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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period ________________ to ________________
Commission file number 000-22037
ATL PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 95-3824281
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation of Organization) Identification No.)
</TABLE>
2801 Kelvin Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (714) 774-6900
________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.0001 par value
(Title of Class)
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 [_]
Indicated by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sale price on Nasdaq National Market on June 24, 1997,
the aggregate market value of the voting stock held by nonaffiliates of the
registrant was $226,428,000. For the purposes of this calculation, shares owned
by officers, directors and 10% stockholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other proposes.
The Company has two classes of common stock authorized, the Class A 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 Class A Common Stock entitles its holder to one vote and each
share of Class B Common Stock entitles its holder to .05 votes. As of June 24,
1997, there were 9,655,000 shares of Class A Common Stock outstanding and no
shares of Class B Common Stock were outstanding. Unless otherwise indicated, all
references herein to "Common Stock" shall refer to the Company's Class A Common
Stock.
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ATL PRODUCTS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS......................................................... 1
ITEM 2. PROPERTIES....................................................... 14
ITEM 3. LEGAL MATTERS.................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.......................................................... 15
ITEM 6. SELECTED FINANCIAL DATA.......................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 22
ITEM 11. EXECUTIVE COMPENSATION........................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K.. 33
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Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s),"
"believe(s)," "will," "may," "anticipate(s)," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. ATL Products, Inc. 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. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which describe certain factors which affect the Company's business,
including the risk factors set forth at the end of Part I, Item 1 of this Report
and in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
General
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). The Company's
products provide high performance, reliable, cost effective and scalable storage
solutions 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 cartridge handling system, providing end users
with rapid and reliable access to computer data across a wide variety of
networks. 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 scalable 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.
On May 18, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Quantum Corporation ("Quantum") providing
for, among other things, the merger of a wholly-owned subsidiary of Quantum with
and into the Company, with the Company surviving the merger and becoming a
wholly-owned subsidiary of Quantum. In the merger, holders of each share of the
Class A Common Stock, par value $.0001 per share, and the Class B Common Stock,
par value $.0001 per share, of the Company will receive shares of the common
stock, par value $.01 per share, of Quantum with a value of $29.00 (as adjusted
pursuant to the Agreement).
The ATL Board of Directors has recommended that stockholders approve the
proposed merger transaction.
Both companies are pursuing the necessary regulatory approval process and,
assuming no usual delays in this process, the Company intends to call a special
stockholders meeting prior to September 30, 1998. There can be no assurance
that the Company's stockholders will approve the merger, or that the merger will
be consummated in the terms indicated in the Agreement, if at all. Please see
the Company's Form 8-K filed May 20, 1998 for additional information relating to
this proposed transaction.
The Company was established in 1990 as a division of Odetics, Inc., a
Delaware corporation ("Odetics"), 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 2801 Kelvin
Avenue, Irvine, California 92614, and its telephone number at that location is
(714) 774-6900.
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Industry Background
Cartridge based magnetic tape has gained increased popularity 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. 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.
Products
The Company's product families consist of the 7100, the 520, the 2640 and
the P1000 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, Auspex and Data General, and are supported by most major
UNIX and NT storage management software applications.
The Company's products incorporate 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.
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All of the Company's current products are based upon DLT technology which
is a high performance, half inch, linear tape solution. 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 currently offers four series of products with a
range of performance characteristics; the 7100 Series, the 520 Series, the 2640
Series and the P1000 Series. All product series can be configured utilizing
either DLT4000(TM) or DLT7000(TM) drives.
P1000 Series
The P1000 Series is a compact DLT library series which can support up to 32
DLTtape cartridges and up to four DLT tape drives. The P1000 Series is the
Company's first library series to incorporate the Company's announced Prism
Library Architecture. The Company commenced shipments of the P1000 Series
products in December 1997. The P1000, which is available in both standalone and
rack-mount configurations, offers a compact one terabyte solution with backup
performance up to 72 gigabytes per hour. The size and density of the P1000
Series products permits effective integration with rack-mount servers with disk
capacities of 150 gigabytes or greater. The Prism Library Architecture of the
P1000 permits efficient upgrades of the products to incorporate new features
such as FibreChannel interfaces as they become available at a system level by
the use of industry-standard PCI (Personal Computer Interconnect) electronic
cards. The P1000 is intended for modest size network applications which are
experiencing rapid growth. The P1000 is the first ATL library to incorporate a
fully-integrated touch screen control panel for both operational and service
functions and is supported by both Unix and NT storage management software
products. The P1000 Series products support "hot swap" of DLT drives for
enhanced system availability and are intended to support other advanced Prism
Library Architectures features as they become available. A fully configured
P1000 library achieving 2:1 data compression generally can backup a 150 gigabyte
database in approximately one hour. The end user list prices for products in
the P1000 Series generally range from approximately $25,000 to approximately
$50,000 depending primarily upon drive configuration.
7100 Series
In March 1997, the Company commenced shipping of its 7100 Series, which
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
generally 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
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 end user list prices for
products in the 7100 Series typically will from approximately $65,000 to
approximately $130,000 depending primarily on drive configuration.
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520 Series
The Company introduced the 520 Series departmental libraries in 1995 for
Unix network environments. The 520 Series was designed specifically 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 hierarchical storage
management 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 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
The P1000 and all of the Company's products introduced subsequent to the
P1000 are expected to be compatible with the Prism Library Architecture. Each of
the Prism products will include a high performance, industry standard PCI bus,
to address both the emerging NT market and large data mining and warehousing
applications. The Company is developing future versions within this product
family which are designed to increase speed and cartridge capacity and to
enhance their integration into both high end network and data archiving
applications. Prism products are being developed in close cooperation with
existing and potential OEM customers and should 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 permits 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. The
Company's statements concerning the timing of the introduction of the initial
Prism product and the capabilities of the Prism series are intended to be
forward looking statements and actual results may differ as a result of the
various risks, including
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but not limited to, management's allocation of research and development
resources, unforeseen defects in the new architecture and the performance of the
Company's suppliers.
P3000 Series. The Company is developing a new enterprise-class DLT library
incorporating the Prism Library Architecture called the P3000 series. The P3000
is intended to be the industry's first High Availability ("HA") DLT library
offering such advanced features as redundant hot swap power supplies, fan
modules and DLT drives. The P3000 will support up to sixteen DLT drives and 320
DLTtape(TM) cartridges. The P3000 is intended to support high performance
applications with a high availability, high throughput DLT solution. A fully
configured P3000 will have a native capacity of 11.2 terabytes and can achieve
backup performance of over one-half terabyte per hour with 2:1 data compression.
Libraries in the P3000 Series should be able to be integrated into string of up
to five units providing over 50 terabytes of native storage capacity. The P3000
is expected to be fully compatible with the Prism Library Architecture for both
advanced functionality and enhanced interface flexibility. The Company
anticipates the P3000 will be available to customers in the fourth quarter of
1998.
L500 Series. In order to provide a DLT library product for the low-end Unix
market and the entry-level NT market, the Company is working with Quantum to
qualify the Quantum Gemini DLT(TM)stor product as the ATL PowerStor L500 DLT
Library. With one to three DLT drives and up to fourteen cartridges, the L500
will complement the Company's other library series by providing an entry-level
library product, positioned below the Company's P1000. The Quantum product has
been under development for a considerable period of time, and the Company
believes that, in cooperation with Quantum, it should be able to complete the
development and qualification process and provide the L500 for customer
shipments in the second quarter of 1998.
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 are designed to 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
Research and development expense aggregated $8.4 million, $5.7 million, and
$1.7 million in fiscal 1998, 1997 and 1996, respectively. 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 82 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.
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.
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 was able
to work closely with Quantum during the early stages of the development of the
DLT7000 drive which facilitated the Company's rapid development of products
using this 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.
Recently Quantum announced that the next generation of DLT technology,
super DLT, will become available in the second half of 1999. As a result, the
Company anticipates significant research and development activity to support
that technology beginning in the fourth quarter of fiscal year 1999.
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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. 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; however, 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
has and continues to develop 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 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 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 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 the flexibility to meet customer demand expectations.
The Company's principal competitors include the following manufacturers of
DLT based products: Advanced Digital Information Corporation ("ADIC"), Breece
Hill Technologies, Hewlett-Packard, Overland Data and StorageTek. The Company
also 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.
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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. 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.
Sales and Marketing; Principal Customers
The Company markets and sells its products through indirect sales channels
comprised primarily of Value Added Resellers ("VARs") and Original Equipment
Manufacturers ("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
sales generally have represented an increased portion of the sales of the
products incorporating that technology. During the year ended March 31, 1998,
direct sales to VARs and OEMs each accounted for approximately 50% of the
Company's total net product sales. In addition, a small number of customers have
historically accounted for a substantial proportion of the Company's net sales
in recent periods, and the identity of such significant customers changes from
period to period. Sales to EMC, DEC and Sun Microsystems accounted for
approximately 8.2%, 13.2% and 16.3%, respectively, of the Company's total net
sales for the year ended March 31, 1998 and 9.9%, 8.9%, and 3.7%, respectively,
for the year ended March 31, 1997. No other customer accounted for 10% or more
of the Company's total net sales for these periods.
The Company has relationships with selected VARs who integrate the
Company's products with storage management software to provide comprehensive
storage solutions. The Company has certified approximately 35 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, Atlanta, San Francisco and Washington to
facilitate close cooperation and communication with its VAR and OEM customers.
The Company also employs an international sales staff which assists in the
marketing of the Company's products to VARs and OEMs throughout Europe and Asia.
International sales constituted approximately 25% of the Company's total net
sales during the year ended March 31, 1998 compared to 21% in the comparable
prior year period. The Company anticipates that international sales will
continue to represent a significant portion of the Company's total net sales.
The Company undertook a sales initiative for Europe in late fiscal 1995 and
fiscal 1996 utilizing the pre-existing infrastructure of a European sales
subsidiary of Odetics, 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 ATL Products
Limited in the United Kingdom to conduct its European operations. In March 1998,
the Company opened a new branch office
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in Japan and a new subsidiary in Australia in order to support business
opportunities in Asia Pacific. Sales to customers outside the United States
are subject to certain risks. See Risks Associated with International Sales.
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 on-site customer
assistance on the next business day in the United States. In addition, warranty
coverage may be upgraded to include on-site 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 30 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 OEMs, VARs, and CMPs. The CMPs often provide
the initial on-site response for on-site 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 domestic field service program, the Company has contracted
with a national organization to provide on-call field service to the Company's
customers.
Manufacturing
The Company manufactures all of its tape libraries at its facility in
Irvine, California. The Company's corporate headquarters and manufacturing
facilities are included within a 120,000 square foot facility, of which
approximately 50,000 square feet is allocated to manufacturing. The Company
currently operates four assembly lines during one daily eight hour shift.
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. A significant portion 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. In addition, the Company currently purchases most of
its circuit boards from one key supplier although a second supplier has been
qualified.
Employees
The Company refers to its employees as associates. At June 1, 1998, the
Company employed 342 associates including 133 in manufacturing, 82 in
engineering, 38 in customer service, 60 in sales and marketing and 29 in general
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.
8
<PAGE>
RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. Other risks are presented elsewhere in this Report. See in
particular, Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations." 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 Common
Stock.
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 Asian economic crisis; 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 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. 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 DLT market is relatively new, and there
can be no assurance that another technology will not replace or adversely affect
DLT technology as a widely accepted data storage medium. In addition, due to
the relatively recent emergence of the DLT market, the Company expects that
additional companies may introduce products incorporating DLT technology
competing directly with the Company. Any decline in the rate of growth of the
DLT market or failure of the market to sustain acceptance of DLT technology, or
any decline in unit prices of the Company's products as a result of increased
competition, technological change or otherwise, would have a material adverse
effect on the business, operating results and financial condition of the
Company.
The Company's success also depends in large part upon its relationship with
Quantum, who has the exclusive worldwide manufacturing rights for the DLT
technology and is the sole supplier of DLT tape drives and upon the Company's
ability to continue to obtain adequate supplies of DLT drives from Quantum.
There can be no assurance that Quantum will provide an adequate supply of the
DLT7000 drives as the Company has not been able to secure any guarantee of the
future supply of DLT drives from Quantum. In addition, 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
9
<PAGE>
operations. The Company's relationship with Quantum could be materially and
adversely affected to the extent the merger with Quantum is not consummated.
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.
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 P1000 Series (which
commenced volume shipments in the forth quarter of fiscal 1998), the continued
acceptance of the Company's 7100 Series (first volume shipment commenced in the
first quarter of fiscal 1998), 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 may
result in a reduction in the sales of the Company's 520 Series products as
customers re-evaluate their automated solutions requirements given the Company's
expanded product line. 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. The Company's principal competitors include the following
manufacturers of DLT based products, ADIC, Breece Hill Technologies, Hewlett-
Packard, Overland Data and StorageTek. The Company also 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.
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.
10
<PAGE>
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 50% and 33% of
the Company's total net sales in fiscal 1998 and 1997, 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.
The Company also relies heavily on selected VARs who integrate the
Company's products with storage management software to provide comprehensive
storage solutions. Most of the Company's VARs carry product lines that are
competitive with those of the Company, and there can be no assurance that they
will give the marketing of the Company's products high priority, or that they
will continue to carry the Company's products. The Company's agreements with
VARs and OEMs are generally not required to be exclusive, and in many cases may
be terminated by either party at any time with limited notice and without cause.
A small number of customers has historically accounted for a substantial
portion of the Company's net sales and the identity of the Company's significant
customers has historically varied from period to period. Sales to EMC, DEC and
Sun Microsystems accounted for approximately 8.2%, 13.2% and 16.3%, respectively
of the Company's total net sales for the year ended March 31, 1998. No other
customer accounted for 10% or more of net sales during these periods. 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
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, 1997 to March 31,
1998, the size of the Company's staff increased from 176 to 342 employees and
further increases in the number of employees are anticipated during fiscal year
1998. 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 to 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.
Absence of History as an Independent Entity; Limited Relevance of Historical
Financial Information
The Company was operated as a division of Odetics between January 1993 and
March 1997, and accordingly, has had limited independent operating history.
Prior to Odetics' distribution in of its remaining 82.9% of its controlling
interest in the Company and through the current period, the Company continued to
operate as an independent company but was supported by various service
agreements between the Company and Odetics intended to facilitate the Company's
transition to an independent public company. There can be no assurance that the
Company will be able to continue to manage this transition or to develop these
independent resources successfully. Also, 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,
11
<PAGE>
standalone company during the periods presented or be indicative of future
results of operations and the financial condition of the Company.
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
International product sales represented approximately 25% and 21% of the
Company's total net sales during fiscal 1998 and 1997, respectively. The
Company maintains sales and support offices in England, Germany, Australia,
Japan 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 devaluations 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
12
<PAGE>
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
On April 1, 1997, the Company entered into a four year promissory note
payable to Odetics in the amount of approximately $13.0 million (approximately
$10.0 million of which was outstanding at March 31, 1998). This note is payable
in sixteen equal quarterly installments of principal plus accrued interest
commencing June 30, 1997. On March 25, 1998, the Company obtained a $20.0
million revolving working capital facility through January 2000 and a $6.5
million term loan also due in January 2000. While the Company believes that
these facilities should be sufficient to meet its current obligations, the
Company does continue to operate in a high growth market with limited capital
resources. The Company believes that in order to remain competitive, it may
require additional financial resources over the next year for working capital,
research and development, and the expansion of sales, marketing and general and
administrative functions.
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 eleven 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. Competition for such
employees, particularly development engineers and experienced senior management,
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.
Effect of Certain Charter Provisions; Anti-Takeover 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. 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.
13
<PAGE>
Anti-Takeover Effect of Shareholder Rights Plan
On March 12, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan. Under terms of the Plan, preferred stock purchase rights were
distributed to the Company's stockholders as a dividend at the rate of one Right
for each share of Common Stock held as of the close of business on March 23,
1998. The rights are designed to guard against partial tender offers and other
abusive and coercive tactics that might be used in an attempt to gain control of
the Company without paying all stockholders a fair price for their shares. Each
Right entitles stockholders to buy one one-thousandth of a share of Series A
Preferred Stock of the Company at an exercise price of $60.00. In general, the
Rights will be exercisable only if a person or group acquire 15% of more of the
Company's Common Stock. Although these Rights are not intended to prevent a
takeover, any Rights Plan could be considered to delay or make a merger, tender
offer, or proxy contest more difficult thereby potentially adversely affecting
the market price of the Company's Common Stock.
Year 2000 Compliance
Many current computer systems and software products may not correctly
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists in the
hardware and software industry concerning the potential effects associated with
such compliance. All of the Company's core products have been designed to be
Year 2000 compliant and have been tested to establish this compliance. The
Company has scheduled a change to its MRP system for the fourth quarter of 1998
to utilize a version of the system that has been established to be Year 2000
compliant. The Company believes that all of its other business systems are
currently Year 2000 compliant, but will continue to pursue certification of
compliance for all critical business systems. The Company has made Year 2000
compliance a requirement for all purchases of its business systems. The Company
may be required to expend additional resources to make Year 2000 compliance
corrections to its information systems, which corrections may not be able to be
made in a timely basis, if at all. The Company believes that the Year 2000
issues may affect purchasing patterns of customers and potential customers in a
variety of ways. Many companies are expending significant resources to correct
their current systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products such as those offered by the
Company. Many potential customers may also choose to defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus resulting
in potentially stalled market sales within the industry. In addition, Year 2000
issues could cause a significant number of companies, including current
customers of the Company, to reevaluate their current systems needs, and, as a
result consider switching to other systems or suppliers. Any of the foregoing
could result in a material adverse effect on the Company's business financial
condition and results of operation.
ITEM 2. PROPERTIES.
The Company's principal administrative, engineering and manufacturing
facilities are located in one 120,000 square foot facility in Irvine,
California, under a lease which expires in December 2003. The Company has an
option to extend the lease for an additional five year period. The base rent is
currently approximately $72,000 per month. In addition to the base rent, the
Company pays its share of operating expenses, property tax and insurance
premiums on the building. The Company is currently in negotiations to lease an
additional facility in Irvine, California to accommodate growth of the business.
The Company also leases office space in England for sales and service activities
and office space for its sales representatives in various domestic and foreign
locations.
ITEM 3. LEGAL MATTERS.
The Company is not currently a party to any pending litigation that it
believes could have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1998.
14
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol "ATLPA." The following
table sets forth, for the periods indicated, the high and low last reported sale
prices for the Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal Year High Low
- ---------------------------------------------------------- -------- -------
<S> <C> <C>
Fiscal Year Ended March 31, 1997
Fourth Quarter (commencing March 7, 1997)............... $12.875 $8.000
<CAPTION>
Fiscal Year Ended March 31, 1998 High Low
-------- -------
<S> <C> <C>
First Quarter.......................................... $11.250 $7.500
Second Quarter......................................... 13.500 8.625
Third Quarter.......................................... 15.125 9.125
Fourth Quarter......................................... 16.500 9.125
</TABLE>
As of June 24, 1998, there were 772 record holders of the Company's Common
Stock. On June 24, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $25.6875 per share.
Recent Sales of Securities
Since April 1, 1997, the Company has not sold or issued any unregistered
securities.
Dividend Policy
The Company has never declared or paid cash dividends on shares of its
capital stock. The Company currently intends to retain all of its earnings, if
any, for use in its business and does not anticipate paying any cash dividends
in the foreseeable future. Furthermore, the Agreement with Quantum and the
Company's agreement with its lender currently limits the Company's ability to
pay cash dividends. The payment of any future dividends will be at the
discretion of the Company's Board of Directors, and will depend upon a number of
factors, including, but not limited to, future earnings, the success of the
Company's business, activities, its capital requirements, the general financial
condition and future prospects of the Company, general business conditions, the
consent of the Company's principal Lender and such other factors as the Board
may deem relevant.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated and combined financial data with
respect to the Company's consolidated and combined statement of operations for
each of the five years in the period ended March 31, 1998 and the balance sheet
data at March 31, 1998, 1997, 1996, 1995 and 1994 are derived from the audited
consolidated and combined financial statements of the Company. The financial
statements for the fiscal years ended March 31, 1994 and 1995 and the Company's
consolidated balance sheet at March 31, 1996 are not included in this Report.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Consolidated and Combined Financial Statements of the Company and the
related notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Consolidated and Combined Statements
of Operations Data:
Net sales
Products $87,910 $53,717 $24,795 $15,898 $15,534
Service and spare parts 9,717 6,311 4,615 6,743 4,972
------- ------- ------- ------- -------
Total net sales 97,627 60,028 29,410 22,641 20,506
Gross profit
Products 32,509 21,126 9,113 3,623 3,136
Service and spare parts 3,821 3,260 1,434 2,095 1,653
------- ------- ------- ------- -------
Total gross profit 36,330 24,386 10,547 5,718 4,789
Expenses:
Research and development 8,370 5,686 1,731 3,248 2,285
Sales and marketing 12,239 7,070 3,718 1,838 1,308
General and administrative 4,020 3,392 2,948 2,862 2,549
Nonrecurring charge -- -- 1,392 4,042 --
------- ------- ------- ------- -------
Income (loss) from operations 11,701 8,238 758 (6,272) (1,353)
Interest expense 992 1,707 1,861 1,243 542
------- ------- ------- ------- -------
Income (loss) before income taxes 10,709 6,531 (1,103) (7,515) (1,895)
Income taxes 2,615 2,600 86 -- --
------- ------- ------- ------- -------
Net income (loss) $ 8,094 $ 3,931 $(1,189) $(7,515) $(1,895)
======= ======= ======= ======= =======
Basic earnings (loss) per share $ .84 $ .48 $(.15) $ (.94) $ (.24)
======= ======= ======= ======= =======
Diluted earnings (loss) per share(1) $ .83 $ .48 $(.15) $ (.94) $ (.24)
======= ======= ======= ======= =======
</TABLE>
(1) The earnings (loss) per share amounts prior to fiscal 1998 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128 Earnings per Share. For further discussion of earnings per
share and the impact of Statement No. 128, see the notes to the consolidated
and combined financial statements.
<TABLE>
<CAPTION>
As of March 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands)
Consolidated Balance Sheet Data:
Working capital (deficit) $21,121 $15,894 $(11,313) $(9,990) $(2,875)
Total assets 55,029 37,925 16,748 11,253 13,195
Total liabilities 38,072 29,060 26,861 20,091 14,743
Total stockholders' equity (deficit) 16,957 8,865 (10,113) (8,838) (1,548)
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Financial Statements and related Notes thereto contained elsewhere in this
Report. This Report contains forward-looking statements that involve a number of
risks and uncertainties including, without limitation, those set forth in Item
1. "Business--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 and E-Systems, Inc. worked to develop and provide a 19mm
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
distributed computing environments, applications which historically had 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. The Company's most recent product, the P1000, was
initially shipped in the third fiscal quarter of 1998. The P1000 is the
Company's first library series to incorporate the Company's Prism Library
Architecture. All of the Company's 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 periods presented.
In July 1996, the Company established its own wholly owned European
subsidiary, 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.
In March 1998, the Company established a new sales subsidiary in Australia
and a new branch office in Japan. These new locations are intended to support
the Company's on-going efforts to expand its business opportunities in the Asia
Pacific region.
The Company's operating expenses have increased significantly in recent
periods as the Company has added resources in order to support expanding growth
opportunities. The Company also expects operating expenses to increase as the
Company continues to build its management and information systems and other
infrastructure to support the services previously performed by Odetics.
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 related to the
Distribution and governing various interim and continuing relationships between
the companies, including (i) a Separation and Distribution Agreement which set
forth the principal corporate transactions required to effect the separation of
the Company from Odetics, the initial public offering and the Distribution, (ii)
a Tax Allocation Agreement which governed the
17
<PAGE>
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 initial public offering and the Distribution to perform
certain financial, management information and other services for the Company.
Items (i) and (ii), above were effectively cancelled upon Odetics distribution
of its remaining shares of ATL Stock. During fiscal 1998, charges paid to
Odetics pursuant to the Services Agreement have declined as the Company has
begun to build its own infrastructure and to incur directly expenses that
otherwise would have been included in charges allocated by Odetics.
In March 1997, the Company completed an initial public offering of
1,650,000 of its Common Stock following which Odetics' beneficial ownership of
the Company was reduced to 82.9%. The initial public offering generated net
proceeds to the Company of approximately $16.0 million, $6.8 million of those
proceeds were used to reduce the Company's obligations to Odetics. The balance
of the proceeds was being used to fund working capital requirements. In October
1997, Odetics completed the Distribution by disbursing its remaining ownership
interest in the Company to stockholders of Odetics.
Results of Operations
The following table sets forth for the years indicated, the percentages of
net sales represented by each item in the Company's statement of operations.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales
Products...................................... 90.0% 89.5% 84.3%
Service and spare parts....................... 10.0% 10.5 15.7
----- ----- -----
Total net sales................................ 100.0% 100.0% 100.0%
Gross profit
Products..................................... 37.0 39.3 36.8
Service and spare parts...................... 39.3 51.7 31.1
----- ----- -----
Total gross profit 37.2 40.6 35.9
Expenses:
Research and development..................... 8.6 9.5 5.9
Sales and marketing.......................... 12.5 11.8 12.6
General and administrative................... 4.1 5.6 10.0
Nonrecurring charge.......................... -- -- 4.8
----- ----- -----
Income (loss) from operations.................. 12.0 13.7 2.6
Interest expense............................... 1.0 2.8 6.3
----- ----- -----
Income (loss) before income taxes.............. 11.0 10.9 (3.7)
Income taxes................................... 2.7 4.4 0.3
----- ----- -----
Net income (loss).............................. 8.3% 6.5% (4.0)%
===== ===== =====
</TABLE>
Net Sales. Total net sales increased 63% to $97.6 million for the fiscal
year ended March 31, 1998 ("fiscal 1998") as compared to total net sales of
$60.0 million in fiscal 1997. Total net sales increased 104.1% to $60.0 million
in the fiscal year ended March 31, 1997 ("fiscal 1997") from $29.4 million in
the fiscal year ended March 31, 1996 ("fiscal 1996").
Product sales rose to $87.9 million or 63.7% for fiscal 1998 compared to
$53.7 million in the prior year period. This overall increase was due to
continued growth in the Company's traditional 2640 and 520 product lines as well
as strong demand for the Company's 7100 tape library series, which began
shipping in the last fiscal quarter of the prior year. Also contributing to the
strong growth rate was the fiscal fourth quarter introduction of the P1000, the
Company's latest automated tape library offering, as well as increased shipments
of tape upgrade kits during both the third and fourth fiscal quarters. Fiscal
1997 product sales increased 116.6% to $53.7 million compared to fiscal 1996,
reflecting growth in both the Company's 2640 and 520 tape libraries and the
fiscal fourth quarter introduction of the 7100 tape library series.
18
<PAGE>
Service and spare parts sales include revenue derived from the sales of
spare parts and extended service contracts to support the worldwide installed
base of tape library products. In fiscal 1998, service revenues represented
10.0% of total net sales compared to 10.5% in fiscal 1997. Total service and
spare parts sales levels have increased by 54.0% over fiscal 1997 due to both
higher parts sales consistent with the large increase in the worldwide installed
base of libraries and increased extended service contract revenues. The Company
expects that service revenues in future periods will continue to increase as the
initial one-year warranties on prior sales expire and customers purchase
extended service contracts. In fiscal 1996, service revenues represented 15.7%
of total net sales.
Gross Profit. Total gross profit as a percent of total net sales declined
to 37.2% in fiscal 1998 from 40.6% in fiscal 1997 but rose from 35.9% in fiscal
1996.
Gross profit on product sales was 37.0% in fiscal 1998 compared to 39.3% in
fiscal 1997. The decline in overall gross profit was due primarily to the
impact of increased volumes of higher cost DLT7000 drives being included within
the Company's libraries. In the fiscal 1998 fourth quarter, over 90% of the
libraries sold contained DLT7000 drives. The introduction of the P1000 in the
fourth quarter of fiscal 1998 also contributed to lower overall gross profit
margins as this product, until volume production commenced, was expected to
carry lower overall margins than those of the Company's other product lines.
Finally, the increasingly competitive pricing environment for the Company's
products, together with the increased investments in operations infrastructure
necessary to support the increased production volume, have also contributed to
overall lower gross margins. The Company believes that competitive pricing
pressures will continue to reduce average selling prices in the future. While
the Company continues to work to improve manufacturing efficiencies and reduce
component costs, there can be no assurance that these cost reduction activities
will be sufficient to offset the potentially negative impact of lower average
selling prices. In fiscal 1997, gross profit on product sales was 39.3%
compared to 36.8% in fiscal 1996. This increase was attributable to improved
absorption of manufacturing overhead resulting from increased production levels
as well as reductions in the cost of materials.
Gross profit on service and spare parts sales was 39.3% in fiscal 1998,
51.7% in fiscal 1997 and 31.1% in fiscal 1996. The decline in fiscal 1998
margins was primarily due to unusually high service margins in 1997 due to both
the impact of a higher proportion of spare parts sales and the prior year impact
of a favorable nonrecurring adjustment to service inventory reserves. The
increase in 1997 margins over 1996 was due to the unfavorable impact of the
reserve adjustments recorded in 1996.
Research and Development. In fiscal 1998, research and development expense
increased to $8.4 million (8.6% of total net sales) from $5.7 million (9.5% of
total net sales) in fiscal 1997 and from $1.7 million (5.9% of total net sales)
in fiscal 1996. The increased fiscal 1998 research and development expenditures
resulted from investments to support the Prism Architecture development, the
introduction of the 7100 library series, the introduction of the P1000 in the
fourth quarter of fiscal 1998, and the development and qualification activities
for the new P3000 and L500 library series. The Company also continued its
aggressive development efforts in new web-based internet software management
tools such as the 1997 introduction of WebAdmin. In addition, the Company has
continued to invest in comprehensive development activities with its major OEM
customers in order to support the product requirements identified by these
important partners. The increase in fiscal 1997 spending over fiscal 1996
levels was due primarily to the development, testing and pre-production
activities for the Company's 7100 series, Prism technology development and the
incorporation of the new DLT7000 tape technology into the Company's then
existing products. The Company expects expenditures for research and
development to increase over time and to be higher during periods of new product
development when significant expenditures are incurred in preproduction and
increased testing. These expenditures may, therefore, fluctuate as a percentage
of sales from period to period.
19
<PAGE>
Sales and Marketing. Sales and marketing expense increased to $12.2
million (12.5% of total net sales) compared to $7.1 million (11.8% of total net
sales) in fiscal 1997 and to $3.7 million (12.6% of total net sales) in fiscal
1996. The dollar increases in both years is due to the Company's expansion of
its worldwide sales and marketing organizations and related activities in North
America, Europe and Asia Pacific. The Company has continued to invest in
increased advertising, promotion and tradeshow expenditures necessary to
continue to develop new market opportunities. Increased sales variable expenses,
such as commissions and travel and entertainment expenses, also increased in a
manner consistent with increased sales levels. The Company anticipates that
total aggregate spending for sales and marketing will continue to rise as the
Company expands both its domestic and international sales and marketing
organizations in order to take advantage of the opportunities being presented by
the expanding worldwide data storage marketplace.
General and Administrative. During fiscal 1998, 1997 and 1996, the Company
operated with various agreements between the Company and Odetics. Pursuant to
these agreements, Odetics has provided various tax, financial, information
systems and other administrative support activities to the Company at an
established allocated cost. On October 31, 1997, Odetics distributed its
remaining 82.9% ownership in the Company's Common Stock to all Odetics
stockholders. As a result of this transaction, the Tax Sharing Agreement was
terminated. At the same time, the Company continues to operate with other
various shared service activities including information systems and other
administrative support functions. The Company expects, during fiscal 1999, to
continue to build the infrastructure necessary to eventually assume all
information system and administrative responsibilities.
General and administrative expense increased to $4.0 million (4.1% of total
net sales) in fiscal 1998 from $3.4 million (5.6% of total net sales) in fiscal
1997 and from $2.9 million (10.0% of total net sales ) in fiscal 1996. The
increased aggregate expenses were due largely to the development of the
infrastructure noted above and consisted primarily of increased finance,
information systems and other infrastructure support personnel. In addition, the
Company has incurred increased legal, accounting and other professional fees
consistent with the overall growth in its business operations. As the Company
continues to add the infrastructure necessary to support both its domestic and
international operations, the Company believes that general and administrative
expenses will continue to increase in aggregate dollars.
Nonrecurring Charge. The Company incurred a nonrecurring charge of $1.4
million in fiscal 1996, which consisted of legal expenses incurred in connection
with patent infringement litigation with E-Systems, which was settled in May
1996.
Income Taxes. Through October 31, 1997, the Company was included in the
consolidated tax return of its former parent company, Odetics. According to the
Tax Sharing Agreement between the two companies, members of the consolidated
group that generate taxable losses were 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 had no loss carry forward
available to offset future taxable income. For periods subsequent to April 1,
1996, the Company entered into a Tax Allocation Agreement with Odetics pursuant
to which the Company would make a payment to Odetics, or Odetics would 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 provided that members of the Odetics,
Inc. consolidated group generating tax losses after April 1, 1996 would be paid
by other members which utilize such tax losses to reduce such other members' tax
liability. Accordingly, for fiscal 1997, the Company's effective tax rate was
40.0%.
Subsequent to the Distribution in October 31, 1997, the Company's Tax
Allocation Agreement was terminated and the Company has assumed responsibility
for its own tax planning strategies and has filed its own federal and state
income tax returns. As a result of new tax planning options available to the
Company, the Company reported an effective tax rate of 37.0% for the five month
period ended March 31, 1998, excluding the favorable impact of the nonrecurring
tax benefit recorded in the fiscal fourth quarter.
20
<PAGE>
During the fourth quarter of fiscal 1998, the Company benefited from an
approximate $1.5 million reduction of federal deferred tax valuation allowances
provided in prior years. The Company was able to recognize this benefit because
its taxable income in the five month period ending March 31, 1998, when the
Company was not included in the consolidated tax return of Odetics was
sufficient to provide assurance of the realization of previously reserved
deferred tax benefits.
The combination of the factors noted above resulted in an effective tax
rate of 24.4% for fiscal 1998 ended compared to 40.0% in fiscal 1997.
Backlog. The Company builds products both to forecast and to order. As a
result, the Company's total net sales during any period are largely dependent
upon orders booked and shipped during that period. The Company includes in its
backlog those customer orders for which it has received purchase 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 cancelable under
certain circumstances. Due to the potential cancellation or orders and delays
in customer shipments and delivery schedules, the Company's backlog at any
period may not be indicative of actual sales for any succeeding period.
Although the Company primarily attempts to build to order, it must purchase
components and subassemblies and incur operating expenses which are relatively
fixed in nature based upon forecasted orders. If orders do not meet the
Company's forecast 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.
Liquidity and Capital Resources
Total working capital increased to $21.1 million at March 31, 1998 from
$15.9 million at March 31, 1997 due primarily to increases in inventory and
accounts receivable, offset by increases in accounts payable and other accrued
liabilities. During fiscal 1998, the Company used $3.7 million in cash from
operating activities primarily to finance higher inventory levels. The Company
also used approximately $3.8 million in fiscal 1998 in order to purchase
equipment and make leasehold improvement additions.
The Company was originally capitalized with a $1.0 million capital
investment provided by Odetics. Since its inception, and until its initial
public offering in March 1997, the Company relied primarily upon interest
bearing advances from Odetics to fund its working capital requirements. On
December 31, 1996, the Company purchased from Odetics the net assets of the
division of Odetics that provided service and support for the Company's products
for $2.3 million. This purchase was reflected as an increase in the Company's
current obligation to Odetics. On April 1, 1997, the Company entered into a
promissory note payable to Odetics in the original principal amount of $13.0
million, which represented the aggregate balance of the Company's cumulative
borrowings from Odetics. This note bears interest at a rate equal to Odetics'
cost of borrowing with principal and interest payments due in sixteen equal
quarterly installments at the end of each quarter beginning June 30, 1997 and
ending on March 31, 2001.
21
<PAGE>
In March 1997, the Company completed an initial public offering of
1,650,000 shares of its Common Stock. The Company generated $15.9 million of
cash from the initial public offering and used $8.9 million to repay
intercompany indebtedness to Odetics and approximately $2.0 million for
purchases of equipment and leasehold improvements. During fiscal 1997, the
Company also generated approximately $4.5 million of cash from operating
activities, of which $3.9 million was provided through net income.
In March 1998, in order to facilitate the Company's worldwide sales growth,
the Company secured a new credit facility with Union Bank of California through
January 2000. This facility includes a $20.0 million working capital line,
subject to a maximum borrowing base restriction on the Company's eligible
accounts receivable and a $6.5 million term loan which is available to the
Company on a quarterly basis in order to fund quarterly debt repayments to
Odetics, Inc. This facility also provides for borrowings at the lesser of the
bank's prime rate or at LIBOR plus 1.75% to 2.25% basis points, depending upon
borrowing level, and is secured by all of the Company's assets. This facility
requires the Company to comply with various financial covenants and other
standard compliance requirements. At March 31, 1998, the Company had
outstanding approximately $2.0 million on the working capital line and $812,000
on the term loan. The Company believes that available borrowings under its new
credit facility, together with funds generated from operations, will be adequate
to support the Company's current obligations.
YEAR 2000 COMPLIANCE
Many current computer systems and software products may not correctly
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists in the
hardware and software industry concerning the potential effects associated with
such compliance. All of the Company's core products have been designed to be
Year 2000 compliant and have been tested to establish this compliance. The
Company has scheduled a change to its MRP system for the fourth quarter of 1998
to utilize a version of the system that has been established to be Year 2000
compliant. The Company does not expect the cost of this upgrade to be
significant. The Company believes that all of its other business systems are
currently Year 2000 compliant, but will continue to pursue certification of
compliance for all critical business systems. The Company has made Year 2000
compliance a requirement for all purchases of its business systems. The Company
may be required to expend additional resources to make Year 2000 compliance
corrections to its information systems, which corrections may not be able to be
made in a timely basis, if at all. The Company believes that the Year 2000
issues may affect purchasing patterns of customers and potential customers in a
variety of ways. Many companies are expending significant resources to correct
their current systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products such as those offered by the
Company. Many potential customers may also choose to defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus resulting
in potentially stalled market sales within the industry. In addition, Year 2000
issues could cause a significant number of companies, including current
customers of the Company, to reevaluate their current systems needs, and, as a
result consider switching to other systems or suppliers. Any of the foregoing
could result in a material adverse effect on the Company's business financial
condition and results of operation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X
are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company and their ages as of
June 25,1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ --- --------------------------------
<S> <C> <C>
Kevin C. Daly, Ph.D........... 53 Chairman of the Board, President and
Chief Executive Officer
Mark P. de Raad............... 39 Vice President and Chief Financial Officer
Chester Baffa................. 58 Vice President, Marketing and Sales
Todd Kreter................... 38 Vice President, Operations
Steve Morihiro................ 40 Vice President, Engineering
James A. Pipp................. 53 Vice President, Controller and Secretary
Mark P. Spowart............... 46 Vice President, Worldwide Sales
Crandall Gudmundson (1)....... 67 Director
Joel Slutzky (1).............. 59 Director
Thomas L. Thomas.............. 48 Director
Paul E. Wright (1)............ 67 Director
</TABLE>
____________________
(1) Member of the Audit Committee and the Compensation Committee.
22
<PAGE>
Directors are elected annually and serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified.
Officers are elected by, and serve at the discretion of, the Board of Directors.
There are no family relationships among any of the directors or officers of the
Company.
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 also
served as a member of the Board of Directors of Odetics since June 1993 and as
Vice President and Chief Technical Officer of Odetics from 1987 to 1997. Prior
to that, Dr. 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 the
Director of the 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.
Mark P. de Raad has served as Chief Financial Officer of the Company since
September 1997. Prior to joining the Company, Mr. de Raad was employed, since
1987, by AST Research, Inc, a worldwide manufacturer of personal computers, in
various positions, most recently as Vice President, Finance, Treasurer and
Principal Accounting Officer. Prior to 1987, Mr. de Raad was employed by Tandem
Computers, Inc. and KMPG Peat Marwick, LLP. Mr. de Raad is a certified public
accountant.
Chester Baffa has served as Vice President, Marketing and Sales of the
Company 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.
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.
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.
James A. Pipp has served as the Vice President, Controller and Secretary of
the Company since June 1996 and as Controller since January 1993. From 1981 to
1993, Mr. Pipp served as the Corporate Controller of Odetics. Mr. Pipp 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.
23
<PAGE>
Crandall Gudmundson has served as a director of the Company since 1993.
Mr. Gudmundson is a co-founder of Odetics, has served as President of Odetics
since 1975 since his retirement in late 1997, and has been a director of Odetics
since 1979. Mr. Gudmundson has also served as a director of Odetics since 1969.
Prior to co-founding Odetics, Mr. Gudmundson was the lead project engineer for
Leach Corporation.
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 co-founded Odetics in 1969. From May 1993
until January 1994, Mr. Slutzky also served as the Chief Financial Officer of
Odetics, and as President of Odetics from 1969 to 1975. Prior to that, Mr.
Slutzky was an engineering manager at Leach Corporation, now part of the
Lockheed Electronics Division of Lockheed Corporation.
Thomas L. Thomas has served as a director of the Company since November
1997. Mr. Thomas has been the Senior Vice President and Chief Information
Officer, Global Information Systems of 3Com Corporation since August 1996 and a
member of the Executive Committee of 3Com. From September 1995 through July
1996, Mr. Thomas served as the Vice President and Chief Information Officer,
Global Information Systems. Prior to joining 3Com, Mr. Thomas had been Vice
President and Chief Information Officer of Dell Computer Corporation, a
manufacturer of personal computers, from 1993 to 1995. Prior to that, Mr. Thomas
served as Vice President of Management Information Systems at Kraft General
Foods from 1987 to 1993, and at Sara Lee Corporation from 1981 to 1987. Mr.
Thomas currently serves on several Industry Advisory Boards for Dell Computer
Corporation and Vital Signs.
Paul E. Wright was appointed as a director of the Company in July 1997.
Mr. Wright is the President of Wright Associates--Engineering and Business
Consultants, a company he formed in 1997. Mr. Wright served as the Chairman of
Chrysler Technologies Corp., the aerospace and defense electronics subsidiary of
Chrysler Corporation, from 1988 until his retirement in 1997. From 1986 to
1988, Mr. Wright served as President and Chief Operating Officer of Fairchild
Industries, Inc. Prior to joining Fairchild, he was employed for 28 years by RCA
Corporation, where he last served as the Senior Vice President responsible for
planning RCA's merger into General Electric Corporation. Mr. Wright has also
served as a director of Odetics since 1993.
Compensation of Directors
The Company reimburses all for out-of-pocket expenses incurred in attending
meetings of the Board and any committee thereof., and currently pays to Messrs.
Thomas and Wright $15,000 annually for serving on the Board of Directors.
Nonemployee directors are eligible to receive periodic option grants pursuant to
the Automatic Option Grant Program under the 1997 Option Plan. Under the 1997
Option Plan, each nonemployee director received an option to purchase 10,000
shares of Class A Common Stock in connection with his initial appointment to the
Board of Directors and will receive an additional option to purchase 5,000
shares on the date of each Annual Meeting thereafter. Each such option will
have an exercise price equal to the fair market value per share of the Class A
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 service as
a Board member. See "1997 Stock Incentive Plan."
Board Meetings and Committees
The Company has two standing committees, the Compensation Committee and the
Audit Committee, both of which were formed after fiscal 1997 upon the completion
of the Company's initial public offering. The Company has no standing
nominating committee, and the Board as a whole acts upon matters which would
otherwise be the responsibility of a nominating committee. The Audit Committee
supervises and reviews the audit and audit review programs and procedures of the
Company's independent auditors, the Company's internal accounting staff and the
results of internal auditing procedures. The Audit Committee also reviews the
independence, professional services, fees, plans and results of the independent
auditors' engagement, and recommends their retention or discharge to the Board.
The members of the Company's Audit Committee are Messrs. Gudmundson, Slutzky and
Wright. The Audit Committee held one meeting during the fiscal year ended March
31, 1998.
24
<PAGE>
The Compensation Committee will make recommendations to the Board
concerning the compensation of all officers of the Company and will administer
the Company's stock option plans. The members of the Company's Compensation
Committee are Messrs. Gudmundson and Slutzky. The Compensation Committee held
one meeting during fiscal 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission.
Such persons are required by the SEC regulations to furnish the Company with
copies of all Section 16(a) reports filed by such person. Based solely upon the
Company's review of such reports furnished to the Company and written
representations from certain reporting persons, the Company believes that all
filing requirements applicable to the Company's executive officers, directors
and 10% stockholders were complied with, except for the following transactions
which where reported late: (i) the grant of options to purchase 10,000 shares of
Class A Common Stock to Mr. Gudmundson in November 1997; and (ii) the grant of
options to purchase 10,000 shares of Class A Common Stock by Mr. Slutzky in
November 1997.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended March 31, 1998, all
compensation received for services rendered to the Company in all capacities by
the Company's Chief Executive Officer and each of the other most highly
compensated executive officers of the Company whose salary plus bonus exceeded
$100,000 in fiscal 1998 (collectively, the "Named Executive Officers"). Amounts
for fiscal 1997 and fiscal 1996 reflect the amount paid by Odetics and its
subsidiaries on an aggregate basis for periods prior to the Distribution.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------- ----------------------------------------
Restricted Securities All Other
Name and Fiscal Stock Underlying Compensation
Principal Positions Year Salary($)(1) Bonus($) Awards (2) Options(#)(3) ($)(5)
------------------- ------ ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kevin C. Daly, Ph.D. 1998 $196,257 $125,000 -- -- $4,023
Chief Executive Officer, 1997 201,810 60,000 263 250,000 4,106
President and Chairman 1996 164,104 50,000 2,465 12,000 3,258
of the Board 10,000 (4)
Chester Baffa 1998 192,740 95,200 -- -- 5,913
Vice President, Marketing 1997 144,938 74,000 263 50,000 --
and Sales 1996 100,067 36,668 1,914 -- --
Mark Spowart 1998 145,965 133,107 -- -- --
Vice President, 1997 106,384 192,979 263 50,000 4,021
Worldwide Sales 1996 90,312 173,739 2,567 -- 4,610
Steve Morihiro 1998 114,404 65,000 -- -- 3,253
Vice President, Engineering 1997 96,000 15,000 171 50,000 3,120
1996 99,205 5,000 1,697 1,500 2,976
667 (4)
Todd Kreter 1998 114,461 50,000 -- -- 3,237
Vice President, Engineering 1997 96,648 15,000 163 50,000 --
1996 83,240 5,000 1,388 2,000 --
</TABLE>
___________________
(1) Includes amounts deferred under Odetics' Executive Deferral Plan and the
Company's and Odetics' Section 401(k) Plan.
(2) Represents Odetics contribution to Odetics' Associate Stock Ownership Plan
for the benefit of the Named Executive Officer during the periods prior to
the Distribution based on the closing price of Odetics' Class A Common
Stock at March 31, 1997 and March 31, 1996.
(3) Options granted in fiscal 1996 represent options to purchase shares of
Class A Common Stock of Odetics. All other options indicated represent the
options to purchase shares of the Company's Class B Common Stock.
(4) During fiscal 1996, Odetics offered all holders of Odetics' options that
were granted in fiscal 1994 the opportunity to have the option exercise
price of outstanding fiscal 1994 options reduced to the then current 1996
trading price. In connection with any such option repricing, one-third of
any repriced options were required to be cancelled. The option information
contained in this table does not take into account any options that may
have been cancelled in connection with any option repricing.
26
<PAGE>
(5) Represents the Company's matching contribution under the Company's Section
401(k) Plan to the respective accounts of the Named Executive Officers. For
periods prior to the Distribution, represents Odetics' matching
contribution under Odetics' Section 401(k) Plan to the respective accounts
of the Names Executive Officers.
Aggregated Options Exercised in Last Fiscal Year and Fiscal Year-End Option
Values
The following table provides information with respect to the Named
Executive Officers concerning the exercise of options during the last fiscal
year and unexercised options held as of March 31, 1998: All of the following
options entitle the holders thereof to purchase shares of the Company's Class B
Common Stock.
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options In-the Money Options
Name Exercise(#) Realized($) at Fiscal Year End(#) at Fiscal Year End($)(1)
---- ----------- ----------- ------------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin C. Daly -- -- 104,114 145,884 $1,119,226 $1,568,253
Chester Baffa -- -- 20,833 29,167 223,955 313,545
Mark Spowart -- -- 20,833 29,167 223,955 313,545
Steve Morihiro -- -- 20,833 29,167 223,955 313,545
Todd Kreter -- -- 20,833 29,167 223,955 313,545
</TABLE>
________________
(1) Based upon the market price of $15.75 per share, determined on the basis of
the closing selling price per share of the Company's Class A Common Stock
on the Nasdaq National Market on March 31, 1998, less the option exercise
price payable per share.
Employment Contracts, Termination of Employment and Change in Control
Arrangements.
While the Company does not currently have any employment contracts in
effect with any of its executive officers, the Board of Directors adopted a
Severance Plan in 1998, which provides for the payment of certain separation
benefits to officers and other employees of the Company in the event of
termination, other than for cause, following a change in control of the Company.
The Severance Plan defines a "change in control" of the Company generally as any
of the following transactions: (a) the acquisition by an unrelated third party
of beneficial ownership of more than 50% of the voting securities of the Company
by a tender or exchange offer made directly to the Company's stockholders, (b) a
merger or consolidation in which securities possessing more than 50% of the
total combined voting power of the Company's securities are transferred to
persons different than those holding such securities immediately prior to the
transaction, or (c) the sale, transfer or other disposition of all or
substantially all of the Company's assets in a complete liquidation or
dissolution of the Company.
Under the Severance Plan, certain officers of the Company are entitled to
receive twice their annual compensation (then current base salary and management
bonus plan) for a period of two years following termination. Benefits will also
be provided for the same period, and the acquiror will provide executive
outplacement, financial counseling and gross-up for any excise taxes imposed on
any parachute payments and any income taxes or excise taxes relating to the
gross-up payment. There is no requirement of mitigation and payments are not
reduced if the participant finds employment during the payout period; provided,
however, that the recipient may not render services for any competitive
organization or engage in any business competitive with the Company.
In addition to actual termination, officers may terminate their employment
and be entitled to separation benefits if at any time during the two year period
following the closing of a change of control transaction (the "Closing") (i) the
officer's annual compensation (including average annual bonus during the
preceding three years or such shorter term as the officer has been employed) is
reduced below the highest amount such officer has earned from and including the
date of the Closing, (ii) the officer's duties, responsibilities (including
title and
27
<PAGE>
reporting requirements) and perquisites are diminished in comparison to his or
her duties, responsibilities and perquisites immediately prior to the Closing,
or (iii) the officer is required to be based at a location more than 25 miles
from the location where his or her services were performed on the date of the
Closing or is required to travel materially more often or for materially longer
periods than required prior to the Closing.
Non-officer employees may also be entitled to Separation Benefits following
a change in control up to a maximum of 12 months for Director level employees, 9
months for Manager and Supervisor level employees and 6 months for other
employees. Such non-officer may also terminate their employment and receive
Separation Benefits if their annual base salary is reduced or they are required
to be based more than 25 miles from where they were based on the date of the
Closing.
In addition to the Severance Plan, the Company also provides incentives
such as salary, benefits and option grants (which are typically subject to a
three or four year vesting schedule) to attract and retain executive officers
and other key associates. The Compensation Committee, as Plan Administrator of
the 1997 Stock Incentive Plan and the 1996 Stock Incentive Plan, will have the
authority to provide for the accelerated vesting of the shares of Common Stock
subject to any outstanding options 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. Other
than such accelerated vesting, there is no agreement or policy which would
entitle any executive officers to severance payments or any other compensation
as a result of such officer's termination.
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,
require the Company to indemnify its 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.
28
<PAGE>
1997 Stock Incentive Plan
The Company's 1997 Stock Incentive Plan (the "1997 Plan") was adopted by
the Board of Directors and became effective on September 4, 1997 upon adoption
by the Company's stockholders. A total of 200,000 shares of Class A Common Stock
have been authorized for issuance under the 1997 Plan. In no event may any one
participant in the 1997 Plan receive option grants or direct stock issuances for
more than 50,000 shares in the aggregate per calendar year.
The 1997 Plan contains three separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) a Stock Issuance Program, and (iii) an
Automatic Option Grant Program. The Company has reserved 200,000 shares of the
Company's Class A Common Stock for issuance under the 1997 Plan. In no event
may any one participant in the 1997 Plan be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
50,000 shares in the aggregate per calendar year. Shares subject to any
outstanding options under the 1997 Plan which expire or otherwise terminate
prior to exercise will be available for subsequent option grants and direct
issuances. Unvested shares issued under the 1997 Plan and subsequently
repurchased by the Company, at the exercise price or direct issue price paid per
share, pursuant to its repurchase rights under the 1997 Plan will also be
available for subsequent issuance. However, shares subject to any option
surrendered in accordance with the stock appreciation right provisions of the
1997 Plan will not be available for subsequent issuance.
The Compensation Committee of the Board will serve as the initial Plan
Administrator with respect to the Discretionary Option Grant and Stock Issuance
Programs. The term "Plan Administrator" as used herein will mean the
Compensation Committee or any other appointed committee acting within the scope
of its administrative authority under the 1997 Plan. Administration of the
Automatic Option Grant Program will be self-executing in accordance with the
express provisions of such program.
Officers and employees, nonemployee Board members and independent
consultants and advisors in the service of the Company or its parent and
subsidiaries (whether now existing or subsequently established) are eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs. Only
nonemployee members of the Board will be eligible to participate in the
Automatic Option Grant Program.
Discretionary Option Grant Program. The Plan Administrator has complete
discretion under the Discretionary Option Grant Program to determine which
eligible individuals are to receive option grants, the time or times when such
grants are to be made, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a
nonstatutory option under the federal tax laws, the vesting schedule (if any) to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding. Each granted option will have an exercise
price per share not less than one hundred percent (100%) of the fair market
value per share of Class A Common Stock on the option grant date, and no granted
option will have a term in excess of ten (10) years. The option will generally
become exercisable in a series of installments over a specified period of
service measured from the grant date. The Plan Administrator is also authorized
to issue tandem stock appreciation rights and limited stock appreciation rights
in connection with option grants made under the Discretionary Option Grant
Program. The Plan Administrator also has the authority to effect the
cancellation of outstanding options under the Discretionary Option Grant Program
and to issue replacement options with an exercise price equal to the fair market
value per share of Class A Common Stock at the time of the new grant.
Stock Issuance Program. The Company may sell shares of Class A Common
Stock under the Stock Issuance Program at a price per share not less than one
hundred percent (100%) of their fair market value, payable in cash or through a
promissory note payable to the Company. Shares may also be issued as a bonus for
past services. The shares issued as a bonus for past services will be fully
vested upon issuance. All other shares issued under the program will be subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any and all unvested shares
outstanding under the 1997 Plan.
29
<PAGE>
Automatic Option Grant Program. Under the Automatic Option Grant Program,
nonemployee Board members will receive option grants at specified intervals over
their period of Board service. Under this program, each individual serving as a
nonemployee Board member on the Effective Date of the 1997 Plan will
automatically be granted on that date a nonstatutory option to purchase 10,000
shares of Class A Common Stock. Each individual who first becomes a nonemployee
Board member on or after the Effective Date, whether through election by the
stockholders or appointment by the Board, will automatically be granted, at the
time of such initial election or appointment, a nonstatutory option to purchase
5,000 shares of Class A Common Stock, provided such individual has not
previously been in the Company's employ.
Each automatic option grant will have an exercise price per share equal to
100% of the fair market value per share of Class A Common Stock on the grant
date and a maximum term of ten years measured from such date. Each option will
be immediately exercisable for all of the option shares. Any shares purchased
under the option will, however, be subject to repurchase by the Company at the
exercise price paid per share upon the optionee's cessation of Board service
prior to vesting in those shares. The shares of Class A Common Stock subject to
each initial 10,000 share grant will vest in a series of four successive equal
annual installments over the optionee's period of continued Board service
measured from the automatic grant date, and the shares subject to each annual
5,000 share grant will vest in full upon the optionee's completion of one year
of Board service measured from the grant date. Each automatic option will
remain exercisable for a twelve month period following the optionee's cessation
of service as a Board member. In no event, however, may the option be exercised
after the expiration date of the option term. During the applicable post-service
exercise period, the option may not be exercised for more than the number of
option shares (if any) in which the Board member is vested at the time of his or
her cessation of Board service. The shares subject to each automatic option
grant will immediately vest upon (i) the optionee's death or permanent
disability while a Board member, (ii) an acquisition of the Company by merger or
asset sale, (iii) the successful completion of a tender offer for more than 50%
of the Company's outstanding voting stock, or (iv) a change in the majority of
the Board effected through one or more contested elections for Board membership.
30
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 24, 1998, the number and
percentage ownership of the Company's Class A Common Stock and Class B Common
Stock owned by (i) each of the Named Executive Officers in the Summary
Compensation Table which appears elsewhere herein, (ii) each director of the
Company, and (iii) all Executive Officers and Directors of the Company as a
group.
<TABLE>
<CAPTION>
Amount of Common Stock Percentage of
Name of Beneficial Owner Beneficially Owned(1) Class(1)
- ------------------------ ---------------------- -------------
<S> <C> <C>
Kevin C. Daly, Ph.D. 180,984 (2) 1.9
Chester Baffa 27,331 (3) *
Mark P. Spowart 32,913 (3) *
Steve Morihiro 32,378 (3) *
Todd Kreter 25,831 (3) *
Crandall Gudmundson 186,728 1.9
Joel Slutzky 497,146 5.5
Thomas L. Thomas -- --
Paul E. Wright 35,145 *
All directors and executive officers
as a group (11 persons) 1,027,771 (5) 10.6
</TABLE>
_____________
* Less than one percent.
(1) The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 9,655,000 shares of Class A Common Stock
and no shares of Class B Common Stock outstanding as of March 31, 1998.
Beneficial ownership is determined in accordance with the rules and
regulations of the Commission. Shares of Common Stock subject to options
that are currently exercisable or exercisable within 60 days of March 31,
1998 are deemed to be outstanding and beneficially owned by the person
holding such options for the purpose of computing the number of shares
beneficially owned and the percentage ownership of such person, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to
this table, and subject to applicable community property laws, such person
have sole voting and investment power with respect to all shares of the
Company Common Stock shown as beneficially owned by them.
(2) Includes 104,155 shares of Class B Common Stock issuable upon exercise of
vested options.
(3) Includes 20,833 shares of Class B Common Stock issuable upon exercise of
vested options.
(4) Includes 299,257 shares held by the Slutzky Family Trust.
(5) Includes 208,331 shares of Class A Common Stock issuable upon exercise of
vested options
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Company's initial public offering in March 1997 (the "IPO"),
the Company was a wholly owned subsidiary of Odetics. As the sole stockholder,
Odetics maintained substantial control over the operations of the Company and
provided the Company with significant management, financial, administrative and
other resources, including treasury, accounting, tax, internal audit, legal,
human resources, sales and marketing and other support services. In May 1997,
the Company and Odetics entered into a Separation and Distribution Agreement,
pursuant to which, in October 1997 Odetics completed a tax free distribution of
all of Odetics' shares of Class A Common Stock of the Company to the
stockholders of Odetics (the "Distribution").
31
<PAGE>
The Separation and Distribution Agreement set forth the agreements between
the Company and Odetics with respect to the principal corporate transactions
required to effect the IPO, to separate the operations of the Company from
Odetics (the "Separation"), and to facilitate the Distribution. Pursuant to this
agreement, Odetics sold all assets related to the business of the Company to the
Company, and the Company assumed and agreed to faithfully perform and fulfill
all related liabilities and obligations. All assets conveyed were transferred
for a purchase price equal to their respective book values, calculated in
accordance with generally accepted accounting principles, which the parties
believe was equivalent to the fair market value thereof.
The Separation and Distribution Agreement also provided for a full and
complete release and discharge after the IPO 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 IPO, 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 IPO), except as expressly set forth
in the Separation and Distribution Agreement.
The Company 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 the
Company's Registration Statement on Form S-1 in connection with the IPO.
Odetics agreed to indemnify, defend and hold the Company and its affiliates
harmless 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 hereof which would give rise to an indemnification
obligation under the Separation and Distribution Agreement. The Separation and
Distribution Agreement also provided that during the period prior to the
Distribution, the Company would reimburse Odetics for its proportionate share of
premiums paid or accrued on insurance policies under which the Company had
coverage.
In fiscal year 1998, the Company was charged and/or allocated expenses of
$506,000. The costs of these services were directly charged and/or allocated
using methods that the Company's management believes are reasonable, although
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 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.
In October 1997, twelve employees borrowed an aggregate of approximately
$237,000 from Odetics to finance the exercise of options to purchase Class A
Common Stock of Odetics. Such loans were evidenced by promissory notes which
bear interest at 5.7% per annum and are due payable upon the expiration date of
the original options, which dates range from December 1997 to May 2005. Such
employees included Kevin C. Daly, the Company's Chief Executive Officer,
President and Chairman of the Board, whose initial principal balance under such
notes was approximately $171,000. In March 1998, the Company purchased all of
these promissory notes from Odetics for an aggregate purchase price of $244,000.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements of the
Company are included in a separate section of this Annual Report on Form 10-K
commencing on the pages referenced below:
Page
----
Index to Consolidated and Combined Financial Statements.................. F-1
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997................ F-3
Consolidated and Combined Statements of Operations for the years ended
March 31, 1998, 1997 and 1996........................................ F-5
Consolidated and Combined Statements of Stockholders' Equity
for the years ended March 31, 1998, 1997 and 1996.................... F-6
Consolidated and Combined Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996........................................ F-7
Notes to Consolidated and Combined Financial Statements.................. F-8
2. Financial Statement Schedules. The following financial statement
schedule of the Company is included in a separate section of this Annual Report
on Form 10-K commencing on the pages referenced below. All other schedules have
been omitted because they are not applicable, not required, or the information
is included in the consolidated financial statements or notes thereto.
Page
----
Schedule II - Consolidated Valuation and Qualifying Accounts........ S-1
3. Exhibits.
3.1 Certificate of Incorporation of the Company as filed with
the Delaware Secretary of State on December 19, 1996/(1)/
3.2 Certificate of Merger of the Company as filed with the
Delaware Secretary of State on December 19, 1996/(1)/
3.3 Bylaws of the Company/(1)/
4.1 Specimen certificate representing shares of Class A
Common Stock of the Company./(1)/
4.2 1996 Stock Incentive Plan./(1)/
4.3 Form of Notice of Grant of Stock Option and related Stock
Option Agreement under 1996 Stock Incentive Plan./(1)/
10.1 Form of Indemnification Agreement./(1)/
10.2 Real Property lease, dated October 9, 1996, by and between
Thomas M. Zapara and Violet J. Zapara, Trustees of the
Zapara Family Trust U/D/T dated December 7, 1995 and
Company, a wholly-owned subsidiary of Odetics, Inc./(1)/
10.3 Separation and Distribution Agreement between the Company
and Odetics dated March 1, 1997./(2)/
10.4 Tax Allocation Agreement between the Company and Odetics
dated March 1, 1997./(2)/
10.5 Services Agreement between the Company and Odetics dated
March 21, 1997./(2)/
10.6 Form of Value Added Reseller Agreement./(1)/
10.7 Form of International Value Added Reseller Agreement./(1)/
10.8+ Technical Support Agreement dated May 6, 1996, between
Technology Service Solutions and Odetics, Incorporated,
as amended May 7, 1996./(1)/
33
<PAGE>
10.9+ Tape Library OEM Purchase Agreement dated August 28, 1996,
between Quantum Corporation and Company./(1)/
10.10+ Veritas Software License Agreement, dated November 8, 1996,
between Veritas Software Corporation and the Company./(1)/
10.11+ Agreement dated December 18, 1995, between Hewlett-Packard
GmbH Local Products Organization and Company./(1)/
10.12+ Basic Order Agreement dated April 15, 1993, between Digital
Equipment Corporation and Odetics, Inc. and Company, as
amended January 11, 1994, March 25, 1994, October 19, 1994,
October 27, 1994 and January 12, 1995./(1)/
10.13 Basic Ordering Agreement dated September 14, 1995 between
EMC Corporation and the Company./(1)/
10.14 Promissory Note between the Company and Odetics dated
April 1, 1997./(2)/
10.15 Form of Odetics Associate Agreement./(1)/
10.16 Note in the principal amount of $20 million and note in
principal amount of $6.5 million, and related loan
agreements between the Company and Union Bank entered
into as of March 25, 1998.
10.17 Intentionally Omitted
10.18 Development and License Agreement dated January 14, 1997
between the Company and Sun Microsystems, Inc./(1)/
21 List of Subsidiaries
23.1 Consent of Independent Auditors
27 Financial Data Schedule
_______________
+ The Company has received confidential treatment for portions of this
document previously filed with the Commission.
(1) Included as an exhibit to the Company's Registration Statement on Form S-1
(Reg. No. 333-15837), as amended, as filed with the Securities and Exchange
Commission, and incorporated herein by reference.
(2) Included as an exhibit to the Company's Annual Report Form 10-K (Commission
File No. 000-22037), as filed with the Securities and Exchange Commission
on June 30, 1997, and incorporated herein by reference.
(b) Reports on Form 8-K:
On March 19, 1998 the Company filed a Form 8-K dated as of March 11,
1998, reporting the adoption by the Board of Directors of the Company
a Stockholder Rights Plan under Item 5.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine,
State of California, on June 25, 1998.
ATL PRODUCTS, INC.
By: /s/ KEVIN C. DALY
----------------------------------
Kevin C. Daly, Ph.D.
Chief Executive Officer, President
and Chairman of the Board
POWER OF ATTORNEY
We, the undersigned officers and directors of ATL Products, Inc., do hereby
constitute and appoint Kevin C. Daly, Ph.D. and Mark P. de Raad, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ KEVIN C. DALY Chief Executive Officer, President June 25, 1998
- -------------------------- and Chairman of the Board
Kevin C. Daly, Ph.D. (principal executive officer)
/s/ JOEL SLUTZKY Director June 25, 1998
- --------------------------
Joel Slutzky
/s/ CRANDALL GUDMUNDSON Director June 25, 1998
- --------------------------
Crandall Gudmundson
/s/ MARK P. DE RAAD Chief Financial Officer June 25, 1998
- -------------------------- (principal financial officer)
Mark P. de Raad
/s/ JAMES A. PIPP Vice President, Controller June 25, 1998
- -------------------------- (principal accounting officer)
James A. Pipp
/s/ PAUL E. WRIGHT Director June 25, 1998
- --------------------------
Paul E. Wright
/s/ THOMAS L. THOMAS Director June 25, 1998
- --------------------------
Thomas L. Thomas
</TABLE>
35
<PAGE>
ATL PRODUCTS, INC.
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated and Combined Financial Statements of ATL Products, Inc.
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997............... F-3
Consolidated and Combined Statements of Operations for the years ended
March 31, 1998, 1997 and 1996........................................ F-5
Consolidated and Combined Statements of Stockholders' Equity
for the years ended March 31, 1998, 1997 and 1996.................... F-6
Consolidated and Combined Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996........................................ F-7
Notes to Consolidated and Combined Financial Statements................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
ATL Products, Inc.
We have audited the accompanying consolidated balance sheets of ATL Products,
Inc. (the Company), as of March 31, 1998 and 1997, and the related consolidated
and combined statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998. Our audits also
included the financial statement schedule listed in Item 14(a). These financial
statements and schedule 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ATL Products, Inc.
at March 31, 1998 and 1997, 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, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
April 28, 1998
F-2
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31
---------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,815 $ 9,494
Trade accounts receivable, net of allowance for doubtful accounts
of $511 in March 1998 and $319 in March 1997 22,383 12,730
Inventories:
Materials and supplies 15,821 8,671
Work in process 2,023 1,019
Finished goods 4,629 2,937
Deferred income taxes 2,042 --
Prepaid expenses and other 898 355
-------- --------
Total current assets 49,611 35,206
Leasehold improvements and equipment:
Leasehold improvements 1,293 596
Equipment 7,075 3,967
Allowances for depreciation (2,950) (1,844)
------- -------
5,418 2,719
------- -------
Total assets $55,029 $37,925
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31
-----------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Current liabilities:
Trade accounts payable $15,099 $10,185
Accrued payroll and related 2,733 1,545
Income taxes payable 3,474 2,018
Deferred service income 2,753 1,116
Other accrued expenses 1,182 1,199
Current portion of long-term debt (Note 3) 3,249 3,249
------- -------
Total current liabilities 28,490 19,312
Long-term debt, less current portion (Note 3) 9,582 9,748
Commitments and contingencies (Note 8)
Stockholders' equity (Note 7)
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 9,655,000 Class A at March 31, 1998
and March 31, 1997; no Class B 1 1
Additional paid in capital 16,927 16,927
Retained earnings (deficit) 29 (8,065)
Cumulative translation adjustment - 2
------- -------
Stockholders' equity 16,957 8,865
------- -------
Total liabilities and stockholders' equity $55,029 $37,925
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31
-------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(In thousands, except per share information)
Net sales:
Products $87,910 $53,717 $24,795
Service and spare parts 9,717 6,311 4,615
----------------- ----------------- -----------------
Total net sales 97,627 60,028 29,410
Cost of sales:
Products 55,401 32,591 15,682
Service and spare parts 5,896 3,051 3,181
----------------- ----------------- -----------------
Total cost of sales 61,297 35,642 18,863
----------------- ----------------- -----------------
Gross profit 36,330 24,386 10,547
Expenses:
Research and development 8,370 5,686 1,731
Sales and marketing 12,239 7,070 3,718
General and administrative 4,020 3,392 2,948
Nonrecurring charge (Note 4) -- -- 1,392
----------------- ----------------- -----------------
Income from operations 11,701 8,238 758
Interest expense 992 1,707 1,861
----------------- ----------------- -----------------
Income (loss) before income taxes 10,709 6,531 (1,103)
Income taxes (Note 5) 2,615 2,600 86
----------------- ----------------- -----------------
Net income (loss) $ 8,094 $ 3,931 $(1,189)
================= ================= =================
Basic earnings (loss) per share (Note 1) $.84 $.48 $(.15)
================= ================= =================
Diluted earnings (loss) per share (Note 1) $.83 $.48 $(.15)
================= ================= =================
</TABLE>
See accompanying notes.
F-5
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------
Additional Retained Cumulative
paid in earnings translation
Shares Amount capital (deficit) adjustment Total
------ ------ ------------ -------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 8,005 $1 $ 1,009 $ (9,848) $ -- $ (8,838)
Allocation to former
parent -- -- -- (86) -- (86)
Net loss -- -- -- (1,189) -- (1,189)
------ --- ------- -------- ------- --------
Balance at March 31, 1996 8,005 $1 1,009 (11,123) -- (10,113)
Proceeds from initial
public offering 1,650 -- 15,918 -- -- 15,918
Allocation to former
parent -- -- -- (873) -- (873)
Foreign currency
translation adjustment -- -- -- -- 2 2
Net income -- -- -- 3,931 -- 3,931
------ --- ------- -------- ------- --------
Balance at March 31, 1997 9,655 $1 16,927 (8,065) 2 8,865
Foreign currency
translation adjustment -- -- -- -- (2) (2)
Net income -- -- -- 8,094 -- 8,094
------ --- ------- -------- ------- --------
Balance at March 31, 1998 9,655 $1 $16,927 $ 29 $ -- $ 16,957
====== === ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31
------------------------------------------
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
(in thousands)
Operating activities
Net income (loss) $ 8,094 $ 3,931 $(1,189)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,905 503 450
Deferred tax benefit (2,042) -- --
Provision for losses on accounts receivable 192 343 39
Foreign currency translation adjustment (2) 2 --
Changes in operating assets and liabilities (Note10) (11,855) (243) (1,948)
-------- --------- --------
Net cash provided by (used in) operating activities (3,708) 4,536 (2,648)
Investing activities
Purchases of property, plant and equipment (3,805) (2,022) (498)
Financing activities
Proceeds from line of credit and long-term borrowings 9,212 -- --
Principal payments on line of credit and long-term debt (6,400) -- --
Principal payments on long-term debt to former parent (2,978) (8,939) 3,146
Proceeds from initial public offering -- 15,918 --
-------- --------- --------
Net cash provided by (used in) financing activities (166) 6,979 3,146
-------- --------- --------
Net change in cash and cash equivalents (7,679) 9,493 --
Cash and cash equivalents at beginning of period 9,494 1 1
-------- ------- -------
Cash and cash equivalents at end of period $ 1,815 $ 9,494 $ 1
======== ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
March 31, 1998
1. Summary of Significant Accounting Policies
The Company. ATL Products, Inc. (the Company), 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
wholly-owned subsidiaries in the United Kingdom and in Australia, and has a
sales branch office in Japan.
Distribution of Parent Company's Equity Interest in Company. On October 2,
1997, Odetics, Inc., the Company's former parent (Odetics), announced that it
had received a favorable Section 355 distribution ruling from the Internal
Revenue Service allowing it to distribute, on a tax free basis, its 82.9%
ownership of the Company's Class A Common Stock to Odetics stockholders. On
October 31, 1997, Odetics completed the distribution by issuing a dividend of
approximately 1.1 shares of the Company's Class A Common Stock for each share of
Odetics Class A Common Stock and Class B Common Stock outstanding on the record
date.
Basis of Presentation. The accompanying financial statements include the
accounts of the Company and its subsidiaries. Effective December 31, 1996, the
Company's former parent, Odetics, 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 long-term debt. 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 reporting purposes.
Additionally, for periods prior to the establishment of the Company's
wholly-owned subsidiary in the United Kingdom, ATL Products, Ltd. (APL), on July
1, 1996, the Company utilized a subsidiary of its former 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 Odetics, Inc. and are reflected as
"Allocation to former parent" in the accompanying consolidated and combined
statements of stockholders' equity. 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.
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-8
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Long-Lived Assets. Long-lived assets and certain intangibles held and used
by the Company are 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 performed at the lowest level at which
undiscounted net cash flows can be directly attributable to long-lived assets.
Fair Values of Financial Instruments. The fair values of the Company's
long-term debt instruments approximate their carrying value because interest
charges thereon are based on prevailing market rates.
Stock Compensation. The Company has adopted 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 weighted average
number of common stock and common stock equivalents outstanding during the year.
In fiscal 1998, the Company adopted FASB Statement No. 128, Earnings Per Share,
which replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform with the Statement No. 128 requirements and the accounting
rules set forth in Staff Accounting Bulletin 98 issued by the Securities and
Exchange Commission on February 3, 1998.
F-9
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
<S> <C> <C> <C>
(In thousands, except per share information)
Numerator: Net income (loss) $8,094 $3,931 $(1,189)
==================== =================== ====================
Denominator:
Denominator for basic earnings (loss) per
share--weighted average shares outstanding 9,655 8,118 8,005
Effect of dilutive securities:
Employee stock options 110 40 --
-------------------- ------------------- --------------------
Denominator for diluted earnings (loss) per share 9,765 8,158 8,005
==================== =================== ====================
Basic earnings (loss) per share $ 0.84 $ 0.48 $ (0.15)
==================== =================== ====================
Diluted earnings (loss) per share $ 0.83 $ 0.48 $ (0.15)
==================== =================== ====================
</TABLE>
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 $532,000, $434,000 and $121,000 in the fiscal years
ended March 31, 1998, 1997 and 1996, respectively.
Income Taxes. 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. 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.
Prior to November 1, 1997, the Company was included in the consolidated
federal income tax return with its former parent, Odetics. The Company and
Odetics had initially entered into a Tax Sharing Agreement pursuant to which
U.S. and state income taxes were 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 that 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 entered into a new Tax Allocation Agreement
which was effective retroactively to April 1, 1996, whereby the consolidated
federal and state income tax liabilities for a given tax year were allocated to
the companies in the Parent's group according to their relative separate taxable
income for such year. Amounts payable to Odetics under this arrangement totaled
$2,100,000 in fiscal 1998 and $1,500,000 in fiscal 1997. As of October 31, 1997,
in conjunction with Odetics' distribution of its remaining equity interest in
the Company, the Tax Sharing Agreement was terminated.
F-10
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
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 $493,000, $192,000 and $183,000 representing the
Company's estimated warranty liability at March 31, 1998, 1997 and 1996,
respectively.
Recent Accounting Pronouncements. In June 1997, the FASB issued Statement No.
130, Reporting Comprehensive Income, which establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments by distributions to
stockholders. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. The
Company plans to adopt this statement in fiscal 1999. The effect of adopting
Statement No. 130 will be the inclusion of foreign currency translation gains
and losses as a component of comprehensive income.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to stockholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented. The Company plans
to adopt this statement in fiscal 1999. Management has not completed its review
of the impact of Statement No. 131 but believes adoption may effect segment
disclosure in future reporting periods.
2. Transactions with Former Parent
The Company and Odetics are parties to an agreement whereby the Company is
charged for certain corporate general and administrative functions. These
charges totaled $506,000, $1,551,000 and $1,534,000 in the years ended March 31,
1998, 1997 and 1996, respectively, and are included in general and
administrative expense in the accompanying consolidated and combined statements
of operations. These charges consist of certain accounting, auditing, income
tax, payroll and treasury functions, the 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. Amounts due to Odetics
that are included in accounts payable are $49,000 and $509,000 as of March 31,
1998 and 1997, respectively.
Prior to March 1997, Odetics also managed consolidated domestic cash flows.
Pursuant to that cash management program, the Company transferred any
accumulated cash surplus to Odetics' accounts and Odetics' funded cash
disbursements, as needed, to maintain minimum account balances. The Company and
Odetics also had an agreement whereby the Odetics charged the Company interest
based on the Company's net payable to Odetics using Odetics' cost of related
borrowed funds.
On April 1, 1997, the Company converted the net payable to its former parent
into a promissory note that bears interest at the rate to be equal to Odetics'
cost of borrowing from the lesser of either of Odetics' primary banks or
principal bank (8.5% at March 31, 1998). Principal and interest on this note is
payable in sixteen equal quarterly installments at the end of each calendar
quarter commencing June 30, 1997 and continuing until all principal and interest
have been fully paid. Maturities on the note payable to Odetics are $3,249,000
in 1999, $3,249,000 in 2000 and $3,250,000 in 2001.
F-11
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
3. Long-Term Debt
In March 1998, the Company entered into a new credit facility with Union
Bank of California. This facility includes a $20,000,000 revolving credit
agreement, subject to a maximum borrowing base restriction on the Company's
eligible accounts receivable, and a $6,500,000 term-loan which is available to
the Company on a incremental quarterly basis in order to fund other long-term
debt obligations. The facility provides for borrowings at the lesser of the
bank's prime rate or at LIBOR plus 1.75% to 2.25% depending on the borrowing
level, and is secured by all of the Company's assets. This facility requires the
Company to comply with various financial covenants and includes other standard
loan compliance requirements. Both credit facilities are currently scheduled to
expire in January 2000.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31
-------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
(In thousands)
Revolving credit agreement due January 2000 interest payable monthly 8.5% at
March 31, 1998............................................................... $ 2,000 $ --
Term-loan due January 2000 interest payable quarterly 8.5% at March 31, 1998.. 812
Note payable to Odetics (Note 2).............................................. 10,019 12,997
------------------ -------------------
12,831 12,997
Less current portion.......................................................... 3,249 3,249
------------------ -------------------
$ 9,582 $ 9,748
================== ===================
</TABLE>
Included in the borrowing limits of the revolving credit agreement, the
Company has available $1,000,000 in standby letters of credit. At March 31,
1998, approximately $485,000 has been reserved for standby letters of credit.
4. Nonrecurring Charges
In May 1996, the Company and E-Systems, Inc. (E-Systems) settled certain
legal actions each Company had filed against the other related to E-Systems'
cancellation of certain purchase orders for the Company's DataLibrary and
DataTower products. As a result of the settlement the Company recovered the
carrying value of its accounts receivable and inventories related to the E-
Systems litigation and recognized no gain or loss on the settlement. In fiscal
1996, the Company incurred legal fees of $1,392,000 of legal fees associated
with this dispute, which is reflected as a non-recurring charge in the
accompanying financial statements.
F-12
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
5. Income Taxes
The reconciliation of the income tax provision (benefit) to taxes computed
at the U.S. statutory rate of 35% is as follows:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------------------
1998 1997 1996
----------- --------- -------
<S> <C> <C> <C>
(In thousands)
Income tax (benefit) at statutory rates $ 3,748 $2,286 $(386)
State income taxes, net of federal benefit 571 246 -
Research and development credit (131) - -
Increase (Decrease) in valuation allowance
associated with deferred tax assets (1,474) 133 375
Foreign income subject to tax - - 86
Other (99) (65) 11
------- ------ -----
Total income tax provision $ 2,615 $2,600 $ 86
======= ====== =====
</TABLE>
United States and foreign income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Pretax income (loss)
Domestic $10,540 $ 6,303 $(1,446)
Foreign 169 228 343
------- ------- -------
$10,709 $ 6,531 $(1,103)
======= ======= =======
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
(In thousands)
Current:
Federal $ 3,760 $2,221 $ -
State 841 379 -
Foreign 56 - 86
------- ------ --------
Total Current $ 4,657 $2,600 $ 86
Deferred:
Federal $(2,042) - -
State - - -
------- ------ --------
Total Deferred $(2,042) - -
------- ------ --------
Total income tax provision $ 2,615 $2,600 $ 86
======= ====== ========
</TABLE>
F-13
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
The components of the deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
(In thousands)
Deferred tax liabilities:
Tax over book depreciation $ (26) $ (23)
Other - (27)
------- -------
Total deferred tax liabilities (26) (50)
Deferred tax assets:
Inventory reserves 1,490 1,445
Deferred compensation and other payroll 349 232
Warranty reserves 196 76
Bad debt reserve 172 127
State taxes 317 154
Other 54 -
------- -------
Total deferred tax assets 2,578 2,034
Valuation allowance for deferred tax assets (510) (1,984)
------- -------
Net deferred tax assets 2,068 50
------- -------
Net deferred tax assets (liabilities) $2,042 $ -
======= =======
</TABLE>
The decrease in the Company's valuation allowance from $1,984,000 at March
31, 1997 to $510,000 at March 31,1998 is due primarily to the generation of
current year taxable income available for future federal net operating loss
carrybacks.
6. Employee Incentive Programs
Effective for the year ended March 31, 1998 the Company's employees
participated in the following Company sponsored incentive programs, a Profit
Sharing Plan, a Section 401(k) Plan and an Associate Stock Ownership Plan. Prior
to October 31, 1997, these incentive programs were sponsored by Odetics.
Under the terms of a Profit Sharing Plan, the Company contributes to a trust
fund such amounts as are determined annually by the Board of Directors. The
Company will make approximately a $225,000 contribution for the fiscal year
ended March 31, 1998 as compared to no contributions in either 1997 or 1996.
The Company's employees participate in a Section 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 ten investment choices, one of which is the purchase of the
Company's Class A common stock at market price. Company matching contributions
were approximately $253,000, $123,000 and $115,000 in the years ended March 31,
1998, 1997 and 1996, respectively.
The Company's employees with more than six months of eligible service
participate in a 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 Company's stock. The
Company contributions to the ASOP were approximately $0, $144,000 and $98,000 in
the years ended March 31, 1998, 1997 and 1996, respectively.
F-14
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Certain executives of the Company participate in the Odetics' 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 $25,000, $25,000 and $20,000 for the years ended
March 31, 1998, 1997 and 1996, respectively.
7. Common Stock and Stock Option Plans
On December 19, 1996, the Company was reincorporated as a Delaware
corporation and effected a recapitalization in which two classes of common stock
were authorized, consisting of 45,000,000 shares of Class A common stock and
5,000,000 shares of Class B common stock, and each share of the Company's no par
common stock was recapitalized into 8,005 shares of Class A common stock, par
value $.0001 per share. All share and per share information included in the
accompanying financial statements has been restated to reflect the
reincorporation and the stock split. Class A and Class B common stock are
identical in all respects except 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.
On March 13, 1997, the Company completed an initial public offering
consisting of 1,650,000 shares of the Company's Class A Common Stock, at an
offering price of $11 per share (Offering). From the net proceeds of the
Offering of approximately $15,918,000, the Company used $6,752,000 to repay a
portion of Company's indebtedness to Odetics.
The Company's Board of Directors has adopted and approved the ATL Products,
Inc. 1996 Stock Incentive Plan (the 1996 Plan), and authorized 2,000,000 shares
of the Company's Class B common stock for issuance under the 1996 Plan. In
November 1997, the Company's Board of Directors adopted and approved the 1997
Stock Incentive Plan (the 1997 Plan) and authorized 200,000 shares of the
Company's Class A Common Stock for issuance under the 1997 Plan. In connection
with the adoption of the 1997 Plan, the Board of Directors canceled 1,151,500
shares available for grant under the 1996 Plan. Under terms of the Plans,
eligible key employees, directors and consultants can receive options to
purchase shares of the Company's common stock at prices not less than 100% for
incentive stock options and not less than 85% for nonqualified stock options of
the fair value on the date of grant as determined by the Board of Directors.
Options vest over a three year period and expire ten years after date of grant
or 90 days after termination of employment.
F-15
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Activity under the 1996 and 1997 Plans are set forth below:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------
Shares Number Weighted-
available for of Price per average
grant shares Share exercise price
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 - - $ - $ -
Additional shares reserved 2,000,000 - - -
Options granted (879,000) 879,000 5.00 5.00
-------------- ----------- ----------- ---------------
Balance at March 31, 1997 1,121,000 879,000 5.00 5.00
Shares canceled (1,152,166) - - -
Additional shares reserved 200,000 - - -
Options granted (187,300) 187,300 9.13-16.50 9.65
Options canceled 31,166 (31,166) 5.00 5.00
-------------- ----------- ----------- ---------------
Balance at March 31, 1998 12,700 1,035,134 $5.00-16.50 $ 5.82
============== =========== =========== ===============
</TABLE>
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as March 31,
1998 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------------------------- -------------------------------------
Weighted Average Weighted
Number of Remaining Weighted Average Average
Range of Shares Contractual Life Exercise Price Shares Exercise Price
Exercise Prices Outstanding (Years) Exercisable
- --------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
$5.00 847,834 8.76 $ 5.00 366,000 $ 5.00
$9.13-$11.06 171,000 9.67 9.13 - 9.13
$12.94-$15.75 16,300 9.83 15.08 - 15.08
</TABLE>
In calculating pro forma information regarding net income and earnings per
share, as required by Statement No. 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 A and Class
B common stock: risk-free interest rate of 6.0%; a dividend yield of 0%;
volatility of the expected market price of the Company's common stock of .36;
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 is as follows:
<TABLE>
<CAPTION>
March 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Pro forma net income $7,518,000 $3,831,000
Pro forma net income per share $ .77 $ .47
</TABLE>
On March 12, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan. Under terms of the Plan, preferred stock purchase rights will be
distributed as a dividend at the rate of one Right for each share of
F-16
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Common Stock held as of the close of business on March 23, 1998. The rights are
designed to guard against partial tender offers and other abusive and coercive
tactics that might be used in an attempt to gain control of the Company without
paying all stockholders a fair price for their shares. The Rights will not
prevent a takeover attempt, but should encourage anyone seeking to acquire the
Company to negotiate with the Company's Board of Directors prior to attempting a
takeover. Each Right entitles the Company's stockholders to buy one one-
thousandth of a share of Series A Preferred stock of the Company at an exercise
price of $60.00. In general, the Rights will be exercisable only if a person or
group acquire 15% of more of the Company's Common Stock. Although these Rights
are not intended to prevent a takeover, any Rights Plan could be considered to
delay or make a merger, tender offer, or proxy contest more difficult thereby
potentially adversely affecting the market price of the Company's Common Stock.
8. Commitments and Contingencies
The Company leases manufacturing and various office facilities under
operating leases. Lease terms generally range from 5 to 15 years with options to
renew at varying terms. Annual commitments under these leases at March 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year
-----------
<S> <C>
1999 $ 988
2000 1,033
2001 1,077
2002 1,122
2003 1,166
Thereafter 1,794
------
$7,180
======
</TABLE>
Total rent expense was $1,076,000, $469,000 and $265,000 in the years ended
March 31, 1998, 1997 and 1996.
9. Significant Customer and Segment Information
The Company operates in a single industry segment; namely, the design,
manufacturing, marketing and servicing of automated magnetic tape libraries.
Sales to individual customers in excess of 10% of total net sales in the years
ended March 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------
Customer 1998 1997 1996
-------------- ------------- ------------ --------------
<S> <C> <C> <C>
A $12,867 $5,328 $5,603
B $15,952 $2,221 -
</TABLE>
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
allowance for doubtful accounts.
F-17
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
Information regarding the Company's activities by geographical region are as
follows (In thousands):
<TABLE>
<CAPTION>
North
America Europe
--------- --------
Year ended March 31, 1998
- -------------------------
<S> <C> <C>
Sales $83,805 $13,822
Net income 7,981 113
Identifiable assets 50,343 4,686
Year ended March 31, 1997
- -------------------------
Sales $50,572 $ 9,456
Net income 3,716 215
Identifiable assets 34,951 2,974
</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 unaffiliated foreign customers approximated $14.2 million in
fiscal 1998 and were less than 10 percent of net sales in fiscal 1997 and 1996.
An integral component of the Company's products is a data library tape drive
that is available from a single supplier. Demand for the supplier tape drives is
high and it is possible that in the near term the supply of tape drives could be
disrupted. Any disruption of the supply of tape drives would cause delays in
production that may be detrimental to the Company's financial performance.
F-18
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
March 31, 1998
10. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended March 31
----------------------------------
1998 1997 1996
----------- --------- --------
<S> <C> <C> <C>
(In thousands)
Net cash used in changes in operating assets and
liabilities
Increase in accounts receivable $ (9,845) $(2,914) $(5,786)
(Increase) decrease in inventories (10,645) (7,310) 262
(Increase) decrease in prepaid expenses and other
assets (543) (284) 38
Increase in accounts payable and accrued expenses
9,178 10,265 3,538
-------- ------- -------
Net cash used in changes in operating assets and
liabilities $(11,855) $ (243) $(1,948)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended March 31
------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
(In thousands)
Cash paid during the year:
Interest $ 938 - -
Income taxes paid 3,166 - -
</TABLE>
F-19
<PAGE>
SCHEDULE II
ATL PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Charges to Charges to Balance
Beginning Costs and Other at End of
of Year Expenses Accounts Deductions Year
---------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996
Deducted from assets accounts:
Allowance for doubtful accounts..... $ 627 $ 38 $ - $ 3 $ 662
Reserve for inventory obsolescence.. 3,982 750 - - 4,732
------ ------ --------- --------- --------
Total.......................... $4,609 $ 788 $ - $ 3 $ 5,394
====== ====== ========= ========== ========
Year ended March 31, 1997
Deducted from assets accounts:
Allowance for doubtful accounts..... $ 662 $ 253 $ - $ 596/1/ $ 319
Reserve for inventory obsolescence.. 4,732 1,450 - 2,546/1/ 3,636
------ ------ --------- --------- --------
Total.......................... $5,394 $1,703 $ - $ 3,142 $ 3,955
====== ====== ========= ========= ========
Year ended March 31, 1998
Deducted from assets accounts:
Allowance for doubtful accounts..... $ 319 $ 320 $ - $ 128 $ 511
Reserve for inventory obsolescence.. 3,636 800 - 780 3,656
------ ------ --------- --------- --------
Total.......................... $3,955 $1,120 $ - $ 908 $ 4,167
====== ====== ========= ========= ========
</TABLE>
(1) Consists of additional write-offs in connection with the settlement of
litigation with E-Systems, Inc. See Note 4 of Notes to Consolidated and Combined
Financial Statements.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
<C> <S> <C>
3.1 Certificate of Incorporation of the Company as filed with the
Delaware Secretary of State on December 19, 1996 /(1)/
3.2 Certificate of Merger of the Company as filed with the Delaware
Secretary of State on December 19, 1996/(1)/
3.3 Bylaws of the Company/(1)/
4.1 Specimen certificate representing shares of Class A Common Stock
of the Company./(1)/
4.2 1996 Stock Incentive Plan./(1)/
4.3 Form of Notice of Grant of Stock Option and related Stock Option
Agreement under 1996 Stock Incentive Plan./(1)/
10.1 Form of Indemnification Agreement./(1)/
10.2 Real Property lease, dated October 9, 1996, by and between Thomas
M. Zapara and Violet J. Zapara, Trustees of the Zapara Family
Trust U/D/T dated December 7, 1995 and Company, a wholly-owned
subsidiary of Odetics, Inc./(1)/
10.3 Separation and Distribution Agreement between the Company and
Odetics dated March 1, 1997. /(2)/
10.4 Tax Allocation Agreement between the Company and Odetics dated
March 1, 1997. /(2)/
10.5 Services Agreement between the Company and Odetics dated March 21,
1997. /(2)/
10.6 Form of Value Added Reseller Agreement./(1)/
10.7 Form of International Value Added Reseller Agreement./(1)/
10.8+ Technical Support Agreement dated May 6, 1996, between Technology
Service Solutions and Odetics, Incorporated, as amended May 7,
1996./(1)/
10.9+ Tape Library OEM Purchase Agreement dated August 28, 1996, between
Quantum Corporation and Company./(1)/
10.10+ Veritas Software License Agreement, dated November 8, 1996,
between Veritas Software Corporation and the Company./(1)/
10.11+ Agreement dated December 18, 1995, between Hewlett-Packard GmbH
Local Products Organization and Company./(1)/
10.12+ Basic Order Agreement dated April 15, 1993, between Digital
Equipment Corporation and Odetics, Inc. and Company, as amended
January 11, 1994, March 25, 1994, October 19, 1994, October 27,
1994 and January 12, 1995./(1)/
10.13 Basic Ordering Agreement dated September 14, 1995 between EMC
Corporation and the Company/(1)/
10.14 Promissory Note between the Company and Odetics dated April 1,
1997. /(2)/
10.15 Form of Odetics Associate Agreement./(1)/
10.16 Note in the principal amount of $20 million and note in principal
amount of $6.5 million, and related loan agreements between the
Company and Union Bank entered into as of March 25, 1998.
10.17 Intentionally Omitted
10.18 Development and License Agreement dated January 14, 1997 between
the Company and Sun Microsystems, Inc./(1)/
21 List of Subsidiaries
23.1 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
<PAGE>
____________________________
+ The Company has received confidential treatment for portions of this
document previously filed with the Commission.
(1) Included as an exhibit to the Company's Registration Statement on Form S-1
(Reg. No. 333-15837), as amended, as filed with the Securities and Exchange
Commission, and incorporated herein by reference.
(2) Included as an exhibit to the Company's Annual Report Form 10-K
(Commission File No. 000-22037), as filed with the Securities and Exchange
Commission on June 30, 1997, and incorporated herein by reference.
<PAGE>
EXHIBIT 10.16
PROMISSORY NOTE
(BASE RATE)
================================================================================
Borrower Name ATL PRODUCTS, INC.
- --------------------------------------------------------------------------------
Borrower Address Office 45061 Loan Number 0535391204 0080-00-0-000
2801 KELVIN AVENUE
IRVINE, CA 92614-5872
- --------------------------------------------------------------------------------
Maturity Date JANUARY 31, 2000 Amount $20,000,000.00
================================================================================
$20,000,000.00 Date FEBRUARY 10, 1998
- -------------- -----------------
FOR VALUE RECEIVED, on JANUARY 31, 2000, the undersigned ("Debtor") promises to
----------------
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of TWENTY MILLION AND NO/100 Dollars ($20,000,000.00), or so
------------------------- ----------------
much thereof as is disbursed, together with interest on the balance of such
principal from time to time outstanding, at the per annum rate or rates and at
the times set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the LAST day of each MONTH
---- -----
(commencing FEBRUARY 28, 1998). Should interest not be paid when due, it
-----------------
shall become part of the principal and bear interest as herein provided.
All computations of interest under this note shall be made on the basis of
a year of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder
in minimum amounts of at least $100,000.00 shall bear interest at a
rate, based on an index selected by Debtor, which is (i) 1.50% per
annum in excess of Bank's LIBOR-Rate for the Interest Period selected
by Debtor for such portion of any given advance which, when added to
the principal amount already outstanding under this note on the date
such advance is requested, would not exceed $10,000,000.00, and (ii)
2.00% per annum in excess of Bank's LIBOR-Rate for the period selected
by Debtor for any remaining portion of such advance. The margin in
excess of Bank's LIBOR-Rate which is applicable to any given advance or
portion thereof shall be determined on the date such advance is
requested, shall remain applicable until the maturity of the Interest
Period by Debtor for such advance, and shall not be subject to increase
or reduction even if the aggregate principal amount outstanding under
this note is thereafter increased by subsequent borrowings or reduced
by subsequent repayments or prepayments.
No Base Interest Rate may be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in
Bank's records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in
its records shall not discharge Debtor from its obligations to repay in
full with interest all amounts borrowed. In no event shall any Interest
Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing,
and on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index,
the Interest Period and the Origination Date selected (which
Origination Date, for a Base Interest Rate Loan based on the LIBOR-
Rate, shall follow the date of such selection by no more than two (2)
Business Days).
-1-
<PAGE>
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds
notwithstanding any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is
not bearing interest at a Base Interest Rate shall bear interest at a
rate per annum equal to the Reference Rate, which rate shall vary as
and when the Reference Rate changes.
At any time prior to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note. Debtor may borrow,
repay and re-borrow hereon so long as the total outstanding at any one
time does not exceed the principal amount of this note. Debtor shall
pay all amounts due under this note in lawful money of the United
States at Bank's ORANGE COUNTY COMMERCIAL BANKING Office, or such other
office as may be designated by Bank, from time to time.
1. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days, at the option of Bank, Debtor shall pay a fee of
$100 to Bank.
2. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in paragraph 1.b,
above, calculated from the date of default until all amounts payable under
this note are paid in full.
3. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate
based on the Reference Rate may be prepaid in whole or in part at any
time, without penalty or premium. Debtor may prepay amounts outstanding
under this note bearing interest at a Base Interest Rate in whole or in
part provided Debtor has given Bank not less than five (5) Business
Days prior written notice of Debtor's intention to make such prepayment
and pays to Bank the liquidated damages due as a result. Liquidated
Damages shall also be paid, if Bank, for any other reason, including
acceleration or foreclosure, receives all or any portion of principal
bearing interest at a Base Interest Rate prior to its scheduled payment
date. Liquidated Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less than zero) between
(a) the Base Interest Rate applicable to the principal amount which is
being prepaid, and (b) the return which Bank could obtain if it used
the amount of such prepayment of principal to purchase at bid price
regularly quoted securities issued by the United States having a
maturity date most closely coinciding with the relevant Base Rate
Maturity Date and such securities were held by Bank until the relevant
Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator
of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator
of which is 360; and (iii) the amount of the principal so prepaid
(except in the event that principal payments are required and have been
made as scheduled under the terms of the Base Interest Rate Loan being
prepaid, then an amount equal to the lesser of (A) the amount prepaid
of (B) 50% of the sum of (1) the amount prepaid and (2) the amount of
principal scheduled under the terms of the Base Interest Rate Loan
being prepaid to be outstanding at the relevant Base Rate Maturity
Date). Present value under this note is determined by discounting the
above product to present value using the Yield Rate as the annual
discount factor.
b. In no event shall Bank be obligated to make any payment or refund
to Debtor, nor shall Debtor be entitled to any setoff or other claim
against Bank, should the return which Bank could obtain under this
prepayment formula exceed the interest that Bank would have received if
no prepayment had occurred. All prepayments shall include payment of
accrued interest on the principal amount so prepaid
-2-
<PAGE>
and shall be applied to payment of interest before application to
principal. A determination by Bank as to the prepayment fee amount, if
any, shall be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor acknowledges that (i) Bank establishes a
Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepayment may result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquidated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
1. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement
between Bank and any Obligor; (c) the insolvency of any Obligor or the
failure of any Obligor generally to pay such Obligor's debts as such debts
become due; (d) the commencement as to any Obligor of any voluntary or
involuntary proceeding under any laws relating to bankruptcy, insolvency,
reorganization, arrangement, debt adjustment or debtor relief; (e) the
assignment by any Obligor for the benefit of such Obligor's creditors; (f)
the appointment, or commencement of any proceeding for the appointment of a
receiver, trustee, custodian or similar official for all or substantially
all of any Obligor's property; (g) the commencement of any proceeding for
the dissolution of liquidation of any Obligor; (h) the termination of
existence or death of any Obligor; (i) the revocation of any guaranty or
subordination agreement given in connection with this note; (j) the failure
of any Obligor to comply with any order, judgment, injunction, decree, writ
or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any
notice of levy, notice to withhold, or other legal process for taxes other
than property taxes; (l) the default by any Obligor personally liable for
amounts owed hereunder on any obligation concerning the borrowing of money;
(m) the issuance against any Obligor, or the property of any Obligor, of
any writ of attachment, execution, or other judicial lien; or (n) the
deterioration of the financial condition of any Obligor which results in
Bank deeming itself, in good faith, insecure. Upon the occurrence of any
such default, Bank, in its discretion, may cease to advance funds hereunder
and may declare all obligations under this note immediately due and
payable; however, upon the occurrence of an event of default under d, e, f,
or g, all principal and interest shall automatically become immediately due
and payable.
2. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or
enforcement of this note. Debtor and any endorsers of this note, for the
maximum period of time and the full extent permitted by law, (a) waive
diligence, presentment, demand, notice of nonpayment, protest, notice of
protest, and notice of every kind; (b) waive the right to assert the
defense of any statute of limitations to any debt or obligation hereunder;
and (c) consent to renewals and extensions of time for the payment of any
amounts due under this note. If this note is signed by more than one party,
the term "Debtor" includes each of the undersigned and any successors in
interest thereof; all of whose liability shall be joint and several. Any
married person who signs this note agrees that recourse may be had against
the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall
not be considered a payment on account until such check or other item of
payment is honored when presented for payment at the drawee bank. Bank may
delay the credit of such payment based upon Bank's schedule of funds
availability, and interest under this note shall accrue until the funds are
deemed collected. In any action brought under or arising out of this note.
Debtor and any Obligor, including their successors and assigns, hereby
consent to the jurisdiction of any competent court within the State of
California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consent to service or process by any
means authorized by said state's law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This
note hereby incorporates any alternative dispute resolution agreement
previously, concurrently or hereafter executed between Debtor and Bank.
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<PAGE>
3. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Base Interest Rate" means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts
outstanding under this note that bear interest at a Base Interest Rate.
"Base Rate Maturity Date" means the last day of the Interest Period with
respect to principal outstanding under a Base Interest Rate Loan. "Business
Day" means a day on which Bank is open for business for the funding of
corporate loans, and, with respect to the rate of interest based on the
LIBOR-Rate, on which dealings in U.S. dollar deposits outside of the United
States may be carried on by Bank. "Interest Period" means with respect to
funds bearing interest at a rate based on the LIBOR-Rate, any calendar
period of two weeks or one, two, three or six months. In determining an
Interest Period, a month means a period that starts on one Business Day in
a month and ends on and includes the day preceding the numerically
corresponding day in the next month. For any month in which there is no
such numerically corresponding day, then as to that month, such day shall
be deemed to be the last calendar day of such month. Any Interest Period
which would otherwise end on a non-Business Day shall end on the next
succeeding Business Day unless that is the first of the month, in which
event such Interest Period shall end on the next preceding Business Day.
"LIBOR-Rate" means a per annum rate of interest (rounded upward, if
necessary, to the nearest 1/100 of .1%) at which dollar deposits, in
immediately available funds and in lawful money of the United States would
be offered to Bank, outside of the United States, for a term coinciding
with the Interest Period selected by Debtor and for an amount equal to the
amount of principal covered by Debtor's interest rate selection, plus
Bank's costs, including the costs, if any of reserve requirements.
"Origination Date" means the first day of the Interest Period. "Reference
Rate" means the rate announced by Bank from time to time as its corporate
headquarters as its Reference Rate. The Reference Rate is an index rate
determined by Bank from time to time as a means of pricing certain
extensions of credit and is neither directly tied to any external rate of
interest or index nor necessarily the lowest rate of interest charged by
Bank at any given time.
ATL PRODUCTS, INC.
- -----------------------------------------
By /s/ Mark de Raad
- -----------------------------------------
Title Vice President and CFO
- -----------------------------------------
-4-
<PAGE>
PROMISSORY NOTE
(BASE RATE)
================================================================================
Borrower Name ATL PRODUCTS, INC.
- --------------------------------------------------------------------------------
Borrower Address Office 45061 Loan Number 0535391204 0081-00-0-000
2801 KELVIN AVENUE
IRVINE, CA 92614-5872
- --------------------------------------------------------------------------------
Maturity Date JANUARY 31, 2000 Amount $6,500,000.00
================================================================================
$6,500,000.00 Date MARCH 19, 1998
- ------------- --------------
FOR VALUE RECEIVED, on JANUARY 31, 2000, the undersigned ("Debtor") promises to
----------------
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of SIX MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars
--------------------------------------------
($6,500,000.00), or so much thereof as is disbursed, together with interest on
- ---------------
the balance of such principal from time to time outstanding, at the per annum
rate or rates and at the times set forth below. Debtor may request only one (1)
advance under this note during each calendar quarter (commencing with the
calendar quarter which began on January 1, 1998), said advance to be in amount
not to exceed Eight Hundred Twelve Thousand Three Hundred Forty Dollars
($812,340) (the "Maximum Quarterly Advance"). The amount available to be
disbursed under this note shall automatically be reduced on the first day of
each calendar quarter (commencing with the calendar quarter which begins on
April 1, 1998) by an amount equal to the difference (if any) between (a) the
Maximum Quarterly Advance, and (b) the amount of such advance under this note
(if any) as was requested by Debtor and funded by Bank during the immediately
preceding calendar quarter. Amounts borrowed and repaid under this note may not
thereafter be reborrowed, and no advances under this note may be requested at
any time on or after January 1, 2000.
1. INTEREST PAYMENTS. Debtor shall pay interest on the LAST day of each MONTH
---- -----
(commencing APRIL 30, 1998). Should interest not be paid when due, it shall
--------------
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a
year of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding
hereunder in minimum amounts of at least $100,000.00 shall bear
interest at a rate, based on an index selected by Debtor, which is (i)
2.25% per annum in excess of Bank's LIBOR-Rate for the Interest Period
selected by Debtor, acceptable to Bank.
No Base Interest Rate may be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in
Bank's records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in
its records shall not discharge Debtor from its obligations to repay in
full with interest all amounts borrowed. In no event shall any Interest
Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing,
and on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index,
the Interest Period and the Origination Date selected (which
Origination Date, for a Base Interest Rate Loan based on the LIBOR-
Rate, shall follow the date of such selection by no more than two (2)
Business Days).
-5-
<PAGE>
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds
notwithstanding any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which
is not bearing interest at a Base Interest Rate shall bear interest at
a rate per annum equal to the Reference Rate, which rate shall vary as
and when the Reference Rate changes.
Debtor shall pay all amounts due under this note in lawful money of the
United States at Bank's ORANGE COUNTY COMMERCIAL BANKING Office, or
--------------------------------
such other office as may be designated by Bank, from time to time.
1. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days, at the option of Bank, Debtor shall pay a fee of
$100 to Bank.
2. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in paragraph 1.b,
above, calculated from the date of default until all amounts payable under
this note are paid in full.
3. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate
based on the Reference Rate may be prepaid in whole or in part at any
time, without penalty or premium. Debtor may prepay amounts outstanding
under this note bearing interest at a Base Interest Rate in whole or in
part provided Debtor has given Bank not less than five (5) Business
Days prior written notice of Debtor's intention to make such prepayment
and pays to Bank the liquidated damages due as a result. Liquidated
Damages shall also be paid, if Bank, for any other reason, including
acceleration or foreclosure, receives all or any portion of principal
bearing interest at a Base Interest Rate prior to its scheduled payment
date. Liquidated Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less than zero) between
(a) the Base Interest Rate applicable to the principal amount which is
being prepaid, and (b) the return which Bank could obtain if it used
the amount of such prepayment of principal to purchase at bid price
regularly quoted securities issued by the United States having a
maturity date most closely coinciding with the relevant Base Rate
Maturity Date and such securities were held by Bank until the relevant
Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator
of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator
of which is 360; and (iii) the amount of the principal so prepaid
(except in the event that principal payments are required and have been
made as scheduled under the terms of the Base Interest Rate Loan being
prepaid, then an amount equal to the lesser of (A) the amount prepaid
of (B) 50% of the sum of (1) the amount prepaid and (2) the amount of
principal scheduled under the terms of the Base Interest Rate Loan
being prepaid to be outstanding at the relevant Base Rate Maturity
Date). Present value under this note is determined by discounting the
above product to present value using the Yield Rate as the annual
discount factor.
b. In no event shall Bank be obligated to make any payment or refund
to Debtor, nor shall Debtor be entitled to any setoff or other claim
against Bank, should the return which Bank could obtain under this
prepayment formula exceed the interest that Bank would have received if
no prepayment had occurred. All prepayments shall include payment of
accrued interest on the principal amount so prepaid and shall be
applied to payment of interest before application to principal. A
determination by Bank as to the prepayment fee amount, if any, shall be
conclusive.
-6-
<PAGE>
c. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor acknowledges that (i) Bank establishes a
Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepayment may result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquidated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
1. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement
between Bank and any Obligor; (c) the insolvency of any Obligor or the
failure of any Obligor generally to pay such Obligor's debts as such debts
become due; (d) the commencement as to any Obligor of any voluntary or
involuntary proceeding under any laws relating to bankruptcy, insolvency,
reorganization, arrangement, debt adjustment or debtor relief; (e) the
assignment by any Obligor for the benefit of such Obligor's creditors; (f)
the appointment, or commencement of any proceeding for the appointment of a
receiver, trustee, custodian or similar official for all or substantially
all of any Obligor's property; (g) the commencement of any proceeding for
the dissolution of liquidation of any Obligor; (h) the termination of
existence or death of any Obligor; (i) the revocation of any guaranty or
subordination agreement given in connection with this note; (j) the failure
of any Obligor to comply with any order, judgment, injunction, decree, writ
or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any
notice of levy, notice to withhold, or other legal process for taxes other
than property taxes; (l) the default by any Obligor personally liable for
amounts owed hereunder on any obligation concerning the borrowing of money;
(m) the issuance against any Obligor, or the property of any Obligor, of
any writ of attachment, execution, or other judicial lien; or (n) the
deterioration of the financial condition of any Obligor which results in
Bank deeming itself, in good faith, insecure. Upon the occurrence of any
such default, Bank, in its discretion, may cease to advance funds hereunder
and may declare all obligations under this note immediately due and
payable; however, upon the occurrence of an event of default under d, e, f,
or g, all principal and interest shall automatically become immediately due
and payable.
2. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or
enforcement of this note. Debtor and any endorsers of this note, for the
maximum period of time and the full extent permitted by law, (a) waive
diligence, presentment, demand, notice of nonpayment, protest, notice of
protest, and notice of every kind; (b) waive the right to assert the
defense of any statute of limitations to any debt or obligation hereunder;
and (c) consent to renewals and extensions of time for the payment of any
amounts due under this note. If this note is signed by more than one party,
the term "Debtor" includes each of the undersigned and any successors in
interest thereof; all of whose liability shall be joint and several. Any
married person who signs this note agrees that recourse may be had against
the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall
not be considered a payment on account until such check or other item of
payment is honored when presented for payment at the drawee bank. Bank may
delay the credit of such payment based upon Bank's schedule of funds
availability, and interest under this note shall accrue until the funds are
deemed collected. In any action brought under or arising out of this note.
Debtor and any Obligor, including their successors and assigns, hereby
consent to the jurisdiction of any competent court within the State of
California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consent to service or process by any
means authorized by said state's law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This
note hereby incorporates any alternative dispute resolution agreement
previously, concurrently or hereafter executed between Debtor and Bank.
3. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Base Interest Rate" means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts
outstanding under this note that bear interest at a Base Interest Rate.
"Base Rate Maturity Date"
-7-
<PAGE>
means the last day of the Interest Period with respect to principal
outstanding under a Base Interest Rate Loan. "Business Day" means a day on
which Bank is open for business for the funding of corporate loans, and,
with respect to the rate of interest based on the LIBOR-Rate, on which
dealings in U.S. dollar deposits outside of the United States may be
carried on by Bank. "Interest Period" means with respect to funds bearing
interest at a rate based on the LIBOR-Rate, any calendar period of two
weeks or one, two, three or six months. In determining an Interest Period,
a month means a period that starts on one Business Day in a month and ends
on and includes the day preceding the numerically corresponding day in the
next month. For any month in which there is no such numerically
corresponding day, then as to that month, such day shall be deemed to be
the last calendar day of such month. Any Interest Period which would
otherwise end on a non-Business Day shall end on the next succeeding
Business Day unless that is the first of the month, in which event such
Interest Period shall end on the next preceding Business Day. "LIBOR-Rate"
means a per annum rate of interest (rounded upward, if necessary, to the
nearest 1/100 of .1%) at which dollar deposits, in immediately available
funds and in lawful money of the United States would be offered to Bank,
outside of the United States, for a term coinciding with the Interest
Period selected by Debtor and for an amount equal to the amount of
principal covered by Debtor's interest rate selection, plus Bank's costs,
including the costs, if any of reserve requirements. "Origination Date"
means the first day of the Interest Period. "Reference Rate" means the rate
announced by Bank from time to time as its corporate headquarters as its
Reference Rate. The Reference Rate is an index rate determined by Bank from
time to time as a means of pricing certain extensions of credit and is
neither directly tied to any external rate of interest or index nor
necessarily the lowest rate of interest charged by Bank at any given time.
ATL PRODUCTS, INC.
- -----------------------------------------
By /s/ Mark de Raad
- -----------------------------------------
Title Vice President and CFO
- -----------------------------------------
-8-
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into as of February
9, 1998 by and between ATL Products, Inc., a Delaware corporation ("Borrower")
and UNION BANK OF CALIFORNIA, N.A. ("Bank").
SECTION 1. THE LOAN
1.1.1 The Revolving Loan. Bank will loan to Borrower an amount not to
exceed Twenty Million Dollars ($20,000,000) outstanding in the aggregate at any
one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all or
part of the Revolving Loan in accordance with the terms of the Revolving Note in
amounts of not less than One Hundred Thousand Dollars ($100,000) in accordance
with the terms of the Note. All borrowings of the Revolving Loan must be made
before January 31, 2000 at which time all unpaid principal and interest of the
Revolving Loan shall be due and payable. The Revolving Loan shall be evidenced
by a promissory note (the "Revolving Note") on the standard form used by Bank
for commercial loans. Bank shall enter each amount borrowed and repaid in
Bank's records and such entries shall be deemed to be the amount of the
Revolving Loan outstanding. Omission of Bank to make any such entries shall not
discharge Borrower of its obligation to repay in full with interest all amounts
borrowed.
1.2 Terminology.
As used herein the word "Loan" shall mean, collectively, all the
credit facilities described above.
As used herein the word "Note" shall mean, collectively, all the
promissory notes described above.
As used herein, the words "Loan Documents" shall mean all documents
executed in connection with this Agreement.
1.3 Borrowing Base. Notwithstanding any other provision of this
Agreement, Bank shall not be obligated to advance funds under the Revolving
Loan, if at any time the aggregate of Borrower's obligations to Bank thereunder
shall exceed eighty percent (80%) of Borrower's Eligible Accounts. If at any
time Borrower's obligations to Bank under the above facilities exceed the sum so
permitted, Borrower shall immediately repay to Bank such excess.
1.3.1 Eligible Accounts. The term "Accounts" means all presently
existing and hereafter arising accounts receivable, contract rights, chattel
paper, and all other forms of obligations owing to Borrower, payable in United
States Dollars, arising out of the sale or lease of goods, or the rendition of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's books and
records relating to any of the foregoing.
The term "Eligible Accounts" means those Accounts, net of finance charges,
which are due and payable within thirty (30) days, or less, from the date of the
invoice, have been validly assigned to Bank and strictly comply with all of
Borrower's warranties and representations to Bank, but Eligible Accounts shall
not include the following:
(a) Any Account with respect to which the account debtor is an
officer, shareholder, director, employee or agent of Borrower;
(b) Any Account with respect to which the account debtor is a
subsidiary of, related to, or affiliated or has common officers or directors
with Borrower;
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<PAGE>
(c) Any Account relating to goods placed on consignment, guaranteed
sale or other terms by reason of which the payment by the account debtor may be
conditional;
(d) Any Account with respect to which the account debtor is not a
resident of the United States or Canada; provided, however, Accounts due from
wholly owned foreign subsidiaries of Sun Microsystems, Incorporated and Digital
Equipment Corporation shall be deemed Eligible Accounts;
(e) Any Account with respect to which the account debtor is the
United States or any department, agency or instrumentality of the United States;
(f) Any Account with respect to which Borrower is or may become
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower;
(g) Any Account with respect to which there is asserted a defense,
counterclaim, discount or setoff, whether well-founded or otherwise, except for
those discounts, allowances and returns arising in the ordinary course of
Borrower's business;
(h) Any Account with respect to which the account debtor becomes
insolvent, fails to pay its debts as they mature or goes out of business or is
owed by an account debtor which has become the subject of a proceeding under any
provision of the United States Bankruptcy Code, as amended, or under any other
bankruptcy or insolvency law, including, but not limited to, assignments for the
benefit of creditors, formal or informal moratoriums, compositions or extensions
with all or substantially all of its creditors;
(i) Any Account owed by any account debtor with respect to which
twenty-five percent (25%) or more of the aggregate dollar amount of its Accounts
are not paid within ninety (90) days from the due date of the invoice;
(j) Any Account that is not paid by the account debtor within
ninety (90) days of its date of invoice;
(k) Any Account that is not paid by the account debtor and for
which a credit memo has been issued which is over 90 days old;
(l) That portion of the Accounts owed by Sun Microsystems,
Incorporated, Digital Equipment Corporation, and EMC Corporation which exceeds
twenty percent (20%) of all of the Accounts; and that portion of the Accounts
owed by any other single account debtor which exceeds fifteen percent (15%) of
all of the Accounts; and
(m) Any Account which Bank deems not to be an Eligible Account.
1.4 Purpose of Loan. The proceeds of the Revolving Loan shall be used for
general working capital and general corporate purposes.
1.5 Interest. The unpaid principal balance of the Revolving Loan shall
bear interest at the rate or rates provided in the Note and selected by
Borrower. The Revolving Loan may be prepaid in full or in part only in
accordance with the terms of the Note and any such prepayment shall be subject
to the prepayment fee provided for therein.
1.6 Loan Commitment Fee. Borrower shall pay in advance a commitment fee of
two-tenths of one percent (.20%) on or before the date of execution of this
Agreement. No portion of this fee shall be reimbursable.
1.7 Unused Commitment Fee. On the last calendar day of the third month
following the execution of this Agreement and on the last calendar day of each
three-month period thereafter until January 31, 2000, or the earlier termination
of the Loan, Borrower shall pay to Bank a fee which shall be determined based on
the average
-10-
<PAGE>
unused portion of the Revolving Loan for the preceding quarter computed on the
basis of a 30 day month of a year of 360 days. If the average unused portion of
the Revolving Loan is (a) less than Ten Million Dollars ($10,000,000), the
quarterly fee shall be the sum of (i) Five Thousand Dollars ($5,000) and (ii)
twenty five percent (25%) of the product of one-tenth of one percent (.10%) and
multiplied by the result of (x)Ten Million Dollars ($10,000,000) less (y) the
average outstanding portion of the Revolving Loan; or (b) greater than Ten
Million Dollars ($10,000,000), the quarterly fee shall be twenty five percent
(25%) of the product of two-tenths of one percent (.20%) and Twenty Million
Dollars ($20,000,000) from which the average outstanding portion of the
Revolving Loan is subtracted.
1.8 Balances. Borrower shall maintain its major depository accounts with
Bank until the Note and all sums payable pursuant to this Agreement have been
paid in full.
1.9 Disbursement. Upon execution hereof, Bank shall disburse the proceeds
of the Loan as provided in Bank's standard form Authorization executed by
Borrower.
1.10 Security. Prior to any disbursement of the Loan, Borrower shall have
executed a security agreement, on Bank's standard form, and a financing
statement, suitable for filing in the office of the Secretary of State of the
State of California and any other state designated by Bank, granting to Bank a
first priority security interest in such of Borrower's property as is described
in said security agreement. Exceptions to Bank's first priority, if any, are
permitted only as otherwise provided in this Agreement. At Bank's request,
Borrower will also obtain executed landlord's and mortgagee's waivers on Bank's
form covering all of Borrower's property located on leased or encumbered real
property.
1.11 Controlling Document. In the event of any inconsistency between the
terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the terms of this
Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such disbursement,
the following conditions have been fulfilled to Bank's satisfaction:
2.1 Compliance. Borrower shall have performed and complied with all terms
and conditions required by this Agreement to be performed or complied with by it
prior to or at the date of the making of such disbursement and shall have
executed and delivered to Bank the Note and other documents deemed necessary by
Bank.
2.2 Guaranties. ATL Products Limited ("Guarantor") shall have executed and
delivered to Bank a continuing guaranty in form and amount satisfactory to Bank.
2.3 Borrowing Resolution. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.4 Termination Statements. Borrower shall have provided Bank with UCC-2
termination statements executed by such secured creditors as may be required by
Bank suitable for filing with the Secretary of State in each state designated by
Bank.
2.5 Continuing Compliance. At the time any disbursement is to be made,
there shall not exist any event, condition or act which constitutes an event of
default under Section 6 hereof or any event, condition or act which with notice,
lapse of time or both would constitute such event of default; nor shall there be
any such event, condition, or act immediately after the disbursement were it to
be made.
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SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 Business Activity. The principal business of Borrower is the
manufacture and distribution of automated storage products for the computer
industry.
3.2 Affiliates and Subsidiaries. Borrower's affiliates and subsidiaries
(those entities in which Borrower has either a controlling interest or at least
a 25% ownership interest) and their addresses, and the names of Borrower's
principal shareholders, are as provided on a schedule delivered to Bank on or
before the date of this Agreement.
3.3 Authority to Borrow. The execution, delivery and performance of this
Agreement, the Note and all other agreements and instruments required by Bank in
connection with the Loan are not in contravention of any of the terms of any
indenture, agreement or undertaking to which Borrower is a party or by which it
or any of its property is bound or affected.
3.4 Financial Statements. The financial statements of Borrower, including
both a balance sheet at December 31, 1997, together with supporting schedules,
and an income statement for the nine (9) months ended December 31, 1997, have
heretofore been furnished to Bank, and are true and complete and fairly
represent the financial condition of Borrower during the period covered thereby.
Since December 31, 1997, there has been no material adverse change in the
financial condition or operations of Borrower.
3.5 Title. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
3.6 Litigation. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's insurance
coverage.
3.7 Default. Borrower is not now in default in the payment of any of its
material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.8 Organization. Borrower is duly organized and existing under the laws
of the state of its organization, and has the power and authority to carry on
the business in which it is engaged and/or proposes to engage.
3.9 Power. Borrower has the power and authority to enter into this
Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 Authorization. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
3.11 Qualification. Borrower is duly qualified and in good standing in any
jurisdiction where such qualification is required.
3.12 Compliance With Laws. Borrower is not in violation with respect to
any applicable laws, rules, ordinances or regulations which materially affect
the operations or financial condition of Borrower.
-12-
<PAGE>
3.13 ERISA. Any defined benefit pension plans as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
3.14 Regulation U. No action has been taken or is currently planned by
Borrower, or any agent acting on its behalf, which would cause this Agreement or
the Note to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the same may hereafter
be in effect. Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock as one of its important
activities and none of the proceeds of the Loan will be used directly or
indirectly for such purpose.
3.15 Continuing Representations. These representations shall be considered
to have been made again at and as of the date of each disbursement of the Loan
and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full, unless Bank waives compliance in
writing, Borrower agrees that:
4.1 Use of Proceeds. Borrower will use the proceeds of the Loan only as
provided in subsection 1.4 above.
4.2 Payment of Obligations. Borrower will pay and discharge promptly all
taxes, assessments and other governmental charges and claims levied or imposed
upon it or its property, or any part thereof, provided, however, that Borrower
shall have the right in good faith to contest any such taxes, assessments,
charges or claims and, pending the outcome of such contest, to delay or refuse
payment thereof provided that adequately funded reserves are established by it
to pay and discharge any such taxes, assessments, charges and claims.
4.3 Maintenance of Existence. Borrower will maintain and preserve its
existence and assets and all rights, franchises, licenses and other authority
necessary for the conduct of its business and will maintain and preserve its
property, equipment and facilities in good order, condition and repair. Bank
may, at reasonable times, visit and inspect any of the properties of Borrower.
4.4 Records. Borrower will keep and maintain full and accurate accounts
and records of its operations according to generally accepted accounting
principles and will permit Bank to have access thereto, to make examination and
photocopies thereof, and to make audits during regular business hours. Costs for
such audits shall be paid by Borrower.
4.5 Information Furnished. Borrower will furnish to Bank:
(a) Within forty-five (45) days after the close of each fiscal
quarter, except for the final quarter of each fiscal year, its 10-Q report as
filed with the Securities Exchange Commission ("SEC") as of the close of such
fiscal quarter, prepared in accordance with generally accepted accounting
principles;
(b) Within ninety (90) days after the close of each fiscal year, a
copy of its 10-K report as filed with the SEC, in accordance with generally
accepted accounting principles applied on a basis consistent with that of the
previous year.
(c) As soon as filed, copies of all other reports as Borrower may file
with the SEC.
(d) Such other financial statements and information as Bank may
reasonably request from time to time;
-13-
<PAGE>
(e) In connection with each financial statement provided hereunder, a
statement executed by the president or chief financial officer of Borrower,
certifying that no default has occurred and no event exists which with notice or
the lapse of time, or both, would result in a default hereunder;
(f) In connection with each fiscal year-end statement required
hereunder, any management letter of Borrower's certified public accountants;
(g) All press releases made by Borrower, or on Borrower's behalf, upon
such release.
(h) Prompt written notice to Bank of all events of default under any
of the terms or provisions of this Agreement or of any other agreement,
contract, document or instrument entered, or to be entered into with Bank; and
of any litigation which, if decided adversely to Borrower, would have a material
adverse effect on Borrower's financial condition; and of any other matter which
has resulted in, or is likely to result in, a material adverse change in its
financial condition or operations; and
(i) Within fifteen (15) days after each calendar month end, a copy of
Borrower's monthly aging of accounts receivable and accounts payable and a
certification of compliance with the Borrowing Base described above, executed by
Borrower's chief financial officer or other duly authorized officer of Borrower,
in form acceptable to Bank, which certificate shall accurately report Borrower's
accounts receivable and Eligible Accounts. Borrower will permit Bank to audit,
at Borrower's expense, Bank's collateral upon reasonable notice and during
regular business hours.
4.6 Quick Ratio. Borrower shall maintain at the end of each fiscal
quarter a ratio of cash, accounts receivable and marketable securities to
current liabilities of not less than .90:1.0 at December 31, 1997 and 1.00:1.00
thereafter, as such terms are defined by generally accepted accounting
principles.
4.7 Tangible Net Worth. Until March 31, 1997, Borrower will maintain
Tangible Net Worth of not less than Eight Million Eight Hundred Sixty Five
Thousand Dollars ($8,865,000). Thereafter, Borrower will at all times maintain
a minimum Tangible Net Worth that increases from said amount as of the end of
Borrower's fiscal year by one hundred percent (100%) of Borrower's net profit
after taxes. "Tangible Net Worth" shall mean net worth increased by
indebtedness of Borrower subordinated to Bank and decreased by patents,
licenses, trademarks, trade names, goodwill and other similar intangible assets,
organizational expenses, and monies due from affiliates (including officers,
shareholders and directors).
4.9 Debt to Tangible Net Worth. Borrower will maintain a ratio of total
liabilities to tangible net worth of not greater than 2.25:1.00 through the
fiscal quarter ending December 31, 1998 and 1.55:1.00 thereafter.
4.10 Profitability. Borrower will maintain a minimum net profit measured
on a quarterly basis, after provision for income taxes, which shall include the
net profit for each of the immediately preceding four (4) quarters, according to
the following schedule:
a) $6,500,000 for the period ending June 30, 1998, and thereafter
b) $7,000,000 for the period ending September 30, 1998, and
thereafter
c) $7,500,000 for the period ending December 31, 1998, and
thereafter
d) $8,000,000 for the period ending March 31, 1999, and thereafter
e) $8,500,000 for the period ending June 30, 1999, and thereafter
f) $9,500,000 for the period ending September 30, 1999, and
thereafter
4.11 Insurance. Borrower will keep all of its insurable property, real,
personal or mixed, insured by good and responsible companies against fire and
such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will furnish to Bank
statements of its insurance coverage, will promptly furnish other or additional
insurance deemed necessary by and upon request of Bank to the extent that such
insurance may be available and hereby assigns to Bank, as security for
Borrower's obligations to Bank, the proceeds of any such insurance. Prior to
any disbursement of the Loan, Bank will be
-14-
<PAGE>
named loss payee on all policies insuring collateral and such policies shall
require at least ten (10) days' written notice to Bank before any policy may be
altered or cancelled. Borrower will maintain adequate worker's compensation
insurance and adequate insurance against liability for damages to persons and
property.
4.12 Additional Requirements. Borrower will promptly, upon demand by Bank,
take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
4.13 Litigation and Attorneys' Fees. Borrower will pay promptly to Bank
upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.14 Bank Expenses. Borrower will pay or reimburse Bank for all costs,
expenses and fees incurred by Bank in preparing and documenting this Agreement
and the Loan, and all amendments and modifications thereof, including but not
limited to all filing and recording fees, costs of appraisals, insurance and
attorneys' fees, including the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and legal staff.
4.15 Reports Under Pension Plans. Borrower will furnish to Bank, as soon
as possible and in any event within 15 days after Borrower knows or has reason
to know that any event or condition with respect to any defined benefit pension
plans of Borrower described in Section 3 above has occurred, a statement of an
authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Notes and all other sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 Encumbrances and Liens. Borrower will not create, assume or suffer to
exist any mortgage, pledge, security interest, encumbrance, or lien (other than
for taxes not delinquent and for taxes and other items being contested in good
faith) on property of any kind, whether real, personal or mixed, now owned or
hereafter acquired, or upon the income or profits thereof, except to Bank and
except for minor encumbrances and easements on real property which do not affect
its market value, and except for existing liens on Borrower's personal property
and future purchase money security interests encumbering only the personal
property purchased. All of such permitted personal property liens shall not
exceed, in the aggregate, Two Hundred Fifty Thousand Dollars ($250,000) at any
time.
5.2 Borrowings. Borrower will not sell, discount or otherwise transfer any
account receivable or any note, draft or other evidence of indebtedness, except
to Bank or except to a financial institution at face value for deposit or
collection purposes only and without any fee other than fees normally charged by
the financial institution for deposit or collection services. Borrower will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank and existing indebtedness due Odetics, Inc.
5.3 Sale of Assets, Liquidation or Merger. Borrower will neither liquidate
nor dissolve nor enter into any consolidation, merger, partnership or other
combination, nor convey, nor sell, nor lease all or the greater part of its
assets or business, nor purchase or lease all or the greater part of the assets
or business of another.
-15-
<PAGE>
5.4 Loans, Advances and Guaranties. Borrower will not, except in the
ordinary course of business as currently conducted, make any loans or advances,
become a guarantor or surety, pledge its credit or properties in any manner or
extend credit.
5.5 Investments. Borrower will not purchase the debt or equity of another
person or entity except for savings accounts and certificates of deposit of
Bank, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, provided all
such permitted investments shall mature within one year of purchase.
5.6 Payment of Dividends. Borrower will not declare or pay any dividends,
other than a dividend payable in its own common stock, or authorize or make any
other distribution with respect to any of its stock now or hereafter
outstanding.
5.7 Retirement of Stock. Borrower will not acquire or retire any share of
its capital stock for value.
5.8 Capital Expenditures. Borrower will not make capital expenditures in
excess of Three Million Dollars ($3,000,000) for the fiscal year ending March
31, 1998 and Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000) for
the fiscal year ending March 31, 1999; and shall only make such expenditures as
are necessary for Borrower in the conduct of its ordinary course of business.
Each said expenditure shall be needed by Borrower in the ordinary course of its
business. Expenditures as used in this subsection shall include the current
expense portion of all leases whether or not capitalized and shall also include
the current portion of any debt used to finance capital expenditures.
5.9 Business and Management. Borrower will not make any substantive change
in the character of its business or make changes in its executive management.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Note, shall make all sums of
interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Documents; or
6.4 Any guaranty or subordination agreement required hereunder is breached
or becomes ineffective, or any Guarantor or subordinating creditor dies,
disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Additional Remedies. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
-16-
<PAGE>
7.2 Nonwaiver. Any forbearance or failure or delay by Bank in exercising
any right, power or remedy hereunder shall not be deemed a waiver thereof and
any single or partial exercise of any right, power or remedy shall not preclude
the further exercise thereof. No waiver shall be effective unless it is in
writing and signed by an officer of Bank.
7.3 Inurement. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment by Borrower without Bank's consent shall be null
and void.
7.4 Applicable Law. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 Severability. Should any one or more provisions of this Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective. In the event of any conflict between the provisions of this
Agreement and the provisions of any note or reimbursement agreement evidencing
any indebtedness hereunder, the provisions of such note or reimbursement
agreement shall prevail.
7.6 Integration Clause. Except for documents and instruments specifically
referenced herein, this Agreement constitutes the entire agreement between Bank
and Borrower regarding the Loan and all prior communications verbal or written
between Borrower and Bank shall be of no further effect or evidentiary value.
7.7 Construction. The section and subsection headings herein are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 Amendments. This Agreement may be amended only in writing signed by
all parties hereto.
7.9 Counterparts. Borrower and Bank may execute one or more counterparts
to this Agreement, each of which shall be deemed an original, but when together
shall be one and the same instrument.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed hereunder
shall be effective only when given by one of the following methods and addressed
to the respective party at its address given with the signatures at the end of
this Agreement and shall be considered to have been validly given: (a) upon
delivery, if delivered personally; (b) upon receipt, if mailed, first class
postage prepaid, with the United States Postal Service; (c) on the next business
day, if sent by overnight courier service of recognized standing; and (d) upon
telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be
changed from time to time by notice delivered as provided above.
-17-
<PAGE>
THIS AGREEMENT is executed on behalf of the parties by duly authorized officers
as of the date first above written.
UNION BANK OF CALIFORNIA, N.A.
("Bank")
By: /s/ Jim Heim
----------------------------
Jim Heim
Title: Vice President
By: /s/ Douglas S. Lambell
----------------------------
Douglas S. Lambell
Title: Vice President
Address: 500 South Main Street #201
Orange, CA 92868
Telecopier: (714) 565-5770
Telephone: (714) 565-5752
ATL PRODUCTS, INC.
("Borrower")
By: /s/ Mark P. de Raad
----------------------------
Mark de Raad
Title: Chief Financial Officer
By: /s/ Kevin C. Daly
----------------------------
Kevin C. Daly
Title: Chief Executive Officer
Address: 2801 Kelvin Avenue
Irvine, CA 92614-5872
Telecopier: (714) 477-7799
Telephone: (714) 477-7750
-18-
<PAGE>
FIRST AMENDMENT
TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT ("First Amendment"), dated as a February
9, 1998, is made and entered into by and between ATL Products, Inc., a Delaware
corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A. ("Bank").
RECITALS:
---------
A. Borrower and Bank are parties to that certain Loan Agreement, dated February
9, 1998 (the "Agreement"), pursuant to which Bank agreed to extend credit to
Borrower.
B. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this First Amendment.
AGREEMENT:
----------
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. Defined Terms. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the
Agreement.
2. Amendments to the Agreement.
(a) Section 1.1.2 of the Agreement is hereby added in its entirety as
follows:
The Non-Revolving Loan. Bank will loan to Borrower an amount not to
exceed Six Million Five Hundred Thousand Dollars ($6,500,000) outstanding
in the aggregate at any one time (the "Non-Revolving Loan"); provided,
however, that (a) Borrower may request only one (1) advance under the Non-
Revolving Loan during each calendar quarter (commencing with the calendar
quarter which began on January 1, 1998), said advance to be in an amount
not to exceed Eight Hundred Twelve Thousand Three Hundred Forty Dollars
($812,340) (the "Maximum Quarterly Advance"), (b) availability under the
Non-Revolving Loan shall automatically be reduced on the first day of each
calendar quarter (commencing with the calendar quarter which begins on
April 1, 1998) by an amount equal to the difference (if any) between (i)
the Maximum Quarterly Advance, and (ii) the amount of such advance under
the Non-Revolving Loan (if any) as was requested by Borrower and funded by
Bank during the immediately preceding calendar quarter, (c) amounts
borrowed and repaid under the Non-Revolving Loan may not thereafter be re-
borrowed, and (d) Borrower may not request an advance under the Non-
Revolving Loan at any time on or after January 1, 2000. All unpaid
principal and accrued but unpaid interest under the Non-Revolving Loan
shall be due and payable on January 31, 2000. The Non-Revolving Loan shall
be evidenced by a promissory note (the "Non-Revolving Loan Note") on the
standard form used by Bank for commercial loans. Bank shall enter each
amount borrowed and repaid in Bank's records and such entries shall be
deemed to be the amount of the Non-Revolving Loan outstanding. Omission of
Bank to make any such entries shall not discharge Borrower of its
obligation to repay in full with interest all amounts borrowed.
(b) Section 1.4 of the Agreement is hereby amended in its entirety as
follows:
The proceeds of the Revolving Loan shall be used for general working
capital and general corporate purposes. The proceeds of the Non-Revolving
Loan shall be used to reimburse Borrower for debt service expenditures on
the Odetics note.
-19-
<PAGE>
(c) Section 1.5 of the Agreement is hereby amended in its entirety as
follows:
The unpaid principal balances of the Revolving Loan and the Non-
Revolving Loan shall bear interest at the rate or rates provided in the
Revolving Note or the Non-Revolving Loan Note, as the case may be, and
selected by the Borrower.
The Revolving Loan or the Non-Revolving Loan may be prepaid in full or in
part only in accordance with the terms of the Revolving Note or the Non-
Revolving Loan Note, as the case may be, and any such prepayment shall be
subject to the prepayment fee provided for therein.
(d) Section 4.6 of the Agreement is hereby amended by substituting the
phrase "through September 30, 1998," for the phrase "at December 30,
1997."
1. Effectiveness of the First Amendment. The First Amendment shall become
effective as of the date hereof when, and only when, Bank shall have
received all of the following, in form and substance satisfactory to Bank:
(a) A counterpart of the First Amendment, duly executed by Borrower;
(b) The Non-Revolving Loan Note, duly executed by Borrower; and
1. Ratification. Except as specifically amended hereinabove, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
2. Representations and Warranties. Borrower represents and warrants as
follows:
(a) Each of the representation and warranties contained in the Agreement,
as the same may be amended hereby, is hereby reaffirmed as of the date
hereof, each as if set forth herein;
(b) The execution, delivery and performance of this First Amendment and
any other instruments or document in connection herewith are within
Borrower's power, have been duly authorized, are legal, valid and binding
obligations of Borrower, and are not in conflict with the terms of any
charter, bylaw, or other organization papers of Borrower or with any law,
indenture, agreement or undertaking to which Borrower is a party or by
which Borrower is bound or affected;
(c) No event has occurred and is continuing or would result from the First
Amendment which constitutes or constitute an Event of Default under the
Agreement.
1. Governing Law. This First Amendment and all other instruments or documents
executed or to be executed in connection herewith shall be governed by an
construed according to the laws of the State of California.
2. Counterparts. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
-20-
<PAGE>
WITNESS the due execution hereof as of the date first above written.
ATL Products, Inc. UNION BANK OF CALIFORNIA, N.A.
- ---------------------------------------- ----------------------------------
By: /s/ Kevin Daly By: /s/ Jim Heim
-------------------------------- --------------------------
Title: President Title: Vice President
----------------------------- -----------------------
By: /s/ Mark de Raad By: /s/ Kim Ha
-------------------------------- --------------------------
Title: Vice President and CFO Title: Vice President
----------------------------- -----------------------
GUARANTORS
ATL Products Limited
- ----------------------------------------
By: /s/ Kevin Daly
--------------------------------
Title: President
-----------------------------
-21-
<PAGE>
EXHIBIT 21
ATL PRODUCTS, INC.
LIST OF SUBSIDIARIES
ATL PRODUCTS LIMITED
ATL PRODUCTS JAPAN BRANCH
ATL PRODUCTS AUSTRALIA PTY LIMITED
ATL PRODUCTS INTERNATIONAL, A DELAWARE CORPORATION
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-52253) pertaining to the 1997 Stock Incentive Plan of ATL Products,
Inc. of our report dated April 28, 1998, with respect to the consolidated and
combined financial statements and schedule of ATL Products, Inc. included in
this Annual Report (Form 10-K) for the year ended March 31, 1998.
/s/ Ernst & Young LLP
Orange County, California
June 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997 MAR-31-1996
<PERIOD-START> APR-01-1997 APR-01-1996 APR-01-1995
<PERIOD-END> MAR-31-1998 MAR-31-1997 MAR-31-1996
<CASH> 1,815 9,494 1
<SECURITIES> 0 0 0
<RECEIVABLES> 22,383 12,730 10,159
<ALLOWANCES> 511 319 662
<INVENTORY> 22,473 12,627 5,317
<CURRENT-ASSETS> 49,611 35,206 15,548
<PP&E> 8,368 4,563 2,541
<DEPRECIATION> 2,950 1,844 1,341
<TOTAL-ASSETS> 55,029 37,925 16,748
<CURRENT-LIABILITIES> 28,490 19,312 26,861
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 1 1 1
<OTHER-SE> 16,956 8,864 (10,114)
<TOTAL-LIABILITY-AND-EQUITY> 55,029 37,925 16,748
<SALES> 97,627 60,028 29,410
<TOTAL-REVENUES> 97,627 60,028 29,410
<CGS> 61,297 35,642 18,863
<TOTAL-COSTS> 61,297 35,642 18,863
<OTHER-EXPENSES> 24,629 16,148 9,789
<LOSS-PROVISION> 320 253 38
<INTEREST-EXPENSE> 992 1,707 1,861
<INCOME-PRETAX> 10,709 6,531 (1,103)
<INCOME-TAX> 2,615 2,600 86
<INCOME-CONTINUING> 8,094 3,931 (1,189)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,094 3,931 (1,189)
<EPS-PRIMARY> 0.84 0.48 (0.15)<F1>
<EPS-DILUTED> 0.83 0.48 (0.15)
<FN>
<F1> Represents BASIC EPS
</FN>
</TABLE>
