<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 000-22037
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ATL PRODUCTS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3824281
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(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
2801 Kelvin Avenue, Irvine, California 92614
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(Address of Principal Executive Offices) (Zip Code)
(949) 477-7800
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Addressed and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of August 12, 1998:
Class A Common Stock - 9,655,000 shares
Class B Common Stock - 333 shares
<PAGE>
INDEX
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ATL PRODUCTS, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
- -------------------------------
<S> <C>
ITEM 1. Financial Statements (Unaudited) Page
Consolidated Balance Sheets as of June 30, 1998 and March 31, 1998 .................................. 3
Consolidated Statements of Operations for the three months ended June 30, 1998
and June 30, 1997..................................................................................... 5
Consolidated Statements of Cash Flows for the three months ended June 30, 1998
and June 30, 1997..................................................................................... 6
Notes to Consolidated Financial Statements............................................................ 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 9
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K...................................................................... 17
Signatures..................................................................................................... 18
</TABLE>
2
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
(unaudited)
------------ ----------
ASSETS (in thousands)
<S> <C> <C>
Current assets:
Cash $ 970 $ 1,815
Trade accounts receivable, net of allowance for doubtful
accounts of $628 in June 1998 and $511 in March 1998 24,602 22,383
Inventories:
Materials and supplies 16,171 15,821
Work in process 2,273 2,023
Finished goods 4,900 4,629
Deferred income taxes 2,042 2,042
Prepaid expenses and other 1,083 898
======= =======
Total current assets 52,041 49,611
Buildings and equipment
Leasehold improvements 1,418 1,293
Equipment 7,362 7,075
Allowances for depreciation (3,331) (2,950)
======= =======
5,449 5,418
======= =======
Total assets $57,490 $55,029
======= =======
</TABLE>
3
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
(unaudited)
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 9,165 $15,099
Accrued payroll and related 2,973 2,733
Income taxes payable 1,371 3,474
Deferred service income 3,115 2,753
Other accrued expenses 1,500 1,182
Current portion of long-term debt 4,873 3,249
======= =======
Total current liabilities 22,997 28,490
Long-term debt, less current portion 15,637 9,582
Stockholders' equity
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 at June 30, 1998
and March 31, 1998; no Class B 1 1
Additional paid in capital 16,927 16,927
Retained earnings 1,930 29
Accumulated other comprehensive income:
Cumulative translation adjustment (2) ---
======= =======
Total stockholders' equity 18,856 16,957
======= =======
Total liabilities and stockholders' equity $57,490 $55,029
======= =======
</TABLE>
4
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
NET SALES
Products $28,625 $16,677
Service and spare parts 4,364 1,890
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Total net sales 32,989 18,567
Cost of sales:
Products 19,114 9,973
Service and spare parts 2,803 1,215
------- -------
Total cost of sales 21,917 11,188
------- -------
Gross profit 11,072 7,379
Expenses:
Research and development 2,658 1,761
Sales and marketing 3,971 2,698
General and administrative 1,266 661
------- -------
Income from operations 3,177 2,259
Interest expense and other 253 276
------- -------
Income before income taxes 2,924 1,983
Income taxes 1,023 793
------- -------
Net income $ 1,901 $ 1,190
======= =======
Basic earnings per share $ 0.20 $ 0.12
======= =======
Diluted earnings per share $ 0.19 $ 0.12
======= =======
</TABLE>
5
<PAGE>
ATL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,901 $1,190
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 688 347
Provision for losses on accounts receivable 117 60
Foreign currency translation adjustment (2) (11)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,336) (1,767)
Increase in inventories (1,177) (343)
(Increase) decrease in prepaid expenses
and other assets (185) 102
Decrease in accounts payable and
accrued expenses (7,117) (5,713)
-------- -------
Net cash used in operating activities (8,111) (6,135)
INVESTING ACTIVITIES
Purchases of leasehold improvements
and equipment (413) (550)
FINANCING ACTIVITIES
Proceeds from line of credit and long-term borrowings 29,148 ---
Principal payments on line of credit and long-term debt (21,469) (644)
-------- -------
Net cash provided by (used in) financing activities 7,679 (644)
Net change in cash and cash equivalents (845) (7,329)
Cash and cash equivalents at beginning of period 1,815 9,494
-------- -------
Cash and cash equivalents at end of period $ 970 $ 2,165
======== =======
</TABLE>
6
<PAGE>
ATL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1999. For further information, refer to the
consolidated and combined financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1998.
Note B - 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.
The following table sets forth the computation of basic and diluted earnings per
share
(in thousands, except per share information):
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Numerator: Net income.......................... $ 1,901 $1,190
======= ======
Denominator:
Denominator for basic earnings per share
weighted average shares outstanding........... 9,655 9,655
Effect of dilutive securities:
Employee stock options......................... 603 -
------- ------
Denominator for diluted earnings per share..... 10,258 9,655
======= ======
Basic earnings per share....................... $ 0.20 $ 0.12
======= ======
Diluted earnings per share..................... $ 0.19 $ 0.12
======= ======
</TABLE>
7
<PAGE>
Note C - Comprehensive Income
As of April 1, 1998 the Company adopted statement No. 130 "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no material impact on the Company's net income or
stockholders' equity. Statement 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity to be included in other comprehensive income.
The components of comprehensive income for the three months ended June 30, 1998
and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net income...................................... $1,901 $1,190
Foreign currency translation adjustment......... 2 -
------ ------
Comprehensive income............................ $1,903 $1,190
====== ======
</TABLE>
Note D - Long-Term Debt
The Company has a 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.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------- --------
(In thousands)
<S> <C> <C>
Revolving credit agreement due January 2000 interest
payable monthly 8.5% at June 30, 1998.................. $ 9,950 $ 2,000
Term-loan due November 1998 interest payable quarterly
7.9% at June 30, 1998.................................. 1,624 812
Note payable to Odetics.................................. 8,936 10,019
------- -------
20,510 12,831
Less current portion..................................... 4,873 3,249
------- -------
$15,637 $ 9,582
======= =======
</TABLE>
Included in the borrowing limits of the revolving credit agreement, the Company
has available $1,000,000 in standby letters of credit. At June 30, 1998,
approximately $485,000 has been reserved for standby letters of credit.
8
<PAGE>
ATL PRODUCTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto contained elsewhere
in this Report and the Consolidated And Combined Financial Statements and the
related Notes thereto included in the latest Annual Report on Form 10-K of ATL
Products, Inc. (the "Company"). This Report contains forward-looking statements
including, among others, statements concerning projected revenues, funding
requirements, manufacturing efficiencies, sales mix, and supply issues, that
involve a number of risks and uncertainties and expected increased sales of
certain product lines including, without limitation, those set forth at the end
of this section under quote "Risk Factors". The Company's actual results may
differ materially from any future performance or forward-looking statements
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations. Readers are cautioned not to place undue reliance on
these forward looking statements which speak only as of the date hereof. The
Company undertakes no obligation to republish revised forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Business
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 (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 Merger
and has established August 10, 1998 as the record date for stockholders entitled
to vote on the Merger at a special stockholders meeting to be held September 24,
1998 at the Hyatt Regency Irvine, located at 17900 Jamboree Road, Irvine,
California 92614.
There can be no assurance that the Company's stockholders will approve the
Merger, or that the Merger will be consummated pursuant to 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 the proposed Merger.
Results of Operations
Net Sales. Total net sales increased 78% to $32,989,000 for the first quarter
of fiscal 1999 as compared to total net sales of $18,567,000 in the first
quarter of the prior fiscal year.
Product sales increased 72% to $28,625,000 for the first quarter of fiscal
1999 as compared to $16,677,000 in the corresponding period of the prior fiscal
year. These increases occurred in all library families with 7100 series library
sales contributing the largest share at 31% of total product sales. The 520 and
2640 series library shipments continued their steady performance representing
26% and 21%, respectively, of total first quarter product sales. Sales of P1000
series, the Company's newest library offering which began shipping in the third
quarter of the prior fiscal year were lower than expected. The Company expects
that P1000 sales will regain momentum in the second fiscal quarter due to a
renewed focus on the product line and initial shipments to its OEM customers.
Also during the first quarter of fiscal 1999, the Company made its first revenue
shipments of the PowerStor(TM) library manufactured by Quantum. Fiscal 1999
first quarter OEM revenues rose significantly and represented 66% of total
product sales, compared to 50% in the prior year comparable quarter. This large
increase in OEM revenue was due to a combination of strength in the 7100 series
sales and the lower than anticipated P1000 shipments, which, to-date, have only
been shipped through the VAR channel. Revenues generated from non-library sales,
which include primarily drive upgrade kits and media, accounted for 8.0% of
fiscal 1999 first quarter revenue as compared to 4.6% in the prior year
comparable quarter.
9
<PAGE>
Service and parts sales include revenue derived from the sale of spare parts
and service contract activities to support the installed base of the Company's
products. Service revenues in the first quarter of fiscal 1999 were
exceptionally strong due to higher parts sales and an increase in extended
service contract revenues. Service and parts sales in the first quarter of
fiscal 1999 increased 131% to $4,364,000 as compared to $1,890,000 in the first
quarter of the prior fiscal year.
Gross Profit. Total gross profit as a percent of total net sales decreased
to 33.6% for the first quarter of fiscal 1999 from 39.7% for the first quarter
of the prior fiscal year.
Gross profit on product sales decreased to 33.2% for the first quarter of
fiscal 1999 as compared to 40.2% for the first quarter of fiscal 1998. The
primary reason for the decline was directly related to the large shift in
channel mix with OEM revenues accounting for a record 66% of total first quarter
fiscal 1999 revenues. As OEM products, on balance, generate lower overall gross
margins, the large increase in OEM sales had a corresponding downward impact on
overall gross profit. In addition, the product mix within the quarter also
included sales having a higher drive content; and, as drives are typically
margined lower than libraries, an increase in the value of the drive component
of the mix also negatively impacted fiscal 1999 first quarter gross profit. The
Company believes that both the channel mix and the higher proportion of drives
relative to libraries sold was somewhat unique during the first quarter of
fiscal 1999 and anticipates that both figures will move toward their historical
averages in the second quarter of fiscal 1999. However, the Company believes
average selling prices on future product sales will likely decline as a result
of both competition and the Company's desire to increase market share. While the
Company continues working with its suppliers to reduce its costs of materials
and to improve manufacturing efficiencies, there can be no assurance these
actions will be sufficient to offset future reductions in sales prices.
Research and Development. Research and development expense increased 50.9% to
$2,658,000 (8.1% of total net sales) for the first quarter of fiscal 1999
compared to $1,761,000 (9.5% of total net sales) in the corresponding period of
the prior fiscal year. The increase in research and development expense for the
first quarter of fiscal 1999 as compared to the corresponding quarter of the
prior fiscal year is primarily driven by investments in the development,
qualification and preproduction costs for the Company's new P3000 and L500
series libraries. Also, the Company continues its Prism Architecture
development, web-based internet software tool development and ongoing
enhancement investments in current products. The Company expects expenditures
for research and development generally to increase over time and to be higher
during periods of new product development when significant expenditures are
incurred for preproduction activities and increased testing. These expenditures
may, therefore, fluctuate as a percentage of total net sales from period to
period.
Sales and Marketing. Sales and marketing expense increased to $3,971,000 (or
12.0% of total net sales) for the first quarter of fiscal 1999 compared to
$2,698,000 (or 14.5% of total net sales) in the corresponding period of the
prior fiscal year. The increase is due in large part to the expansion and
strengthening of the Company's sales and marketing organization, including
higher promotional expenditures, advertising, and variable sales expenses. 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. General and administrative expense increased to
$1,266,000 (3.8% of total net sales) for the first quarter of fiscal 1999
compared to $661,000 (3.6% of total net sales) in the corresponding period of
the prior fiscal year. The increase in aggregate dollar spending for the
comparable quarters is due primarily to the development of infrastructure to
support increasing finance, information systems, and general operating
activities consistent with the overall growth of the Company's business
operations, and to replace infrastructure costs that were in part previously
supplied by the Company's former parent. As the Company continues to add the
infrastructure necessary to support both its domestic and international
operations, the Company believes that aggregate general and administrative
expenses will continue to increase.
Income Taxes. The Company's effective tax rate was 35.0% for the first
quarter of fiscal 1999 compared to 40.0% in the corresponding period of the
prior fiscal year. The reduction in effective tax rate for the comparable
quarters is due to implementation of various domestic and foreign tax credits
which are now available to the Company due to its separation from its former
parent on October 31, 1997.
10
<PAGE>
Liquidity and Capital Resources
For the first quarter of fiscal 1999, the Company incurred a reduction in cash
and cash equivalents of $845,000. Operating activities consumed $8,111,000 which
included net income of $1,901,000 that was offset by reductions of accounts
payable and accrued expenses of $7,117,000, and increases in accounts receivable
and inventory of $2,336,000 and $1,177,000 respectively. The Company also used
$413,000 to purchase equipment and make leasehold improvements in its principal
operating facilities. In order to fund these operating activities, the Company
had net additional borrowings on its line of credit and term loan of $7,679,000.
Included in the net borrowings are principal and interest payments of $1,276,000
on its note payable obligation to Odetics, Inc., the Company's former parent.
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 included 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 was 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 (8.5% at June 30, 1998) or at LIBOR plus 1.75% to 2.25% basis
points, depending upon borrowing level, and was secured by all of the Company's
assets. This facility required the Company to comply with various financial
covenants and other standard compliance requirements. In July 1998 the Company
renegotiated the term loan portion of its credit facility with Union Bank of
California from $6.5 million to $10.5 million and a new expiration date of
November 1998. Upon completion of the term loan renegotiation the Company drew
down the remaining unused portion of $8.6 million and paid off in full the
outstanding loan balance due to Odetics, Inc. The Company believes that cash
flow generated from operations, in conjunction with funds available under the
Company's bank line of credit, will be adequate to execute its current operating
plans and meet its obligations on a timely basis. The Company does not have any
material commitments for capital expenditures as of June 30, 1998.
In July 1998 the Company entered into a five year lease agreement plus two,
five-year options for a new worldwide headquarters facility in Irvine,
California. This new facility will accommodate the Company's engineering,
sales, marketing, and general and administrative functions. This facility is
approximately 63,000 square feet and the Company expects to be able to occupy
the new facility in the third quarter of fiscal 1999.
RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. The following risks should be considered carefully in addition
to the other information contained in this Report in evaluating the Company and
its business before purchasing the shares of the Company's Class A Common Stock
("Common Stock").
Fluctuations in Quarterly Operating Results; 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 and product lines; 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
11
<PAGE>
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 operations. Quantum has expressed it's intention to enter the high
performance automated tape library business, either by acquisition or internal
development. Even though ATL believes that its automated tape library business
is media independent and that its products could be modified to incorporate tape
drive components other than the DLT tape drives manufactured exclusively by
Quantum, ATL believed that some degree of uncertainty existed concerning that
product strategy. In particular, redesign and modification would probably be
conducted under potentially adverse circumstances, such as potentially reduced
access to Quantum's DLT drives, and with Quantum as a possible new competitor,
either directly or by virtue of Quantum's acquisition of one of ATL's existing
competitors. On May 19, 1998 ATL and Quantum jointly announced a merger
agreement under the terms of which Quantum would acquire ATL Products. The
company's market position and its relationship with Quantum could be materially
and adversely affected to the extent the merger with Quantum is not consummated.
Quantum has also historically sold DLTStor, 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.
12
<PAGE>
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), the Company's P3000 Series (scheduled for introduction
in the third quarter of fiscal 1999) 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.
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
13
<PAGE>
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 June 30,
1998, the size of the Company's staff increased from 176 to 385 employees and
further increases in the number of employees are anticipated during fiscal year
1999. 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.
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.
14
<PAGE>
Dependence on Proprietary Technology; Risks of Infringement
The Company's ability to compete effectively depends in part on its ability to
develop and maintain the proprietary aspects of its technology. There can be no
assurance, however, that any future patents will be granted or that any issued
patents or other intellectual property rights of the Company will provide
meaningful protection for the Company's product innovations. Moreover, such
rights may not preclude competitors from developing substantially equivalent or
superior products to the Company's products. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights in the United States or abroad will
be adequate, or that competitors will not independently develop technologies
that are similar or superior to the Company's technology, duplicate the
Company's technology, or design around any patent of the Company. Litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others,
or to defend the Company against claims of infringement or invalidity by others.
An adverse outcome in such litigation or similar proceedings could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from others or require the Company to cease marketing or using
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to obtain licenses under patents or proprietary rights of
others, there can be no assurance that any required licenses would be made
available on terms acceptable to the Company, if at all. In addition, the cost
of addressing any intellectual property litigation claim, both in legal fees and
expenses and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could have a material adverse effect on
the Company's results of operations.
Future Capital Requirements
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. In July 1998 the Company
renegotiated the term loan portion of its credit facility from $6.5 million to
$10.5 million and a new expiration date of November 1998. 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 anti-takeover 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
15
<PAGE>
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.
Anti-Takeover Effect of Shareholder Rights Plan
On March 12, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). Under terms of the Rights 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.
In May 1998, the Company amended the Rights Plan to permit Quantum Corporation
to acquire the company without triggering a distribution of the Rights.
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 has
continued to operate as an independent company and has been 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, standalone company during the periods presented or be
indicative of future results of operations and the financial condition of the
Company.
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. The Company has scheduled a change to its MRP system for
the fourth quarter of 1998 to utilize a version of the system that is 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.
16
<PAGE>
ATL PRODUCTS, INC.
PART II OTHER INFORMATION
June 30, 1998
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On May 20, 1998 the Company filed a Form 8-K dated as of May
18, 1998, reporting that the Company had entered into an
Agreement and Plan of Reorganization (the "Merger Agreement")
with Quantum Corporation ("Quantum") providing for, among
other things, the merger of a wholly-owned subsidiary of
Quantum with and into ATL Products, Inc. ("ATL") with ATL
becoming a wholly-owned subsidiary of Quantum.
17
<PAGE>
ATL PRODUCTS, INC.
SIGNATURES
June 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATL PRODUCTS, INC.
(Registrant)
By /s/ Mark P. de Raad
----------------------
Mark P. de Raad
Chief Financial Officer
(principal financial officer)
By /s/ James A. Pipp
--------------------
James A. Pipp
Vice President, Controller
(principal accounting officer)
Dated: August 12, 1998
---------------
18
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