enhancements in a timely manner and to control costs;
the Company's success in expanding and implementing its sales and marketing
programs; technological changes in the distributed computing markets; the mix of
sales among the Company's channels; deferrals of customer orders in anticipation
of new products, applications or product enhancements; currency fluctuations;
and general economic and market conditions. Moreover, the Company's sales in any
quarter typically consist of a relatively small number of large OEM and VAR
customer orders, and the timing of a small number of orders can impact quarter
to quarter results. Since the Company's sales are primarily made through OEMs
and VARs who typically provide the Company with relatively short lead times, it
is often difficult for the Company to forecast the timing and quantity of orders
accurately. The Company's expense levels and its purchases of parts, components
and subassemblies are based in part upon its expectations concerning future
revenues. Accordingly, if revenue levels are below expectations, whether as a
result of product transition or otherwise, operating results are likely to be
adversely affected. There can be no assurance that the Company will achieve
profitability on a quarterly or annual basis in the future. Due to all of the
foregoing factors and other risks discussed below, it is possible that in some
future period the Company's operating results may be below the expectations of
analysts and investors. In such event, the price of the Company's Common Stock
would probably be materially and adversely affected.
Dependence on Quantum Corporation and DLT Technology
The Company currently derives substantially all of its revenues from
the sale of its DLT based products and related services, and the Company expects
that revenues from its DLT based products will continue to account for
substantially all of the Company's revenues for the foreseeable future.
Accordingly, the Company's operating results for the foreseeable future will be
substantially dependent on the continued market acceptance of DLT technology and
growth of the DLT library market. The distributed computing market and the
related data storage market are characterized by rapid technological change,
frequent new product introductions and enhancements, and evolving industry
standards. The DLT market is relatively new, and there can be no assurance that
another technology will not replace or adversely affect DLT technology as a
widely accepted data storage
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<PAGE> 11
medium. In addition, due to the relatively recent emergence of the DLT market,
the Company expects that additional companies may introduce products
incorporating DLT technology competing directly with the Company. Any decline in
the rate of growth of the DLT market or failure of the market to sustain
acceptance of DLT technology, or any decline in unit prices of the Company's
products as a result of increased competition, technological change or
otherwise, would have a material adverse effect on the business, operating
results and financial condition of the Company. The Company's success also
depends in large part upon its relationship with Quantum, who has the exclusive
worldwide manufacturing rights for the DLT technology and is the sole supplier
of DLT tape drives, and upon the Company's ability to continue to obtain
adequate supplies of DLT drives from Quantum. The Company has been informed by
Quantum that the growth in the demand for the DLT7000 drives will result in
continued limitations in the availability of these drives. The Company does not
expect that its indicated allocation of DLT7000 drives will have a material
adverse effect on the Company's results of operations in the near future. The
foregoing statement is intended to be a prediction and actual results may differ
as a result of the risks discussed in this paragraph. There can be no assurance
that Quantum will not revise its allocation to the Company or that Quantum will
otherwise continue to provide an adequate supply of the DLT7000 drives. The
Company has not been able to secure any guarantee of the future supply of DLT
drives from Quantum. The Company's agreement with Quantum permits Quantum to
terminate its arrangement with the Company for any reason upon providing 90 days
written notice to the Company. The disruption or termination of the Company's
supply of DLT drives from Quantum would have a material adverse effect on the
Company's business, financial condition and results of operations. Quantum
currently supplies drives to all of the Company's competitors, and there can be
no assurance that the Company's competitors will not establish relationships
with Quantum in which the competitors could achieve higher priority in the
supply of DLT drives. Moreover, since Quantum has only one manufacturing
facility for DLT drives located in Colorado Springs, Colorado, any disruption in
Quantum's ability to continue to manufacture and supply the Company with DLT
tape drives, whether as a result of a natural disaster or otherwise, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Effect of New Product Introductions
The Company's future operating results will depend significantly on the
degree and timing of market acceptance of the Company's 7100 Series (which was
introduced in November 1996), the P1000 (which was introduced in May 1997) and
other new products. It is difficult to predict the effect that the announcement
of these or other new products (or enhancements to existing products) will have
on sales of current products pending the full availability of the new products,
or the rate at which such products will be accepted by the market, if at all.
For example, the P1000 could result in a reduction in the sales of the Company's
520 Series products in anticipation of the new libraries by the Company's
customers. In addition, manufacturing defects or other operational problems
commonly associated with new product introductions could adversely affect the
successful introduction of such new products. There can be no assurance that the
Company will be able to introduce new products or enhancements to existing
products on a timely basis, if at all, or the effect to which such introductions
will have on sales of existing products.
Competition
The data storage market is intensely competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Competitors
vary in the number, scope and breadth of the products and services offered.
Management believes eight tape library manufacturers currently provide DLT based
products, including the Company's principal competitors, Advanced Digital
Information Corporation, Breece Hill Technologies, Hewlett-Packard, Overland
Data and StorageTek. The Company competes indirectly with a large number of
manufacturers offering tape storage systems using formats other than DLT,
including 8mm, 4mm (DAT), half inch format (3480) and QIC. Many of these
indirect competitors have larger installed bases and may be expected to continue
to provide intense competition for the DLT format. These competitors include
ADIC, Exabyte, Fujitsu, Hitachi, IBM, Spectra Logic and StorageTek. These
competitors are expected to expand the functionality and performance of their
selected storage technologies which may render such technologies even more
competitive as compared to DLT. The Company also expects additional competition
from large integrated computer 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
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<PAGE> 12
support of their products than the Company. Accordingly, there can be no
assurance that the Company will be able to continue to compete effectively.
Reliance on OEMs and VARs; Concentration of Sales
The Company relies heavily upon its relationships with selected OEMs
who sell and support the Company's products as part of their comprehensive data
storage systems. Sales through OEMs accounted for approximately 24% and 33% of
the Company's total revenues in fiscal 1996 and 1997, respectively and 52% in
the first quarter of fiscal 1998. The Company is currently investing, and
intends to continue to invest, significant resources to develop these OEM
relationships. These expenditures could materially and adversely affect the
Company's operating margins unless the Company is able to achieve commensurate
growth in sales to OEMs. The Company also relies heavily on selected VARs who
integrate the Company's products with storage management software to provide
comprehensive storage solutions. Most of the Company's VARs carry product lines
that are competitive with those of the Company, and there can be no assurance
that they will give the marketing of the Company's products high priority, or
that they will continue to carry the Company's products. The Company's
agreements with VARs and OEMs are generally not required to be exclusive, and in
many cases may be terminated by either party at any time with limited notice and
without cause. A small number of customers has historically accounted for a
substantial portion of the Company's net sales and the identity of the Company's
significant customers has historically varied from period to period. Three
customers, Sun Microsystems, EMC Corporation, and Digital Equipment Corporation,
each accounted for 13% of the Company's net sales during the first quarter of
fiscal 1998. The loss of important OEMs or VARs, their reduced focus on the
Company's products, or the inability to obtain additional OEMs as the market
evolves could materially and adversely affect the Company's business, financial
condition and operating results.
Management of Expanding Operations; Separation from Odetics
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 June 30,
1997, the size of the Company's staff increased from 66 to 227 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. The Company's ability to manage growth effectively will
require it to install its own operational, financial and management controls,
reporting systems and procedures independent from Odetics, to establish new
management information and control systems and to train, motivate and manage its
employees. There can be no assurance that the Company will be able to install
such operational, financial and management information and control systems in an
efficient and timely manner or that the new structures, systems and controls
will be adequate to support the Company's operations and prevent the occurrence
of unforeseen management or financial issues. Continued growth will also require
the Company to recruit additional key management personnel (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.
Possibility of Substantial Sales of Common Stock; No Assurance of Distribution
Prior to December 31, 1997, Odetics intends to distribute all of its
Common Stock of the Company to the stockholders of Odetics (the "Distribution"),
pending certain contingencies, including, but not limited to receipt of a
favorable tax ruling from the Internal Revenue Service. The Distribution 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. No
assurance can be given that the conditions to the Distribution will be satisfied
or waived, or that the Distribution will occur. A failure to undertake the
Distribution could adversely affect the market price of the Company's Common
Stock.
-12-
<PAGE> 13
Risks Associated with International Sales
International product sales represented approximately 19% and 21% of
the Company's net sales during fiscal 1996 and 1997, respectively and 22% in the
first quarter of fiscal 1998. The Company maintains sales and support offices in
England, Germany and Taiwan. The Company believes that international sales will
continue to represent a significant portion of its revenues, and that continued
growth and profitability will require further expansion of its international
operations. The Company's international sales are currently denominated in U.S.
dollars, and an increase in the relative value of the dollar could make the
Company's products more expensive and, therefore, potentially less price
competitive in international markets. Additional risks inherent in international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, longer accounts receivable
payment cycles, difficulties in managing and staffing international operations,
potentially adverse tax consequences including restrictions on the repatriation
of earnings, the burdens of compliance with a wide variety of foreign laws,
currency fluctuations and political and economical instability. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's business,
operating results and financial condition. Furthermore, as the Company increases
its international sales, its total 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.
Dependence on Proprietary Technology; Risks of Infringement
The Company's ability to compete effectively depends in part on its
ability to develop and maintain the proprietary aspects of its technology. There
can be no assurance, however, that any future patents will be granted or that
any issued patents or other intellectual property rights of the Company will
provide meaningful protection for the Company's product innovations. Moreover,
such rights may not preclude competitors from developing substantially
equivalent or superior products to the Company's products. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate, or that competitors will not independently develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology, or design around any patent of the Company. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others,
or to defend the Company against claims of infringement or invalidity by others.
An adverse outcome in such litigation or similar proceedings could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from others or require the Company to cease marketing or using
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to obtain licenses under patents or proprietary rights of
others, there can be no assurance that any required licenses would be made
available on terms acceptable to the Company, if at all. In addition, the cost
of addressing any intellectual property litigation claim, both in legal fees and
expenses and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could have a material adverse effect on
the Company's results of operations.
Future Capital Requirements
The Company entered into a four year promissory note payable to Odetics
in the amount of approximately $13.0 million as of April 1, 1997. Such note is
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 initial public 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.
Control by Odetics Pending the Distribution
The Company is currently a subsidiary of Odetics, and has no operating
history as an independent public company. Odetics owns approximately 82.9% of
the outstanding shares of Common Stock and is 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 has the power
to determine matters submitted to a vote of the Company's stockholders without
the consent of the Company's other stockholders, has 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
-13-
<PAGE> 14
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.
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. The Company's inability to attract and retain
additional key employees or the loss of one or more of its current key employees
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation; Bylaws and Delaware Law
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future and may make it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. In addition, the Company is subject
to the antitakeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company, which could adversely affect the market price of the Company's
Common Stock.
-14-
<PAGE> 15
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
PART II. OTHER INFORMATION
JUNE 30, 1997
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended June 30, 1997.
-15-
<PAGE> 16
ATL PRODUCTS, INC.
(A SUBSIDIARY OF ODETICS, INC.)
SIGNATURES
JUNE 30, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATL PRODUCTS, INC.
(Registrant)
By /s/ GREGORY A. MINER
------------------------------
Gregory A. Miner
Chief Financial Officer
By /s/ JAMES A. PIPP
------------------------------
James A. Pipp
Vice President, Controller
(Principal Accounting Officer)
Dated: August 12, 1997
-16-
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