<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission file number 000-22037
ATL PRODUCTS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-3824281
(State or Other Jurisdiction 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)
(714) 774-6900
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Addressed and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of February 10, 1998:
Class A Common Stock - 9,655,000 shares
Class B Common Stock - No shares outstanding
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ATL PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited) Page
<S> <C>
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1997 .................................................3
Consolidated Statements of Operations for the three months
and nine months ended December 31, 1997 and 1996....................5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1997 and 1996..........................................6
Notes to Condensed Consolidated Financial Statements ...............7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ...................................15
Signatures .................................................................16
</TABLE>
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ATL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
(UNAUDITED)
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,097 $ 9,494
TRADE ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $534 IN DECEMBER 1997 AND $319 IN MARCH 1997 18,117 12,730
INVENTORIES:
MATERIALS AND SUPPLIES 12,229 8,671
WORK IN PROCESS 1,756 1,019
FINISHED GOODS 3,756 2,937
PREPAID EXPENSES AND OTHER 386 355
-------- --------
TOTAL CURRENT ASSETS 37,341 35,206
BUILDINGS AND EQUIPMENT
LEASEHOLD IMPROVEMENTS 1,192 596
EQUIPMENT 5,972 3,967
ALLOWANCES FOR DEPRECIATION (2,622) (1,844)
-------- --------
BUILDINGS AND EQUIPMENT, NET 4,542 2,719
======== ========
TOTAL ASSETS $ 41,883 $ 37,925
======== ========
</TABLE>
3
<PAGE> 4
ATL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
(UNAUDITED)
-------- --------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $ 9,366 $ 9,676
ACCRUED PAYROLL AND RELATED 2,255 1,545
INCOME TAXES PAYABLE 3,029 2,018
DEFERRED SERVICE INCOME 2,182 1,116
OTHER ACCRUED EXPENSES 810 1,199
PAYABLE TO ODETICS 68 509
CURRENT PORTION OF NOTE PAYABLE TO ODETICS 3,249 3,249
-------- --------
TOTAL CURRENT LIABILITIES 20,959 19,312
LONG-TERM NOTE PAYABLE TO ODETICS 7,586 9,748
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, PAR VALUE $.0001;
5,000,000 SHARES AUTHORIZED, NO SHARES
ISSUED AND OUTSTANDING AT DECEMBER 31, 1997 AND
MARCH 31, 1997 -- --
COMMON STOCK, PAR VALUE $.0001; 45,000,000 CLASS A SHARES AND 5,000,000 CLASS
B SHARES AUTHORIZED; 9,655,000 CLASS A SHARES ISSUED AND OUTSTANDING AT
DECEMBER 31, 1997 AND MARCH 31, 1997; NO CLASS B
SHARES ISSUED AND OUTSTANDING 1 1
ADDITIONAL PAID IN CAPITAL 16,927 16,927
ACCUMULATED DEFICIT (3,507) (8,065)
CUMULATIVE TRANSLATION ADJUSTMENT (83) 2
-------- --------
TOTAL STOCKHOLDERS' EQUITY 13,338 8,865
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,883 $ 37,925
======== ========
</TABLE>
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ATL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------ ------------------ ------------------
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES:
PRODUCTS $22,956 $14,081 $59,449 $38,267
SERVICE AND SPARE PARTS 2,147 1,331 7,123 4,185
------------------ ------------------ ------------------ ------------------
TOTAL NET SALES 25,103 15,412 66,572 42,452
COST OF SALES:
PRODUCTS 14,556 8,418 36,962 23,420
SERVICE AND SPARE PARTS 1,354 883 4,276 2,021
------------------ ------------------ ------------------ ------------------
TOTAL COST OF SALES 15,910 9,301 41,238 25,441
------------------ ------------------ ------------------ ------------------
GROSS PROFIT 9,193 6,111 25,334 17,011
EXPENSES:
RESEARCH AND DEVELOPMENT 2,106 2,056 5,704 3,751
SALES AND MARKETING 2,964 1,898 8,684 4,727
GENERAL AND ADMINISTRATIVE 1,030 946 2,683 2,545
------------------ ------------------ ------------------ ------------------
INCOME FROM OPERATIONS 3,093 1,211 8,263 5,988
INTEREST EXPENSE 241 372 776 1,301
------------------ ------------------ ------------------
------------------
INCOME BEFORE INCOME TAXES 2,852 839 7,487 4,687
INCOME TAXES 1,075 335 2,929 1,874
------------------ ------------------ ------------------ ------------------
NET INCOME $1,777 $504 $4,558 $2,813
================== ================== ================== ==================
BASIC AND DILUTED EARNINGS PER SHARE $0.18 $0.06 $0.47 $0.35
================== ================== ================== ==================
</TABLE>
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ATL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 4,558 $ 2,813
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
DEPRECIATION AND AMORTIZATION 778 346
PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE 215 163
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (85) 6
CHANGES IN OPERATING ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (5,602) (282)
INCREASE IN INVENTORIES (5,114) (1,817)
INCREASE IN PREPAID EXPENSES
AND OTHER ASSETS (31) (4)
INCREASE IN ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 2,088 2095
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,193) 3,320
INVESTING ACTIVITIES
PURCHASES OF LEASEHOLD IMPROVEMENTS
AND EQUIPMENT (2,601) (953)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (2,601) (953)
FINANCING ACTIVITIES
NET CASH PAID TO ODETICS (2,603) (2,367)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (2,603) (2,367)
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,397) 0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,494 1
======= =======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,097 $ 1
======= =======
</TABLE>
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ATL PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
Note A - Basis of Presentation
The accompanying unaudited (except for balance sheet information as of March 31,
1997) consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The accompanying consolidated financial statements do not include
certain footnotes and financial presentation normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended March 31, 1997. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
Note B - Distribution of Parent Company's Equity Interest in Company
On October 2, 1997, Odetics, Inc., the Company's parent, announced that it had
received a favorable Section 355 distribution ruling from the Internal Revenue
Service allowing it to distribute, on a tax free basis, its 82.9% ownership of
the Company'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.
Note C - Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, effective for both interim and
annual periods ending after December 15, 1997. Statement 128 replaces the
previously reported 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 very similar to the previously
reported fully diluted earnings per share in which the dilutive effects of stock
options, warrants, and convertible securities are included. For the period ended
December 31, 1997, the Company has adopted Statement 128, and where necessary,
has restated all prior periods to conform with the new Accounting Standard.
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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 and product
mix, increases in operating expenses, funding requirements, manufacturing
efficiencies and supply issues, that involve a number of risks and uncertainties
including, without limitation, those set forth at the end of this section under
the caption "Risk Factors." The Company's actual results may differ materially
from any forward-looking statements discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations. Readers are
cautioned not to place undue reliance on these forward looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
republish revised forward looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
Net Sales. Total net sales increased to $25.1 million for the 1998 third fiscal
quarter up 63% from $15.4 million in the prior year third quarter. Total net
sales for the nine month period ended December 31, 1997 rose to $66.6 million or
57% from $42.5 million in the comparable prior year nine month period.
Product sales increased 63% to $23.0 million for the third quarter of fiscal
1998 as compared to $14.1 million in the prior year third quarter, and increased
55% to $59.4 million for the nine month period ended December 31, 1997 from
$38.3 million in the comparable prior year period. The increases for both the
three and nine month periods ended December 31, 1997 were primarily attributable
to higher sales of the 7100 series libraries. These products, which began
shipping in the last quarter of fiscal 1997, accounted for approximately 26% of
fiscal 1998 third quarter product sales and approximately 23% of fiscal 1998
nine month product sales. Sales of the 520 series libraries rose slightly in
both the three and nine month comparable periods, while 2640 series libraries
decreased slightly for the three month comparable periods while increasing
slightly for the nine month comparable periods. The overall decline in fiscal
third quarter 2640 product sales was due primarily to a product mix shift from
these libraries to the Company's 7100 series product. Also in the fiscal third
quarter, the Company shipped its initial P1000 series libraries which accounted
for a modest portion of total third quarter product revenues. Partially due to
the increased availability of DLT7000 drives, the Company was able to increase
its shipments of drive upgrade kits which, along with media sales, resulted in
an increase in other revenues.
Value Added Reseller ("VAR") product sales rose to account for 53% of total
third quarter product sales up from 48% in each of the first and second fiscal
quarters in fiscal 1998. The increase in VAR revenues was due primarily to
initial shipments of the P1000 libraries. Sales to the Company's three largest
OEM partners accounted for approximately 42% of total third quarter product
sales, down from 45% in each of the prior two fiscal 1998 quarters. The Company
shipped 587 libraries during the third fiscal quarter bringing the Company's
worldwide installed base to over 4,100 libraries.
International sales rose to $6.7 million or 27% of total third quarter revenues,
up from $3.0 million or 19% in the same prior year period. The Company's
European region continued to account for the majority of its international sales
as sales within the Company's Pacific Rim region accounted for only 2% of total
third quarter sales. As a result of relatively low Pacific Rim sales activity
combined with the U.S. dollar denomination of substantially all of the Company's
international sales, the Company's exposure to recent international currency
fluctuations has been immaterial.
Service and parts sales include revenue derived from the sales of spare parts
and service contracts to support the installed base of the Company's products.
Service sales increased 61% to $2.1 million for the third quarter of fiscal 1998
as compared to $1.3 million in the corresponding prior year period, and
increased 70% to $7.1 million for the nine month period ended December 31, 1997
as compared to $4.2 million for the comparable prior year period. Both the
quarterly and year to date increases are due primarily to higher parts sales and
service contract revenues consistent with the Company's growing installed base
of libraries.
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<PAGE> 9
Gross Profit. Gross profit as a percentage of total net sales declined to 36.6%
for the third quarter of fiscal 1998 from 39.6% in the comparable prior year
quarter and decreased to 38.1% for the nine month period ended December 31, 1997
from 40.1% in the prior year period.
Gross profit on product sales declined to 36.6% in the third quarter of fiscal
1998 as compared to the 39.7% in the prior year period, and declined to 38.1%
for the nine month period ended December 31, 1997 from 40.1% in the same prior
year period. The overall reduction in product margins was due to a combination
of factors including increased competitive pricing pressures and the
continuation of an increase in the average value of the drive component of the
products shipped in the third quarter. As a larger percentage of higher cost
DLT7000 drives are shipped with the Company's libraries, the result is a
slightly negative impact on overall product margins. Also contributing to the
lower overall margins was the introduction of the P1000, which, until fully
production ramped, will continue to negatively impact overall gross profit
margins. Primarily due to the impact of increased P1000 shipments over the next
two fiscal quarters, the Company anticipates that overall gross profit margins
may continue to decline over the near-term. Also, while the Company continues to
work with its suppliers to reduce its cost of materials and to improve overall
manufacturing efficiencies, there can be no assurance that these actions will be
sufficient to offset future reductions in sales prices.
Gross profit on service and spare parts sales increased to 36.9% for the third
quarter of fiscal 1998 as compared to 33.7% for the third quarter of the prior
fiscal year. The improved margins are due primarily to increased service
contract and parts sales. Gross profit on service and spare parts for the nine
month period ended December 31, 1997 was 40.0% as compared to 51.7% in the same
period of the prior year. The decline was due primarily to the favorable impact
of a nonrecurring adjustment to inventory reserves in the second fiscal quarter
of the prior fiscal year.
Research and Development. Research and development expense increased 2.4% to
$2.1 million (or 8.4% of total net sales) for the third quarter of fiscal 1998
as compared to $2.1 (or 13.3% of total net sales) in the comparable prior year
period and increased 52% to $5.7 million (or 8.6% of total net sales) for the
nine month period ended December 31, 1997 as compared to $3.8 (or 8.8% of total
net sales) for the same prior year period. The increased spending was due to
increased engineering development activities, testing and pre-production costs
associated with the P1000, increased development expenditures associated with
the Company's on-going efforts to support both its existing and potential OEM
customers and overall increased staffing levels associated with the Company's
expanded development activities and programs. Higher third fiscal quarter
engineering labor costs were partially offset by lower engineering material
expenses incurred in the prior year quarter. The Company expects aggregate
expenditures for research and development to continue to increase and to be
higher during periods of new product introductions due to preproduction and
testing activities.
Sales and Marketing. Sales and marketing expense increased to $3.0 million (or
11.8% of total net sales) for the third quarter of fiscal 1998 from $1.9 million
(or 12.3% of total net sales) in the comparable prior year period and increased
to $8.7 million (or 13.0% of total net sales) for the nine month period ended
December 31, 1997 compared to $4.7 million (or 11.1% of total net sales) for the
same period of the prior fiscal year. The increase in overall aggregate spending
levels was primarily attributable to additional personnel and general
infrastructure growth, higher promotional spending and increased sales
expenditures consistent with increased sales volume. The Company expects
aggregate expenditures for sales and marketing to continue to increase due to
both increased promotional activities and international sales expansion
programs.
General and Administrative. General and administrative expense, which includes
charges allocated by the Company's former parent increased to $1.0 million (or
4.1% of total net sales) in the third quarter of fiscal 1998 from $0.9 million
(or 6.1% of total net sales) in the comparable prior year period and increased
to $2.7 (or 4.0% of total net sales) in the nine month period ended December 31,
1997 from $2.5 million (or 6.0% of total net sales) in the same prior year
period. Increased aggregate spending for both comparable periods primarily
reflects the addition of personnel to support the Company's increased operating
activities. The Company expects the aggregate dollar amount of expenditures for
general and administrative expenses to continue to increase as the company's
administrative organization expands in order to assume support activities
previously provided by its former parent company.
Interest Expense. Prior to the Company's initial public offering ("IPO") the
Company's parent, Odetics, Inc., had historically advanced funds to meet the
Company's capital requirements and has charged the Company interest on the
resulting intercompany balance at a rate determined using Odetics' cost of
borrowing. On April 1, 1997, after completion of the Company's IPO, and payment
to Odetics of $6.8 million of the net proceeds of the IPO, the Company entered
into a four-year
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<PAGE> 10
promissory note payable to Odetics in the original principal amount of $13.0
million which represented the aggregate total of the intercompany balance due to
Odetics. As a result of the quarterly repayments of this debt, interest expense
declined to $241,000 in the third quarter of fiscal 1997 as compared to $372,000
in the same prior year period and to $776,000 in the nine month period ended
December 31, 1997 from $1,301,000 in the comparable prior year period. In
addition, effective April 1, 1997, the Company has assumed responsibility for
many of the charges that were historically processed through intercompany
obligations prior to the Company's IPO. All intercompany obligations incurred
after April 1, 1997 are paid on a non-interest bearing open account basis.
Income Taxes. Through October 31, 1997, the Company was a party to 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 provides that members of the Odetics' consolidated group generating
tax losses will be paid by other members which utilize tax losses to reduce such
other members' tax liability. Under this agreement, the Company's effective tax
rate was 40% for all periods through October 31, 1997.
On October 31, 1997, Odetics completed the distribution of its remaining
ownership of the Company to Odetics stockholders. This transaction also ended
the Company's obligations under the Tax Allocation agreement. As a result,
effective November 1, 1997, the Company began the implementation of various tax
planning strategies which have reduced the Company's effective tax rate to 37.7%
in the third fiscal quarter of 1998. The Company intends to continue addressing
alternative tax planning opportunities and expects its rate to continue to
decline slightly throughout the next fiscal year.
Liquidity and Capital Resources
For the nine month period ended December 31, 1997, the Company incurred a
reduction in cash and cash equivalents of $8.4 million. Net cash used within
operating activities was $3.2 million which included net income of $4.5 million
offset by increased accounts receivable of $5.6 million and inventory of $5.1
million. The Company also utilized $2.6 million to purchase equipment and make
leasehold improvements to its principal operating facilities and paid $2.6
million in principal on its long-term note payable to its former parent and
other net intercompany account obligations due to Odetics.
The Company has a $5.0 million bank line of credit which provides for borrowings
generally at the lesser of the bank's prime rate (8.5% at December 31, 1997) or
the bank's LIBOR rate plus 2.25%. Any borrowings under the Company's bank line
of credit will be secured by substantially all of the Company's assets. The
Company believes that cash flow generated from operations, in conjunction with
funds available under the Company's bank line of credit, will be adequate to
execute its current operating plans and meet its debt obligations on a timely
basis. At the same time, the Company has been in discussions with various
financial institutions regarding an expansion of its current credit facility.
While there discussions are continuing, the Company does expect to be able to
announce a significant increase to its credit facility within the fiscal fourth
quarter. The Company did not have any material commitments for capital
expenditures as of December 31, 1997.
RISK FACTORS
The Company's business is subject to a number of risks, some of which are
discussed below. The following risks should be considered carefully in addition
to the other information contained in this Report in evaluating the Company and
its business before purchasing shares of the Company's Class A Common Stock
("Common Stock").
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future based on a number of factors, not all of
which are in the Company's control. These factors include, without limitation,
the size and timing of significant customer orders; the introduction of new
products or technologies by competitors; the availability of components used in
the manufacture of the Company's products; changes in pricing policies by the
Company, its suppliers or its competitors; the ability of the Company to
develop, introduce, market and gain market acceptance of new products,
applications and product enhancements in a timely manner and to control costs;
the Company's success in expanding and implementing its sales and marketing
programs; technological changes in the distributed computing markets; the mix of
sales
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<PAGE> 11
among the Company's channels; deferrals of customer orders in anticipation
of new products, applications or product enhancements; currency fluctuations;
and general economic and market conditions. Moreover, the Company's sales in any
quarter typically consist of a relatively small number of large OEM and VAR
customer orders, and the timing of a small number of orders can impact quarter
to quarter results. Since the Company's sales are primarily made through OEMs
and VARs who typically provide the Company with relatively short lead times, it
is often difficult for the Company to forecast the timing and quantity of orders
accurately. The Company's expense levels and its purchases of parts, components
and subassemblies are based in part upon its expectations concerning future
revenues. Accordingly, if revenue levels are below expectations, whether as a
result of product transition or otherwise, operating results are likely to be
adversely affected. There can be no assurance that the Company will achieve
profitability on a quarterly or annual basis in the future. Due to all of the
foregoing factors and other risks discussed below, it is possible that in some
future period the Company's operating results may be below the expectations of
analysts and investors. In such event, the price of the Company's Common Stock
would probably be materially and adversely affected.
Dependence on Quantum Corporation and DLT Technology
The Company currently derives substantially all of its revenues from the sale of
its DLT based products and related services, and the Company expects that
revenues from its DLT based products will continue to account for substantially
all of the Company's revenues for the foreseeable future. Accordingly, the
Company's operating results for the foreseeable future will be substantially
dependent on the continued market acceptance of DLT technology and growth of the
DLT library market. The distributed computing market and the related data
storage market are characterized by rapid technological change, frequent new
product introductions and enhancements, and evolving industry standards. The DLT
market is relatively new, and there can be no assurance that another technology
will not replace or adversely affect DLT technology as a widely accepted data
storage medium. In addition, due to the relatively recent emergence of the DLT
market, the Company expects that additional companies may introduce products
incorporating DLT technology competing directly with the Company. Any decline in
the rate of growth of the DLT market or failure of the market to sustain
acceptance of DLT technology, or any decline in unit prices of the Company's
products as a result of increased competition, technological change or
otherwise, would have a material adverse effect on the business, operating
results and financial condition of the Company. The Company's success also
depends in large part upon its relationship with Quantum, who has the exclusive
worldwide manufacturing rights for the DLT technology and is the sole supplier
of DLT tape drives, and upon the Company's ability to continue to obtain
adequate supplies of DLT drives from Quantum. Growth in the demand for the
DLT7000 drives has resulted in the past and could result in the future, in
limitations in the availability of these drives and there can be no assurance
that Quantum will otherwise continue to provide an adequate supply of the
DLT7000 drives or the next generation of such drives. The Company has not been
able to secure any guarantee of the future supply of DLT drives from Quantum.
The Company's agreement with Quantum permits Quantum to terminate its
arrangement with the Company for any reason upon providing 90 days written
notice to the Company. The disruption or termination of the Company's supply of
DLT drives from Quantum would have a material adverse effect on the Company's
business, financial condition and results of operations. Quantum currently
supplies drives to all of the Company's competitors, and there can be no
assurance that the Company's competitors will not establish relationships with
Quantum in which the competitors could achieve higher priority in the supply of
DLT drives. Moreover, since Quantum has only one manufacturing facility for DLT
drives located in Colorado Springs, Colorado, any disruption in Quantum's
ability to continue to manufacture and supply the Company with DLT tape drives,
whether as a result of a natural disaster or otherwise, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Effect of New Product Introductions
The Company's future operating results will depend significantly on the degree
and timing of market acceptance of the Company's 7100 Series (which was
introduced in November 1996), the P1000 (which was introduced in May 1997) and
other new products. It is difficult to predict the effect that the announcement
of these or other new products (or enhancements to existing products) will have
on sales of current products pending the full availability of the new products,
or the rate at which such products will be accepted by the market, if at all.
For example, the P1000 could result in a reduction in the sales of the Company's
520 Series products in anticipation of the new libraries by the Company's
customers. In addition, manufacturing defects or other operational problems
commonly associated with new product introductions could adversely affect the
successful introduction of such new products. There can be no assurance that the
Company will be able to introduce new products or enhancements to existing
products on a timely basis, if at all, or the effect to which such introductions
will have on sales of existing products.
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<PAGE> 12
Competition
The data storage market is intensely competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Competitors
vary in the number, scope and breadth of the products and services offered.
Management believes eight tape library manufacturers currently provide DLT based
products, including the Company's principal competitors, Advanced Digital
Information Corporation, Breece Hill Technologies, Hewlett-Packard, Overland
Data and StorageTek. The Company competes indirectly with a large number of
manufacturers offering tape storage systems using formats other than DLT,
including 8mm, 4mm (DAT), half inch format (3480) and QIC. Many of these
indirect competitors have larger installed bases and may be expected to continue
to provide intense competition for the DLT format. These competitors include
ADIC, Exabyte, Fujitsu, Hitachi, IBM, Spectra Logic and StorageTek. These
competitors are expected to expand the functionality and performance of their
selected storage technologies which may render such technologies even more
competitive as compared to DLT. The Company also expects additional competition
from large integrated computer equipment companies, many of whom have
historically incorporated their own tape storage products into their mainframe
systems, and are broadening their focus to include the distributed computing
markets. In addition, because there are relatively low barriers to entrance into
the tape library market, the Company anticipates increased competition from
other established and emerging companies. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could have a material adverse affect upon the Company's business,
operating results and financial condition. Many of the Company's current and
potential competitors have significantly greater financial, technical,
manufacturing, marketing and other resources than the Company, and may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion, sale
and support of their products than the Company. Accordingly, there can be no
assurance that the Company will be able to continue to compete effectively.
Reliance on OEMs and VARs; Concentration of Sales
The Company relies heavily upon its relationships with selected OEMs who sell
and support the Company's products as part of their comprehensive data storage
systems. Sales through OEMs accounted for approximately 24% and 33% of the
Company's total net sales in fiscal 1996 and 1997, respectively and
approximately 50% in the first nine months of fiscal 1998. The Company is
currently investing, and intends to continue to invest, significant resources to
develop these OEM relationships. These expenditures could materially and
adversely affect the Company's operating margins unless the Company is able to
achieve commensurate growth in sales to OEMs. The Company also relies heavily on
selected VARs who integrate the Company's products with storage management
software to provide comprehensive storage solutions. Most of the Company's VARs
carry product lines that are competitive with those of the Company, and there
can be no assurance that they will give the marketing of the Company's products
high priority, or that they will continue to carry the Company's products. The
Company's agreements with VARs and OEMs are generally not required to be
exclusive, and in many cases may be terminated by either party at any time with
limited notice and without cause. A small number of customers has historically
accounted for a substantial portion of the Company's net sales and the identity
of the Company's significant customers has historically varied from period to
period. Three customers, Sun Microsystems, EMC Corporation, and Digital
Equipment Corporation, together accounted for approximately 43% of the Company's
total net sales during the first nine months of fiscal 1998. The loss of
important OEMs or VARs, their reduced focus on the Company's products, or the
inability to obtain additional OEMs as the market evolves could materially and
adversely affect the Company's business, financial condition and operating
results.
Management of Expanding Operations; Limited History as an Independent Entity
The Company is currently experiencing a period of rapid growth which has placed
and is expected to continue to place a considerable strain on the Company's
management and its administrative, sales and marketing, financial, information
systems and operational resources. From April 1, 1995 to December 31, 1997, the
size of the Company's staff increased from 66 to 287 employees. Further
significant increases in the number of employees are anticipated during calendar
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. Through October 31, 1997, the Company,
as a subsidiary of Odetics, had no operating history as an independent public
company. The Company's ability to manage growth effectively will require it to
install its own operational, financial and management controls, reporting
systems and procedures independent from Odetics, to establish new management
information and control systems and to train, motivate and manage its employees.
-12-
<PAGE> 13
There can be no assurance that the Company will be able to install such
operational, financial and management information and control systems in an
efficient and timely manner or that the new structures, systems and controls
will be adequate to support the Company's operations and prevent the occurrence
of unforeseen management or financial issues. Continued growth will also require
the Company to recruit additional key management personnel, expand its
engineering and product development capabilities, expand its sales and marketing
capabilities, improve its customer service and support functions and to train,
motivate and manage additional employees. There can be no assurance that the
Company will be able to manage these changes and implement the required programs
successfully, and its failure to do so could have a material adverse effect upon
the Company's business, financial condition and operating results.
Shares Eligible for Immediate Resale
On October 31, 1997, Odetics distributed all of its 8,005,000 shares of Common
Stock of the Company to the stockholders of Odetics (the "Distribution").
Substantially all of such shares were eligible for immediate resale in the
public market. Sales of substantial amounts of Common Stock in the open, whether
as a result of the Distribution or otherwise, could materially and adversely
affect the market price of the Company's Common Stock.
Risks Associated with International Sales
International product sales represented approximately 19% and 21% of the
Company's total net sales during fiscal 1996 and 1997, respectively and 25% in
the first nine months of fiscal 1998. The Company maintains sales and support
offices in England, Germany and Taiwan. The Company believes that international
sales will continue to represent a significant portion of its revenues, and that
continued growth and profitability will require further expansion of its
international operations. The Company's international sales are currently
denominated in U.S. dollars, and an increase in the relative value of the dollar
could make the Company's products more expensive and, therefore, potentially
less price competitive in international markets. Additional risks inherent in
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, longer accounts
receivable payment cycles, difficulties in managing and staffing international
operations, potentially adverse tax consequences including restrictions on the
repatriation of earnings, the burdens of compliance with a wide variety of
foreign laws, currency fluctuations and political and economical instability.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, the
Company's business, operating results and financial condition. Furthermore, as
the Company increases its international sales, its total net sales may also be
affected to a greater extent by seasonal fluctuations resulting from lower sales
that typically occur during the summer months in Europe and other parts of the
world.
Dependence on Proprietary Technology; Risks of Infringement
The Company's ability to compete effectively depends in part on its ability to
develop and maintain the proprietary aspects of its technology. There can be no
assurance, however, that any future patents will be granted or that any issued
patents or other intellectual property rights of the Company will provide
meaningful protection for the Company's product innovations. Moreover, such
rights may not preclude competitors from developing substantially equivalent or
superior products to the Company's products. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights in the United States or abroad will
be adequate, or that competitors will not independently develop technologies
that are similar or superior to the Company's technology, duplicate the
Company's technology, or design around any patent of the Company. Litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others,
or to defend the Company against claims of infringement or invalidity by others.
An adverse outcome in such litigation or similar proceedings could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from others or require the Company to cease marketing or using
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to obtain licenses under patents or proprietary rights of
others, there can be no assurance that any required licenses would be made
available on terms acceptable to the Company, if at all. In addition, the cost
of addressing any intellectual property litigation claim, both in legal fees and
expenses and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could have a material adverse effect on
the Company's results of operations.
-13-
<PAGE> 14
Future Capital Requirements
The Company's ability to fund its activities from operations is directly
dependent upon its rate of growth, ability to effectively manage its inventory,
the terms under which suppliers extend credit to the Company, the terms under
which the Company extends credit to its customers and its ability to collect
under such terms, the manner in which it finances any capital expansion and the
Company's ability to access external sources of financing. The Company has
entered into a four year promissory note payable to Odetics in the amount of
approximately $13.0 million payable in sixteen equal quarterly installments of
principal plus interest beginning June 30, 1997. At December 31, 1997, $10.8
million remains due on the note. 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 has been in discussions with
various financial institutions regarding an expansion of its current credit
facility. While these discussions are continuing, the Company does expect to be
able to announce a significant increase to its credit facility within the fiscal
fourth quarter.
Dependence upon Key Personnel; New Management Personnel
The Company's future performance depends to a significant extent on its senior
management and other key employees. In particular its Chief Executive Officer,
Kevin C. Daly, Ph.D. who has more than ten years experience in the field of data
storage technologies. The Company's inability to attract and retain additional
key employees or the loss of one or more of its current key employees could have
a material adverse effect upon the Company's business, financial condition and
results of operations.
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation; Bylaws and Delaware Law
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future and may make it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to the antitakeover
provisions of Section 203 of the Delaware General Corporation Law, which will
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. Further, certain provisions of the Company's Certificate
of Incorporation and Bylaws and of Delaware law could delay or make more
difficult a merger, tender offer or proxy contest involving the Company, which
could adversely affect the market price of the Company's Common Stock.
-14-
<PAGE> 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended December 31, 1997.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATL PRODUCTS, INC.
(Registrant)
By /s/ Mark P. deRaad
---------------------------------
Mark P. deRaad
Chief Financial Officer
By /s/ James A. Pipp
---------------------------------
James A. Pipp
Vice President, Controller
(Principal Accounting Officer)
Dated: February 13, 1998
-16-
<PAGE> 17
EXHIBIT INDEX
Exhibits
27 Financial Data Schedule
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,097
<SECURITIES> 0
<RECEIVABLES> 18,117
<ALLOWANCES> 534
<INVENTORY> 17,741
<CURRENT-ASSETS> 37,341
<PP&E> 7,164
<DEPRECIATION> 2,622
<TOTAL-ASSETS> 41,883
<CURRENT-LIABILITIES> 20,959
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 13,337
<TOTAL-LIABILITY-AND-EQUITY> 41,883
<SALES> 66,572
<TOTAL-REVENUES> 66,572
<CGS> 41,238
<TOTAL-COSTS> 41,238
<OTHER-EXPENSES> 17,071
<LOSS-PROVISION> 180
<INTEREST-EXPENSE> 776
<INCOME-PRETAX> 7,487
<INCOME-TAX> 2,929
<INCOME-CONTINUING> 4,558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,558
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
